The Finance Act, 2016 inserted a new section 44ADA providing for taxation of professional income on presumptive basis. The presumption of income is not new to the Income Tax Act, in the past various sections have been inserted for taxation of income on presumptive basis some of them are:
- the Finance Act, 1988 had inserted section 44AC dealing with presumption of income in case of purchase of liquor, timber and forest produce through auction or tender. This was omitted by the Finance Act, 1992;
- the Finance Act, 1994 had inserted section 44AD which was amended from time to time, as on today this section lays down the presumption of income at 8% of the total turnover or gross receipts provided its below 2 crores in case of all businesses with certain exceptions;
- the Finance Act, 1994 has also inserted section 44AE dealing with presumption of income in case of business of plying, hiring or leasing of goods carriages;
- the Finance Act, 1998 had inserted section 44AF dealing with presumption of income in case of retail business but was made redundant by Finance (No.2) Act, 2009 as the retail business category covered under this section was included under section 44AD by amendment.
Apart from the above various other sections were inserted during different point of times dealing with presumption of income from various businesses like non-resident’s shipping business and operation of aircraft, exploration of mineral oils etc..
The objectives behind introduction of presumptive basis of taxation scheme, as brought out by the finance minister speeches and memorandum to the finance bills, is to simplify the taxation scheme, to reduce the compliance burden and to facilitate the ease of doing business for the small taxpayers. What was missing in the presumptive basis of taxation schemes was the scheme for professionals. Now the section 44ADA provides for the same.
The text of the section 44ADA is reproduced below for the ready reference:
“44ADA. (1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.
(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.
(3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.”
Section 44ADA is applicable to:
- the person who is resident of India and having income from profession referred in section 44AA(1) Viz.,legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration and any other profession as notified by CBDT[1]; and
- the gross receipt on account of such profession does not exceed ` 50 lakhs.
Once the above said conditions are satisfied then the person has an option to declare either 50% or more of the gross receipts as income from such profession. While arriving at such presumed income it would be deemed that all deductions under section 30 to 38 is given effect to and the written down value of the assets used for the purposes of such profession would be deemed to be calculated as if the person would have claimed depreciation.
However, if the person claims his income from profession to be lower than 50% of the gross receipts from such profession and whose total income exceeds the maximum amount not chargeable to income-tax then the person has to maintain the required/specified books of account, documents and get them audited as per the provisions of the section 44AB i.e. obtain a report in Form 3CA or 3CB along with the Form 3CD as the case may be.
Every time a new section is inserted it gives rise to new thoughts, interpretations, queries and anomalies and so have the insertion of section 44ADA, in the discussion below an attempt is made to deliberate on few of them.
Gross Receipts
One of the criteria for applicability of Section 44ADA is limit of ‘gross receipts’ whereas in contrast to this the words used in section 44AD is ‘total turnover or gross receipts’, in section 44AF the word used is ‘total turnover’. The words gross receipts or total turnover are not defined and as such one has to fall back on their meaning as understood under normal parlance of trade and the judicial precedents.
The black’s law dictionary describes gross receipts as – “The total amount of money or other consideration received by a business taxpayer for goods sold or services performed in a year, before deductions.”
The Hyderabad ITAT[2] has laid out the rationale that the term turnover or gross receipts have to be interpreted in reference to the items which goes into the profit and loss account of the concern which in turn is based on the method of accounting regularly applied by the concern. The CBDT in circular[3] dealing with turnover for agency and commission business have impliedly supported the view that method of accounting regularly employed by the assessee and the trade or commercial practice will play a vital role in determining the constituents of the turnover.
The guidance note[4] issued by the Institute of Chartered Accountants of India on tax audit explains that the words sales, turnover and gross receipts are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assesse. In fact the provisions of the section 145(1) mandates to compute the income under the head ‘Profits and gains of business or profession’ in accordance with the cash or mercantile system of accounting regularly employed by the assessee. In case of professionals, the guidance note states that gross receipts would include all receipts arising from carrying on of profession. The out of pocket expenses collected separately either in advance or otherwise would not form part of gross receipts. If on the other hand if out of pocket expenses are not collected separately but are included or collected as a consolidated fees then the same would form part of gross receipts. Accordingly, the gross receipts would mean total consideration received on provision of services based on the accounting principles regularly employed.
Deduction of partner’s remuneration and interest:
The sub-section 2 of section 44ADA provides that all deductions under section 30 to 38 would be deemed to have been provided and no further deduction under the said sections would be allowable. Can a deduction under section 40(b) with regard to the salary and interest of partners be claimed? One can argue that the section 44ADA beings with non obstante clause – “Notwithstanding anything contained in sections 28 to 43C” implying all the deductions and disallowances under said sections would be deemed to have been provided for and hence, deduction under section 40(b) would not be allowed.
It would be pertinent to discuss the legislative history regarding the allowability of deduction under section 40(b) in regard to section 44AD and 44AE which employs the language similar to section 44ADA and all the three section belongs to the same genesis. Section 44AD and 44AE were inserted by the Finance Act 1994, dealing with presumptive income for the business of civil construction and business of plying, hiring or leasing of goods carriage respectively. CBDT issued a circular [5] in 1994 dealing with scope and explaining the effect of section 44AD which stated that deduction under section 40(b) of partner’s salary and interest would be allowed from the income computed on the presumptive basis. However, later in the year 1996 CBDT issued another circular[6] holding that circular of 1994 was erroneous to the extend it allowed
deduction under section 40(b) and deleted the same with retrospective effect from 1994. This gave rise to widespread litigations but the controversy was laid to rest by the Finance Act, 1997 which inserted the proviso in section 44AD and 44AE specifically providing for deduction under section 40(b) with retrospective effect from April 1, 1994 and the High Courts[7] struck down the CBDT circular of 1996 in light of the said amendment.
Section 44ADA does not contain the provision similar to that of section 44AD and 44AE extending the deduction under section 40(b) and more over the Finance Act, 2016 has omitted the said proviso from section 44AD though not from section 44AE, these have potential to give rise to fresh litigation. It would be open for one to argue that deemed deduction under section 30 to 38 is been specifically mentioned but not under other sections and hence, the deduction of partners salary, partners interest under section 40(b) is to be allowed. However, if this rationale is upheld then the effect of, disallowances as a consequence of non-observation of TDS and TCS provisions, disallowance of cash payments and allowability of governmental taxes/duties, employee welfare fund contributions etc. on cash/ payment basis, also needs to be given effect to. In other words, the income from profession would be 50% of the gross receipts which would be further reduced or increased as per the provisions of section 40, 40A, 41, 43A, 43B, and 43C, the resultant amount would be the income from such profession.
However, the Jaipur ITAT had an occasion to decide a case[8] involving addition under section 69 when income was offered under presumptive scheme of section 44AD, it held that section 44AD have limited overriding effect over sections 28 to 43C but not over the other sections of the Income Tax Act. Hence, the argument in the above para may fail.
[1] CBDT has notified – Authorised representative representing before any tribunal or authority and film artist vide notification no. 1620 SO 18(E) dated January 12, 1977; Company Secretary vide notification no. 9102 SO 2675 dated September 25, 1992; Profession of information technology vide notification no. 116 SO 385(E) dated May 4, 2001.
[2] Dy. CIT v. Mangal Dayak Chit Fund (P) Ltd. (2002) 92 ITD 258, 92 TTJ 889
[3] Circular No. 452 dated March 17, 1986
[4] Guidance note on tax audits under section 44AB of the income Tax Act, 1961 – (Revised 2014 Edition)
[5] Circular no. 684 dated June 10, 1994
[6] Circular no. 737 dated February 23, 1996
[7] Goswami & Bros v. Union of India & Anr – 250 ITR 359 (Raj HC); A.S. Construction Co. v. Union of India & Anr – 252 ITR 182 (Raj HC); Ranjan Constructions & Ors v. Central Board of Direct Taxes & Ors – 232 ITR 76 (Ori HC)
[8] ITO v. Devi Singh Solanki 99 TTJ 890 – (Jaipur ITAT)
