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December 30, 2020

Partner cannot claim benefit of section 44AD on interest and remuneration received from firm: Madras HC

by CA Shivam Jaiswal in Income Tax

Partner cannot claim benefit of section 44AD on interest and remuneration received from firm: Madras HC

Section 44AD of the Income Tax Act is a special provision for computing profits and gains of business on presumptive basis which was introduced in the Act with effect from 1993.

Sub-section (1) of Section 44AD states that in the case of an eligible assessee engaged in an eligible business, a sum equal to 8% of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

Sub-section (2) of Section 44AD states that any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

The explanation found in section 44AD defines eligible assessee as well as the eligible business. Under clause (a) of the explanation which defines eligible assessee to mean an individual, Hindu undivided family or a firm who is a resident but not a limited liability partnership firm.

Eligible business has been defined in clause (b) to mean

  • any business except the business of plying, hiring or leasing goods carriages referred to in Section 44AE and
  • whose total turnover or gross receipts in the previous year does not exceed an amount of Rs. 2 Crores.

Let us refer to the case of Mr A Anandkumar Vs Assistant Commissioner of Income Tax where the issue under consideration was whether partner can claim benefit of section 44AD on interest & remuneration received from firm

Facts of the Case:

  • The assessee is an individual, a partner in M/s Kumbakonam Jewellers, M/s ANS Gupta & Sons and M/s ANS Gupta Jewellers.
  • The Assessing Officer (AO) disallowed the claim made by the assessee under section 44AD of the Act.
  • While filing the return of income, the assessee had applied the presumptive rate of tax at 8% under section 44AD and returned Rs. 4,68,240 as income from the remuneration and interest received from the partnership firm.
  • AO did not agree with the assessee and opined that Section 44AD was available only for an eligible assessee engaged in an eligible business and that the assessee was not carrying on business independently but only a partner in the firm.
  • Further the assessee did not have any turnover and receipts of account of remuneration and interest from the firms could not be construed as gross receipts mentioned in Section 44AD.
  • Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) [CIT(A)].
  • The said appeal was dismissed by CIT(A).
  • Aggrieved by the same, the assessee preferred appeal before the Tribunal which was also dismissed.
  • Aggrieved with the order of the Tribunal, assessee filed and appeal before the High Court (HC)

Observations of HC on whether remuneration and interest could be treated as gross receipt or not

  • To avail the benefit of Section 44AD, the assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt.
  • Admittedly, the assessee who was an individual in the instant case was not carrying on any business.
  • Therefore, the remuneration and interest received by the assessee from the partnership firm could not be termed to be a turnover of the assessee [individual].
  • Similarly, it would also not qualify for gross receipts.
  • In the statement issued by the ICAI on the Companies (Auditors report) Order 2003, the word ‘turnover’ for the purpose of this clause could be interpreted to mean the aggregate amount for which sales were affected or services rendered by an enterprise.
  • Admittedly, the assessee had not done any sales nor rendered any services but was receiving remuneration and interest from the partnership firms which amount was already debited in the profit and loss account of the firms.
  • Therefore, the revenue was right in their contention that remuneration and interest could not be treated as gross receipt.

Observations of HC on the order of the Tribunal

  • The Tribunal took note of section 28(v) which dealt with profits and gains of business or profession and noted that clause (v) mentioned about section 40(b) and rightly concluded that only remuneration and salary received from a firm to the extent eligible under section 40(b) would be considered as profits and gains of the business or profession of the recipient partner.
  • Further, it took note of section 40(b) and observed that the language used in the said provision was in the negative as it stated that certain amounts shall not be deducted while computing income under the head ‘Profits and gains of business or profession’.
  • However, it exempted from such prohibition, payment of salary, bonus, commission and interest to the extent specified in sub-clause (iv) and (v) of sub-section (b) of section 40
  • The Tribunal observed that the intention of Section 40(b) was that the partner should not be disentitled for claiming reasonable remuneration where he was a working partner and should not be denied reasonable interest on the capital invested by him in a firm and these changes if not made in the accounts of the firm, then the pro rata profits of the firm would be higher resulting in higher tax for the firm.
  • Therefore, the payments have to be construed indirectly as type of distribution of profits of a firm or otherwise the firm would have been taxed.
  • Therefore, the Tribunal observed that the legislature in its wisdom chose such remuneration and interest to be a part of profits from business or profession and that could never translate into gross receipts or turnover of a business of being partners in a firm.

Conclusion by HC

  • Section 44ADA is a special provision for computing profits and gains of profession on presumptive basis uses the expression ‘Total gross receipts’.
  • As already seen in Section 44AD, the words used are ‘total turnover’ or ‘gross receipts’ and it pre-supposes that it pertains to a sales turnover and no other meaning can be given to the said words and if done so, the purpose of introducing Section 44AD would stand defeated.
  • That apart, the position becomes much clearer if we take note of sub-Section (2) of Section 44AD which states that any deduction allowable under the provision of Section 30 to 38 for the purpose of sub-section (1) be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.
  • Thus, conspicuously section 28(v) has not been included in sub-section (2) of Section 44AD which deals with any interest, salary, bonus, commission or remuneration by whatever name called, due to or received by, a partner of a firm from such firm.
  • Thus, HC found that the Tribunal rightly rejected the plea raised by the assessee and confirmed the order passed by the CIT(A) and the AO.

In simple words, partner cannot claim benefit of section 44AD on interest & remuneration received from firm.

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