For many partnerships or limited liability partnership firms, the taxation could be based on the calculation of estimated income or profit. Many partners estimate their net income at about 8% of the total receipts, as per the presumptive taxation scheme. The Madras High Court said recently that the benefits of the presumptive scheme are available only to certain individuals engaged in certain businesses.
Interest and salary received by the assessee (taxpayer) not carrying on business independently but only as a partner in a firm could not be construed as business income and therefore not eligible for applying the presumptive interest rate of 8%, the court ruled. The tax department could now scrutinise income on capital and remuneration received by a partner from a partnership firm, experts said.
“Various assessees are provided with an option to offer income on a presumptive basis, i.e. pays tax on 8% of gross receipts in case of business or 50% of gross receipts in case of the profession. Partners of the partnership firm or LLP can receive interest on capital and remuneration from a firm. The high court has held that partners cannot offer interest or remuneration on a presumptive basis. Hence tax on interest on capital and remuneration would be computed as normal business. Usually, limited deductions are allowed against such income,” said Paras Savla, partner, KPB & Associates, a tax advisory.
Experts said several structures, including sole partnership, joint venture or an LLP, were being explored while computing taxation under presumptive taxation. The tax regulations have other conditions, too, including the size of the partnership firm, to determine which firms are eligible to offer their income on a presumptive basis, tax experts said.