Applicability of Tax Audit on remuneration from Partnership firm
One of the common questions is with regard to the applicability of tax audit on the remuneration received by the partner from the firm.
The question arises as to whether it is to be included in gross receipts or turnover to calculate the limits for tax audit applicability?
Bombay High Court holds that for computing the limits for a tax audit, remuneration from the partnership cannot be included in gross receipt or turnover.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.1333 OF 2021
Perizad Zorabian Irani Petitioner
V/s.
Principal Commissioner of Income-Tax
(Central)-1 Mumbai & Ors …Respondents
—-
Dr. K. Shivram, Sr. Advocate i/b Mr. Rahul K. Hakani for Petitioner
Mr. Suresh Kumar for Respondents
—-
CORAM : K.R. SHRIRAM &
N.J. JAMADAR, J
DATED : 9th MARCH 2022
P.C.
1) Petitioner is impugning an order dated 25th March 2021 passed by
respondent no.1 u/s 264 of the Income Tax Act 1961 (the said Act),
rejecting the revision application filed by petitioner challenging the order
dated 25th February 2020 passed under Section 139(9) by respondent no.2
treating the return of income filed by petitioner for A.Y.-2017-2018 as
invalid. The reason why return of income was treated as invalid was
because according to respondent, petitioner failed to get her accounts
audited u/s 44AB though her gross receipts / turnover after including
remuneration received from partnership firm was more than the threshold
limit of Rs.50,00,000/-.
2) Petitioner is an individual deriving her income under the heads salary,
income from house property, business / profession and income from other
sources. Petitioner is an Actor by profession. Petitioner also is a partner in
two partnership firms namely M/s Zorabian Sales and Marketing and M/s
Zorabian Foods.
3) On or about 25th October 2017, petitioner filed her return of income
for A.Y.-2017-2018 under Section 139(1) of the Act declaring total income
of Rs.1,75,88,360/-. Out of this total income, a sum of Rs.1,09,65,411/- was
declared under the heads of business and profession. Out of
Rs.1,09,65,411/-, petitioner derived a sum of Rs.8,45,220 as net income
from petitioner’s acting profession and Rs.1,01,20,191/- as remuneration
received as working partner from the firm M/s Zorabian Sales and
Marketing.
4) On 27th June 2019, petitioner received a notice from respondent no.2
alleging defect in the return on the ground that petitioner failed to get her
accounts audited in accordance with provisions of Section 44AB of the Act.
Petitioner replied to the said notice and explained that she was not required
to get her account audited under Section 44AB,by letter dated 3rd July 2019.
This explanation of petitioner was rejected and order dated 25th February
2020 came to be passed by respondent no.2 treating the return of income
filed by petitioner as invalid due to non auditing of accounts as required
under Section 44AB of the Act.
5) On or about 3rd February 2021, petitioner filed revision application
under Section 264 of the Act impugning the order passed by respondent
no.2. Petitioner made detailed submissions with the application.
Respondent No.1 issued a notice dated 17th March 2021 thereby calling
upon petitioner to show cause why revision application under Section 264
should not be rejected. By a letter dated 22nd March 2021, petitioner
responded to the show cause notice. On 25th March 2021, respondent no.1
passed order dismissing the revision application, rejecting petitioner’s
submissions and upholding the order of respondent no.2. While doing so,
respondent no.1 has relied upon decision of ITAT Kolkata in Amal Ganguli
Vs. DCI, which had been reversed by the High Court in Sagar Dutta Vs. CIT,
IT Appeal No.150 of 2009 dated 17th February 2014.
6) It is this order of respondent no.1, which is impugned in this petition.
7) Section 44AB of the Act reads as under:
“44AB. Every person:-
(a) …………….
(b) carrying on profession shall, if his gross receipts in professionn
exceed fifty lakh rupees in any previous year; or
(d)………..
(e)…………
get his accounts of such previous year audited by an accountant
before the specified date and furnish by that date the report of such
audit in the prescribed form duly signed and verified by such
accountant and setting forth such particulars as may be prescribed
8) Dr. Shivram submitted that the provisions of Section 44AB are not
applicable to the facts of the present case because: (a) the business is
carried on by the partnership firm and not the assessee, (b) becoming the
partner of partnership cannot be construed as carrying on business, (c)
partners’ remuneration cannot be construed as total sales turn over or gross
receipts in business, (d) partners’ remuneration does not arise out of
carrying on profession, (e) partners’ remuneration cannot be construed as
gross receipts from profession and (f) Section 44AB is not applicable where
assessee is carrying on a profession as well as business simultaneously in
different field.
9) Mr. Suresh Kumar, per contra reiterated the finding of respondent
no.1 and respondent no.2 and relied upon the order of ITAT in Amal
Ganguli. Mr. Suresh Kumar submitted that the order of ITAT in Amal
Ganguli has not been entirely reversed by the High Court and only the
penalty order was set aside because the Assessing Officer had not obtained
necessary approval before issuing penalty order. Mr. Suresh Kumar
submitted that the Hon’ble Court remanded the matter to the Assessing
Officer for passing the penalty order after obtaining necessary approval from
the competent authority. Thus, the claim of petitioner that judgment of ITAT
in Amal Ganguli has been reversed, is not correct.
10) The provision applicable to petitioner is clause (b) of Section 44AB
which provides, every person carrying on profession shall, if his gross
receipts in profession exceed fifty lakh rupees in any previous year, get his
accounts of such previous year audited by an accountant before the
specified date and furnish by that date the report of such audit in the
prescribed form duly signed and verified by such accountant and setting
forth such particulars as may be prescribed. Profession is defined under
Section 2(36) of the Act as under: “Profession includes vocation”. The
income earned by petitioner as remuneration received as working partner or
partners’ remuneration, cannot be held as carrying on profession as well as
business simultaneously in different field. That is because the provisions of
Section 44AB(a) which says “every person carrying on business shall, if his
total sales, turnover or gross receipts, as the case may be, in business exceed
or exceeds one crore rupees in any previous year” and clause (b) of Section
44AB which says “every person carrying on profession shall, if his gross
receipts in profession exceed fifty lakh rupees in any previous year”, are
mututally exclusive, i.e., the former dealing with the assessee carrying on
business and later dealing with the profession. None of the clauses under
Section 44AB envisages the situation where the assessee is carrying on both
the profession as well as business. In a matter which is similar to this
matter at hand, where the scope of Section 44AD of the Act came up for
consideration, is the judgment of Madras High Court in Anandkumar Vs.
Assistant Commissioner of Income Tax1. In that case, the assessee was an
individual and a partner in some partnership firms. The assessee filed his
return of income of assessment year under consideration admitting a total
income of Rs.43,53,066/-. The assessment was selected for scrutiny and it
was finalised under Section 143(3) of the Act, disallowing 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. The Assessing Officer did
not agree with the assessee and opined that Section 44AD is available only
for an eligible assessee engaged in an eligible business and that the assessee
was not carrying on business independently but only as partner in the firm.
The Assessing Officer further held that the assessee did not have any
turnover and receipts on account of remuneration and interest from the
firms cannot be construed as gross receipts mentioned in Section 44AD of
the Act. This was challenged by the assessee before Commissioner of
Income Tax (Appeals), who rejected the appeal and later before the ITAT,
which also rejected the assessee’s challenge to the findings of the Assessing
Officer. Before the High Court, counsel for the Revenue submitted that the
assessee was not doing any business but the firm was carrying on business
in which the assessee is a partner and, therefore, the condition that it should
arise from an eligible business was not satisfied. The submissions thereon of
the Revenue are totally contrary to the submissions made in the case at
hand where, the Revenue is wanting to add the income received as
remuneration from the partnership firm as professional income. The Madras
High Court while upholding the contentions of Revenue observed that the
assessee should establish that he is an eligible assessee engaged in an
eligible business and such business should have a total turn over or a gross
receipt. Admittedly, the assessee who was an individual in that case was not
carrying on any business and the remuneration and interest received by the
assessee from the partnership firm cannot be termed to be a turn over of the
assessee (individual). The court concluded that the Revenue was right in its
contention that remuneration and interest from the partnership firm cannot
be treated as gross receipt of the assessee. We respectfully agree with the
view expressed by the Hon’ble Madras High Court.
In fact, in the case at hand, petitioner’s case is the same that
petitioner’s remuneration from the partnership cannot be treated as gross
receipt in profession.
11) In the circumstances, in our view petitioner’s stand that she was not
required to get her accounts audited under Section 44AB, is correct.
12) Petition, therefore, is allowed in terms of prayer clauses (a) and (b)
which read as under:
“(a) that this Hon’ble Court be pleased to issue a writ of certiorari or a
writ in the nature of certiorari or any other appropriate writ, order or
direction under Article 226 of the Constitution of India calling for the
records of petitioner’s case and after examining the legality and
validity thereof quash and set aside the impugned orders dated 25th
March 2021 (Exhibit A) and 25th February 2020 (Exhibit B) passed by
respondent no.1 and respondent no.2 respectively and/or allow the
claim of petitioner.
(b) that this Hon’ble Court may be pleased to issue a writ of
mandamus or a writ in the nature of mandamus or any other
appropriate writ, order or direction under Article 226 of the
Constitution of India ordering and directing respondent no.2 to treat
the return of income dated for A.Y.2017-2018 filed by petitioner as a
valid return of income.”
13) Petition disposed.
(N. J. JAMADAR, J.)
(K.R. SHRIRAM, J.)