Landmark & Interesting Judgment on applicability of Presumptive taxation under section 44AD on Partner’s remuneration and interest

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Landmark & Interesting Judgment on applicability of Presumptive taxation under section 44AD on Partner’s remuneration and interest

Short Overvivew : In terms of Explanatory Notes to the provisions of Finance (No. 2) Act, 2009 vide Circular No. 5/2010 dated 3-6-2010, the intention of revenue was to help small business to comply with the taxation provisions through presumptive taxation scheme under section 44AD. Revenue’s intention was not at all to construe a partner’s remuneration or interest as business income.

Assessee claimed that interest and salary received by him from firms in which, he was a partner had to be construed as business income by virtue of section 28(v) and therefore, he was eligible for applying presumptive interest rate under section 44AD. Revenue denied assessee’s claim for estimating income under section 44AD on remuneration and interest received from firms.

 it is held that Section 44AD was substituted by Finance (No. 2) Act, 2009 with effect from 1-4-2011 and prior to this substitution, the said section allowed application of presumptive tax rate only for business of civil construction or supply of labour for civil construction. Presumptive tax rate application was widened to include any business which had turnover or gross receipts of less than one crore rupees through such substitution. In the Explanatory Notes to the provisions of Finance (No. 2) Act, 2009 vide Circular No. 5/2010, dated 3-6-2010, CBDT has explained the reason for widening. It is clear from the reading of the said Explanatory Note that the intention was to help small business to comply with the taxation provisions. Intention was not at all to construe a partner’s remuneration or interest as business income.

Decision: Against the assessee.

Referred: Munjal Sales Corporation v. CIT (2008) 298 ITR 298 (SC) : 2008 TaxPub(DT) 1671 (SC) and Sagar Dutta v. Dy. CIT [ITA No.692/Kol/2012, dt. 3-5-2013] : 2018 TaxPub(DT) 466 (Kol-Trib).

IN THE ITAT, CHENNAI BENCH

ABRAHAM P. GEORGE, A.M. & DUVVURU RL REDDY, J.M.

A. Anandkumar v. ACIT

I.T.A. No. 573/CHNY/2018

30 January, 2019

Appellant by: K. Raghu, C.A.

Respondent by: AR. V. Sreenivasan, Joint Commissioner

ORDER

Abraham P. George, A.M.

In this appeal filed by the assessee, against Order, dt. 22-12-2017 of Commissioner (Appeals), Salem, is aggrieved on denial of his claim for estimating income under section 44AD of the Income Tax Act (in short “the Act”), on remuneration and interest received from firms.

2. Facts apropos are that assessee had received remuneration and interest from partnership firms namely M/s. Kumbakonam Jewellers, M/s. ANS Gupta & Sons and M/s. ANS Gupta Jewellers during the previous impugned assessment year aggregating to Rs. 58,53,000. While filing return for the impugned assessment year, assessee had applied presumptive rate at 8% under section 44AD of the Act and returned Rs. 4,68,240 as income from the above mentioned remuneration and interest. Assessing officer was of the opinion that section 44AD could be availed only by eligible assessee engaged in eligible business. According to him, assessee was not doing any business independently but was only a partner in the firms. Further, as per learned assessing officer, assessee had no turnover and receipts on account of remuneration and interest from the firms could not be construed as gross receipts mentioned under section 44AD of the Act. He therefore denied assessee the benefit of section 44AD of the Act and brought to tax the entire amount of remuneration and interest from the firms. Assessee’s appeal before the Commissioner (Appeals) did not meet with any success.

3. Now, before us, learned Authorised Representative strongly assailing the orders of lower authorities and submitted that section 28(v) of the Act, clearly specified that interest, salary, bonus, commission or remuneration received or due to a partner of a firm, from such firm, had to be assessed under the head “Profits & gains of business or profession”. As per Learned Authorised Representatives, section 44AD enabled an assessee having turnover or gross receipts from eligible business, to apply presumptive rate of 8%. According to him, by virtue of Explanation to section 44AD, eligible business included any business other than the business of plying, hiring or leasing upto ten goods carriages. Contention of the learned Authorised Representatives was that remuneration and interest being considered as profits and gains of business or profession by virtue of section 28(v) of the Act, it became an eligible business. According to him, gross receipts of the assessee from interest and remuneration was below Rs. 1 crore, for the impugned assessment year and therefore assessee was eligible for applying presumptive rate of 8% on such receipts for estimating the income. Reliance was placed on the judgment of Hon’ble Apex Court in the case of Munjal Sales Corporation v. Commissioner (2008) 298 ITR 298 (SC) : 2008 TaxPub(DT) 1671 (SC) and an order of Kolkata Bench of the Tribunal in the case of Sagar Dutta v. DCIT in ITA No. 692/Kol/2012, dt. 3-5-2013.

4. Per contra, Learned Departmental Representative strongly supported orders of lower authorities.

5. We have heard rival contentions and perused material on record. Claim of the assessee is that interest and salary received by him from firms in which, he was a partner had to be construed as business income by virtue of section 28(v) of the Act and hence assessee is eligible for applying presumptive interest rate under section 44AD of the Act.

Section 28(v) of the Act is reproduced hereunder :–

“Profits and gains of business or profession.

28. The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,–

(i) xxxxxx

(ii) xxxxx

(iii) xxxxxx

(iv) xxxxx

(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm :–

Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted”

It is interested to note that the proviso to clause (v) specifically mentions clause (b) of section 40 of the Act. In other words, only remuneration and salary, received from a firm, to the extent eligible under clause (b) of section 40 of the Act, would be considered as profits and gains of business or profession, of the recipient partner. It would be apposite to have a look at section 40(b) of the Act, insofar as it concerns remuneration and interest payable to partners concerned.

Section 40(b) is reproduced hereunder :–

“Amounts not deductible.

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession” :–

(a) xxxxxxx

(b) in the case of any firm assessable as such,–

(i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as “remuneration”) to any partner who is not a working partner; or

(ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or

(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or

(iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of twelve per cent simple interest per annum; or

(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :–

(a) on the first Rs. 3,00,000 of the book-profit or in case of a loss

(b) on the balance of the book-profit

Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1-4-1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.”

6. What we can understand from section 40 is that it is clothed in a negative language. It says that certain amounts shall not be deducted while computing income under the head “profits & gains of business or profession. However, it exempts from the rigors of such prohibition, payment of salary, bonus, commission and interest to the extent specified in sub-clause (iv) and (v) of sub-section (b) thereof. Intention of the above section, in our opinion, is that partner should not be disentitled from claiming reasonable remuneration where he is a working partner and also should not be denied reasonable interest on the capital invested by him in a firm. If these charges are not made in the accounts of the firm, then pro-rata profits of the firm would be higher, resulting in higher taxes to the firm. The payments therefore have to be construed indirectly as a type of distribution of profits of a firm, for which otherwise, a firm would have been taxed. It seems that legislature in its wisdom chose such remuneration and interest to be a part of profits from business or profession. This by itself, in our opinion, would not translate such remuneration and interest, to gross receipts or turnover of a business of being partners in firms. In other words, it cannot be construed as gross receipts or turnover of a business independently carried on by a partner.

7. To elucidate the position further, we need to have a look section 44AD which was substituted by Finance (No. 2) Act, 2009 with effect from 1-4-2011. Prior to this substitution, the said Section allowed application of presumptive tax rate only for business of civil construction or supply of labour for civil construction. Presumptive tax rate application was widened to include any business which had turnover or gross receipts of less than one crore through such substitution. In the Explanatory Notes to the provisions of Finance (No. 2) Act, 2009 vide Circular No. 5/2010, dt. 3-6-2010, CBDT has explained the reason for widening. Para no. 21 of the circular is reproduced hereunder:–

“21. Special provision for computing profits and gains of business on presumptive basis.

21.1 The existing provisions of the Income Tax Act provide for taxation of income on presumptive basis in the case of construction business, income from goods carriages and business of retail trade. Section 44AD prescribes a method of presumptive taxation for assessee engaged in the business of civil construction or supply of labour for civil construction in which a sum equal to eight percent of the gross receipts is deemed to be the profits and gains from business. Section 44AE provides presumptive provisions for the assessee engaged in the business of plying, hiring or leasing up to ten goods carriages in which a prescribed sum per vehicle is deemed to be the presumptive income of the assessee. Section 44AF prescribes a method of presumptive taxation for retail trade, under which the presumptive income is computed at the rate of a sum equal to five per cent of the total turnover. There has been a substantial increase in small businesses with the growth of transport and communication and general growth of the economy. A large number of businesses and service providers in rural and urban areas who earn substantial income are outside the tax-net. Introduction of presumptive tax provisions in respect of small businesses would help a number of small businesses to comply with the taxation provisions without consuming their time and resources. A presumptive income scheme for small taxpayers lowers the compliance cost for such taxpayers and also reduces the administrative burden on the tax machinery. In view of the above, to expand the scope of presumptive taxation to all businesses, the existing section 44AD has been substituted by a new section 44AD.

21.2 The salient features of the new presumptive taxation scheme are as under :–

(a) The scheme is applicable to individuals, HUFs and partnership firms excluding Limited liability partnership firms. It is also not be applicable to an assessee who is availing deductions under sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C.-Deductions in respect of certain incomes” in the relevant assessment year.

(b) The scheme is applicable for any business (excluding a business already covered under section 44AE) which has a maximum gross turnover/gross receipts of 40 lakhs.

(c) The presumptive rate of income is prescribed at 8% of gross turnover/gross receipts.

(d) An assessee opting for the above scheme is exempted from payment of advance tax related to such business under the current provisions of the Income Tax Act.

(e) An assessee opting for the above scheme is exempted from maintenance of books of accounts related to such business as required under section 44AA of the Income Tax Act.

(f) An assessee with turnover below Rs. 40 lakhs, who shows an income below the presumptive rate prescribed under these provisions, in case his total income exceeds the taxable limit, required to maintain books of accounts and also get them audited.

(g) The existing section 44AF is to be made inoperative for the assessment year beginning on or after 1-4-2011.

21.3 Applicability–These amendments have been made applicable with effect from 1-4-2011 and will accordingly apply in relation to assessment year 2011-12 and subsequent assessment years.”

It is clear from the reading of the above Explanatory Note, that the intention was to help small business to comply with the taxation provisions. Intention was not at all to construe a partner’s remuneration or interest as business income. As for the judgment of Hon’ble Apex Court in the case of Munjal Sales Corporation (supra), relied on by the learned Authorised Representatives, the issue was not related to section 44AD of the Act. Insofar as the decision of the Kolkata Bench of the Tribunal in the case of Sagar Dutta (supra) is concerned, the question there was on levy of penalty under section 271B of the Act, for failure of furnishing audited accounts under section 44AB of the Act. This also has got no relevance here. In these circumstances, we do not find any reason to interfere with the orders of the authorities below.

8. In the result, appeal of the assessee stand dismissed.

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