2020 (12) TMI 994 - HC - Income Tax

Characterization of interest income from the partnership firm as business income - Presumptive income @8% u/s 44AD - Interest and salary received by the assessee from firms in which he was a partner - Tribunal held that only remuneration and salary, received from a firm, to the extent of eligible under clause (b) of Section 40 of the Act, would be considered as profits and gains of business or profession of the recipient partner? - HELD THAT - As already seen in Section 44AD, the words used are 'total turnover' or 'gross receipts' and it pre-supposes that it pertains to a sales turnover and no other meaning can be given to the said words and if done so, the purpose of introducing Section 44AD would stand defeated. That apart, the position becomes much clearer if we take note of sub-Section (2) of Section 44AD which states that any deduction allowable under the provision of Section 30 to 38 for the purpose of sub-section (1) be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. Thus, conspicuously section 28(v) has not been included in sub-section (2) of Section 44AD which deals with any interest, salary, bonus, commission or remuneration by whatever name called, due to or received by, a partner of a firm from such firm. We find that the Tribunal rightly rejected the plea raised by the assessee and confirmed the order passed by the CIT(A) and the Assessing Officer.

Summary

Issues Involved:
1. Classification of income from interest and salary received by the assessee from firms.
2. Eligibility of the assessee to apply the presumptive tax rate under Section 44AD of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Classification of Income from Interest and Salary:
The primary issue was whether the interest and salary received by the assessee from firms in which he was a partner could be construed as business income under Section 28(v) of the Income Tax Act, 1961, and thereby be eligible for applying the presumptive interest rate of 8% under Section 44AD of the Act. The Tribunal held that such income could not be considered as business income under Section 28(v). The reasoning was that Section 44AD is a special provision meant for small businesses, and the income from interest and salary received by a partner does not qualify as gross receipts or turnover from an eligible business. The Tribunal noted that the remuneration and interest received by the assessee from the partnership firms were already debited in the firms' profit and loss accounts and could not be treated as the assessee's gross receipts.

2. Eligibility to Apply Presumptive Tax Rate under Section 44AD:
The second issue was whether the assessee, who received remuneration and interest from partnerships, could apply the presumptive tax rate under Section 44AD. The Tribunal and the CIT(A) both concluded that the assessee was not eligible to apply Section 44AD. Section 44AD is intended to help small businesses by allowing them to compute profits on a presumptive basis. The Tribunal emphasized that the assessee must satisfy four main criteria under Section 44AD: being an eligible assessee, engaged in an eligible business, and having a total turnover or gross receipts. The assessee, in this case, was not carrying on any business independently but was merely receiving remuneration and interest from the partnership firms. Therefore, the remuneration and interest could not be considered as turnover or gross receipts of the assessee's business. The Tribunal further noted that the legislative intention behind Section 44AD was to simplify tax compliance for small businesses, not for partners receiving remuneration and interest from firms.

Conclusion:
The Tribunal concluded that the remuneration and interest received by the assessee from the partnership firms could not be treated as gross receipts or turnover from an eligible business under Section 44AD. The assessee did not meet the criteria for applying the presumptive tax rate under Section 44AD, as he was not engaged in an independent business, and the income received was already accounted for in the firm's profit and loss statements. Consequently, the appeal was dismissed, and the substantial questions of law were answered against the assessee and in favor of the revenue.