I am a partner. Can I take the salary and interest my firm pays me, call it my turnover, and offer 8 per cent of it under s.44AD?
No. The High Court held that a partner receiving remuneration and interest from his firm is not himself carrying on a business, so those receipts cannot be termed a turnover, and they do not qualify as gross receipts either. Section 44AD applies only to an eligible assessee engaged in an eligible business having a total turnover or gross receipts, and the assessee here had neither effected sales nor rendered services; the sums had already been debited in the firms' own profit and loss accounts. The appeal was dismissed and both questions of law were answered against the assessee and in favour of the Revenue. This is the answer to a scheme that is still marketed to partners, and it is a High Court answer, not a Tribunal one.
Decided by the High Court (Madras High Court; T.S. Sivagnanam J and V. Bhavani Subbaroyan J) on 2020-12-23, reported as Tax Case Appeal No. 388 of 2019 (the page header on the source consulted shows T.C.A. No. 388 of 2020). It bears on section 44AD, section 28(v), section 40(b), section 260A of the Income Tax Act 1961, in Presumptive Taxation & Audit and Assessment & Scrutiny matters.
Presumptive taxation is usually litigated by taxpayers, and most of the reported material runs their way. This is one of the places where the Revenue is plainly right and an appeal will fail. The arrangement the Court struck down is attractive on its face: a partner draws, say, Rs 58 lakh of salary and interest, treats it as gross receipts of a business, offers 8 per cent of it and pays tax on a fraction. Section 28(v) does make such receipts business income, which is what makes the argument look arguable. The Court's answer is that being taxed under the business head is not the same as having a turnover, and s.44AD needs a turnover. Anyone advising a partner to file under s.44AD on firm remuneration should read this before doing so, and anyone already assessed on that basis should expect the addition to stand.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2012-13 the assessee, an individual, filed a return admitting a total income of Rs 43,53,066, in which he returned Rs 4,68,240 as income from the remuneration and interest received from the partnership firms in which he was a partner, that being 8 per cent of those receipts offered under s.44AD. The Tribunal's order below records the remuneration and interest as Rs 58,53,000 received from three firms. The Assessing Officer and the Commissioner (Appeals) rejected the claim, and the Income Tax Appellate Tribunal, 'A' Bench, Chennai, dismissed the assessee's appeal by order dated 30 January 2019 in I.T.A. No. 573/CHNY/2018. The assessee appealed to the High Court under s.260A. Two substantial questions of law were framed: 'A. Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that interest and salary received by the assessee from firms in which he was a partner cannot be construed as business income[u/s. 28(v)] and therefore not eligible for applying the presumptive interest rate of 8% under [section 44AD] of the Act?' and 'B. Whether on the facts and circumstances of the case, the Appellate Tribunal is right in law in holding that only remuneration and salary, received from a firm, to the extent of eligible under clause (b) of [Section 40] of the Act, would be considered as profits and gains of business or profession of the recipient partner?'
The appeal was dismissed and both substantial questions of law were answered against the assessee and in favour of the Revenue. A partner who receives remuneration and interest from his firm is not himself carrying on a business; those receipts are neither a turnover nor gross receipts of the partner, and s.44AD therefore has no application to them (paras 11, 14 and 15).
The Court began from the conditions in s.44AD(1) read with Explanation (a) and (b): the assessee must be an eligible assessee engaged in an eligible business, and that business must have a total turnover or gross receipts. On the facts the assessee was an individual who was not carrying on any business at all, so the remuneration and interest received from the firms could not be termed a turnover, and would not qualify as gross receipts either. Adopting the meaning the Institute of Chartered Accountants of India had given the word in its statement on the Companies (Auditor's Report) Order 2003 — the aggregate amount for which sales are effected or services are rendered by an enterprise — the Court observed that the assessee had effected no sales and rendered no services, and that the amounts had already been debited in the profit and loss accounts of the firms. It approved the Tribunal's route through s.28(v), which refers to s.40(b) and so confines what is treated as the partner's business income to remuneration and interest allowable under that clause, and noted that s.40(b) is worded negatively, prohibiting deduction save to the extent specified. The assessee's reliance on CIT v. Ramniklal Kothari was met on the footing that the decision was couched on a different set of facts (para 9), and the Court also read the legislative intention from s.44AF, the corresponding special provision for retail business (para 13).
Admittedly, the assessee who is an individual in the instant case is not carrying on any business. Therefore, the remuneration and interest received by the assessee from the partnership firm cannot be termed to be a turnover of the assessee [individual].
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Handle my notice → Ask a CA on WhatsAppNo. The High Court held that a partner receiving remuneration and interest from his firm is not himself carrying on a business, so those receipts cannot be termed a turnover, and they do not qualify as gross receipts either. Section 44AD applies only to an eligible assessee engaged in an eligible business having a total turnover or gross receipts, and the assessee here had neither effected sales nor rendered services; the sums had already been debited in the firms' own profit and loss accounts. The appeal was dismissed and both questions of law were answered against the assessee and in favour of the Revenue. This is the answer to a scheme that is still marketed to partners, and it is a High Court answer, not a Tribunal one. This was decided by the High Court (Madras High Court; T.S. Sivagnanam J and V. Bhavani Subbaroyan J) and bears on section 44AD, section 28(v), section 40(b), section 260A of the Income Tax Act 1961. It is reported as Tax Case Appeal No. 388 of 2019 (the page header on the source consulted shows T.C.A. No. 388 of 2020). Presumptive taxation is usually litigated by taxpayers, and most of the reported material runs their way. This is one of the places where the Revenue is plainly right and an appeal will fail. The arrangement the Court struck down is attractive on its face: a partner draws, say, Rs 58 lakh of salary and interest, treats it as gross receipts of a business, offers 8 per cent of it and pays tax on a fraction. Section 28(v) does make such receipts business income, which is what makes the argument look arguable. The Court's answer is that being taxed under the business head is not the same as having a turnover, and s.44AD needs a turnover. Anyone advising a partner to file under s.44AD on firm remuneration should read this before doing so, and anyone already assessed on that basis should expect the addition to stand. If it applies to you, the first step is this: Do not offer a partner's remuneration or interest from a firm under s.44AD. The receipts are business income under s.28(v) but they are not turnover or gross receipts, which is what s.44AD requires.
For assessment year 2012-13 the assessee, an individual, filed a return admitting a total income of Rs 43,53,066, in which he returned Rs 4,68,240 as income from the remuneration and interest received from the partnership firms in which he was a partner, that being 8 per cent of those receipts offered under s.44AD. The Tribunal's order below records the remuneration and interest as Rs 58,53,000 received from three firms. The Assessing Officer and the Commissioner (Appeals) rejected the claim, and the Income Tax Appellate Tribunal, 'A' Bench, Chennai, dismissed the assessee's appeal by order dated 30 January 2019 in I.T.A. No. 573/CHNY/2018. The assessee appealed to the High Court under s.260A. Two substantial questions of law were framed: 'A. Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that interest and salary received by the assessee from firms in which he was a partner cannot be construed as business income[u/s. 28(v)] and therefore not eligible for applying the presumptive interest rate of 8% under [section 44AD] of the Act?' and 'B. Whether on the facts and circumstances of the case, the Appellate Tribunal is right in law in holding that only remuneration and salary, received from a firm, to the extent of eligible under clause (b) of [Section 40] of the Act, would be considered as profits and gains of business or profession of the recipient partner?' The matter was decided on 2020-12-23 by the High Court (Madras High Court; T.S. Sivagnanam J and V. Bhavani Subbaroyan J). On those facts the High Court held as follows. The appeal was dismissed and both substantial questions of law were answered against the assessee and in favour of the Revenue. A partner who receives remuneration and interest from his firm is not himself carrying on a business; those receipts are neither a turnover nor gross receipts of the partner, and s.44AD therefore has no application to them (paras 11, 14 and 15).
The Court began from the conditions in s.44AD(1) read with Explanation (a) and (b): the assessee must be an eligible assessee engaged in an eligible business, and that business must have a total turnover or gross receipts. On the facts the assessee was an individual who was not carrying on any business at all, so the remuneration and interest received from the firms could not be termed a turnover, and would not qualify as gross receipts either. Adopting the meaning the Institute of Chartered Accountants of India had given the word in its statement on the Companies (Auditor's Report) Order 2003 — the aggregate amount for which sales are effected or services are rendered by an enterprise — the Court observed that the assessee had effected no sales and rendered no services, and that the amounts had already been debited in the profit and loss accounts of the firms. It approved the Tribunal's route through s.28(v), which refers to s.40(b) and so confines what is treated as the partner's business income to remuneration and interest allowable under that clause, and noted that s.40(b) is worded negatively, prohibiting deduction save to the extent specified. The assessee's reliance on CIT v. Ramniklal Kothari was met on the footing that the decision was couched on a different set of facts (para 9), and the Court also read the legislative intention from s.44AF, the corresponding special provision for retail business (para 13). In the words reproduced by the source cited on this page: "Admittedly, the assessee who is an individual in the instant case is not carrying on any business. Therefore, the remuneration and interest received by the assessee from the partnership firm cannot be termed to be a turnover of the assessee [individual]." The decision followed or applied CIT v. Ramniklal Kothari (1969) — distinguished as couched on a different set of facts; Munjal Sales Corporation v. CIT, Ludhiana (2008) — referred to in the judgment.
It was decided by the High Court on 2020-12-23 and is reported as Tax Case Appeal No. 388 of 2019 (the page header on the source consulted shows T.C.A. No. 388 of 2020). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 44AD, section 28(v), section 40(b), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed and both substantial questions of law were answered against the assessee and in favour of the Revenue. A partner who receives remuneration and interest from his firm is not himself carrying on a business; those receipts are neither a turnover nor gross receipts of the partner, and s.44AD therefore has no application to them (paras 11, 14 and 15). It arises in Presumptive Taxation & Audit and Assessment & Scrutiny matters, on section 44AD, section 28(v), section 40(b), section 260A of the Income Tax Act 1961, and was decided by Madras High Court; T.S. Sivagnanam J and V. Bhavani Subbaroyan J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Separate the two questions when you advise. Whether a receipt falls under the business head, and whether it is a turnover, are different questions, and only the second one decides s.44AD. Where the partner also carries on a business of his own, s.44AD can apply to that business on its own turnover. Keep the two streams distinct in the return and in the books. If the officer has already made the addition, check whether he has also charged interest under ss.234B and 234C and whether penalty proceedings have been initiated; the substantive point is not worth appealing after this judgment, and the effort is better spent on the consequential items. Read this with the s.44AB question, which is different and is not decided here: whether firm remuneration counts towards the gross receipts that trigger a tax audit is a separate issue on which other High Courts have spoken. Note the year. The assessment year here is 2012-13, when the s.44AD ceiling was Rs 1 crore; the ceiling and the 6 per cent rate for receipts through banking channels have changed since and must be checked for your year.
Still good law. No decision doubting or overruling it was located, and no report of a Special Leave Petition was found. The holding is confined to the character of a partner's remuneration and interest as turnover or gross receipts for s.44AD; it does not decide the separate question whether such receipts count towards the gross receipts that trigger a tax audit under s.44AB, on which the Bombay High Court has spoken to the same effect in Perizad Zorabian Irani v. PCIT (judgment dated 9 March 2022) — that judgment was not retrieved for this entry and is noted only as a lead. The s.44AD turnover ceiling was Rs 1 crore for assessment year 2012-13 and has been raised more than once since; the 6 per cent rate for receipts through banking channels applies from assessment year 2017-18. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The source consulted prints the appeal number inconsistently: the page header shows 'T.C.A.No.388 of 2020' while the cause title reads 'Tax Case Appeal No.388 of 2019'. The year of the appeal number should be checked against the certified copy before the entry is relied on for that detail; nothing in the holding turns on it. The judgment prints 'Sectio 44AD' in para 11, and 'a turnover' rather than 'the turnover', both of which are reproduced as printed. The figure of Rs 58,53,000 of remuneration and interest received from three firms is taken from the Tribunal's order below (ITA No. 573/CHNY/2018) and not from the High Court judgment, which states only the sum offered. This entry answers one Revenue-side question and one only — that a partner cannot put his firm remuneration and interest through s.44AD — and it should not be read as balancing the library's presumptive material generally. Three Revenue-side lines remain unrepresented here: a s.68 or s.69A addition sustained despite a return under s.44AD; s.44ADA imposed on an assessee who says he is not carrying on a profession; and a penalty under s.271B upheld against a presumptive filer. Until those exist, this batch still reads more favourably to the taxpayer than the law is. Retrieval note, recorded so it is not rediscovered the hard way: https://indiankanoon.org/doc/193134130/ returns HTTP 403, but appending ?type=print to an indiankanoon document URL returns the full judgment, and that is how this judgment was finally read. No indiankanoon document should be recorded as unretrievable until that second URL form has been tried. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed and both substantial questions of law were answered against the assessee and in favour of the Revenue. A partner who receives remuneration and interest from his firm is not himself carrying on a business; those receipts are neither a turnover nor gross receipts of the partner, and s.44AD therefore has no application to them (paras 11, 14 and 15).
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