Case Law Details
Anandkumar Vs ACIT (Madras High Court)
Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that interest and salary received by the assessee from firms in which he was a partner cannot be construed as business income u/s. 28(v) and therefore not eligible for applying the presumptive interest rate of 8% under section 44AD of the Act?
intention of Section 40(b) is that the partner should not be disentitled for 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 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 partners in a firm. The Tribunal took note of the position prior to substitution of Section 44AD by Finance (No.2) Act, 2009 with effect from 01.04.2011. Prior to the said substitution, this provision allowed the application of presumptive tax rate only for 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 03.06.2010, wherein the CBDT had explained as to why the scope of the said provision was enlarged.
A reading of the circular will clearly show the intention behind the widening scope of Section 44AD and the intention is clear that it was made taking note of the fact that there has been substantial increase in small businesses who earns substantial income are outside the tax-net. Precisely for such reason, the assessee opting for presumptive rate of tax provision are exempted from maintenance of books of accounts related to such business as required under Section 44AA of the Act. The intention of the legislature also becomes clearer if we look into Section 44AF which is a special provision for computing profits and gains of retail business which is computed based on the total turnover with the previous year on account of such business. Section 44ADA is a special provision for computing profits and gains of profession on presumptive basis 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 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.
Thus, for all the above reasons, 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.
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There is lot of confusion regarding 44AD and 44ADA. First of all there is no need to take Salary or Interest from the firm, while they file returns under 44AD. Once the return is filed under 44AD, the whatever money is available in the firm is profit and partners can draw money from the firm, tax free. There is difference between deemed profit and actual profit. Law itself clerkly states that, 8% is considered after consider all requirements between section 30 and 38. That means, more money is available with the firm, than the profit declared. So, partners can withdraw, whatever money (if available), tax free. And if any outstanding is there from the firm, all partners are liable to pay the same from their personal money, if firm cannot meet such obligations.