The officer rejected my firm's books and estimated the profit at a percentage of receipts. Can the firm still deduct salary and interest paid to its partners from that estimated figure?
For the years this order governs, yes. The Tribunal held that s.44AD(2) deems only the deductions under ss.30 to 38 to have been given full effect; s.40 is not deemed to have been allowed, and the proviso to s.44AD(2) as it then stood said in terms that salary and interest paid to a partner shall be deducted from the income computed under s.44AD(1), subject to the ceiling in s.40(b). Taking a clue from that scheme, the Tribunal directed the officer to allow partner salary and interest from the estimated income. On depreciation it went the other way: because depreciation is allowable under s.32, which falls inside ss.30 to 38, no separate deduction for depreciation was permitted from the estimate. The order concerns assessment years 2003-04 and 2004-05 and rests squarely on a proviso Parliament has since deleted.
Decided by the ITAT (Income Tax Appellate Tribunal, Hyderabad; Shri N.R.S. Ganesan, Judicial Member and Shri Chandra Poojari, Accountant Member) on 2011-01-31, reported as I.T.A. Nos. 668/HYD/2009 and 670/HYD/2009 (assessee) and I.T.A. Nos. 685/HYD/2009 and 686/HYD/2009 (Revenue). It bears on section 44AD, section 40(b), section 32, section 145 of the Income Tax Act 1961, in Presumptive Taxation & Audit, Deductions & Disallowances and Assessment & Scrutiny matters.
This is the case ordinarily cited when a firm's books have been rejected and the officer refuses to allow anything at all beyond the percentage he has applied. Its structural argument survives the amendment and is worth understanding on its own terms: the presumptive scheme deems certain deductions to have been given effect, and what it does not deem, it does not exclude. But the answer it gives is time limited. The proviso to s.44AD(2) on which it turns was omitted by the Finance Act 2016 with effect from assessment year 2017-18, so a firm returning income under s.44AD for 2017-18 or later cannot deduct partner remuneration or interest from the presumptive figure at all. Anyone quoting this order for a recent year is quoting law Parliament has repealed.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The appeals concern assessment years 2003-04 and 2004-05. The order records the total contract receipt as Rs 20,29,32,425, without stating whether that is the figure for one of the two years under appeal or for both. The Assessing Officer estimated the profit at 12.5 per cent. The Commissioner (Appeals) reduced the estimate, adopting 8 per cent on the main contract receipts and 5 per cent on the sub-contract receipts. Both the assessee and the Revenue appealed. Before the Tribunal the assessee pressed two further claims against the estimated income: depreciation, and the salary and interest paid to its partners. The Revenue relied on the decision of the jurisdictional High Court in Indwell Constructions.
The assessee's appeals were partly allowed and the Revenue's appeals dismissed. Depreciation was refused as a separate deduction from the estimated income, because depreciation is allowable under s.32 and s.44AD provides that no further deduction under ss.30 to 38 shall be allowed (para 13). Salary and interest paid to the partners were allowed from the estimated income, subject to the limitation in s.40(b), and the Assessing Officer was directed accordingly (paras 14 and 15).
The Tribunal took a clue from s.44AD as it stood for the years under appeal and as it was to stand after the Finance (No.2) Act 2009 removed the receipts ceiling with effect from 1 April 2011. Under that scheme the deductions available under ss.30 to 38 are deemed to have been given full effect, which disposed of the depreciation claim (para 13). The proviso to s.44AD(2), however, said in terms that salary and interest paid to a partner shall be deducted from the income computed under s.44AD(1) subject to the limitation in s.40(b), which showed a legislative intention to allow those two items separately from an estimated profit (para 14). Indwell Constructions was distinguished on the footing that it concerned assessment year 1981-82, that s.44AD entered the statute book only with effect from 1 April 1994, and that the High Court therefore had had no occasion to consider s.44AD as it applied to the years before the Tribunal (para 15).
In view of the provision of section 44AD as it is applicable for the assessment year under consideration and the amendment made with effect from1.4.2011 it is obvious that the Legislature intended to allow the interest and salary separately from the estimated income.
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Handle my notice → Ask a CA on WhatsAppFor the years this order governs, yes. The Tribunal held that s.44AD(2) deems only the deductions under ss.30 to 38 to have been given full effect; s.40 is not deemed to have been allowed, and the proviso to s.44AD(2) as it then stood said in terms that salary and interest paid to a partner shall be deducted from the income computed under s.44AD(1), subject to the ceiling in s.40(b). Taking a clue from that scheme, the Tribunal directed the officer to allow partner salary and interest from the estimated income. On depreciation it went the other way: because depreciation is allowable under s.32, which falls inside ss.30 to 38, no separate deduction for depreciation was permitted from the estimate. The order concerns assessment years 2003-04 and 2004-05 and rests squarely on a proviso Parliament has since deleted. This was decided by the ITAT (Income Tax Appellate Tribunal, Hyderabad; Shri N.R.S. Ganesan, Judicial Member and Shri Chandra Poojari, Accountant Member) and bears on section 44AD, section 40(b), section 32, section 145 of the Income Tax Act 1961. It is reported as I.T.A. Nos. 668/HYD/2009 and 670/HYD/2009 (assessee) and I.T.A. Nos. 685/HYD/2009 and 686/HYD/2009 (Revenue). This is the case ordinarily cited when a firm's books have been rejected and the officer refuses to allow anything at all beyond the percentage he has applied. Its structural argument survives the amendment and is worth understanding on its own terms: the presumptive scheme deems certain deductions to have been given effect, and what it does not deem, it does not exclude. But the answer it gives is time limited. The proviso to s.44AD(2) on which it turns was omitted by the Finance Act 2016 with effect from assessment year 2017-18, so a firm returning income under s.44AD for 2017-18 or later cannot deduct partner remuneration or interest from the presumptive figure at all. Anyone quoting this order for a recent year is quoting law Parliament has repealed. If it applies to you, the first step is this: Fix the assessment year first. For assessment years up to 2016-17 the proviso to s.44AD(2) existed and this reasoning is available. From assessment year 2017-18 onwards it does not.
The appeals concern assessment years 2003-04 and 2004-05. The order records the total contract receipt as Rs 20,29,32,425, without stating whether that is the figure for one of the two years under appeal or for both. The Assessing Officer estimated the profit at 12.5 per cent. The Commissioner (Appeals) reduced the estimate, adopting 8 per cent on the main contract receipts and 5 per cent on the sub-contract receipts. Both the assessee and the Revenue appealed. Before the Tribunal the assessee pressed two further claims against the estimated income: depreciation, and the salary and interest paid to its partners. The Revenue relied on the decision of the jurisdictional High Court in Indwell Constructions. The matter was decided on 2011-01-31 by the ITAT (Income Tax Appellate Tribunal, Hyderabad; Shri N.R.S. Ganesan, Judicial Member and Shri Chandra Poojari, Accountant Member). On those facts the ITAT held as follows. The assessee's appeals were partly allowed and the Revenue's appeals dismissed. Depreciation was refused as a separate deduction from the estimated income, because depreciation is allowable under s.32 and s.44AD provides that no further deduction under ss.30 to 38 shall be allowed (para 13). Salary and interest paid to the partners were allowed from the estimated income, subject to the limitation in s.40(b), and the Assessing Officer was directed accordingly (paras 14 and 15).
The Tribunal took a clue from s.44AD as it stood for the years under appeal and as it was to stand after the Finance (No.2) Act 2009 removed the receipts ceiling with effect from 1 April 2011. Under that scheme the deductions available under ss.30 to 38 are deemed to have been given full effect, which disposed of the depreciation claim (para 13). The proviso to s.44AD(2), however, said in terms that salary and interest paid to a partner shall be deducted from the income computed under s.44AD(1) subject to the limitation in s.40(b), which showed a legislative intention to allow those two items separately from an estimated profit (para 14). Indwell Constructions was distinguished on the footing that it concerned assessment year 1981-82, that s.44AD entered the statute book only with effect from 1 April 1994, and that the High Court therefore had had no occasion to consider s.44AD as it applied to the years before the Tribunal (para 15). In the words reproduced by the source cited on this page: "In view of the provision of section 44AD as it is applicable for the assessment year under consideration and the amendment made with effect from1.4.2011 it is obvious that the Legislature intended to allow the interest and salary separately from the estimated income." The decision followed or applied Indwell Constructions v. CIT [1998] 232 ITR 776 (AP) — distinguished; M. Bhaskar Reddy (co-ordinate bench of the same Tribunal) — relied on.
It was decided by the ITAT on 2011-01-31 and is reported as I.T.A. Nos. 668/HYD/2009 and 670/HYD/2009 (assessee) and I.T.A. Nos. 685/HYD/2009 and 686/HYD/2009 (Revenue). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 44AD, section 40(b), section 32, section 145, 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 cuts both ways and is cited by both sides. The assessee's appeals were partly allowed and the Revenue's appeals dismissed. Depreciation was refused as a separate deduction from the estimated income, because depreciation is allowable under s.32 and s.44AD provides that no further deduction under ss.30 to 38 shall be allowed (para 13). Salary and interest paid to the partners were allowed from the estimated income, subject to the limitation in s.40(b), and the Assessing Officer was directed accordingly (paras 14 and 15). It arises in Presumptive Taxation & Audit, Deductions & Disallowances and Assessment & Scrutiny matters, on section 44AD, section 40(b), section 32, section 145 of the Income Tax Act 1961, and was decided by Income Tax Appellate Tribunal, Hyderabad; Shri N.R.S. Ganesan, Judicial Member and Shri Chandra Poojari, Accountant Member. 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. For a firm actually returning income under s.44AD for 2017-18 or later, do not claim partner salary or interest as a deduction from the presumptive income. The proviso permitting it has gone. Where the officer has instead rejected the books and estimated a profit under s.145(3), this order is still the argument for allowing partner salary and interest, but expect it to be met with Indwell Constructions and with the fact that the proviso it relied on has been deleted. Do not claim depreciation separately on top of a presumptive or s.44AD-style estimate; s.44AD(2) treats ss.30 to 38 as already given full effect, and this Tribunal refused it on that ground. Check whether the partnership deed authorises the remuneration and quantifies it, and keep the s.40(b) ceiling computation on file; the deduction was allowed here only subject to that limit.
Superseded by amendment. The reasoning in paras 14 and 15 rests on the proviso to s.44AD(2), which was omitted by the Finance Act 2016 with effect from 1 April 2017, that is from assessment year 2017-18. For assessment year 2017-18 and later there is no statutory provision permitting salary or interest to partners to be deducted from income computed under s.44AD, and this order cannot be relied on for those years. It was followed on the s.40(b) point by the same Tribunal in ACIT v. Ch. Kishore Kumar, ITA No. 2262/Hyd/2017, order dated 15 November 2018, for assessment year 2014-15, which is also within the pre-amendment period. Separately, the refusal of depreciation in para 13 sits uneasily with the later decision of the jurisdictional Andhra Pradesh High Court in CIT v. Y. Ramachandra Reddy, judgment dated 30 July 2014, which held that depreciation and interest retain their character even where profit is determined on a percentage basis; the High Court's view prevails over the Tribunal's on that question. 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 indiankanoon page carries the title 'E.Eswara Reddy &Co.,, Hyderabad vs Assessee', but the cause title inside the order names the firm as M/s. C. Eswara Reddy & Co., Hyderabad. The cause title in the order has been preferred. The order also refers at one point to a co-ordinate bench decision in M. Bhaskar Reddy, which was not separately retrieved. The order prints the total contract receipt as Rs 20,29,32,425 without saying whether that figure is for one of the two years under appeal or for both; no allocation between the years has been made here. A caution for anyone re-checking the amendment this entry turns on: the Income Tax Department's own site serves stale snapshots of s.44AD. The page at https://www.incometaxindia.gov.in/w/section-44ad-2 prints the proviso to s.44AD(2) with no omission footnote at all, its footnotes stopping at the Finance Act 1999, so a reader checking there will have the repealed proviso silently confirmed as current law. Use a page carrying the 2016 footnotes: https://www.incometaxindia.gov.in/w/section-44ad-22 records that the proviso 'shall be omtt. by Act No. 28 of 2016 (w.e.f. 1-4-2017)', the abbreviation being as printed. 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 assessee's appeals were partly allowed and the Revenue's appeals dismissed. Depreciation was refused as a separate deduction from the estimated income, because depreciation is allowable under s.32 and s.44AD provides that no further deduction under ss.30 to 38 shall be allowed (para 13). Salary and interest paid to the partners were allowed from the estimated income, subject to the limitation in s.40(b), and the Assessing Officer was directed accordingly (paras 14 and 15).
TaxSphere, “C. Eswara Reddy & Co v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/c-eswara-reddy-v-acit-40b-from-estimated-income/ (validity last checked 2026-09-07)
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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?
My client wants to file under s.44AD. What turnover can he have, what rate must he declare, and can the firm still deduct partners' salary and interest from the presumptive figure?
My client runs six trucks, two of them well over twelve tonnes. What does he declare under s.44AE, and from which year did the per-tonne rate start?
The officer rejected my firm's books and estimated the profit. Can he then also add back the interest and remuneration the firm paid its partners?
