Remuneration of partnership is not “gross receipts” for audit purposes under Section 44AB of the Income Tax Act: Bombay Supreme Court

the Bombay High Court ruled that remuneration received from a general partnership cannot be regarded as gross receipts in the profession for the purposes of compulsory audit under section 44AB of the Income Tax Act 1961 .

The Bench, made up of Judges KR Shriram and NJ Jamadarruled that none of the clauses of Section 44AB contemplate the situation where a person being assessed is carrying on both a profession and a business.

Applicant/Assessed Perizad Zorabian Irani filed her tax return under Section 139(1) of the Income Tax Act. The Assessing Officer (AO) treated the tax return filed by the assessee as invalid due to failure to audit accounts under Section 44AB of the Act. Against the order of the AO, the Assessée filed a request for review before the Principal Commissioner of Income Tax (PCIT). The PCIT denied the request for review and affirmed AO’s order. The assessee filed a petition for an order in the Bombay High Court against the PCIT order.

Counsel for the assessee Perizad Zorabian Irani argued in the High Court that the remuneration received by the assessee as an associate could not be construed as gross receipts of the profession for the purposes of Section 44AB of the law. Further, he argued that Section 44AB was not applicable where a person being assessed was simultaneously pursuing a profession and a business in different fields.

Section 44AB(b) of the Income Tax Act provides that any person who is engaged in a profession and whose gross earnings in the profession exceed fifty lakh rupees in a preceding year, he shall have his accounts for that previous year by an accountant and provide the audit report by the date indicated. Section 44AB(a) provides that any person who carries on business and whose total sales, turnover or gross receipts in the business exceeds one crore rupees in any preceding year, he shall have its accounts for the previous year audited by an accountant and provide the audit report by the date indicated.

The High Court observed that the provisions of Section 44AB(a) and 44AB(b) are mutually exclusive and none of the provisions of Section 44AB contemplate the situation where an assessee is performing both a profession and a business.

The High Court relied on the judgment of the Madras High Court in the case Anandkumar v Assistant Commissioner of Income Tax (2020) and held that the applicant/reviewee’s compensation from a partnership company could not be considered gross revenue in the profession. Therefore, the High Court ruled that the appraised Perizad Zorabian Irani was not required to have its accounts audited under Section 44AB.

The High Court allowed the assessee’s written petition and ordered the tax authorities to treat the tax return filed by the assessee as valid.

Case title: Perizad Zorabian Irani Versus PCIT And Ors.

Dated: 09.03.2022 (Bombay High Court)

Lawyer for the applicant/assessed: Dr. K. Shivram, Sr. Advocate, Mr. Rahul K. Hakani

Counsel for the Respondent/Directorate of Revenue: Mr. Suresh Kumar

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