Interesting Issues in the Presumptive Taxation Scheme - Part VII

• Click here to read Part 1 - Presumptive Taxation Scheme u/s Section 44AD
• Click here to read Part 2 - Interplay of Section 43CA vs. Section 44AD
• Click here to read Part 3 - Can assessee opt for Sec. 44AD and Sec. 44AE together?
• Click here to read Part 4 - Computation of Income under Section 44AD
• Click here to read Part 5 - Section 44AD (4): Consequences of Opting Out of Section 44AD(1)
• Click here to read Part 6 - Exceptions to the provisions of Sec 44AD(4) & Sec 44AD(5)

No presumptive taxation benefit u/s 44AD to partner on interest, remuneration from firm

This issue has been decided by Hon'ble Madras High Court In Anand Kumar [TS-690-HC-2020(MAD)]Mr. A. Anand Kumar (Assessee) is an individual, who had received remuneration and interest from partnership firms during subject AY 2012-13. While filing the return, assessee had applied the presumptive rate @8% u/s 44AD. Revenue noted that assessee was not doing any business independently but was only a partner in the firms. Moreover, as assessee had no turnover and receipts on account of remuneration and interest from the firms could not be construed as gross receipts mentioned u/s 44AD. Therefore, Revenue denied the benefit of Sec.44AD and brought to tax the entire amount of remuneration and interest from the firms. The assessment order was confirmed by CIT(A) and Chennai ITAT.

Aggrieved, assessee filed appeal before the Madras HC.

HC upholds ITAT order and denies presumptive taxation benefit u/s 44AD to assessee-partner on interest, remuneration from firm.

Key Observations of the HC

1. At the outset, HC notes that Sec.44AD is a special provisions and 4 aspects to be noted in Sec.44AD are that (1) the assessee who claim such a benefit of the presumptive rate of tax should an eligible assessee as defined in Clause (a) of the explanation to Sec.44AD, (2) he should be engaged in an eligible business as defined in Clause (b) of Section 44AD and (3) 8% of the presumptive rate of tax is computed on the total turnover or gross receipts.
2. HC observes that the assessee who is an individual in the instant case is not carrying on any business. Therefore, the remuneration and interest received by the assessee from the partnership firm cannot be termed to be a turnover of the assessee [individual].
3. Likewise, HC holds that remuneration & interest does not qualify as gross receipts. Accepts Revenue's submission that in the statement issued by the ICAI on the Companies (Auditors report) Order 2003, the word term is defined as the aggregate amount for which sales are effected or services rendered by an enterprise.
4. Notes that in the present case the assessee has not done any sales nor rendered any services but has been receiving remuneration and interest from the partnership firms which amount has already been debited in the profit and loss account of the firms. Thus holds that the revenue was right in their contention that remuneration and interest cannot be treated as gross receipt.
5. Further concurs with ITAT's observation that remuneration and interest received from a firm, to the extent eligible u/s 40(b), would be considered as 'profits and gains from business or profession' of the recipient-partner, however that by itself would not translate such remuneration and interest, to gross receipts or turnover of business independently carried on by the partner.
6. Also refers to CBDT circular 5/2010 enhancing the threshold under the provisions of Sec.44AD from 1Cr to 2Cr. States that intention is clear that it was made taking note of the fact that there has been substantial increase in small businesses who earns substantial income are outside the tax-net.
7. Lastly, also refers to sub-section (2) of Sec.44AD which states that any deduction allowable u/s 30 to 36 is deemed to be given full effect and conspicuously section 28(v) has not been included which deals with any interest, salary, bonus, commission or remuneration by whatever name called, due to or received by, a partner of a firm.

Now let us consider the case of a partnership firm which is engaged in eligible business as per section 44AD and whose turnover is say Rs.80 lacs in the preceding Financial Year 2020-21 and which shows Net loss from business of Rs.50,000/- after providing interest and salary to partners. Is this firm required to get the accounts audited under section 44AB read with section 44AD of the Income Tax Act'1961?

The answer is 'No' because if we read section 44AD carefully, the audit is required where profits are less than 8% or 6% of the gross receipts or turnover and the income exceeds maximum amount not chargeable to tax.

Since, the firm is taxed at an income starting from Rs.1, therefore the maximum amount not chargeable to tax is nil.

In case of loss, since there is no income, therefore, it does not exceed the maximum amount not chargeable to tax and so the second condition mandating tax audit u/s 44AB r/w section 44AD is not satisfied and therefore the assessee is not required to get the accounts audited u/s 44AB.If its case falls under 44AD(4) then firm is liable to Tax Audit u/s44AB(e) provided if it earned any positive income

However, in the case of losses, the firm is not required to gets its accounts audited u/s44AB(e) assuming turnover of firm is less than 1 Cr.

If Turnover is more than 1 Cr then even in the case of loss the Firm is subject to Tax Audit u/s44AB(a) & the above limits shall be read as Rs.10 Crores provided other conditions laid down by Finance Act,2020 have been complied with.

It can be concluded with regard to firm that in case section 44AD(4) attracts they are always subject to Tax Audit u/s 44AB provided they earn positive income.

From the above it can be concluded that a firm having zero income is not liable for tax audit under section 44AB. It does not make any difference that the loss is after deducting the salary and interest to partners.