The Scheme of Presumptive Taxation for Professionals was introduced under Section 44ADA in the Finance Act 2016 and is applicable from Financial Year 2016-17 onwards.
Need for Introduction of Section 44ADA
Before 2016, the benefits of Presumptive Taxation were only given to Businesses under Section 44AD and to Transporters under Section 44AE. Specified professionals were specifically kept out of this scheme of Presumptive Taxation.
As Professionals were specifically kept out of the scheme of Presumptive Taxation, the only option available for Professionals was to compute their Income under the normal system of taxation. These professionals were also required to maintain all books of accounts, maintain a copy of invoices for all expenses, and in some cases - they were also required to get their Tax Audit conducted.
So many complexities ended up discouraging the professionals from filing income tax returns. So as to simplify the taxation for Professional, the Presumptive Taxation for Professionals was introduced under Section 44ADA in Finance Act 2016 which is applicable from Financial Year 2016-17 onwards.
Section 44ADA has FOUR sub-sections
- Section 44ADA (1) - Chargeability and scope
- Section44ADA(2) - Deductions deemed have been already given full effect under sec 30 to38
- Section 44ADA (3) - Depreciation deemed to have been allowed - an issue of computation of short term capital gain - an issue of setoff of unabsorbed depreciation
- Section 44ADA (4) - Consequences if sub-section (1) is not followed - applicability of section 44AA(1) and section 44AB
Section 44ADA is as follows
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 percent 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.
Eligible Profession
The presumptive taxation scheme under section 44ADA for estimating the income of an assessee:
•who is engaged in any profession referred to in section 44AA(1) such as 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; and
•whose total gross receipts do not exceed fifty lakh rupees in a previous year,
Profession referred to u/s 44AA(1): Every person carrying on:
- Legal Medical
- Engineering or Architectural profession or
- The profession of accountancy or technical consultancy or
- Any other profession as is notified by the Board in the Official Gazette
Other notified professions
(a) The profession of an authorized representative; and
(b) the profession of film artist (actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, and dress designer)- Notification: No. SO 17(E), dated12-1-1977
(c) the Profession of Company Secretary- Notification: No. SO2675, dated25-9-1992
(d) the Profession of Information Technology- Notification: No.SO 385(E), dated 4-5- 2001.
Example: An individual who is doing financial consultancy business and the service receiver while he is paying service charge, he is deducting TDS u/s 194 J. Whether he can offer income u/s 44ADA? - Sec. 44ADA will be applicable only to the Notified Professions. It is an inclusive definition, it doesn't cover financial consultancy business, hence he can't offer income u/s 44ADA. - Notifications No. SO-18[E] dated 12.01.1977, No. SO 2675 dt.25.09.1992 and S.O. 385[E] dt.04.05.2001
Meaning of authorized representative-
Explanation to Rule 6F
Authorized representative means a person who represents any other person, on payment of any fee or remuneration before any Tribunal or authority constituted or appointed by or under any law for the time being in force, but does not include an employee of the person so represented or a person carrying on a legal profession or a person carrying on the profession of accountancy.
Eligible Business-Financial consultancy
EXAMPLE: An individual who is doing financial consultancy business and the service receiver while he is paying service charge, he is deducting TDS u/s 194 J. Whether he can offer income u/s 44ADA?
A. No. Sec. 44ADA will be applicable only to the Notified Professions. It is an inclusive definition, it doesn't cover financial consultancy business, hence he can't offer income u/s44ADA.
Presumptive rate of income: Presumptive rate of income would be a sum equal to 50% of the total gross receipts, or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee.
Eligible Assessee: All three conditions should be satisfied:
No further deduction would be allowed: Section 44ADA(2): Under the scheme, the assessee will be deemed to have been allowed the deductions under sections 30 to 38. Accordingly, no further deduction under those sections shall be allowed.
Written down value of the asset: Section 44ADA(3): The written down value of any asset used for the purpose of the profession of the assessee will be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of depreciation for the relevant assessment years.
Maintenance of books of accounts and audit:
A very interesting issue is whether a professional who has opted presumptive system of taxation has to maintain books of account also. To resolve this issue firstly we have to see the provisions of section 44AA(1) of the Act given earlier in this book.
From the perusal of the above section, it is clear that it is mandatory for the professional who is covered under Section 44ADA to maintain books of accounts even though he has opted for the presumptive taxation scheme. Although, the Memorandum to the Finance Bill, 2016 provides that an assessee opting for Section 44ADA would not be required to maintain books of account under Section 44AA(1), the same has not been brought out clearly in the Section 44AA. Section 44AA is silent in relation to the assessee who is covered by Section 44ADA. Moreover, the provisions of Sec 44ADA overrides sec 28 to 43C and not sec 44AA of the Act. Hence, on a combined reading of 44AA(1), 44AA(3) read with Rule 6F, the specified professionals would need to maintain books of the account even if they opt for section 44ADA.
However, as per the FAQs on presumptive taxation issued by Income Tax Department provides that if an assessee declares income u/s 44ADA, there is no need to maintain books of account. The FAQ issued is provided here
―If a person adopts the presumptive taxation scheme of section 44ADA, then he is required to maintain books of account as per section 44AA?
In case of a person engaged in a specified profession as referred in sections 44AA(1) and opts for presumptive taxation scheme of sections 44ADA, the provision of sections 44AA relating to maintenance of books of account will not apply. In other words, if a person opts for the provisions of section 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of the specified profession.‖
From the above FAQ, it can be concluded that a person opting for sec 44ADA would not be required to maintain books of account. However, the FAQs do not have any legal backing and it may change in the future.
Option to claim lower profits: Section 44ADA(4): An assessee may claim that his profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under section 44ADA(1); and if such total income exceeds the maximum amount which is not chargeable to income-tax, he has to maintain books of account under section 44AA and get them audited and furnish a report of such audit under section44AB.
Issues related to Sec 44ADA:
Applicability of Section 44ADA to a partner of the firm receiving remuneration and/or interest from the firm
A very interesting is that whether the provisions of Section 44ADA shall be applicable to the remuneration and other receipts by a partner from a professional services firm? In this connection, it is to be noted that the Income Tax Act, 1961 vide Section 40(b) states that the firm is eligible to claim remuneration as a deduction to the extent specified therein and such remuneration is deductible in hands of the firm. The balance amounts are subjected to tax as profits in the hands of the firm. In other words, the eligible remuneration is deductible in the hands of the firm and taxable in hands of partners, the remainder (profit) is taxable in hands of the firm and exempted in the hands of partners u/s 10(2A).
Hence, in the hands of the partner, the following will be the impact:
1. Remuneration which was allowed as a deduction in the firm will be taxable
2. Profit which was taxed in the hands of the firm will be exempt.
Now a question arises whether the remuneration and other income received from the firm can be called gross receipts' for the purposes of Section 44ADA. Whether the share of profits of a partner can be considered as gross receipts for the purpose of Section 44ADA? The Mumbai Bench of the Income Tax Appellate Tribunal in the case of ACIT v. India Magnum Fund (81 ITD 295) held that in order to trigger the provisions of Section 44AB, there should be first computation of profits and gains of business or profession i.e. computation of total income as per Section 4. As the income exempt under Section 10 does not form part of the total income, such exempt income cannot be subjected to the provisions of Section 44AB. Consequently, one may argue that share of partners profit which is exempt under section 10(2A) would not be considered for the purposes of the gross receipts This view is also supported by the guidance note issued by the Institute of Chartered Accountants of India on a tax audit. As per the guidance note, gross receipts exclude the partner's share of profit which is exempt u/s 10(2A).
We are of the opinion that the provisions of Section 44ADA are applicable either for an individual or partner in a professional firm. This is also supported by certain judicial pronouncements (though not directly on the said issue) in the case of Sagar Dutta vs DCIT (ITAT Kolkata) and Usha A Narayanan vs Deputy Commissioner of Income Tax (ITAT Kolkata). The following is evident from the above judgments:
1. In both the judgments, the taxpayers were Chartered Accountants in partner capacity in a firm.
2. Both of them have received remuneration, salary, interest on capital, and others more than the threshold limit specified under Section44AB.
3. The department is of the view that since the gross receipts (remuneration, salary, interest on capital, and others) were in excess of threshold limits specified under Section 44AB, the taxpayers would have got their books of accounts and audited.
4. Since the taxpayers failed to do so, the department has levied penalty under Section 271B amounting to .5% of the receipts.
5. The tax payers contention was that they were not carrying any profession in individual capacity but they were acting as partner and hence tax audit requirements does not attract.
Both the Tribunals relying on Amar Ganguly's judgment stated that the tax audit will be applicable despite the individual is receiving amounts from the firm. Hence, such amounts being in excess of the threshold limit, the books of accounts need to be audited and confirmed the penalty.
Our Inference from the above judgments
Based on the above judgments, the question that whether the salary, remuneration, profit, interest on capital, and others received by a partner from a partnership firm can be called gross receipts for the purposes of 44ADA is answered positively. If such amounts are not to be called as gross receipts, then there is no requirement for the Tribunals to state that such individuals would fall under ambit of Section 44AB.
In light of the above, the amounts received from the firm can be considered as gross receipts and accordingly provisions of Section 44ADA will be applicable. Hence, the benefit of 50% of gross receipts offering to income tax is possible.
Further, one more question that is to be answered is whether the provision of Section 44ADA is optional or mandatory, that is to say, is it mandatory for the partner whose gross receipts is less than 50 lakhs to apply the provisions of Section 44ADA or is it optional. Once the gross receipts are less than Rs 50 lakhs, the partner has to mandatorily offer 50% of such gross receipts for tax. In a case, where the partner thinks his expenditure is more than 50% or want to offer lower amounts of gross receipts for tax, he should then get his books of accounts audited as per provisions of sub-section (4) of Section 44ADA.
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