As per section 44AA of the Income-tax Act, 1961 (“Act”), a person engaged in business or profession is required to maintain regular books of account under certain circumstances. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, sections 44ADA, sections 44AE, etc.
A question often arises: Can a partner in a firm opt for presumptive taxation with respect to the remuneration received from the firm?
The Madras High Court addressed this issue in the case of Anandkumar v. Assistant Commissioner of Income Tax, Circle-2, Salem [2021] 278 Taxman 342.
In its judgment, the Court held that interest and salary received by the partner from firms in which he was a partner cannot be construed as business income u/s. 28(v) of the Act and therefore not eligible for applying the presumptive interest rate of 8% under section 44AD of the Act.
In the said Judgement provisions of presumptive taxation is discussed in detailed as follows:
1. The assessee should be able to satisfy the main criteria mentioned in provision of presumptive. The assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt
2. The remuneration and interest received by the assessee from the partnership firm cannot be termed to be a turnover of the assessee [Individual]. Similarly, it will also not qualify for gross receipts.
3. In the statement issued by the ICAI on the Companies (Auditors report) Order 2003, the word ‘turnover’ has been defined under the term ‘turnover’ for the purpose of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise. Admittedly, the assessee has not done any sales nor rendered any services but has been receiving remuneration and interest from the partnership firms which amount has already been debited in the profit and loss account of the firms.
4. Section 28(v) which deals with profits and gains of business or profession and remuneration and salary received from a firm to the extent eligible under section 40(b) of the Act would be considered as profits and gains of the business or profession of the recipient partner. 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.
Considering above points, it would be difficult to argue that Presumptive taxation applicable on Income earned by a Partner from a firm.
