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

Issue/Justification

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.

Suggestion

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

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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Category : Income Tax (26738)
Type : News (13417)
Tags : Budget (1950) Budget 2018 (393) ICAI (2537) Section 44AD (120)

3 responses to “Section 44AD Allow deduction of interest and remuneration paid to partners by firm: ICAI”

  1. CA Sanjay Jain 9811589067 says:

    Section 44ADA applies to a Person and a person includes a company , a cooperative society also.
    certain professions notified u/s 44AA may now allow corporate form of business, but some may allow.- Interior decoration, technical consultancy. Hence it applies to a company MANDATORILY. Appears that this was not the intention of lawmakers

    Also a firm of professionals , eg a firm of CA will be required to pay tax @ 15.45% of GROSS fee . eg a firm having Fee of Rs 10 lacs has to pay tax Rs 154500/- . A firm is now not entitled to any interest or Remuneration to partner , hence this UNINTENDED situation has arisen which requires URGENT ACTION by legislature.

  2. CA Sanjay Jain says:

    It is an unintended blunder by law. The lawmaker never intended that a business having turnover of Rs 50 Lacs pays NIL tax on Rs 4 Lacs (DEEMED Profit @8%) if a proprietor ran the business ( 2.5 lacs + 1.5 Lacs deduction u/s 80C). But if the same business is run by a partnership than it ha to pay tax of Rs 123600/-.
    .If ththe Turnover is Rs 10 Lacs , Tax payable by the Firm will be Rs 24000.
    They may get TAX Audit to overcome this situation, but This is inequitable and NEEDS URGENT correction with retrospective effect . This will result in break up of partnership , which was not intended by legislature supporting small business

  3. DILIP PALEKAR says:

    yes, above restriction is no justifiable becasuse a small family business partnership having net profit of Rs.500000/- having two partners have to pay tax at highest slab rate,which itself kill main purpose of doing business and ease of doing business.
    Govt. is partial to small and medium Partnerships.Previously there were separate slabs for partnership.
    we will hope favourable changes in coming Budget

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