Definition of ‘Remuneration’ Under the Companies Act, 2013

[The
following post is contributed by Nivedita
Shankar
, who is a Senior Associate at Vinod Kothari & Company. She can
be contacted at nivedita@vinodkothari.com]
As the financial year 2014-2015 approaches
its end, companies are gearing up to meet the “many” requirements pertaining to
preparation of board’s report in line with the new Companies Act, 2013 (‘Act,
2013’). Amongst the other requirements of section 134, managerial remuneration
is one area that requires a lot of attention. In this regard, it would be
necessary to rexamine the basics of managerial remuneration – the definition of
‘remuneration’ to unveil some surprising aspects of the Act, 2013. The previous
Companies Act, 1956 (‘Act, 1956’) was however without any such difficulties
since it did not define ‘remuneration’ at all except for the purpose of
Schedule XIII.
Definition
of ‘remuneration’ under Act, 2013
Section 2(78) of the Act, 2013 defines
‘remuneration’ as follows:
“means any money or its equivalent given or passed to any
person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961”
It
is clear from the definition above that any money or money’s equivalent paid to
a person will be remuneration under Act, 2013. Additionally, any perquisite
paid to a person as defined under the Income Tax Act, 1961 (‘IT Act, 1961’) will
also be taken to be a part of remuneration.
‘Perquisites’ under IT Act,
1961
Further,
according to section 17(2) of the IT Act, 1961, ‘perquisite’ includes the
following:
           
(i) the value of rent-free
accommodation provided to the assessee by his employer;
(ii) the value of any concession in
the matter of rent respecting any accommodation provided to the assessee by his
employer
(iii) the value of any benefit or
amenity granted or provided free of cost or at concessional rate in any of the
following cases—
(a) by
a company to an employee who is a director thereof;
(b) by
a company to an employee being a person who has a substantial interest in the
company;
(c) by
any employer (including a company) to an employee to whom the provisions of
paragraphs (a) and (b) of this sub-clause do not apply and whose
income under the head “Salaries” (whether due from, or paid or allowed by,
one or more employers), exclusive of the value of all benefits or amenities not
provided for by way of monetary payment, exceeds fifty thousand rupees
(iv) any sum paid by the employer
in respect of any obligation which, but for such payment, would have been
payable by the assessee;
(v) any sum payable by the
employer, whether directly or through a fund, other than a recognised provident
fund or an approved superannuation fund 87[or a Deposit-linked Insurance Fund
established under section 3G of the Coal Mines Provident Fund and Miscellaneous
Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of the
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of
1952)], to effect an assurance on the life of the assessee or to effect a
contract for an annuity
(vi) the value of any specified
security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer, or former employer, free of cost or at
concessional rate to the assessee.
(vii) the amount of any
contribution to an approved superannuation fund by the employer in respect of
the assessee, to the extent it exceeds one lakh rupees; and
(viii) the value of any other fringe
benefit or amenity as may be prescribed.
Provided that nothing
in this clause shall apply to,
xxx
(v) any
sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family
[other than the treatment referred to in clauses (i) and (ii)];
so, however, that such sum does not exceed 
2[fifteen]
thousand rupees in the previous year
xxx
The
provisions relating to ‘perquisites’ in IT Act, 1961, evidently provide that
the entire quantum/component of perquisites paid is not taxable for example
superannuation fund, medical reimbursements, etc.

 

Perquisites and Managerial
Remuneration under the Act, 2013
In
pretext of the above definitions, the following can be deduced pertaining to
the definition of ‘remuneration’ under Act, 2013:
(i) perquisites paid by a company as per IT Act, 1961 forms a part of the
remuneration;
(ii) the entire quantum of the perquisites, irrespective of the taxable
value will be a part of ‘remuneration’. On an apparent reading of section 2(78)
of Act, 2013, it may seem that only the taxable value of the perquisites paid
will be taken to be a part of remuneration. However, a closer examination of the
definition of ‘remuneration’ will show that the section only states that
perquisites paid as defined under IT Act, 1961 will be included. It does not
make any reference to the quantum or valuation or taxable component of the
perquisites. Thus the entire amount of perquisites paid or agreed to be paid will
form part of remuneration. The taxable value as prescribed under IT Act, 1961
will have no bearing on the calculation of ‘remuneration’ under Act, 2013.
This reasoning
is further strengthened by the definition of ‘remuneration’ under Section IV of
Part II of Schedule V of Act, 2013 which reads as follows:
A managerial person shall be
eligible for the following perquisites which shall not be included in the
computation of the ceiling on remuneration specified in Section II and Section
III:—
(a) contribution to provident fund,
superannuation fund or annuity fund to the extent these either singly or put
together are not taxable under the Income-tax Act, 1961 (43 of 1961);
(b) gratuity payable at a rate not
exceeding half a month’s salary for each completed year of service; and
(c) encashment of leave at the end
of the tenure.
Looking
at clause (a) above, it is clear that any contribution made to provident fund,
superannuation fund or annuity fund in excess of taxable limits under IT Act,
1961 shall not be included for the purpose of calculation of managerial
remuneration in the event of inadequate profits or nil profits. The law herein
clearly prescribes what value of perquisites shall not be considered as part of
remuneration in cases of inadequate profits. Further, had the intent of law
been to include only taxable amount of perquisites in the definition of
‘remuneration’ under section 2(78), then this clause would have been rendered
meaningless. Thus, one can safely presume that where the intent was to
specifically cover taxable value of perquisites law has been drafted clearly.
Therefore,
to conclude, for the purpose of calculation of remuneration:
i. in the event of adequacy of
profits
– the entire value of perquisites as per IT Act, 1961 will have to
be considered.
ii. in the event of inadequacy of
profits of nil profits
– only the taxable amount of perquisites should be
considered. This is relevant only in case of managerial person.
Preparation
of Board’ Report under Act, 2013
The definition of ‘remuneration’ is of
particular importance when it comes to preparation of Board’s Report since Rule 5 of Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014 requires a listed company to
make a number of disclosures pertaining to remuneration of not just directors,
but also of key managerial persons and other employees. The definition of
‘remuneration’ under section 2(78) does not distinguish between a director, key
managerial person or any other employee. Thus, while preparation of board’s
report, the discussion above will be relevant for the purpose of calculation of
remuneration of every director, key managerial person and other employee of the
company.
– Nivedita Shankar

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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