In the formative phase of a business, especially for startups and newly incorporated private limited companies, directors often engage extensively in activities critical to establishing the business—long before any revenue is generated. These may include legal compliances, infrastructure setup, market research, team building, or strategic planning.
A frequently raised legal and financial question is:
Can a private limited company pay remuneration to its directors even if commercial operations have not yet commenced?
The answer is yes, provided certain conditions under the Companies Act, 2013, the Income Tax Act, 1961, and supporting jurisprudence are complied with. This guide sets out the statutory framework, accounting implications, tax positions, and case law to establish when and how such remuneration can be paid legally.
Companies Act, 2013 — Legal Framework for Director Remuneration
Remuneration is Not Linked to Revenue Generation
Under Section 2(78) of the Companies Act, 2013:
“Remuneration” includes any money or its equivalent given for services rendered, including perquisites.
This implies that remuneration may be paid even during the pre-operative stage, as long as actual services are rendered and duly recorded. The company need not wait for commencement of revenue-generating activity.
Section 197 Not Applicable to Private Companies
Section 197, which prescribes limits on managerial remuneration, applies only to public companies and their subsidiaries.
As per MCA Exemption Notification [GSR 464(E), dated 5 June 2015], private limited companies are exempt from Section 197 provided they have no investments from other body corporates and comply with prescribed internal approvals.
Thus, a private limited company is free to determine and pay director remuneration through a board resolution, without being bound by the 11 percent cap or profit-linked thresholds.
Schedule V – Permissible Remuneration in Absence of Profits
If the company appoints a Managing Director or Whole-time Director, then Schedule V becomes relevant, particularly when there are no profits or inadequate profits.
The Act allows minimum remuneration even in such cases, depending on the company’s effective capital:
| Effective Capital | Maximum Annual Remuneration (Without CG Approval) |
|---|---|
| Negative or less than ₹5 Cr | ₹14.4 lakhs |
| ₹5 Cr to ₹10 Cr | ₹20.4 lakhs |
| ₹10 Cr to ₹250 Cr | ₹28.8 lakhs |
Mandatory Board Resolution under Section 179
Under Section 179(3)(k), the Board of Directors must formally approve the payment of remuneration to any director. The resolution must specify:
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Nature of duties and services performed
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Monthly/annual remuneration amount
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Justification for payment in absence of revenue
Where Schedule V thresholds are exceeded, a special resolution from shareholders is additionally required.
Articles of Association Must Permit Remuneration
Before passing any resolution, the company must review its Articles of Association (AOA) to ensure that it permits payment of remuneration to directors. If the AOA is silent or restrictive, the company must amend it through a special resolution before proceeding.
Income Tax Act, 1961 – Tax Treatment of Pre-Operational Remuneration
Not Allowed as Revenue Expenditure Until Operations Start
Under Section 37(1), only those expenses that are:
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Not capital in nature
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Incurred wholly and exclusively for business
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Incurred in the course of business operations
are allowable as deduction.
Remuneration paid before commencement of operations is generally not allowed as a revenue deduction, since the business has not technically “commenced.” However, it can be:
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Capitalised as a part of pre-operative expenditure or project cost
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Amortised under Section 35D if it qualifies as preliminary expenses
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Claimed in future years once business operations begin
TDS under Section 192 must still be deducted and deposited on salary payments, even if business has not started.
Classification as Pre-Operative Expense
The Institute of Chartered Accountants of India (ICAI) allows director remuneration incurred during the pre-operative phase to be classified as pre-operative expense, which is:
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Accumulated under a separate head in the books
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Capitalised or allocated to the relevant asset (e.g., project, product)
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Not charged to profit and loss until business begins
Judicial Precedents – Legal Recognition of Remuneration Before Operations
Several judicial rulings affirm that remuneration to directors during pre-operative phase is valid and can be capitalised:
CIT v. Ashima Syntex Ltd. (2001) 251 ITR 133 (Gujarat High Court)
Held that salary paid to directors during the construction stage was a capital expenditure and not disallowed.
CIT v. Kernex Microsystems (India) Ltd. (2010)
Allowed capitalisation of directors’ salary paid during pre-operative phase as part of project cost.
DCIT v. Indian Railway Finance Corporation Ltd. (ITAT Delhi, 2022)
Held that managerial remuneration paid before operations is not fictitious if duly authorized and properly accounted.
These cases clarify that genuineness, documentation, and proper accounting treatment are key to withstand scrutiny.
4. Practical Compliance Protocol – Step-by-Step
To ensure legal and financial defensibility, companies should follow this structured compliance route:
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Review Articles of Association – Confirm that remuneration to directors is permitted.
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Pass a Board Resolution – Clearly record amount, scope of services, and approval.
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Issue Employment Contract or Letter of Engagement – For clarity and substance.
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Apply Schedule V where applicable – If appointing MD/WTD and company has no profits.
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Deduct TDS under Section 192 – Treat as salary income even during pre-operations.
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Classify under Pre-operative Expenses – Capitalise or defer in financials.
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Make appropriate financial statement disclosures – Under Notes to Accounts and Related Party Transactions (Schedule III).
Illustrative Case Study
Background
XYZ Logistics Private Limited was incorporated in April 2024 to launch a warehousing platform. As of December 2024, the company has not started operations but is engaged in infrastructure development, recruitment, branding, and vendor negotiations.
Action Taken
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The two promoter-directors are working full-time.
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Articles of Association permit payment of remuneration.
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Board resolution passed in May 2024 authorising ₹75,000 per month to each director.
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TDS under Section 192 is deducted monthly.
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In books, the remuneration is recorded under “Pre-operative Expenses – Director Services.”
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Upon commercial launch, these expenses will be capitalised and amortised over 5 years.
Outcome
No violation of Companies Act or Income Tax Act occurred. Auditor raised no concerns. The remuneration was accepted as genuine during statutory audit.
Conclusion
It is both legally permissible and practically beneficial for a private limited company to pay remuneration to directors before commencement of operations, provided that:
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Genuine services are rendered
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Resolutions and contractual arrangements are properly executed
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Remuneration is reasonable and in line with the company's capital position
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Accounting and taxation treatment is appropriate and transparent
With proper internal records and disclosures, such remuneration not only complies with corporate law but also acknowledges the foundational contributions of the leadership team during the most critical stage of the business lifecycle.
