2019 (2) TMI 165 - AT - Income Tax

Denial of claim for estimating income u/s 44AD on remuneration and interest received from firms - 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 - Held that - Intention of the Section 40, 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. Having a look section 44AD which was substituted by Finance (No.2) Act, 2009 with effect from 01.04.2011. 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 dated 03.06.2010, CBDT has explained the reason for widening. 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. - Decided against assessee.

Summary

Issues:
1. Denial of claim for estimating income under section 44AD of the Income-tax Act on remuneration and interest received from firms.

Analysis:
The appellant, a partner in various firms, received remuneration and interest during the impugned assessment year. The appellant applied a presumptive rate of 8% under section 44AD while filing the return. However, the Assessing Officer denied the benefit of section 44AD, stating that it could only be availed by eligible assessee engaged in eligible business. The Commissioner of Income Tax(Appeals) upheld the decision. The appellant contended that as per section 28(v) of the Act, interest and salary received from firms by a partner should be assessed under the head "Profits & gains of business or profession." The appellant argued that the gross receipts were below ?1 crore, making them eligible for the presumptive rate of 8%. The appellant cited relevant legal provisions and judgments to support the claim.

The tribunal analyzed sections 28(v) and 40(b) of the Act. Section 40(b) specifies amounts not deductible in computing income under the head "Profits and gains of business or profession." It allows for payment of salary, bonus, commission, and interest to partners under specific conditions. The tribunal noted that these payments should not be disallowed as they are considered a type of distribution of profits of a firm. However, the tribunal clarified that such payments do not translate to gross receipts or turnover of a business independently carried on by a partner. The tribunal emphasized that the intention behind section 44AD was to assist small businesses in tax compliance, not to consider a partner's remuneration or interest as business income.

Referring to the Explanatory Notes of the Finance (No.2) Act, 2009, the tribunal highlighted the rationale behind widening the applicability of presumptive tax rates. The tribunal concluded that the judgments cited by the appellant were not directly relevant to the issue at hand. Therefore, the tribunal upheld the decisions of the lower authorities and dismissed the appeal. The order was pronounced on January 30, 2019, at Chennai.