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Presumptive Income Computation System for Professionals (Analysis of Section 44ADA of The Income Tax Act, 1961)

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Presumptive Income Computation System for Professionals (Analysis of Section 44ADA of The Income Tax Act, 1961)
By: ANIL ANIKHINDI
March 20, 2017
  • Contents

Finance Bill 2016 was passed by the parliament on 5th May 2016, and the Finance Act, 2016 was enacted on 14th May 2016, according to which some of the amendments and new provisions are being made applicable w.e.f. 1st April 2017 for Assessment Year 2017-18 relevant to Previous Year 2016-17.

Section 44ADA is newly introduced in the Income Tax Act, 1961 which makes special provision for computing Profits or Gains of profession on presumptive basis. The said section (applicable from 1st April 2017) reads as below-

“(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.]”

The analysis of above provision reveals following points: –

  1. Section 28 to 43C falling in Part D of Chapter IV of Income Tax Act, 1961 relate to Profits and Gains of Business or Profession. 
  2. These sections inter alia provide for taxation of Profits and Gains of Business or Profession, method of computation, various business or profession expenses deductible while arriving such profit or gain, deductions of depreciation, investment allowance, development rebate, expenditure on research, know-how, various development programs, ammortisation and other deductions for expenses relating to business or profession. It includes Section 40, which provides for amounts not deductible and some other provisions to define certain terms and treatment of certain expenses etc.
  3. This section is applicable to professionals covered under section 44 AA (1) which includes, every person carrying on legal, medical, engineering, architecture, profession of accountancy, technical consultancy, interior decoration, profession of authorized representative, all film artists (such as actor, director, music director etc.) etc. Maintenance of books of accounts is mandatory for all such professionals.
  4. Professionals having total gross receipts not exceeding ₹ 50 Lakhs are covered under this section.
  5. Under the Presumptive profit scheme, 50% or more of total gross receipts in any previous year will be deemed to be the profits or gains of such profession, chargeable to tax under the head ‘Profits and Gains of Business or Profession’.
  6. Assessee will not be allowed to claim any deduction as referred in section 30 to 38, which includes rent, rates, taxes, repairs, insurance, depreciation, investment allowance, development rebate, technical know-how, ammortisation and other general deductions pertaining to the business or profession.
  7. The assessee will have to presume the charging of depreciation on any assets used in the profession and the books of accounts will show written down value of such assets even though the actual depreciation is not deducted while calculating profit or gain. This indicates that the professional assets would be continued to be depreciated in the books of accounts to arrive at written down value in subsequent years, which may be considered in case of sale or disposal of such assets.
  8. The assessee is not required to keep and maintain books of accounts as long as he is declaring his profit or gain at the rate of 50% or more of total gross receipts.
  9. If the assessee claims profit or gain lower than 50%, he has to keep and maintain books of accounts and get them audited and submit the audit report under section 44AB. This indicates that, even if the gross receipts of the professionals are say ₹ 6 Lakhs and the profit or gain is claimed less than 50%, they have to comply with tax audit provisions of section 44AB.
  10. Here it may be noted that, the tax audit provisions were applicable to professionals for gross receipts exceeding ₹ 25 Lakhs till the financial year 2015-2016. (relevant to Assessment year 2016-2017)
  1. Sub section (1) of section 44ADA states as –

“Notwithstanding anything contained in section 28 to 43C,…………………”

Further sub section (2) of section 44 ADA states as “any deduction allowable under the provisions of section 30 to 38 shall,…………deemed to have been already given full effect………………….”

The major point in this regard is about salary or remuneration paid to working partners and interest paid to any partner in case of professional partnership firms. It can be a debatable point in view of contradictory reference of sections in 44ADA (1) and 44ADA (2). The salary or remuneration to working partner and interest to any partner is allowable as deduction as per the limits prescribed in section 40(b) (iv) and 40(b) (v). The standalone interpretation of section 44ADA (2) reveals that- the deductions of salary to working partner and interest to any partner would be allowed from the profit or gain calculated at 50% or more of the gross receipts. However, the sequential and logical reading of section 44ADA (1) reveals non applicability of any of the provisions of section 28 to 43C (which includes sections 40(b) (iv) and 40(b) (v)). This clearly means that, taxable profit or gain of profession will be equal to 50% or more of total gross receipts (not exceeding ₹ 50 Lakhs) for the assessee not willing to go for tax audit.

Other Relevant Provisions:-

Section 44AB

   (b) carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees in any  previous year; or

  (c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any  previous year; or,

   (d) carrying on the  profession shall, if the profits and gains from the profession are deemed to be the profits and gains of such person under section 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any  previous year; or

   (e) carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year, 

get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :”

  1. Every professional having gross receipts more than ₹ 50 Lakhs is covered for compulsory tax audit.
  2. Every professional having gross receipts not exceeding ₹ 50 Lakhs and has claimed profit or gain lower than 50% is also mandatorily covered for tax audit from the financial year 2016-17 (relevant to assessment year 2017-18).

Section 194C Explanation (i) (l) provides for applicability of Tax Deduction at Source (TDS) provisions to individual or HUF assessees covered under section 44AB tax audit. As such, if any individual professional claims profit or gain less than 50% (as explained above) for the current financial year 2016-17, he has not only to comply with tax audit provisions but also to comply with TDS provisions in the subsequent financial year 2017-18. If such professional makes any payment to contractors (section 194C), payment of commission or brokerage (194 H) , payment of rent (194 I), payment of fees for professional or technical services (194J), he has to comply with TDS related provisions like tax deduction, TDS payment, filing of TDS returns, issue of TDS certificates etc.

It may be interested here to that section 44AD is applicable for business assesses to compute profit or gain of business on presumptive basis. In such case eligible business except business of plying, hiring or leasing goods carriages (covered under section 44AE) having turnover or gross receipts less than ₹ 2 crore and eligible assessee (i.e. individual or HUF or partnership firm) are covered to claim 8% or more of their turnover as deemed profit or gain of business. Here also, section 28 to 43C are not applicable as referred in section 44AD (1) and deductions under section 30 to 38 are not allowed as referred in section 44AD (2). However upto Asst. year 2016-17, salary and interest paid to partners was allowed to be deducted from such presumptive profit as per the “proviso” after section 44AD (2). This proviso is deleted w.i.f. 1st April 2017.

Interestingly it may be also noted that under section 44AE, the presumptive profit scheme applicable for “Transporters” (assesse engaged in the business of goods carriage and owning upto 10 vehicles-- Minimum profit ₹ 90000 per vehicle), the deduction of salary and interest to partners is still permitted as per the proviso after section 44AE (3). This proviso is not deleted as yet.

The contradictory provision as explained above is seen in this section also. As such the partnership business firms, covered under section 44AD, may not be getting deduction for salary to working partners and interest to any partners. But business firms covered under section 44AE are getting further deduction for salary and interest to partners after arriving at presumptive profit.

Furthermore, Section 44AB (a) provides for tax audit of business assesses having turnover more than ₹ 1 Crore but Section 44AD provides for compulsory tax audit for those business assessee claiming profit less than 8% of total turnover. This means even if the turnover is less than 1 Crore and assessee claims profit less than 8%, he has to comply with the maintenance of books of accounts and tax audit provisions.

Section 44 AD (4) provides for non applicability of provision of presumptive profit (8%) for subsequent five assessment years, if the assessee declares profit less than 8% for any previous year. As such he has to maintain the books of accounts and comply with the tax audit provisions for subsequent five assessment years, even if his profit is more than 8% of turnover during such five years. However, the said provision is not applicable to professional assessee.

The readers may also note that the information of Gross Turnover/Receipts, Presumptive Profit, Sundry Debtors, Sundry Creditors, Stock in Trade and Cash Balance is required to be given in the ITR-4 (Sugam) return which is applicable for Presumptive Income assessees. Hence it is imperative that even if any assesse declares his profit on presumptive basis, he has to maintain the books of accounts and prepare Balance sheet to enable him to fill above information in the Return.

Conclusion:-

All professionals covered under section 44AA, will have to carry the impact of above referred provisions applicable from the current financial year 2016-17. Especially, professional partnership firms (having gross receipts not exceeding ₹ 50 lakhs) will have to pay more tax by way of presumptive profit at 50% of the total gross receipts without claiming any deduction, especially salary to working partners and interest to any partners. Otherwise, they have to go for compulsory tax audit and other applicable provisions. It is expected that the CBDT should clarify about the said contradictory provisions at the earliest to enable the professional assessees to compute their income for the previous year 2016-17 properly by taking legitimate deductions of payment of salary to working partners and interest to partners.

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By CMA (Dr.) Anil Anikhindi

Contact- 91-9371438160, e-mail- anilcost@gmail.com

 

By: ANIL ANIKHINDI - March 20, 2017

 

 

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