The Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) has held that a partners’ remuneration from the Firm shall be subject to the application of presumptive interest rate under section 44AD of the Income Tax Act.
The assessee received remuneration and interest from partnership firms namely M/s. Kumbakonam Jewellers, M/s. ANS Gupta & Sons and M/s.ANS Gupta Jewellers during the previous impugned assessment year aggregating to Rs. 58,53,000/-. While filing a return for the impugned assessment year, the assessee had applied presumptive rate at 8% under section 44AD of the Act and returned Rs. 4,68,240/- as income from the above-mentioned remuneration and interest.
The Assessing Officer held that section 44AD could be availed only by an eligible assessee engaged in eligible business. According to him, the assessee was not doing any business independently but was only a partner in the firms. Further, as per Ld. Assessing Officer, the assessee had no turnover and receipts on account of remuneration and interest from the firms could not be construed as gross receipts mentioned under section 44AD of the Act. He, therefore, denied assessee the benefit of section 44AD of the Act and brought to tax the entire amount of remuneration and interest from the firms.
The assessee claimed that the 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 of the Act.
The Tribunal noted that the proviso to clause (v) specifically mentions clause (b) of section 40 of the Act.
“In other words, only remuneration and salary, received from a firm to the extent 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. It would be opposite to have a look at section 40(b) of the Act, insofar as it concerns remuneration and interest payable to partners concerned,” the Tribunal said.
Noting that Section 40 is clothed in a negative language, the Tribunal said that “It says that certain amounts shall not be deducted while computing income under the head “profits & gains of business or profession. However, it exempts from the rigors of such prohibition, payment of salary, bonus, commission and interest to the extent specified in sub-clause (iv) and (v) of subsection (b) thereof. The intention of the above Section, 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 the 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 the 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.”
“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. The intention was not at all to construe a partner’s remuneration or interest as business income,” the Tribunal said.
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