Partner’s Remuneration and Interest Eligible for 50% Presumptive Taxation Under Section 44ADA? A Legal Grey Area for Professionals
Can a Chartered Accountant, Advocate or other professional receiving remuneration and interest from a partnership firm offer only 50% of such receipts to tax under Section 44ADA?
Consider a lawyer who is a partner in a law firm and receives ₹30 lakh towards remuneration and interest from the firm. The firm deducts TDS at 10% under Section 194T. Can the partner declare only ₹15 lakh as taxable professional income under Section 44ADA?
This seemingly simple tax-planning question has generated an interesting legal debate.
The issue involves the interplay of three provisions:
* Section 28(v): Taxability of remuneration, salary, bonus, commission and interest received by a partner from a firm under the head Profits and Gains of Business or Profession (PGBP).
* Section 44ADA: Presumptive taxation for specified professionals, subject to prescribed eligibility conditions.
* Section 194T: TDS on remuneration, interest, commission, salary or bonus paid by a firm to its partners, effective from 1 April 2025.
The crucial question is whether the classification of partner remuneration under the head PGBP automatically makes it eligible for presumptive taxation under Section 44ADA.
The answer requires examining the distinction between the head under which income is assessed and the nature of professional receipts eligible for presumptive taxation.
1\. Understanding Section 28(v): Classification Is Not the Same as Eligibility
Section 28(v) specifically provides that interest, salary, bonus, commission or remuneration received by a partner from a firm is taxable under the head ‘Profits and Gains of Business or Profession’.
This provision determines the head under which such income is taxable.
However, the important question is whether this classification automatically satisfies the separate conditions prescribed under Section 44ADA.
Section 44ADA does not cover every receipt taxable under PGBP. It applies to gross receipts of an eligible assessee on account of a specified profession.
The distinction between these two expressions is at the heart of the controversy.
2\. The Delhi ITAT’s Favourable View: Ranu Gupta v. ACIT
In Ranu Gupta v. ACIT, ITA No. 2224/Del/2025, order dated 2 June 2025, the Delhi ITAT considered the claim of a Chartered Accountant who received ₹27 lakh as remuneration from M/s SARC and Associates, Chartered Accountants.
The assessee had offered 50% of the remuneration to tax under Section 44ADA.
The Assessing Officer rejected the claim on the ground that remuneration received as a partner was not professional income earned independently by the assessee.
The CIT(A) also upheld the disallowance, relying upon the Madras High Court decision in Anandkumar v. ACIT.
However, the Delhi ITAT took a different view.
The Tribunal observed that Section 44ADA did not prescribe a condition that the professional must carry on independent professional activities rather than work as a partner in an establishment.
It also rejected the Revenue’s argument that the assessee must necessarily claim corresponding expenditure to become eligible for Section 44ADA.
The Tribunal accordingly directed the Assessing Officer to assess the assessee under Section 44ADA in accordance with law.
Favourable view for the assessee
My observation: This decision supports the argument that where a partner is a qualified professional and the remuneration is earned on account of professional engagements, the mere fact that the payment is received from a partnership firm should not automatically exclude it from Section 44ADA.
However, the decision was rendered ex parte, by a Single Member Bench, and is a Tribunal decision. It is persuasive authority, not a binding High Court precedent.
2224 Ranu Gupta-SMC +1
3\. The Contrary View: Anandkumar v. ACIT – Madras High Court
The Revenue has a strong contrary authority in Anandkumar v. ACIT, reported in 430 ITR 391 (Mad).
The original dispute concerned Section 44AD, rather than Section 44ADA.
The assessee had received remuneration and interest from partnership firms and sought to declare presumptive income at 8% under Section 44AD.
The Madras High Court upheld the view that remuneration and interest received by an individual partner could not be treated as the individual’s turnover or gross receipts from an independently carried-on eligible business.
The Court explained that Section 28(v) merely brings such receipts under PGBP. It does not automatically convert them into turnover or gross receipts of an eligible business.
The underlying principle is significant:
Income being taxable under the head PGBP does not necessarily mean that it qualifies for every presumptive taxation scheme available under that head.
Indian Kanoon +1
4\. Bombay High Court: Perizad Zorabian Irani v. PCIT
Another important decision is Perizad Zorabian Irani v. PCIT, Writ Petition No. 1333 of 2021, decided on 9 March 2022.
The issue before the Bombay High Court concerned the applicability of Section 44AB and whether remuneration received by a working partner should be included while determining the professional gross receipts for tax audit purposes.
The Court held that remuneration received by an individual as a working partner could not be treated as professional gross receipts for the purpose of Section 44AB.
While the judgment did not directly concern Section 44ADA, it relied upon the Madras High Court decision in Anandkumar and accepted the distinction between remuneration received as a partner and independent professional receipts.
This judgment is particularly relevant because it is a decision of the jurisdictional Bombay High Court for taxpayers falling within its jurisdiction.
However, one must remember that the issue directly adjudicated was under Section 44AB, not Section 44ADA.
TaxGuru +1
5\. Latest Development: Hemant Kumar Agrawal v. ITO – ITAT Mumbai, 2026
The controversy has become even more interesting following the decision of the Mumbai ITAT in Hemant Kumar Agrawal v. ITO, ITA No. 4728/Mum/2025, AY 2018-19, pronounced on 30 January 2026.
The assessee was a practising Chartered Accountant and a full-time associate partner in Jayesh Sanghrajka & Co. LLP.
He received remuneration of ₹18 lakh from the LLP and offered 50%, i.e. ₹9 lakh, as presumptive income under Section 44ADA.
The assessee advanced several arguments:
* Section 44ADA uses the expression ‘gross receipts’ and does not specifically use the expression ‘sales turnover’.
* The remuneration was received by the assessee from the firm and constituted gross receipts in his hands.
* There is no express exclusion of partner remuneration under Section 44ADA.
* The assessee was a qualified Chartered Accountant holding a Certificate of Practice.
* The Delhi ITAT decision in Ranu Gupta supported his claim.
The Tribunal examined the statutory language and the conflicting judicial precedents.
It acknowledged that the assessee was engaged in a specified profession and that the remuneration arose from professional engagements.
Nevertheless, it relied upon the Madras High Court decision in Anandkumar and the Bombay High Court decision in Perizad Zorabian Irani.
The Tribunal ultimately held that remuneration received from the partnership firm could not be treated as gross receipts qualifying for presumptive taxation under Section 44ADA.
Claim under Section 44ADA rejected
An Important Alternative Relief
The Tribunal did not, however, hold that the entire remuneration was taxable without allowing any expenditure.
It accepted the assessee’s alternative contention that remuneration received from a partnership firm is taxable under PGBP and that expenditure having a direct nexus with earning such income can be claimed as a deduction.
It relied upon the Supreme Court decision in CIT v. Ramniklal Kothari (74 ITR 57) and the Delhi ITAT decision in Atul Kumar Gupta v. ITO.
Thus, although the 50% presumptive claim was rejected, the assessee was entitled to claim actual expenditure incurred for earning the remuneration, subject to the applicable statutory conditions.
This is an important practical distinction.
Indian Kanoon +1
6\. Does Section 194T Change the Position?
Section 194T was introduced by the Finance (No. 2) Act, 2024, with effect from 1 April 2025.
It requires a partnership firm or LLP to deduct TDS at 10% on salary, remuneration, commission, bonus or interest credited or paid to its partners, where the aggregate exceeds ₹20,000 during the financial year.
The important point is that Section 194T is a TDS provision.
It does not prescribe the manner of computation of taxable income in the hands of the partner.
Therefore:
* Deduction of TDS under Section 194T does not automatically establish eligibility under Section 44ADA.
* Equally, deduction of TDS does not mean that the partner cannot claim legitimate expenditure against the remuneration.
* The ultimate tax treatment must be determined under the applicable computation provisions.
The introduction of Section 194T does not, by itself, resolve the controversy surrounding Section 44ADA.
194T +1
7\. Is Interest on Partner’s Capital Different from Remuneration?
This is another aspect deserving separate consideration.
A partner may receive two distinct types of payments:
- Remuneration for professional services
Where a practising Chartered Accountant, Advocate or other specified professional actively renders professional services through the partnership firm, an argument can be made that the remuneration is earned on account of the specified profession.
This was substantially the assessee’s argument in Ranu Gupta and Hemant Kumar Agrawal.
- Interest on capital
Interest paid on capital invested by a partner is fundamentally different in character from remuneration for professional services.
It represents a return on the capital contribution and does not necessarily arise from the practice of a specified profession.
Even though both receipts are covered by Section 28(v), their underlying nature is different.
The reasoning in Hemant Kumar Agrawal is particularly relevant here, but the precise eligibility of interest on partner capital under Section 44ADA should not be treated as conclusively decided by that judgment, which principally examined remuneration.
In my view, the claim for presumptive treatment of interest on capital is considerably more difficult to sustain.
8\. What Changes Under the New Income-tax Act, 2025?
There is one further development that professionals should keep in mind.
The Income-tax Act, 1961 has been replaced by the Income-tax Act, 2025 with effect from 1 April 2026.
The presumptive taxation provisions have been consolidated under Section 58 of the new Act.
Accordingly:
* For earlier tax years governed by the Income-tax Act, 1961, the controversy has to be examined under Section 44ADA.
* For Tax Year 2026-27 onwards, the corresponding presumptive taxation framework is contained in Section 58 of the Income-tax Act, 2025.
The change in statutory numbering and presentation does not, by itself, settle the underlying interpretational controversy concerning partner remuneration.
IndiaCode +2
9\. My Analysis: Where Does the Law Stand?
In my opinion, the issue requires a distinction between three separate questions:
| Question | Position |
| ————————————————————- | ————————————————————————— |
| Is partner remuneration taxable under PGBP? | Yes, under Section 28(v) |
| Does this automatically make it eligible for Section 44ADA? | No settled uniform judicial position; substantial contrary authority exists |
| Can actual expenditure be claimed if Section 44ADA is denied? | Yes, subject to proof and statutory conditions |
The argument in favour of the assessee is not without substance.
Section 44ADA specifically uses the expression ‘gross receipts’ and does not expressly exclude remuneration received by a partner.
Where the partner is a qualified professional, actively engaged in the specified profession and the remuneration is demonstrably attributable to professional work, there is a reasonable argument that such receipts arise on account of the specified profession.
On the other hand, the decisions of the Madras and Bombay High Courts support the Revenue’s argument that partner remuneration is not necessarily the individual’s professional gross receipts merely because it is taxable under PGBP.
The Mumbai ITAT decision in Hemant Kumar Agrawal has now adopted this restrictive interpretation even after considering the favourable Delhi ITAT decision in Ranu Gupta.
Therefore, claiming 50% of partner remuneration under Section 44ADA without considering these authorities may invite litigation.
Conclusion: A Question That Deserves Further Judicial Clarity
The controversy surrounding partner remuneration and Section 44ADA highlights an important distinction in income tax law.
Section 28(v) determines the head of income. Section 44ADA determines the manner of computing income from a specified profession.
The two provisions operate in different fields, and satisfaction of one provision does not automatically establish eligibility under the other.
At the same time, where a professional partner actually renders professional services and receives remuneration for those services, the argument for presumptive taxation deserves serious consideration, particularly in view of the favourable decision in Ranu Gupta.
The latest Mumbai ITAT decision, however, makes the position considerably more challenging.
My practical view is that independent professional receipts and remuneration received as a partner should not be casually clubbed together for presumptive taxation. Each receipt must be examined on its own merits, and the nature of the underlying activity must be established.
Questions for Fellow Tax Professionals
1\. Does Section 28(v) merely determine the head of income, or does it also support the argument that remuneration is received on account of the partner’s profession?
2\. Can the restrictive interpretation adopted in Anandkumar under Section 44AD and Perizad Zorabian Irani under Section 44AB automatically be extended to Section 44ADA, considering the difference in statutory language?
3\. Should remuneration earned by a practising professional for actual professional work be distinguished from interest received on capital contributed to the firm?
4\. Does the introduction of Section 194T provide any additional support to the argument that partner remuneration is a distinct category of receipt, or is it merely a TDS compliance provision?
This is an interesting area of tax jurisprudence where the distinction between the head of income, the source of income and the eligibility for presumptive taxation deserves further judicial examination.
I would particularly welcome views from fellow Chartered Accountants, Advocates and tax professionals on this issue.
Important Case References
* Ranu Gupta v. ACIT, ITA No. 2224/Del/2025, dated 2 June 2025 – ITAT Delhi.
* Anandkumar v. ACIT, (2021) 430 ITR 391 (Mad) – Madras High Court.
* Perizad Zorabian Irani v. PCIT, \ [2022\] 139 taxmann.com 164 (Bombay) – Bombay High Court.
* Hemant Kumar Agrawal v. ITO, ITA No. 4728/Mum/2025, dated 30 January 2026 – ITAT Mumbai.
* CIT v. Ramniklal Kothari, 74 ITR 57 (SC).
* CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd., 349 ITR 336 (Bom).
The copy of the order is as under:
