1. An assessee is declaring income lower than 6%/8% and his total income exceeds the maximum amount which is not chargeable to income-tax. Is he required to get his accounts audited by CA u/s 44AB or only section 44AA will be applicable?
In case of a Partnership firm after deducting Salary and interest to partners, the net profit is NIL. Is it required to get its accounts audited?
Ans. Section 44AD(5) provides that an eligible assessee to whom section 44AD(4) applies and whose total income exceeds the maximum amount not chargeable to tax, is required to maintain books of account and other documents specified in section 44AA(2) and get them audited and furnish a report of such audit under section 44AB. Similarly, clause (e) of section 44AB provides that every person carrying on business shall get his accounts of the previous year audited under that section before the specified date and furnished by the date the report of such audit, if section 44AD(4) is applicable and his income exceeds the maximum amount not chargeable to income tax for that year. Therefore, two conditions are required to be fulfilled if a tax audit is required under section 44AB – one, that section 44AD(4) should apply, and the income should exceed the basic exemption limit applicable to that person.
Section 44AD(4) provides that where an eligible assessee declares profit for any previous year in accordance with section 44AD and he declares profit for any of the five assessment years relevant to the previous year subsequent to such previous year, not in accordance with section 44AD(1) [i.e. not at 6%/8% of turnover], hey shall not be eligible to claim the benefit of section 44AD for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been so declared. In other words, once an assessee has declared profit at 6%/8% of turnover, and in any of the next five years, does not declare profits at, at least such a percentage of turnover, he cannot claim the benefit of section 44AD for the next five years. It is such an assessee who is required to get his accounts audited under section 44AB in those years in which he is not so eligible for section 44AD.
2. A partnership firm having two partners (husband and wife). One partner (Husband) expired. The firm has one old industrial gala in the balance sheet. Now what are the tax consequences in such a case?
Whether the firm can be continued with admitting sons of the deceased as per partnership deed, as partners from the date of death and firm will continue? Or the firm will be regarded as dissolved and tax have to be paid by firm on difference between fair market value of industrial gala and the written down value of such gala?
As discussed with the Registrar of Firms consultants, the Supreme court has given a verdict that where a firm has only two partners and one partner dies, the firm is compulsorily dissolved, even if there is a clause in the partnership deed of admission of legal heirs as partners.
Considering the above facts, what is the best possible solution?
Ans. As rightly pointed out, under the Partnership Act, 1932, the firm gets dissolved. Once the firm has been dissolved, subsequent admission of a partner (maybe the legal heirs of the deceased partner) would amount to constitution of a new firm, which would be separate and therefore assessed separately. The Supreme Court, in the case of Mohd. Laiquiddin v. Kamala Devi Mishra (deceased) by LRs, (2010) 2 SCC 407, held that on the death of a partner of a firm comprised of only two partners, the firm is dissolved automatically; this is notwithstanding any clause to the contrary in the partnership deed.
As regards the applicability of section 45(4) in such cases of dissolution, the Madras High Court in the case of CIT v. Vijayalakshmi Metal Industries 256 ITR 540, has held that where there was a dissolution of a firm by operation of law by reason of section 42(c) of the Partnership Act (i.e. on death of a partner), but this was not followed by the by distribution of capital assets on the dissolution of the firm, since no transfer had taken place, no capital gains could be said to arise under section 45(4). A similar view has been taken by the Madhya Pradesh High Court in the case of CIT v. Moped and Machines 281 ITR 52.
However, a slightly different view has been taken by the Andhra Pradesh High Court in the case of Rajlaxmi Trading Co 250 ITR 581, and by the Kerala High Court in the case of CIT v. Southern Tubes 306 ITR 216, on slightly different facts. In those cases, the firm was dissolved (voluntarily, and not by death of a partner) and all its assets were taken over by one partner. The court held that the assessing officer was justified in taking market value of assets as transferred for the purpose of determining capital gains tax under section 45(4).
Therefore, if a new firm is started with the legal heirs of the deceased partner immediately after the death of the partner, it can be argued that the provisions of section 45(4) do not apply, as there is no distribution of assets to the partners.
3. An appeal filed by the Tax Department is pending with ITAT on 31st January 2020. Is the assessee eligible to apply under Vivad se Vishwas Scheme? Now, If ITAT hearing is held in July and the appeal is decided against the assessee, is the assessee still eligible under the Vivad se Vishwas Scheme? Is there any condition that the appeal should also be pending on the date of application under the Vivad se Vishwas Scheme?
Ans. Under the Vivad se Vishwas Act, 2020, an appeal has to be pending before the appellate forum on the specified date, i.e. 31st January 2020, in order to be eligible to make an application under the Scheme. This has been clarified in the answer to question No. 1 in CBDT circular No. 7 of 2020 dated 22 April 2020.
There is no requirement under the Act that such appeal should also be pending on the date of application. Therefore, even if the tribunal has decided the matter subsequent to the specified date, the assessee can still make an application for settlement under the Vivad se Vishwas scheme.
In this case, since the appeal that is pending is an appeal filed by the Income Tax department, the amount payable under the scheme would be 50% of the disputed tax.