We continue to discuss few more situations in this part –
Maintenance of books of account:
One of the essential characteristics of a presumptive taxation scheme is that books of account is not required to be maintained, which is provided by way of mentioning in respective presumptive income sections (i.e. 44AD, 44AE and 44ADA) that books of account would be required if the person does not agree to offer income at the specified percentage or opts out of the scheme. Further a corresponding mandate is also provided in section 44AA i.e. section dealing with maintenance of books of account. However, a
corresponding mandate in section 44AA with regard to the section 44ADA is missing thus creating a chaos. The section 44ADA overrides only section 28 to 43C thus making it mandatory for the professionals covered under section 44ADA to maintain books of accounts though they have opted for presumptive taxation scheme.
The memorandum to Finance Bill, 2016 through which section 44ADA was introduced states that the assessee opting for this section would not be required to maintain books of account under section 44AA(1) but in the process of evolution of bill to act the same seems have missed the bus. One can definitely bank on the intention put forth by the memorandum to finance bill and also the fact that without the exception to maintain books of account the very basic essence of the presumptive taxation scheme would be lost. To the contrary, argument can be put forth that when there is no ambiguity in the words then there is no need to decipher the intent of the legislature by referring to the memorandum to finance bill.
However, the publication/tutorial issued by the Income Tax Department titled ‘Tax on Presumptive basis in case of certain eligible businesses or professions‘ states that –
“Maintenance of books of account if a person opts for presumptive taxation scheme of section 44ADA
In case of a person engaged in a specified profession as referred in section 44AA(1) and opts for presumptive taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of books of account will not apply. In other words, if a person opt for the provisions of section 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.”
If it is accepted that person opting for presumptive scheme under section 44ADA is not required to maintain books of accounts then it is advised in the interest of the assessee that it at least maintains some records like invoice/billing register to prove the fact that its gross receipts does not exceed the prescribed threshold limit of presumptive scheme.
Applicability of section 44ADA to a partner of firm receiving remuneration and/or interest from the firm:
An interesting scenario will arise in case of partner of a professional firm/LLP who gets interest and salary from firm/LLP. Such receipts would be taxable as business or professional income by virtue of section 28(v) and hence, can partner opt for presumptive scheme under section 44ADA?
The Kolkata ITAT in number of cases [1] has held that a partner would be liable to tax audit under section 44AB if his salary from the partnership firm exceeds the threshold limit prescribed under section 44AB. It is interesting to note the rationale of the Kolkata ITAT upholding the applicability of tax audit in case of Amal Ganguli –
“However, the assessee is a partner in the firm “Price Waterhouse” which is a firm of Chartered Accountants. We are of the considered view that the assessee is carrying on the profession of Chartered Accountant though not individual but as a partner. The assesee has received income by way of salary, allowance, commission and interest on capital from the firm. During the course of hearing, the ld. A.R. in reply to a query from the Bench admitted that the assessee is holding a certificate of practice to carry on the profession. Therefore, the assessee has received the above amount from the firm as a partner and he is a partner only because he is engaged in the business of Chartered Accountants and is eligible to carry on the profession of Chartered Accountant. Thus we are of the considered view that the assesee has received the said amount as a professional fee as a partner from the firm. There is no dispute to the fact that the amount received by the assessee by way of salary, allowance, commission, interest from the firm is assessable under section 28(v) of the Act under the head “profits and gains of business or profession”. Since the receipt of the assessee is more than Rs.10 lakhs, in the previous year relevant to the assessment year under consideration, we are of the considered view that the assessee is required to get his accounts audited as per section 44AB of the Act and to enclose a copy of the said report in the prescribed form before the specified date.”
It was held that partner is carrying out his profession as a partner of a firm though not individually thus satisfying the condition laid out in section 44ADA of ‘engaged in a profession referred to in section 44AA(i)’. On the other hand the above referred cases hold that if the salary, commission, bonus or interest received by a partner of firm exceeds the limit prescribed for tax audit then the partner has to comply with the tax audit provisions in his individual capacity also thus implying that once the salary etc. is taxed as income from profession then all other sections of ‘chapter IV-D Profits and gains of business or profession’ would apply to such income and hence, it should not be considered that salary etc. is offered to tax under the head business or professional only as technical requirement of section 28(v). As a result the provisions of section 44ADA should also be applicable to the partner of a professional firm.
Further, the Hon’ble Apex Court[2] has held that business carried on by firm is business carried on by the partners and profits of the firm are profits earned by all the partners. The salary, interest etc. receipt of partner from a firm is business income and being a business income, expenditure necessary to earn the same would be allowable as deduction in determining the taxable income of partner. Thus, this supports the argument that partner of a professional firm will be eligible for presumptive scheme under section 44ADA.
In case of partnership the salary, bonus, interest etc. is nothing but profits of the firm provided to the partner on different accounts implying that taxation of salary, interest in the hands of the partner is nothing but extension of taxation of profits of the firm in different hands. Also the fact that profits of firm is taxed in the hands of firm and individual share of profit in each partners hand is exempt; income salary/interest paid to partners is allowed as deduction in the hands of the firm up to certain limit failing which the excess portion will be taxed in the hands of the firm and balance in the hands of each individual partners, signifies that the entire scheme is woven together as if it were nothing but the one profit of the firm broken in pieces and taxable in different hands but under the same head of income Viz., Profits and gains of business or profession.
However, a contrary view is also possible that due the amendments brought out by the Finance Act, 1992, which changed the scheme of taxation of partnership firm vis-à-vis the partner. The amendments laid out that the profits of firm taxed in the hands of the firm would be not be taxable in the hands of the partners and interest/salary allowed as deduction in the hands of the firm would be taxable in the hands of the partner. Thus, providing a clear demarcation of taxation of firm and partner’s individually implying that firm is a separate entity vis-à-vis the partner. This view is also upheld by the Mumbai ITAT [3] relying on rationale laid out by the Hon’ble Apex Court[4].
Is share of profits of a partner should be considered for arriving at the gross receipts?
As discussed above the gross receipts is not defined in the Act and should be deduced from the commercial parlance. The Mumbai ITAT [5] has held that for section 44AB to be operational in first place there should be computation of profits and gains of business or profession i.e. computation of total income as per section 4, the income exempt under section 10 are those which do not form part of total income. Hence, the exempt income cannot be subjected to the provisions of section 44AB. Thus implying the share of partners profit which is exempt under section 10(2A) would not be considered for the purposes of the gross receipts.
The guidance note[6] issued by the Institute of Chartered Accountants of India on tax audit explains that in case of gross receipts of the business it will include all receipts whether in cash or in kind arising from carrying on of the business and it specially provides that for the purposes of section 44AB it would exclude partners share of profit which is exempt under section 10(2A). Though the said exclusion is provided for arriving at the gross receipts of the business the same rationale or principle should also apply while arriving at the gross receipts of the profession.
[1] Amal Ganguli v. DCIT – ITA No. 2135/Kol/2008 was followed in cases of Sagar Dutta v. DCIT – ITA No. 692/Kol/2012, Usha A Narayanan v. DCIT – ITA No. 703/Kol/2012.
[2] CIT v. Ramniklal Kothari – 74 ITR 57 (SC)
[3] ACIT v. M/s Pahilajrai Jaikishin – ITA No. 1562/Mum/2014
[4] Munjal Sales Corporation v. CIT & Anr (SC) – 168 Taxman 43
[5] ACIT v. India Magnum Fund (Mum ITAT) – 74 TTJ 620, 81 ITD 295
[6] Guidance note on tax audits under section 44AB of the income Tax Act, 1961 – (Revised 2014 Edition)
