Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

 

The assessee is an individual, a partner in M/s Kumbakonam Jewellers, M/s ANS Gupta & Sons and M/s ANS Gupta Jewellers. The assessee filed his return of income for the A.Y. under consideration admitting a total income of Rs. 43,53,066. The assessment was finalised u/s 143(3) by an order dated 3rd March, 2015 disallowing the claim made by the assessee u/s 44AD. While filing the return, the assessee had applied the presumptive rate of tax at 8% u/s 44AD and returned Rs. 4,68,240 as income from the remuneration and interest received from the partnership firm. The A.O. did not agree with the assessee and opined that section 44AD is available only for an eligible assessee engaged in an eligible business and that the assessee was not carrying on business independently but was only a partner in the firm. Further, the assessee did not have any turnover and receipts of account of remuneration and interest from the firms cannot be construed as gross receipts mentioned in section 44AD.

On appeal, the CIT (Appeals), Salem dismissed the same by order dated 22nd December, 2017. The Tribunal also dismissed the assessee’s appeal.

The Hon. High Court observed that section 44AD is a special provision for computing profits and gains of business on presumptive basis which was introduced in the Act with effect from 1993. At the outset, it needs to be noted that section 44AD is a special provision and it carves out an exception in respect of certain businesses, and from clause (b)(ii) of the Explanation u/s 44AD which prescribes the limit of Rs. 2 crores as total turnover or gross receipts, it is a clear indication that this provision is meant for small businesses. Further, section 44AD(1) commences with a non-obstante clause and states that notwithstanding anything to the contrary contained in sections 28 to 43C in the case of an eligible assessee engaged in an eligible business, a presumptive rate of tax at 8% can be adopted. One more important aspect is that 8% is computed on the basis of the total turnover or gross receipts of the assessee. Therefore, four important aspects to be noted in section 44AD are that the assessee who claims such a benefit of the presumptive rate of tax should an eligible assessee as defined in clause (a) of the Explanation to section 44AD, he should be engaged in an eligible business as defined in clause (b) of section 44AD and 8% of the presumptive rate of tax is computed on the total turnover or gross receipts. Therefore, to avail the benefit of such provision, the assessee has to necessarily satisfy the A.O. that he comes within the framework of section 44AD.

The assessee’s case is that he has received the remuneration and interest from the partnership firm and according to him this remuneration and interest received are gross receipts, and they being less than Rs. 1 crore arising from an eligible business, he is entitled to claim the benefit of the presumptive rate of tax. Further, the assessee’s contention is that he is an eligible assessee and the remuneration and interest received from the partnership firm being gross receipts from an eligible business, the A.O. ought to have allowed the benefit u/s 44AD.

The Revenue submitted that the assessee is not doing any business, but the firm is carrying on business in which the assessee is a partner and therefore the condition that it should arise from an eligible business is not satisfied. In the Statement issued by the ICAI, it has been stated that the word ‘turnover’ for the purpose of the clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise, whereas in the case of the assessee neither has he performed any sales nor rendered any services but merely received remuneration and interest from the firm and the partnership firm has already debited the remuneration and interest in their profit and loss account, and therefore it cannot be taken as turnover or gross receipts.

The assessee should be able to satisfy the four main criteria mentioned in sub-section (1) of section 44AD r/w Explanations (a) and (b) in the said provision. Therefore, the assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt. Admittedly, 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 the turnover of the assessee (individual). Similarly, it will also not qualify for gross receipts.

Admittedly, 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. Therefore, the Revenue was right in the contention that remuneration and interest cannot be treated as gross receipts.

The Court noted that the Tribunal observed that the intention of section 40(b) is that the partner should not be disentitled from claiming reasonable remuneration where he is a working partner and should not be denied reasonable interest on the capital invested by him in a firm and these changes if not made in the accounts of the firm, then the pro-rata profits of the firm would be higher resulting in higher tax for the firm. Therefore, the payments have to be construed indirectly as a type of distribution of profits of a firm or otherwise the firm would have been taxed. Therefore, the Tribunal observed that the Legislature in its wisdom chose such remuneration and interest to be a part of profits from business or profession and that can never translate into gross receipts or turnover of a business of being a partner in a firm. The Tribunal took note of the position prior to the substitution of section 44AD by the Finance (No. 2) Act, 2009 with effect from 1st April, 2011. Prior to the said substitution, this provision allowed the application of presumptive tax rate only for the business of civil construction or supply of labour for civil construction. By virtue of the substitution, the applicability of presumptive rate of tax was expanded to include any business which had turnover or gross receipts of less than Rs. 1 crore. The Tribunal noted the Explanatory notes to the provisions of the Finance (No. 2) Act, 2009 vide Circular No. 5/2010 dated 3rd June, 2010 wherein the CBDT had explained why the scope of the said provision was enlarged.

The Court observed that section 44ADA is a special provision for computing profits and gains of profession on presumptive basis and uses the expression ‘Total gross receipts’. 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 so done, 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 provisions of sections 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.

Thus, the Tribunal rightly rejected the plea raised by the assessee and confirmed the order passed by the CIT(A) and the A.O. The appeal filed by the assessee was accordingly dismissed.