Section 44AD – Deletion of proviso to sub-section (2) providing for deduction of interest and remuneration paid to partners by firm from the presumptive income under section 44AD – Proviso to remain/restored to avoid genuine hardship to small and medium firms
The amendment made via the Finance Act, 2016 to disallow deduction of expenditure in the nature of salary, remuneration, interest paid to the partner as per section 40(b) out of presumptive income. This amendment would hit small and medium firms, especially running family businesses. Taxing the entire income of the firm, without deduction for partner’s salary/interest paid within the permissible limits set out in section 40(b), at flat rate of tax at 30% may hit the small and medium firms badly and adversely affect their business. This would be against the government’s objective of facilitating ease of doing business.
It is pertinent to mention here that the same issue had crept in the past as well. While introducing presumptive income for firms in the Finance Bill 1994, initially there was no provision providing for deduction of interest and remuneration to firm assessees. However, the said proviso was introduced vide Finance Act 1997, thereby giving effect to the true intent of the law, and that too with retrospective effect from 01-04-1994.
For facilitating ease of doing business by small firms and removing the genuine hardship of having to pay higher taxes on their presumptive income on account of the denial of deduction in respect of remuneration paid to partners within the limits set out in section 40(b), the proviso to section to 44AD(2) may be restored. Similarly, separate deduction may be allowed for professional firms as well in respect of remuneration paid to partners under the new section 44ADA