Summary of Section 44ADA of Income tax Act

 Section 44ADA of Income tax Act  Inserted by the Finance Act, 2016, w.e.f. 1-4-2017. we have discussed Commentary on Section 44ADA of Income tax Act

 Section 44ADA of Income tax Act

Note on Section 44ADA of Income Tax Act

1. . Inserted by the Finance Act, 2016, w.e.f. 1-4-2017.

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 turnoverWhen 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 apply

  The 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.

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 Summary of Section 44AD of Income tax Act

 Section 44AD of Income tax Act  Substituted by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2011. Prior to its substitution, section 44AD, as inserted by the Finance Act, 1994, w.e.f. 1-4-1994 and later on amended by the Finance Act, 1997, w.r.e.f. 1-4-1994/w.e.f. 1-4-1997, Income-tax (Second Amendment) Act, 1998, w.r.e.f. 1-4-1997 and Finance Act, 1999, w.r.e.f. 1-4-1998, [ Refer Note-1]

 Section 44AD of Income tax Act

Note on Section 44AD of Income Tax Act

7. Substituted for “one crore rupees” by the Finance Act, 2016, w.e.f. 1-4-2017. Earlier, the quoted words were substituted for “sixty lakh rupees” by the Finance Act, 2012, w.e.f. 1-4-2013 and “sixty lakh rupees” was substituted for “forty lakh rupees” by the Finance Act, 2010, w.e.f. 1-4-2011.

6 Inserted by the Finance Act, 2012, w.r.e.f. 1-4-2011.

5.Substituted by the Finance Act, 2016, w.e.f. 1-4-2017. Prior to their substitution, sub-sections (4) and (5) read as under :

“(4) The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business 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 (2) of section 44AAand get them audited and furnish a report of such audit as required under section 44AB.”

4.  Omitted by the Finance Act, 2016, w.e.f. 1-4-2017. Prior to its omission, proviso read as under :

“Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.”

3. Inserted by the Finance Act, 2017, w.e.f. 1-4-2017.

2. See also Circular No. 737, dated 23-2-1996 (Admissibility of deduction u/s 40(b) to firms).

1. Substituted by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2011. Prior to its substitution, section 44AD, as inserted by the Finance Act, 1994, w.e.f. 1-4-1994 and later on amended by the Finance Act, 1997, w.r.e.f. 1-4-1994/w.e.f. 1-4-1997, Income-tax (Second Amendment) Act, 1998, w.r.e.f. 1-4-1997 and Finance Act, 1999, w.r.e.f. 1-4-1998, read as under :

’44AD. Special provision for computing profits and gains of business of civil construction, etc.—(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee engaged in the business of civil construction or supply of labour for civil construction, a sum equal to eight per cent of the gross receipts paid or payable to the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”:

Provided that nothing contained in this sub-section shall apply in case the aforesaid gross receipts paid or payable exceed an amount of forty lakh rupees.

(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 :

Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

(3) The written down value of any asset used for the purpose of the business referred to in sub-section (1) 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) The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub-section (1) and in computing the monetary limits under those sections, the gross receipts or, as the case may be, the income from the said business shall be excluded.

(5) Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are lower than the profits and gains specified in sub-section (1), and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under sub-section (3) of section 143.

(6) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub-section (1), if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.

Explanation.—For the purposes of this section, the expression “civil construction” includes—

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