Remand to determine actual salary after bank verification and tax partner remuneration under business income.

ORDER

Keshav Dubey, Judicial Member. – This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC, Delhi dated 02.09.2025vide DIN& Order No. ITBA/NFAC/S/250/2025-26/1080255530(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2020-21.

2. The assessee has raised the following grounds of appeal: –

3. The assessee has also filed an application for the admission of additional ground vide letter dated 10.12.2025, however, during the course of hearing, the ld. A.R. of the assessee CA Shreesha N. Ganesh prayed to permit the withdrawal of the additional ground and hence the additional ground as raised by the assessee is dismissed as withdrawn.

3.1 Further, the ld. A.R. of the assessee also filed an application dated 10.12.2025 for admitting the additional evidence i.e. the bank statements to establish the total salary actually received by the assessee as during the assessment proceeding the assessee had inadvertently provided only the details of bank account and not the complete bank statement. However, the ld. A.R. of the assessee did not press the request to admit the additional evidences at the time of hearing and therefore, we are rejecting the additional evidences filed before us.

4. Now the brief facts of the case are that the assessee is a Chartered accountant and was working as a partner in Ernst & Young, LLP. The SRBC & Associates, LLP is an affiliated of Ernst & Young LLP. The assessee was receiving salary from SRBC & Associate LLP taxed under the head income from salary and remuneration and share of profit from Ernst & Young LLP taxed under the head “profits & gains of business or profession” (in short “PGBP”). The assessee filed his return of income for the AY 2020- 21 on 01.03.2021 declaring total income of Rs.9,76,000/- (salary of Rs.10,26,000/- (-) standard deduction Rs.50,000/-). In this case information was received under high risk e-verification scheme, 2021 formulated by the Central Government in accordance with the provisions of section 135A of the Act. As per the information, the assessee has received Rs.24,00,000/-, but such remuneration was not disclosed in the return of income. Accordingly, the notices u/s 133(6) of the Act was issued to the assessee calling for information in respect of the above mentioned transaction. In response to the notices issued, the assessee had responded vide insight portal on 20.01.2023 with the remarks that “THIS INFORMATION IS CORRECT” but the assessee had not uploaded any supporting documents related to remuneration received. Thus, the assessee himself disclosed that the true and correct income has not been shown by the assessee in his return of income and hence the system has declared the return for the AY 2020-21 filed on 01.03.2021 as invalid. Thereafter, the case of the assessee was reopened u/s 147 of the Act and accordingly notice u/s 148 of the Act was issued on 28.03.2024. The assessee did not file any return of income in response to the notice u/s 148 of the Act and hence the assessee had no valid return for the AY 2020-21. Accordingly, the AO had no other option except to complete the case u/s 144 of the Act.

4.1 During the course of assessment proceeding, on perusal of the record available, the AO observed that the assessee had disclosed his salary income of Rs.10,26,000/- in his return of income. However, during the assessment proceedings, the assessee by way of submitting the statement of total income on 22.11.2024 had claimed to have received salary of Rs.3,20,000/ only. Further, the assessee submitted that the amount of Rs.10,26,000/- was erroneously mentioned as the assessee was not sure on the breakup between salary from SRBC & Associate LLP and remuneration from Ernst & Young LLP which is taxable under the head PGBP.

4.2 The AO did not believe the contention of the assessee who is a Chartered Accountant and claiming that he had no knowledge between the salary income and business income. Further, the AO held that the assessee had failed to justify that he had not received any salary except Rs.3,20,000/- by way of filing his bank account or any other corroborative evidence. Hence, the amount of Rs. 10,26,000/- originally declared by the assessee as salary in his return of income was treated as income for AY 2020-21.

4.3 Further, on perusal of the record, the AO noticed that the assessee had also received remuneration from M/s. Ernst & Young LLP amounting to Rs.24,00,000/-. The assessee had not disclosed this remuneration received from M/s. Ernst & Young LLP in his return of income and thus the AO held that 50% of total remuneration received i.e. Rs.12,00,000/- is taxable in the hands of the assessee and accordingly added Rs.12,00,000/- in the hands of the assessee as business income. The AO completed the assessment proceedings on a total assessed income of Rs.22,26,000/- u/s 147 r.w.s. 144 of the Act dated 04.03.2025.

5. Aggrieved by the assessment order dated 04.03.2025 passed u/s 147 r.w.s. 144 of the Act, the assessee preferred an appeal before the ld. CIT(A)/NFAC.

6. The ld. CIT(A)/NFAC partly allowed the appeal of the assessee by observing that the assessee himself admitted that the true and correct income was not disclosed in the return of income originally filed. Further, it is established that: –

i The assessee has failed to discharge the onus of proof by not producing bank statements or corroborative evidence.

ii There is positive information with the AO regarding receipt of remuneration of Rs.24,00,000/- from the firm which the assessee has not been able to rebut.

iii Filing only Form-16 of Rs.3,20,000/- without supporting bank entries cannot negate the documentary and circumstantial evidence relied upon by the AO.

6.1 Accordingly, the ld. CIT(A)/NFAC held that assessee had not been able to produce anything in contravention of the observations of the AO. The claim that salary of only Rs.3,20,000/- was received remains unsubstantiated. In these circumstances, the addition of Rs.12,00,000/- (50% of remuneration of Rs.24 lakhs) and Rs.10,26,000/- (as shown in the return of income) made by the AO is based on cogent material and is sustained. The ld. CIT(A)/NFAC however, directed the AO to grant credit of TDS amounting to Rs.99,840/- as reflected in Form 26AS in accordance with law.

7. Again, aggrieved by the order of ld. CIT(A)/NFAC, the assessee has filed the present appeal before this Tribunal. The assessee has also filed a paper book comprising 284 pages containing therein written submissions along with various documents/records as well as case laws relied upon by the assessee.

8. Before us, the ld. A.R. of the assessee vehemently submitted that the assessee could not submit the bank statement before the lower authority in order to substantiate the claim of receipt of actual salary amounting to Rs.3,20,000/-. Further, the ld. A.R. of the assessee submitted that Rs.24,00,000/- was received as salary being a partner of the limited liability partnership and the assessee was under the presumption that the entire share of profit from Ernst & Young LLP is exempt u/s 10(2A) of the Act. The ld. A.R. of the assessee also argued that an amount of Rs.10,26,000/- was erroneously declared in the return of income as the assessee was not sure of the breakup of the salary from SRBC & Associate LLP and remuneration from Ernest & Young LLP and accordingly prayed to allow the appeal of the assessee.

9. The ld. D.R. on the other hand vehemently submitted that the assessee is a Chartered Accountant by profession and the contention of the ld. A.R. that the assessee had declared salary of Rs.10,26,000/- in his return of income since he had no knowledge of the salary from SRBC & Associates, LLP and remuneration from E&Y LLP is completely unbelievable. Further, the ld. D.R. submitted that the assessee in response to notice u/s 133(6) of the Act had responded vide insight portal with the remarks that “THIS INFORMATION IS CORRECT” and therefore, the assessee himself disclosed that true and correct income had not been shown by the assessee, which is at least not expected from the assessee being a Chartered Accountant. Lastly, the ld. D.R. submitted that the adoption of 50% of the total remuneration received from the LLP by the AO is also erroneous as the entire salary/remuneration received from the partnership firm are liable to be taxed.

10. We have heard the rival submissions and perused the materials available on record. Undisputedly, the assessee filed his return of income u/s 139(4) of the Act on 01.03.2021 vide acknowledgement no.277898200010321 by declaring salary income of Rs.10,26,000/- (Rs.9,76,000/- after standard deduction). Now during the course of assessment proceeding, in response to notice u/s 148 of the Act, the assessee did not file any return of income. However, the assessee had submitted the statement of total income on 22.11.2024 by declaring salary income from SRBC & Associates, LLP amounting to Rs.3,20,000/- and also claimed TDS of Rs.99,840/- thereon. The AO however, had an information that the assessee had also received remuneration amounting to Rs.24,00,000/- during the financial year 2019-20 relevant for AY 2020-21. The contention of ld. A.R. is that the assessee is a Chartered Accountant and was working as a partner in Ernst & Young LLP and also a salaried employee of M/s. SRBC & Associates, LLP which is an affiliate of Ernst & Young LLP. It is also an undisputed fact that both the authorities below did not believe the salary of Rs.3,20,000/- solely on the ground that the assessee failed to justify that he had not received any salary except Rs.3,20,000/- by filing his bank account or any other corroborative evidence. On perusal of the Form-16 issued by SRBC & Associates LLP (placed at page 9 to 36 of the paper book), we observed that the salary was given for the first 3 quarters only and there is no salary in the 4th quarter. The AO had not verified the reasons for non n of the salary in the 4th quarter. Further, we also failed to understand that why a renowned Chartered Accountants LLP will deduct TDS of Rs.99,840/- on a total net salary of Rs.2,70,000/- (salary of Rs.3,20,000/- (-) standard deduction of Rs.50,000/-) paid to an employee and this has created a confusion in the mind of the lower authorities. Before us, the assessee had produced the copy of the bank statements for the first time and therefore, the lower authorities had no occasion to examine the same. Further, we also agree with the view of the lower authorities that it is completely unbelievable that the assessee Chartered Accountant can file a return of income without being not sure of the breakup between salary from SRBC & Associates LLP and remuneration from Ernst & Young LLP and will declare the salary income of Rs.10,26,000/- in his return of income. We are also quite surprised to note that while filing the return of income, the assessee Chartered Accountant did not declare his remuneration from the E&Y LLP at all. It is only after the information received under the high risk e-verification scheme, 2021, the AO initiated the proceedings u/s 148 of the Act. In view of above observation, we remit this issue to the file of the AO to determine the exact salary received by the assessee from SRBC Associates & LLP by taking into account the confirmation from the SRBC along with the bank statements produced for the first time before us.

10.1 Now coming to the remuneration of Rs.24,00,000/- not declared by the assessee while filing his return of income, the contention of the ld. AR is that the assessee had received remuneration and share of profit from the Ernst & Young LLP which is taxable under the head “PGBP”. The assessee was under the presumption that the entire receipts from the Ernst & Young LLP is exempt u/s 10(2A) of the Act. The AO had reproduced the certificate from M/s. Ernst & Young LLP wherein they have certified that the assessee is a partner of Ernst & Young LLP and a sum of Rs.24,00,000/- was paid as remuneration which is authorized by and is in accordance with the provisions of the LLP deed and represents an amount which is chargeable in the hands of the assessee u/s 28(v) of the Act for the AY 2020-21. However, on perusal of the assessment order, we observed that as the assessee had not disclosed this remuneration receipts from M/s. Ernst & Young LLP and accordingly 50% of the total remuneration received i.e. Rs.12,00,000/- was taxed in the hands of the assessee as business income. In our considered opinion, section 28 of the Act is the charging section under the head “profits & gains of business or profession.” Further, section 28(v) of the Act specifically prescribed that any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of the firm from such firm shall be chargeable to income tax under the head “profits & gains of business or profession”. Further, the proviso to that section also states that where any interest, salary, bonus, commission or remuneration has not been allowed to be deducted u/s 40(b) of the Act, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted. Thus, in our considered opinion, a partner’s salary from a partnership firm/LLP is not taxed under the head “salaries” but it is a business income u/s 28(v) of the Act to the extent the firm can deduct it u/s 40(b) of the Act. Thus, what is allowed as deduction in the hands of the partnership firm/LLP is taxable in the hand of the partner. Further, in our considered opinion, unlike section 28(i) of the Act, where it states that only profits & gains of the business or profession which was carried on by the assessee at any time during the previous year shall be chargeable to income tax under the head “profits & gains of business or profession”, section 28(v) of the Act states salary or remuneration received by the partner of a firm from such firm shall be chargeable to income tax under the head PGBP. Thus, this charging section does not stipulates that the profits & gains from salary or remuneration received by the partner of the firm from such firm will only be taxable. Further, on perusal of the section 44ADA of the Act, we also take note of the fact that an individual who is a resident in India engaged in profession referred to in section 44AA(1) of the Act and whose gross receipt do not exceed Rs.50 lakhs in a previous year, a sum equal to 50% of the total gross receipts of the assessee in the previous year on account of such profession or a sum higher than the aforesaid sum claimed to have been earned by the assessee shall be deemed to be profits and gains of such profession chargeable to tax under the head PGBP. However, we are of the considered opinion that the remuneration and interest received by a partner from a firm or LLP are not the partner’s own turnover or gross receipts. Thus, the partner’s remuneration cannot constitute a gross receipt from a profession of the assessee as the partner did not independently carry on the profession. In our considered opinion, as the partnership firm/LLP gets the entire deductions towards the payment of salary or remuneration paid to the working partners subject to the limit as prescribed u/s 40(b) of the Act and therefore, the salary or remuneration received by the partner shall be chargeable to tax u/s 28(v) of the Act entirely. Thus, the salary or remuneration received by the partner from the firm/LLP represents a derivative or secondary source of income that falls outside the ambit of the presumptive scheme. The primary income earner is the partnership firm/LLP itself. The partner is not independently carrying on the profession rather the partner is employed or engaged by the firm to contribute to its professional practice. In our considered opinion, the salary or remuneration are not the receipt from a business/profession carried on by the partner assessee but rather receipts from a partnership in which the assessee is a partner. The presumptive scheme (section 44ADA) applies to person carrying on profession and the receipt from a partnership firm does not constitute a gross receipt from his own profession and accordingly we are of the opinion that the entire remuneration of Rs.24,00,000/- received from the LLP is chargeable to tax u/s 28(v) of the Act.

10.2 Further, on perusal of the Confirmation letter placed at page- 27 of the paper book, we observed that the Ernst & Young LLP has certified that a total of Rs. 23,85,000/- is an exempt/non taxable amount credited to the assessee. However, on perusal of the said certificate, we noted that the Share of profit mentioned as exempted u/s 10(2A) of the Act amounting to Rs. 10,000/- only. However, an amount of Rs. 23,75,000/- paid towards the discretionary additional remuneration was claimed to be non-taxable in terms of the proviso to section 28(v) of the Act which in our opinion needs further verification & examination by the AO. With these observations, we also remit this issue to the file of AO for computing the correct income of the assessee for AY 2020-21 accordingly in accordance with law. Needless to say, reasonable opportunity of being heard must be granted to the assessee. It is ordered accordingly.

11. In the result, appeal filed by the assessee is partly allowed for statistical purposes.