The Income Tax Appellate Tribunal (ITAT) Delhi recently delivered a significant judgment in the case of Ranu Gupta vs ACIT (AY 2018-19), clarifying whether a working partner’s remuneration in a professional firm qualifies for presumptive taxation under Section 44ADA of the Income Tax Act, 1961. This ruling is crucial for Chartered Accountants, lawyers, and other professionals who operate through partnerships and seek simplified tax compliance.
What is Section 44ADA?
Section 44ADA provides a presumptive taxation scheme for professionals such as Chartered Accountants, doctors, architects, and others listed under Section 44AA. If their gross receipts do not exceed ₹50 lakh in a financial year, they can declare 50% of receipts as income and pay tax accordingly, without maintaining detailed books of accounts.
However, ambiguity existed on whether remuneration received by a partner from a firm qualifies as “gross receipts” for this purpose.
The Dispute: AO and CIT(A)’s Stand
In this case, the assessee, a Chartered Accountant and partner in a firm, received ₹27 lakh as remuneration. He opted for presumptive taxation under Section 44ADA, declaring 50% as income.
The Assessing Officer (AO) rejected the claim, arguing:
- Partner’s remuneration is income under Section 28(v), not professional receipts.
- CBDT Circular No. 3/2017 and judicial precedents (e.g., A. Anand Kumar, Madras HC) indicate that such income cannot be treated as professional receipts for presumptive taxation.
The CIT(A) upheld this view, stating that remuneration paid to a working partner is distinct from income earned by an individual practicing independently.
Arguments Before ITAT
The Department contended that:
- The assessee did not perform professional activity independently.
- No expenditure was claimed, so presumptive taxation should not apply.
The assessee argued that:
- Section 44ADA does not require independent practice.
- Partner remuneration for professional services is part of professional income.
ITAT Delhi’s Decision: Ranu Gupta vs ACIT
The Tribunal ruled in favor of the assessee, holding:
- Section 44ADA applies to partnership activity – There is no statutory requirement for independent practice.
- Partner’s remuneration qualifies as gross receipts – It is income from professional services rendered as a partner.
- No need to claim expenses separately – Presumptive taxation inherently provides for deemed expenses.
- Applied the principle of strict interpretation from Commissioner vs Dilip Kumar (SC), favoring the assessee.
Impact of the Ruling
This decision provides clarity for professionals in partnerships:
- Chartered Accountants, lawyers, and similar professionals can claim Section 44ADA on partner remuneration.
- Simplifies compliance and reduces litigation risk.
- Contradicts earlier interpretations based on CBDT Circular and certain High Court rulings.
Key Takeaways
- Partner’s remuneration is eligible for presumptive taxation under Section 44ADA.
- Independent practice is not mandatory.
- Maintain basic documentation to substantiate professional status and receipts.
Conclusion
The ITAT Delhi ruling in Ranu Gupta vs ACIT is a landmark for professionals operating through partnerships. It reinforces the principle that tax laws should be interpreted strictly and in favor of the assessee when ambiguity exists. For Chartered Accountants and other professionals, this judgment opens the door to simplified tax compliance under Section 44ADA.