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

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

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)
Categories: Income Tax

View Comments (7)

  • 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

  • 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.

  • In cases where 44AD is applied and flat 8/6 % profit is computed;Is remuneration required to be added to partners income?

    • Respected sir
      As you know that as per provisions of section 44AD of the Income Tax Act, 1961, we have to show minimum 8% net income of the total gross receipts. In case of a partnership firm, Whether it is Book profit or Net profit ?
      My question is that - In case of a partnership firm, whether this 8% net income should be treated after deduction remuneration to partners or prior to this deduction.
      Suppose, in above query after deduction of remuneration, total income comes less than 8%, then whether the firm is needed for audit or not ?
      Please guide ASAP.

  • Dear friends,

    Vide Finance Act 1997, under presumptive income scheme of 44AD /AE provision was introduced providing for deduction of interest and remuneration paid to partners by firm . These provisions were aimed at facilitating small business under ease of doing business. Finance Act 2016 has withdrawn it and purpose and object of extending relief to small business run under partnership stood defeated.

    Assessee firms have been discriminated before the law. An Individual ( prop firm) with 4 lacs income ( 2.5 L basic exemption and 1.5L 80C deduction) enjoying 0 Zero tax and on the other hand A partner ship firm run by 2 partners require to pay 1.23L tax. It is big blow for small assesseee firms and big blunder of law . It is ex-facie irrational, illogical and patently erroneous.

    There is immediate need to pay heed and restore the provision for deduction of remuneration and interest paid to partners by the firm with retrospective effect .

    Law makers played havoc. This amendment is contrary to concept of EASE OF DOING BUSINESS and suffers from vice of arbitrariness , non application of mind and discrimination contrary to article 14, 19 and 21 of the constitution

    FM and CBDT is expected to correct this manifest error of fact and law at the soonest fulfilling the object of presumptive business scheme in its true sprit and intend.

    AK Bhargava, Nai Basti, Katni, (MP) -09425157452

  • In case of a partnership firm, whether this 8% net income should be treated after deduction remuneration to partners or prior to this deduction.
    Suppose, in above query after deduction of remuneration, total income comes less than 8%, then whether the firm is needed for audit or not ?
    Please guide ASAP.

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