Tax on Profits of professionals on presumptive basis
Section 44ADA of Income tax Act Inserted by the Finance Act, 2016, w.e.f. 1-4-2017 regarding Special provision for computing profits and gains of profession on presumptive basis. we have discussed Commentary on Section 44ADA of Income tax Act Section 44ADA of Income tax Act
Commentary on Section 44ADA of Income Tax Act
- The pre-requisites of section 44ADA are:
|♦||The provision applies to any resident assessee carrying on Profession|
|♦||The assessee is engaged in specified Profession|
|♦||Receipts of the assessee in the previous year do not exceed Rs. 50 lakhs .|
If these pre-requisites are satisfied, the profits and gains from Profession that will be chargeable to tax will be adopted on a deemed basis as the higher of the following sum:
|♦||A sum equal to 50 per cent of Receipts from Profession during the previous year, or|
|♦||A higher amount claimed to have been earned by the assessee as profits and gains from Profession.|
- A non-resident assessee cannot opt for the scheme.
- ProfesssionProfession, for the purpose, is the one described under section 44AA(1) of the Act. They are:
(i) Legal (ii) Medical (iii) Engineering (iv) Architectural (v) Accountancy (vi) Technical consultancy (vii) Interior decoration (viii) Notified profession
The notified Profession are:
(a) The Profession of authorized representative; and the profession of film artist (actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue writer and dress designer) [Notification No. SO 18(E), dated 12-1-1977] (b) Profession of Company Secretary [Notification No. SO 2675, dated 25-9-1992] (c) Profession of Information Technology [Notification No. SO 385(E), dated 4-5-2001.]
Thus, any of the above profession is eligible for the scheme. The only condition is that Receipts of such Profession should not exceed Rs. 50 lakhs.
- Whether any professional activity can be regarded professionThe scheme of section 44ADA applies only to specified profession and not all professions or professional activities. Thus, it would apply only to the professions covered by section 44AA(1)
- Mandatory nature of provision of section 44ADA of Income Tax Act The new provisions are mandatory in nature, subject to the options provided .
- More than one activityAn assessee may carry on more than one activity, say, Profession; trading in some related goods; and some other professional services. Suppose, an individual is carrying on a professional activity being Profession (referred in section 44AA) having turnover of Rs. 30 lakhs as well as he is carrying on other professional activity not being Profession and a small business having turnover of Rs. 70 lakhs. section 44ADA restricts itself to Profession; in other words, they are mutually exclusive. Hence, in the above case, the individual can opt for the scheme under the section 44ADA in respect of Profession and the scheme under section 44AD in respect of small business.
- How to Compute Receipts u/s 44ADA of Income tax Act :– For computation purpose, it is necessary to determine Receipts in the concerned previous year. As Receipts need to be considered, the method of accounting applicable would be cash (and cannot be mercantile/accrual).It may be argued that even if an assessee follows accrual method for the purpose of the scheme, to compute Receipts cash method can be or rather ought to be followed.
- Examples of receipts forming/not forming part of total gross receipts
- Advance or deposits received should not form part of Receipts.
- Consideration received on sale of fixed assets employed in Profession should not form part of turnover or receipts.
- Any security or other deposit obtained from employees should not form part of Receipts.
- Service tax or any other levy (to be charged, collected and paid to the Government), as such, should not form part of Receipts.
- Reimbursement of expenditure (incurred by a person rendering services and reimbursed by a person for whom the expenditure is incurred) should also not form part of Receipts
- Receipts arising on account of sale of unusables, empties and packages may constitute part of Receipts.
- Interest (on surplus funds) and other receipts of similar nature cannot form part of Receipts.
- Incentive received from the suppliers should actually go to reduce the cost of purchase and should not form part of Receipts. Similarly, cash or other discount received on purchase should not form part of Receipts.
- Value of work-in-progress should not form part of Receipts.
- Service charges charged for delivery may form part of Receipts, having regard to terms of contract.
- When to exercise option under Section 44ADA of income tax ActA choice of option under the new provision can be availed each year. The provisions nowhere lays down that once an option is exercised under the new provision, it has to be applied for all time to come.
- Exemption from maintenance of books of account, etc. [Sub-section (4) of section 44ADA]If an assessee engaged in Profession chooses to declare in his return of income the specified profit or a higher amount, the provisions relating to maintenance of books of account (section 44AA) and audit (section 44AB) would not apply to him.
- When Accounts compulsory irrespective of turnoverUnder sub-section (4) of section 44ADA, those assessees who claim that profit from Profession is less than the deemed profit of 50 per cent of Receipts must maintain accounts, irrespective of the quantum of income or Receipts from Profession. Thus, the monetary minimum limit of income and of sales/turnover specified in section 44AA, will not apply to such assessee, insofar as Profession is concerned. Under different situations, position could be as follows (in relation to maintenance of books and/or audit thereof)
- When audit compulsory irrespective of turnover When the assessees, declares lower profit, he must get the accounts audited by a chartered accountant, irrespective of the quantum of turnover from Profession. This means that the monetary turnover minimum limit of Rs. 50 lakhs specified in clause (a) of section 44AB will not apply to such assessee, insofar as section 44ADA cases are concerned.
- Other provisions of the Act to applyThe new provision of Section 44ADA deals only with computation of profits chargeable under the head ‘Business or profession’.For computing total income liable to tax, the other provisions of the Act would apply. Thus, an assessee would be able to set off the brought forward losses or unabsorbed losses; set off of losses under other heads; and also claim deductions or rebate under Chapter VI-A.
- Advance taxThere is no exemption from payment of advance tax. An assessee would be liable to pay advance tax thereon, in terms of the provisions of Chapter XVII-C of the Act.