Mr.anandkumar( v. The Assistant Commissioner Of Income Tax,Circle-2, Salem

THE HIGH COURT OF JUDICATURE AT MADRAS DATE: 23.12.2020Order Reserved on:Order delivered on:21.12.2020 23.12.2020 CORAM : THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMANDTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No.388 of 2019 Mr.Anandkumar(PAN: )...Appellant -vs- The Assistant Commissioner of Income Tax,Circle-2, Salem....Respondent PRAYER: Tax Case Appeal filed under Section 260A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal Chennai 'A' Bench, dated 30.01.2019 in ITANo.573/CHNY/2018 for the Assessment year 2012-13. Appeal against the order dated 22/12/2017 made in ITA.No.43/2015-16 passed by the Commissioner of Income Tax (Appeals)No.3, Gandhi Road,Salem for the Assessment year 2012-13. Against the order dated 03/03/2015, passed by theAssistant Commissioner of income Tax Circle-2, Salem, PANNo/GIR.No. ABQPK0805N, Assessment Year, 2012-13. For Respondent: Mr.M.Swaminathan Senior Standing Counsel Assisted by Ms.V.Pushpa Junior Standing CounselJUDGMENT This appeal filed by the assessee under Section 260A of theIncome Tax Act, 1961 ('the Act' for brevity) is directed againstthe order dated 30.01.2019 passed by the Income Tax Appellant https://hcservices.ecourts.gov.in/hcservices/ Tribunal, 'A' Bench, Chennai (hereinafter referred to as 'theTribunal') in I.T.A.No.573/CHNY/2018 for the assessment year2012-13. 2.The present appeal has been filed raising the followingsubstantial questions of law: “A. Whether, on the facts and circumstances ofthe case, the Appellate Tribunal was right in lawin holding that interest and salary received by theassessee from firms in which he was a partnercannot be construed as business income u/s. 28(v)and therefore not eligible for applying thepresumptive interest rate of 8% under section 44ADof the Act? B. Whether on the facts and circumstances ofthe case, the Appellate Tribunal is right in law inholding that only remuneration and salary, receivedfrom a firm, to the extent of eligible under clause(b) of Section 40 of the Act, would be consideredas profits and gains of business or profession ofthe recipient partner? 3.The assessee is an individual, a partner inM/s.Kumbakonam Jewellers, M/s.ANS Gupta & Sons and M/s.ANS GuptaJewellers. The assessee filed his return of income for theassessment year under consideration admitting a total income ofRs.43,53,066/-. The assessment was selected for scrutiny and itwas finalized under Section 143(3) of the Act by order dated03.03.2015 disallowing the claim made by the assessee underSection 44AD of the Act. While filing the return of income, theassessee had applied the presumptive rate of tax at 8% underSection 44AD and returned Rs.4,68,240/- as income from theremuneration and interest received from the partnership firm.The Assessing Officer did not agree with the assessee and opinedthat Section 44AD is available only for an eligible assesseeengaged in an eligible business and that the assessee was notcarrying on business independently but only a partner in thefirm. Further the assessee did not have any turnover andreceipts of account of remuneration and interest from the firmscannot be construed as gross receipts mentioned in Section 44ADof the Act. Aggrieved by the assessment order dated 03.03.2015,the assessee filed an appeal before the Commissioner of IncomeTax (Appeals), Salem [CIT(A)]. The said appeal was dismissed byorder dated 22.12.2017. Aggrieved by the same, the assesseepreferred appeal before the Tribunal which was dismissed by theimpugned order. 4.We have elaborately heard Mr.R.Sivaraman, learned counselappearing for the appellant/assessee and Mr.M.Swaminathan, learnedSeniorStandingCounselappearingfortherespondent/revenue assisted by Ms.V.Pushpa, learned JuniorStanding Counsel. 4.We have elaborately heard Mr.R.Sivaraman, learned counselappearing for the appellant/assessee and Mr.M.Swaminathan, learnedSeniorStandingCounselappearingfortherespondent/revenue assisted by Ms.V.Pushpa, learned JuniorStanding Counsel. 5.Section 44AD of the Act is a special provision forcomputing profits and gains of business on presumptive basiswhich was introduced in the Act with effect from 1993. Sub-section (1) of Section 44AD states that Notwithstanding anythingto the contrary contained in sections 28 to 43C, in the case ofan eligible assessee engaged in an eligible business, a sumequal to eight per cent of the total turnover or gross receiptsof the assessee in the previous year on account of such businessor, as the case may be, a sum higher than the aforesaid sumclaimed to have been earned by the eligible assessee, shall bedeemed to be the profits and gains of such business chargeableto tax under the head “Profits and gains of business orprofession”. Sub-section (2) of Section 44AD states that anydeduction allowable under the provisions of sections 30 to 38shall, for the purposes of sub-section (1), be deemed to havebeen already given full effect to and no further deduction underthose sections shall be allowed. The explanation found insection 44AD defines eligible assessee as well as the eligiblebusiness. Under Clause (a) of the explanation which defineseligible assessee to mean an individual, Hindu undivided familyor a firm who is a resident but not a limited liabilitypartnership firm. Eligible business has been defined in clause(b) to mean (i) any business except the business of plying,hiring or leasing goods carriages referred to in Section 44AEand (ii) whose total turnover or gross receipts in the previousyear does not exceed an amount of Rs.2 Crores. 6.At the outset, it needs to be noted that Section 44AD isa special provision and it carves out an exception in respect ofcertain businesses and from Clause (b)(ii) of the explanationunder Section 44AD which prescribes the limit of Rs.2 Crores astotal turnover or gross receipts is a clear indication that thisprovision is meant for small businesses. Further Section 44AD(1) commences with a non-obstante clause and states thatnotwithstanding anything to the contrary containing in Section28 to 43C in the case of an eligible assessee engaged in aneligible business a presumptive rate of tax at 8% can beadopted. One more important aspect is that 8% is computed onthe basis of the total turnover or gross receipts of theassessee. Therefore, four important aspects to be noted inSection 44AD are that the assessee who claim such a benefit ofthe presumptive rate of tax should an eligible assessee asdefined in Clause (a) of the explanation to Section 44AD, heshould be engaged in an eligible business as defined in Clause(b) of Section 44AD and 8% of the presumptive rate of tax iscomputed on the total turnover or gross receipts. Therefore, toavail the benefit of such provision, the assessee has to necessarily satisfy the Assessing Officer that they come withinthe frame work of Section 44AD. The assessee's case is that hehas received the remuneration and interest from the partnershipfirm and according to him this remuneration and interestreceived are gross receipts and they being less than Rs.1 Crorearising from an eligible business, he is entitled to claim thebenefit of presumptive rate of tax. Further, the assessee'scontention is that he is an eligible assessee and theremuneration and interest received from the partnership firmbeing gross receipts from an eligible business, the AssessingOfficer ought to have allowed the benefit under Section 44AD ofthe Act. necessarily satisfy the Assessing Officer that they come withinthe frame work of Section 44AD. The assessee's case is that hehas received the remuneration and interest from the partnershipfirm and according to him this remuneration and interestreceived are gross receipts and they being less than Rs.1 Crorearising from an eligible business, he is entitled to claim thebenefit of presumptive rate of tax. Further, the assessee'scontention is that he is an eligible assessee and theremuneration and interest received from the partnership firmbeing gross receipts from an eligible business, the AssessingOfficer ought to have allowed the benefit under Section 44AD ofthe Act. 7.The learned counsel elaborated on the above submissionand referred to the decision of the Hon'ble Supreme Court in thecase of Commissioner of Income Tax vs. Ramniklal Kothari [(1969)74 ITR 57(SC)] and the decision in the case of Munjal SalesCorporation vs. Commissioner of Income Tax, Ludhiana [(2008) 168Taxman 43(SC)]. The learned counsel also referred to the BudgetSpeech of Hon'ble Finance Minister delivered on 29.02.1992,Circular issued by the CBDT [Central Board of Direct Taxes]bearing Circular No.636 dated 31.08.1992, Copy of the Guidancenote of Tax Audit under Section 44AB of the Act and the Copy ofthe Memorandum explaining the provisions of the Finance Bill,1992. To buttress his submission that the assessee is aneligible assessee, the learned counsel referred to Section 44AD(6)(i), (ii) and (iii) of the Act. 8.The learned Senior Standing Counsel for the revenue wouldsubmit that the assessee is not doing any business, but the firmis carrying on business in which the assessee is a partner andtherefore, the condition that it should arise from an eligiblebusiness is not satisfied. In the Statement issued by the ICAI,it has been stated that the word “turnover” for the purpose ofthe clause may be interpreted to mean the aggregate amount forwhich sales are effected or services rendered by an enterprise,whereas in the case of the assessee, neither he has performedany sales nor rendered any services but merely receivesremuneration and interest from the firm and the partnership firmhas already debited the remuneration and interest in the theirprofit and loss account and therefore, it cannot be taken asturnover or gross receipts. Further, the revenue would contendthat the remuneration and interest is not excessive, it is thetotal net income of the assessee because of the expenses to earnand this income has already been claimed in the hands of thefirm's profit and loss account. Therefore, the claim of theassessee under Section 44AD is wholly incorrect and therefore,rightly negatived. Further, the CIT(A) also considered thefacts and correctly held that the assessee has received theremuneration and interest from firms in which he is a partnerand the provisions of Section 44AD will not be applicable to the assessee. The Tribunal also re-considered the facts and heldthat Section 44AD was to help small businesses to comply withthe taxation provisions and the partners remuneration andinterest is not eligible business of the assessee and hence,Section 44AD will not be applicable. 9.Before we move on to consider the arguments of thelearned counsel for the appellant/assessee, we need to point outthat the decision in the case of Ramniklal Kothari was couchedon a different set of facts and what was decided in this case iswith regard to the share of the partner in the taxable profitsof the registered firms whether is liable to be included underSection 23(5)(a)(ii) of the Income Tax Act, 1922 and whetherwhen included in the share of the assessee would connote asincome received from business carried on by him. 9.Before we move on to consider the arguments of thelearned counsel for the appellant/assessee, we need to point outthat the decision in the case of Ramniklal Kothari was couchedon a different set of facts and what was decided in this case iswith regard to the share of the partner in the taxable profitsof the registered firms whether is liable to be included underSection 23(5)(a)(ii) of the Income Tax Act, 1922 and whetherwhen included in the share of the assessee would connote asincome received from business carried on by him. 10.Section 23 of the 1922 Act is a provision which dealswith assessment. Sub-Section (5) which was the subject matterof consideration dealt with assessees which were a firm and thefacts were considered as to whether the assessee's case wouldstand attracted under clause (ii) of Section 23(5) which statesthat the total income of each partner of the firm includingtherein his share of its income, profits and gains of theprevious year, shall be assessed and the sum payable by him onthe basis of such assessment shall be determined. The saidprovision is not in pari materia with Section 44AD which is aspecial provision intended to help small businesses. Therefore,the decision cannot be applied to the facts of this case. 11.As pointed out earlier, the assessee should be able tosatisfy the four main criteria mentioned in sub-section (1) ofSectio 44AD r/w. explanation (a) and (b) in the said provision.Therefore, the assessee should establish that he is an eligibleassessee engaged in an eligible business and such businessshould have a total turnover or a gross receipt. Admittedly,the assessee who is an individual in the instant case is notcarrying on any business. Therefore, the remuneration andinterest received by the assessee from the partnership firmcannot be termed to be a turnover of the assessee [individual].Similarly, it will also not qualify for gross receipts. Asrightly pointed out by the revenue, in the statement issued bythe ICAI on the Companies (Auditors report) Order 2003, the word'turnover' has been defined under the term 'turnover' for thepurpose of this clause may be interpreted to mean the aggregateamount for which sales are effected or services rendered by anenterprise. Admittedly, the assessee has not done any sales norrendered any services but has been receiving remuneration andinterest from the partnership firms which amount has alreadybeen debited in the profit and loss account of the firms.Therefore, the revenue was right in their contention thatremuneration and interest cannot be treated as gross receipt.The CIT(A) also took note of the grounds raised by the assessee which are in fact identical to the grounds raised before us andalso the decisions which were cited by the assessee before usarising under the 1922 Act and took note of the factual positionand the nature of receipts received by the assessee anddismissed the appeal. The Tribunal once again tested thecorrectness of the order passed by the Assessing Officer and theCIT(A), it took note of section 28(v) which deals with profitsand gains of business or profession and noted that clause (v)mentions about section 40(b) of the Act and rightly concludedthat only remuneration and salary received from a firm to theextent eligible under Section 40(b) of the Act would beconsidered as profits and gains of the business or profession ofthe recipient partner. Further, it took note of section 40(b)and observed that the language used in the said provision is inthe negative as it states that certain amounts shall not bededucted while computing income under the head 'Profits andgains of business or profession'. However, it exempts from therigors of such prohibition, payment of salary, bonus, commissionand interest to the extent specified in sub-clause (iv) and (v)of sub-section (b) of section 40 of the Act. 12.The Tribunal observed that the intention of Section 40(b) is that the partner should not be disentitled for claimingreasonable remuneration where he is a working partner and shouldnot be denied reasonable interest on the capital invested by himin a firm and these changes if not made in the accounts of thefirm, then the pro-rata profits of the firm would be higherresulting in higher tax for the firm. Therefore, the paymentshave to be construed indirectly as type of distribution ofprofits of a firm or otherwise the firm would have been taxed.Therefore, the Tribunal observed that the legislature in itswisdom chose such remuneration and interest to be a part ofprofits from business or profession and that can never translateinto gross receipts or turnover of a business of being partnersin a firm. The Tribunal took note of the position prior tosubstitution of Section 44AD by Finance (No.2) Act, 2009 witheffect from 01.04.2011. Prior to the said substitution, thisprovision allowed the application of presumptive tax rate onlyfor business of civil construction or supply of labour for civilconstruction. By virtue of the substitution, the applicabilityof presumptive rate of tax was expanded to include any businesswhich had turnover or gross receipts of less than Rs.1 Crore.The Tribunal noted the explanatory notes to the provisions ofthe Finance (No.2) Act, 2009 vide Circular No.5/2010 dated03.06.2010, wherein the CBDT had explained as to why the scopeof the said provision was enlarged. The relevant portion of theCircular reads as follows: “21.Special Provision for computing profitsand gains of business on presumptive basis. 21.1.The existing provisions of the Income Tax Act provide for taxation of income on presumptivebasis ..............................................................................................There has been a substantial increase in smallbusinesses with the growth of transport andcommunication and general growth of the economy. Alarge number of businesses and service providers inrural ad urban areas who earn substantial incomeare outside the tax-net. Introduction ofpresumptive tax provisions in respect of smallbusinesses would help a number of small businessesto comply with the taxation provisions withoutconsuming their time and resources. A presumptiveincome scheme for small taxpayers lowers thecompliance cost for such taxpayers and also reducesthe administrative burden on the tax machinery. Inview of the above, to expand the scope ofpresumptive taxation to all businesses, theexisting section 44AD has been substituted by a newsection 44AD. 21.2.The salient features of the newpresumptive taxation scheme are as under: (a) The scheme is applicable to individuals,HUFs and partnership firms excluding Limitedliability partnership firms. It is also not beapplicable to an assessee who is availingdeductions under sections 10A, 10AA, 10B, 10BA ordeduction under any provisions of Chapter VIA underthe heading “C.-Deductions in respect of certainincomes” in the relevant assessment year. (b) The scheme is applicable for any business (excluding a business already covered under Section44AE which has a maximum gross turnover/grossreceipts of 40 lakhs). (c) The presumptive rate of income isprescribed at 8% of gross turnover/gross receipts. (d) ................. (e) An assessee opting for the above scheme isexempted from maintenance of books of accountsrelated to such business as required under Section44AA of the Income Tax Act.(f) ................... (g)..................... https://hcservices.ecourts.gov.in/hcservices/ (b) The scheme is applicable for any business (excluding a business already covered under Section44AE which has a maximum gross turnover/grossreceipts of 40 lakhs). (c) The presumptive rate of income isprescribed at 8% of gross turnover/gross receipts. (d) ................. (e) An assessee opting for the above scheme isexempted from maintenance of books of accountsrelated to such business as required under Section44AA of the Income Tax Act.(f) ................... (g)..................... https://hcservices.ecourts.gov.in/hcservices/ intention behind the widening scope of Section 44AD and theintention is clear that it was made taking note of the fact thatthere has been substantial increase in small businesses whoearns substantial income are outside the tax-net. Precisely forsuch reason, the assessee opting for presumptive rate of taxprovision are exempted from maintenance of books of accountsrelated to such business as required under Section 44AA of theAct. The intention of the legislature also becomes clearer ifwe look into Section 44AF which is a special provision forcomputing profits and gains of retail business which is computedbased on the total turnover with the previous year on account ofsuch business. Section 44ADA is a special provision forcomputing profits and gains of profession on presumptive basisuses the expression 'Total gross receipts'. As already seen inSection 44AD, the words used are 'total turnover' or 'grossreceipts' and it pre-supposes that it pertains to a salesturnover and no other meaning can be given to the said words andif done so, the purpose of introducing Section 44AD would standdefeated. That apart, the position becomes much clearer if wetake note of sub-Section (2) of Section 44AD which states thatany deduction allowable under the provision of Section 30 to 38for the purpose of sub-section (1) be deemed to have beenalready given full effect to and no further deduction underthose sections shall be allowed. Thus, conspicuously section 28(v) has not been included in sub-section (2) of Section 44ADwhich deals with any interest, salary, bonus, commission orremuneration by whatever name called, due to or received by, apartner of a firm from such firm. 14.Thus, for all the above reasons, we find that theTribunal rightly rejected the plea raised by the assessee andconfirmed the order passed by the CIT(A) and the AssessingOfficer. 15.In the result, the tax case appeal is dismissed and thesubstantial questions of law are answered against the assesseeand in favour of the revenue. No costs. Sd/- Assistant Registrar //True Copy// Sub Assistant Registrar cse To1.The Assistant Commissioner of Income Tax, Circle-2, Salem.1.The Assistant Commissioner of Income Tax, Circle-2, Salem. https://hcservices.ecourts.gov.in/hcservices/ 2.The Income-tax Appellate Tribunal, “A” Bench, Chennai. “A” Bench, Chennai. 3.The Commissioner of Income Tax (Appeals), No.3, Gandhi Road, Salem. T.C.A.No.388 of 2019 PP(CO)GN(19/01/2021)