Firms opting for presumptive taxation– need for amendment in partnership deeds?
[Query 1]
I am a trader in the stock market. I borrow capital from stock brokers and buy shares for long term and some time for short term also. I request that you please tell me how I can adjust interest while filing return? Whether I can add interest paid to the broker in the cost of acquisition? [viralkotharingp@rediffmail.com]
Opinion:
1. If You Classify Stock Market Transactions as a Business:
If you consider your stock market transactions as a business and report this under “Income from Business & Profession,” you can claim interest paid to your broker or others as a business expense. In this case, there’s no need to add the interest to the acquisition cost of shares since it is eligible as a direct deduction from business income.
2. If You Classify Stock Market Transactions as a Capital Gains:
If you report your stock market transaction as “Capital Gains Income” then in normal course one can neither deduct interest paid to the broker nor it can be added to the cost of acquisition of shares. This is because capital gains rules don’t specifically allow either.
3. Choosing Between Business Income and Capital Gains:
The choice of reporting stock income as business income or capital gains depends on factors like how often you trade, your investment intentions, holding period, etc. For a deeper dive, you can refer to “The Tax Talk” dated 21.10.2024 which discusses these distinctions & rules for set rules for classification of such income.
[Query 2]
A partnership firm having two partners has a turnover of Rs. 1 Crore. Books of accounts reveal remuneration of each partner as Rs. 7.50 Lacs & firm’s Net Profit after remuneration as Rs.10 Lacs. The firm decides to file ITR u/s 44AD @ 6 % i.e., Rs.6 Lacs & pays tax thereon. In such a scenario, can the individual partners claim that the firm doesn’t maintain accounts & consequently just declare share in profit from the firm at Rs. 3 Lacs each & remuneration as NIL in their individual ITRs? Further, offering income of Rs. 6 Lakh for firm and two partners as against actual income of Rs. 25 Lakh i.e., Rs. 10 Lakh + 7.50*2 Lakh) is permissible? Is this approach correct? [itr_ngp@rediffmail.com]
Opinion:
1. Query is a little bit technical from a general reader’s perspective but may be of high relevance for accountant, tax professional and well updated taxpayers. In addition to this, it is also important for all the firms wherein the partnership deed provides for payment of interest & remuneration but firms offers income on presumptive basis U/s 44AD. Non consideration of a few points could result in unintended tax liabilities in the hands of the partners. Let us discuss it in length.
2. Presumptive Taxation and Partnership Firms:
The partnership firms are also covered by the presumptive scheme of taxation under section 44AD & can offer 8% or 6% of the sales /turnover as income.
3. Minimum Income Requirement Under Section 44AD:
Readers may refer to The Tax Talk Dated 23.09.2024 titled “Presumptive Scheme of Taxation – Not a license to declare lower income” wherein I have discussed that the presumptive scheme prescribed the minimum percentage of income to be offered for taxation. If taxpayers have higher income then they may be required to file the income tax return with higher income. In the above case, the income of the firm is Rs. 10 Lakh as against minimum income amount of Rs. 6 Lakh U/s 44AD. Subject to various other factors and consideration, the firm may consider filing the return with income of Rs. 10 Lakh as against the amount of Rs. 6 Lakh.
4. Partner Interest and Remuneration:
As far interest and remuneration to the partner is concerned, it may be noted the same is governed by the clauses of the partnership deed. If the deed provides for payment of interest and remuneration then the firm is obligated to provide for it in accordance with the deed.
5. Changes by the Finance Act – 2016:
It may be noted that there was a proviso to section 44AD(2) prior to FA-2016 which reads as under:
“Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1), subject of the conditions and limit specified in clause (b) of section 40”
As a result of above proviso, the partnership firms earlier were eligible for deduction towards interest / remuneration after computing the income @6% or 8% of sales/turnover. However, above proviso has been omitted by the FA-2016 as a result of which the firm is no more eligible for deduction towards interest and remuneration to the partners.
6. Question of Payments to Partners under Presumptive Scheme:
The question emerges, when the firm is offering the income on presumptive basis then whether it can ignore the result of books of account & need not pay any remuneration to the partners (even if the partnership deed provides for it) as the firm is offering income on presumptive basis and there is no voluntary requirements or need for any further deduction for the firm.
Taxpayers may note that if the partnership deed is providing for interest and remuneration to the partners & the firm is offering income @8% or 6% on presumptive basis then it can be presumed that the income offered is after claiming the deduction towards interest and remuneration in accordance with the partnership deed. In such a scenario, income tax authorities may do a reverse calculation to arrive at the taxable interest and remuneration and may tax the same in the hands of the partner.
7. Suggested Approach for Firms Using Section 44AD:
Ideal solution in such a case where the firm is proposing to opt for presumptive scheme of taxation is to amend the partnership deed to specifically provide that no interest / remuneration shall be payable to the partners if the firm decides to offer the income on presumptive basis U/s 44AD of the Income Tax Act – 1961.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & responses to queries are available at www.theTAXtalk.com].
