Remuneration of Partners Not Salary Income ITAT Pune

Appeal ITA No.934/PUN/2023Dated 20/09/2023 of Kiran Vasant Pawar Vs ITO (ITAT Pune)

Introduction: The Income Tax Appellate Tribunal (ITAT) Pune recently examined a case where the Income Tax department had categorized the remuneration received by a partner as salary income, leading to an addition of Rs. 78,064 to the partner%u2019s income. The case of Kiran Vasant Pawar vs. Income Tax Officer (ITO) is one that sheds light on the misinterpretation of tax provisions, particularly concerning partners%u2019 remuneration.

Background of the Case: The appellant, Kiran Vasant Pawar, was engaged in the profession of consulting engineering and was also a partner in various firms. During the relevant assessment year, he reported an income of Rs. 32,33,288 from partnership firms, but after setting off a loss of Rs. 16,92,142 and claiming depreciation of Rs. 11,27,030, he declared an income of Rs. 15,41,145.

Audit of Books of Account: The Assessing Officer (AO) noticed that the appellant had not audited his books of account as required by Section 44AB of the Income Tax Act, 1961. As a result, the AO believed that the appellant was obligated to declare income at a flat rate of 8% of the total turnover under Section 44AD of the Act.

Questionable Categorization: The issue that became contentious in this case was the categorization of the remuneration received by the appellant as salary income. The AO was of the opinion that since the appellant had not audited his books of account, all expenses incurred were deemed to have been fully accounted for. Consequently, the entire amount received from the partnership firms was added to the appellant%u2019s income.

Challenging the Decision: The appellant contested this categorization, highlighting the inappropriate labeling of the remuneration as %u201Csalary income%u201D and the denial of the set-off for the loss from the profession against the business profit. The appellant emphasized that the partnership firms did not have an employer-employee relationship, making the term %u201Csalary%u201D inapplicable. However, neither the AO nor the National Faceless Appeal Centre (NFAC) provided a clear reason why the set-off was denied.

ITAT%u2019s Directive: The ITAT Pune opined that the Revenue authorities had mischaracterized the remuneration of partners as salary income and should not have applied presumptive taxation under Section 44AD of the Act. This is because in a partnership firm, there is no employer-employee relationship. Furthermore, the absence of an audit of books of account does not, by itself, warrant the application of presumptive taxation. The ITAT directed the NFAC to re-adjudicate the issue in compliance with the principles of natural justice.

Conclusion: The ITAT Pune%u2019s decision in Kiran Vasant Pawar vs. ITO underlines the importance of accurately interpreting tax provisions. It reinforces that remuneration received by partners in a partnership firm cannot be categorized as salary income due to the absence of an employer-employee relationship. Furthermore, the absence of an audit does not automatically warrant presumptive taxation.

The case is a reminder that tax authorities must provide clear and justifiable reasons for their decisions, and taxpayers have the right to challenge categorizations that may not be in accordance with tax laws. This case serves as a lesson in ensuring that tax provisions are accurately applied, preventing undue tax burdens on taxpayers.