The Pune bench of the Income Tax Appellate Tribunal (ITAT), when ruling on the appeal, noted that the Income Tax Department had erred by classifying partners’ remuneration as salary income.
Assesee, Kiran Vasant Pawar is a consulting engineer for builders and developers and also a partner in various firms. During return assessee has shown income from partnership firms of Rs.32,33,288/- and after setting of loss of Rs.16,92,142/- and depreciation of Rs. 11,27,030/- declared income of Rs. 15,41,145/-.
When the assessment proceedings carrying AO noted that assessee has not audited his books of account as per the provisions of Section 44AB of the Income Tax Act. AO was of the opinion that the assessee was required to declare income @8% on the total turnover as per Section 44AD of the Act.
Accordingly, the assessee has declared loss of Rs.16,92,142/- and had claimed expenses of Rs. 26,67,942/. After considering the submissions of the assessee, the AO observed that the assessee is a partner in various firms and had earned income amounting to Rs. 32,33,288/-. The assessee has claimed various expenses in the profit & loss account which resulted into loss of Rs. 16,92,142/-.
In the computation of income, the assessee has taken set off of business loss and depreciation against income from firms. However AO disallowed the entire amount received from the firm and made addition.
Aggrieved by the order assesee filed appeal before CIT(A), who disallowed the appeal.Against the order assessee filed appeal before the tribunal .
During the appeal proceedings the tribunal observed that the assessee had set off the loss of professional income with the business profit i.e. the income earned from various partnership firms as remuneration to partners.
In a partnership firm, there is no employer and employee relation and, therefore, the remuneration given to a partner by the partnership firm cannot be termed as salary.
Further, Neither the AO nor NFAC has given specific findings as to why the loss from profession cannot be set off from the business profit.
Therefore, the bench noted that revenue authorities have travelled on wrong footing by holding the remuneration of partners as salary income.
After considering the facts submitted and circumstances, the two member bench of G.D. Padmahshali (Accountant Member) and Partha Sarathi Chaudhury (Judicial Member) remanded the file back to NFAC for readjudication of remuneration given to a partner by the partnership firm.
Pramod Shingte, counsel appeared for the assessee and Ganesh Budruk, counsel appeared for the revenue.
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