8th November 2016, a remarkable day in Indian history. Demonetisation was made by ordinance. Many e-payment methods emerged. Getting new currency was a Himalayan task. People were queuing in front of ATMs. Whomsoever experienced pains will never forget those days. From the next day morning, numerous calls were received by CAs from their clients. The telecom operators would have earned of course! But Mr. Ambani launched Jio as well. Fine, that’s a history. Then, in finance bill 2017, there was an important amendment in section 44AD. Eligible business can pay presumptive taxation on 6% of gross receipts to the extent they were by account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account.
Then, there was a newly inserted section 44ADA. It says –
44ADA. Special provision for computing profits and gains of profession on presumptive basis.—(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"
So, here we have to know what is a profession referred to in section 44AA(1) –
44AA.(1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
Further 44AD (6) says –
The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to -
(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;
(ii) a person earning income in the nature of commission or brokerage; or
(iii) a person carrying on any agency business.
Explanation to section 44AD says. - For the purposes of this section,
(a) "eligible assessee" means,
(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and
(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading "C. - Deductions in respect of certain incomes" in the relevant assessment year;
(b) "eligible business" means,
(i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of [two crore rupees].
So now, we can say that, presumptive taxation under section 44ADA is applicable only for professionals covered under section 44AA (1).
Also, we can state that, presumptive taxation @ 8% or 6% of gross receipts as the case may be u/s 44AD can be opted for professionals or service providers not covered under section 44AA (1).
Example, a Chartered Accountant has to mandatorily opt for 44ADA. However, an accountant or book-keeper providing book-keeping services shall be covered u/s 44AD. An Engineer providing valuation services is covered under 44ADA. However a chief mason or carpenter is covered under 44AD. This is because, a book-keeper and carpenter are not covered u/s 44AA (1) as they do not possess any such technical qualification. Also, they are not covered by the notification of the CBDT u/s 44AA (1).
Now, let us look how far these two sections in presumptive taxation scheme are affected by TDS provisions. Well in practice, there is a proverb. ‘If you do not know whether to deduct TDS or not, it is better to deduct TDS. And if you do not know whether 1% or 10% is to be deducted, it is better that 10% is deducted’. This is because; the non-deduction or short-deduction will burden only the payer and not the payee. Though there is a provision in the Income Tax Act, 1961 stating that if a certificate has been obtained from the CA of the payee that the payee has accounted the income received from payer, then non-deduction would not affect the payer, many CAs are not willing to do it. So, this is on one hand stating TDS shall be deducted @10%.
Now let us look into the provision pertaining to TDS which state 10% is to be deducted. We all know, 10% deduction is made by and large for Rent, Professional fees, Interest. Now, by and large rental income will get covered under the head house property and interest under other sources unless both are the main business, they will fall under business income.
Now let us enter the grey area of Professional fees or technical fee u/s 194J.
Section 194 J –
194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of -
(a) fees for professional services, or
(b) fees for technical services [or]
(ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company, or
(c) royalty, or
(d) any sum referred to in clause (va) of section 28,
shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein exceeding thirty-thousand rupees.
Explanation to the above states that -
(a) "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;
(b) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
So from all the above, we can say that 194J covers payments covered under section 44AA (1) and also other payments not covered under section 44AA (1).
But practically, these days the department is issuing notices u/s 143(1) (a) stating that on matching with form 26AS, income for which tax is deducted u/s 194J is not reported u/s 44ADA in ITR and asks for explanation. This leads to a view that the department means that all income for which tax is deducted u/s 194J is to be reported u/s 44ADA which is not appropriate.
So, it would be prudent if the CBDT comes forward and gives a clarification to the above or instead the Ministry of finance may give a separate section for deducting tax for professionals and service providers not covered u/s 44AA (1). Moral of story is that 194J not only covers professionals covered u/s 44AA (1) but also others and those others are eligible to opt section 44AD.
Bare sections are sourced from www.incometaxindia.gov.in
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