Case Law Details
Kiran Vasant Pawar Vs ITO (ITAT Pune)
Introduction: The Income Tax Appellate Tribunal (ITAT) Pune recently examined a case where the Income Tax department had categorized the remuneration received by a partner as salary income, leading to an addition of Rs. 78,064 to the partner’s income. The case of Kiran Vasant Pawar vs. Income Tax Officer (ITO) is one that sheds light on the misinterpretation of tax provisions, particularly concerning partners’ remuneration.
1. Background of the Case: The appellant, Kiran Vasant Pawar, was engaged in the profession of consulting engineering and was also a partner in various firms. During the relevant assessment year, he reported an income of Rs. 32,33,288 from partnership firms, but after setting off a loss of Rs. 16,92,142 and claiming depreciation of Rs. 11,27,030, he declared an income of Rs. 15,41,145.
2. Audit of Books of Account: The Assessing Officer (AO) noticed that the appellant had not audited his books of account as required by Section 44AB of the Income Tax Act, 1961. As a result, the AO believed that the appellant was obligated to declare income at a flat rate of 8% of the total turnover under Section 44AD of the Act.
3. Questionable Categorization: The issue that became contentious in this case was the categorization of the remuneration received by the appellant as salary income. The AO was of the opinion that since the appellant had not audited his books of account, all expenses incurred were deemed to have been fully accounted for. Consequently, the entire amount received from the partnership firms was added to the appellant’s income.
4. Challenging the Decision: The appellant contested this categorization, highlighting the inappropriate labeling of the remuneration as “salary income” and the denial of the set-off for the loss from the profession against the business profit. The appellant emphasized that the partnership firms did not have an employer-employee relationship, making the term “salary” inapplicable. However, neither the AO nor the National Faceless Appeal Centre (NFAC) provided a clear reason why the set-off was denied.
5. ITAT’s Directive: The ITAT Pune opined that the Revenue authorities had mischaracterized the remuneration of partners as salary income and should not have applied presumptive taxation under Section 44AD of the Act. This is because in a partnership firm, there is no employer-employee relationship. Furthermore, the absence of an audit of books of account does not, by itself, warrant the application of presumptive taxation. The ITAT directed the NFAC to re-adjudicate the issue in compliance with the principles of natural justice.
6. Conclusion: The ITAT Pune’s decision in Kiran Vasant Pawar vs. ITO underlines the importance of accurately interpreting tax provisions. It reinforces that remuneration received by partners in a partnership firm cannot be categorized as salary income due to the absence of an employer-employee relationship. Furthermore, the absence of an audit does not automatically warrant presumptive taxation.
The case is a reminder that tax authorities must provide clear and justifiable reasons for their decisions, and taxpayers have the right to challenge categorizations that may not be in accordance with tax laws. This case serves as a lesson in ensuring that tax provisions are accurately applied, preventing undue tax burdens on taxpayers.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal preferred by the assessee emanates from the order of National Faceless Appeal Centre [NFAC], Delhi, dated 23.06.2023 for A.Y.2015-16 as per the grounds of appeal on record.
2. The grievance of the assessee is that the Revenue authority erred in computing the income u/sec. 44AD of the Income Tax Act, 1961 (for short, ‘the Act’) for the professional income and thereby making addition of Rs. 78,064/- without considering the fact that the assessee is a professional and maintained books of account and derived loss of Rs. 16,92,142/-.
3. The relevant facts of the case are that assessee is a consulting engineer for builders and developers and also partner in various firms. During the year under consideration, assessee has shown income from partnership firms of Rs.32,33,288/- and after setting of loss of Rs.16,92,142/- and depreciation of Rs. 11,27,030/- declared income of Rs. 15,41,145/-. The Assessing Officer (AO) observed that assessee has not audited his books of account as per the provisions of sec.44AB of the Act. The AO was of the opinion that assessee was required to declare income @8% on the total turnover as per sec.44AD of the Act. However, assessee has declared loss of Rs.16,92,142/- and had claimed expenses of Rs. 26,67,942/-. Accordingly, a show-cause notice was issued to the assessee, for which he had submitted his response. After considering the submissions of the assessee, the AO observed that assessee is a partner in various firms and had earned income amounting to Rs. 32,33,288/-. The assessee has claimed various expenses in the profit & loss account which resulted into loss of Rs. 16,92,142/-. In the computation of income, the assessee has taken set off of business loss and depreciation against income from firms. As per sec.44AD(2), any deduction allowable under the provisions of sec. 30 to 38 shall, for the purposes of sub-section(1) be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. Since, the books of the assessee have not been audited, the expenses incurred by the assessee will be deemed to have been given full effect and no further deduction is allowed. In view thereof, the AO disallowed the entire amount received from the firms of Rs.32,33,288/- and added to the income of the assessee. Further, addition of Rs. 78,064/- was made u/sec. 44AD of the Act. This was upheld by the NFAC.
4. We have considered the facts and circumstances and have heard the submissions of the parties. We have also given considerable thought to those submissions placed on record.
5. In this case, the assessee is a classified professional, working as a consulting engineer. The assessee had set off of loss of professional income with the business profit i.e. the income earned from various partnership firms as remuneration to partners. The AO has denied such set off of loss of professional income with business profit and in addition, has applied presumptive taxation @8% u/sec. 44AD of the Act. Firstly, we observe that in a partnership firm, there is no employer and employee relation and, therefore, the remuneration given to a partner by the partnership firm cannot be termed as salary. Secondly, the assessee has not audited his books of account but that itself cannot be a ground for invoking presumptive taxation u/sec. 44AD of the Act. Neither the AO nor NFAC has given specific finding as to why the loss from profession cannot be set off from the business profit. First of all, at the threshold itself the revenue authorities have travelled on wrong footing by holding the remuneration of partners as salary income. This is evident at para 7.3 of the AO‟s order. Considering these facts, the NFAC is directed to re-adjudicate the issue as per law and come out with a speaking order. In view thereof, we set aside the order of NFAC and remand the matter back to its file. The NFAC shall comply with the principles of natural justice while adjudicating the matter. We order accordingly. The grounds of appeal of the assessee stands allowed for statistical purposes.
6. In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in open Court on 20th September, 2023.
