Remuneration from partnership not ‘Gross Receipt’ for purpose of audit under Section 44AB of Income Tax Act

Facts of the Case

• Assessee has filed her return of income for A.Y.-2017-2018 on 25th October, 2017 under Section 139(1) of the Act declaring total income of Rs.1,75,88,360/-. Out of this total income, a sum of Rs.1,09,65,411/- was declared under the heads of business and profession. Out of Rs.1,09,65,411/-, assessee derived a sum of Rs.8,45,220 as net income from assessee’s acting profession and Rs.1,01,20,191/- as remuneration received as working partner from the partnership firm.
• The Assessing Officer (AO) treated the income tax return filed by the Assessee as invalid due to non-auditing of accounts under Section 44AB of the Act. Against the order of the AO, the Assessee filed a revision application before the Principal Commissioner of Income Tax (PCIT). The PCIT rejected the revision application and upheld the order of AO. The Assessee filed a writ petitioner before the Bombay High Court against the order of the PCIT.

Contention of the Applicant

• The counsel for the Assessee submitted before the High Court that the remuneration received by the Assessee as a partner could not be construed as gross receipts from profession for the purpose of Section 44AB of the Act.
• In their opinion, section 44AB was not applicable where an assessee was carrying on a profession as well as a business simultaneously in different fields.

The Assessee need to be liable for tax audit U/s 44AB if his annual gross turnover/receipts in turnover as stated in the following cases exceeds the specified limit:

a) Business: Rs. 1 Crore

b) Profession: Rs. 50 Lakh

Decision of High Court

• The High Court observed that the provisions of Section 44AB (a) and 44AB (b) are mutually exclusive and none of the clauses under Section 44AB relates to the situation where an assessee is carrying on both profession as well as business.
• The High Court also placed reliance on the judgment of the Madras High Court in the case of Anandkumar v/s Assistant Commissioner of Income Tax (2020) and held that the Petitioner/Assessee’s remuneration from partnership firm could not be treated as gross receipt in profession.
• Therefore, revenue authorities were directed to treat the income tax return filed by the Assessee as valid.

Source: Perizad Zorabian Irani V/s PCIT & Ors, Dated 9th March, 2022

Mridul Agrawal, Audit Associate, SW India