2019 (2) TMI 165 - AT - Income Tax

Tribunal denies benefit under Income-tax Act for partner payments, emphasizing intent of section 44AD

The tribunal upheld the decision to deny the appellant the benefit of section 44AD of the Income-tax Act for estimating income on remuneration and ... Profits and gains of business or profession - presumptive taxation under section 44AD - treatment of partner's remuneration and interest as gross receipts or turnover - non-deduction and limits under section 40(b) - legislative intent of presumptive scheme for small businessesProfits and gains of business or profession - treatment of partner's remuneration and interest as gross receipts or turnover - presumptive taxation under section 44AD - non-deduction and limits under section 40(b) - Whether remuneration and interest received by a partner from his firm constitute gross receipts/turnover of an independent business of the partner for availing presumptive taxation under section 44AD. - HELD THAT: - Section 28(v) brings any interest, salary, bonus, commission or remuneration received by a partner from the firm into the head 'Profits and gains of business or profession'; however, the proviso to clause (v) links such inclusion to the limits of clause (b) of section 40. Section 40(b) operates restrictively by disallowing certain payments unless they are authorised and within specified limits, thereby demonstrating that such payments are treated as an indirect distribution of firm profits rather than as receipts of an independent business carried on by the partner. The legislative expansion of section 44AD was intended to extend a simplified presumptive regime to small businesses generally, not to convert a partner's share of or payments from a firm into the gross turnover/gross receipts of a separate business for that partner. Reliance on decisions unrelated to the scope of section 44AD or addressing different issues (such as audit/penalty or other sections) does not alter this conclusion. Applying these principles, remuneration and interest received by the assessee from the partnership firms cannot be construed as gross receipts or turnover of an independent business of the partner for the purpose of claiming the presumptive rate under section 44AD. [Paras 6, 7, 8]Assessee is not entitled to treat remuneration and interest received from partnership firms as gross receipts/turnover of an independent business for applying presumptive taxation under section 44AD; appeal dismissed.Final Conclusion: Appeal dismissed; assessee not entitled to the benefit of presumptive taxation under section 44AD on remuneration and interest received from partnership firms. 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 Rs. 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.