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Section 44 ADA – Presumptive Tax Scheme for Professionals

Section 44 ADA: Presumptive Tax Scheme for Professionals. Difference Between Section 44AD & 44ADA, Presumptive Income Computation System for Professionals. Analysis of Section 44ADA of The Income Tax Act, 1961. Everything to know about Presumptive Taxation for Professionals. All About Section 44ADA. In this article we provide complete details for Section 44AD, as we all know, the section of Presumptive Income, is a boon for Businessmen. On a similar line, there is another Section for Professionals, which gives the option of Presumptive Income to them.  This section has made tax compliances easy for the small professionals and they can be done away with the maintenance of Books of Accounts. The details of Section 44 ADA – Presumptive Tax Scheme for Professionals are mentioned below:

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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.

Applicability of Section 44 ADA:

Professionals  in the field of Law, Medical, Engineering, Architecture, Accountancy, Technical Consultancy, Interior Decorators, Other Notified Professionals like Authorized Representatives, Film Artists, Certain Sports – Related Person, Company Secretaries and people under the Information Technology Profile are included within the ambit of this section.

FORM OF ORGANIZATION:

This section is only applicable to Individuals, HUFs and Partnership Firms (Excluding LLPs). Limited Liability Partnerships and Companies are excluded from the applicability of this section.

Provisions:

  1. Gross Receipts should be less than Rupees 50 Lacs in the Financial Year under Consideration.
  2. Books of Accounts need not be maintained.
  3. At least 50% of the Gross Receipts should be presumed to be the Income from the Profession.
  4. This section aims to reduce the tax compliance burden on small professionals.
  5. If the Gross Receipts exceeds Rs. 50 Lacs in a Financial Year, then this section won’t be applicable anymore and Books of Accounts will be required to be maintained for the Entire Financial Year.
  6. If the assessee wishes to proclaim an income which is lower than 25% of the Gross Receipts, then again, this section would not be applicable and Books of Accounts will be required to be maintained for the Financial Year under Consideration.
  7. If this section is not opted for, then the Entity becomes liable for Tax Audit.

Section 44 AD V/S. 44 ADA:

  1. Section 44 AD requires a minimum of 8% of the Gross Receipts/ Turnover to be shown as Income while Section 44 ADA requires a minimum of 50% of Gross Receipts to be shown as Income.
  2. Section 44AD is for Business while Section 44 ADA is for Professionals.

Benefits:

  1. No need to maintain Books of Accounts.
  2. Return can be filed easily in the ITR 4S instead of ITR 4.
  3. Not much burden of tax compliances.

Notes:

  1. This section requires a minimum of 50% of Gross Receipts to be chargeable to tax. This may seem burdensome to few professionals. However, I feel this section is beneficial to the Entities having lesser turnover as they have done away with the maintenance of Books of Accounts which was again a very tedious job.

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-

The analysis of above Section 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, knowhow, 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 Rs.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 30to 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 Rs. 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 Rs. 25 Lakhs till the financial year 2015- 2016. (relevant to Assessment year 2016-2017)

Analysis:-

  1. Every professional having gross receipts more than Rs. 50 Lakhs is covered for compulsory tax audit.
  2. Every professional having gross receipts not exceedingRs. 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).

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 Rs.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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About CA Ridhi Dhoot

The writer is a Chartered Accountant & a Licentiate Company Secretary. You can reach out to her at ca.ridhidhoot@gmail.com

13 comments

  1. Whether a beautician can file tax return under sec 44ADA. we have not kept beauty parlour, but doing beautician work like Bridal make up etc.,

  2. MOHIT SRIVASTAVA

    what about general insurance commission agent.???? Does he Able to opt pesumptive scheme U/S 40ADA?????Kindly guide in deatil.

  3. I am a doctor and I wish to file my income return under section 44ADA,
    I have some Capital Gains therefore I can not use ITR4 Sugam,
    Do you think I can use ITR3 because in ITR3 Schedule BP 35 ii there is a provision for declaring income under Section 44 ADA and in Schedule P & L there are rows for NO ACCOUNTS case.

  4. Very good and elaborate information.Hope this will be of great help to professionals.

  5. You say that provisions of 44ADA do not apply to a LLP but the same has not been provided in the section. It says resident assessee’s and definition of assessee includes person, definition of person includes a firm and a firm includes an LLP. So please tell me why are these provisions not applicable to a LLP.

    • It is specifically mentioned in the act that the section is applicable to eligible assessee only & the same have been defined as:
      Resident assessee who is • Individual (or) • Hindu undivided family (or) • Partnership firm (other than limited liability partnership)

  6. In my view,applicable to LLP also (Just read the bare act). if i am missing something, let me know?

    • I agree. Even i have the same query.

    • It is specifically mentioned in the act that the section is applicable to eligible assessee only & the same has been defined as:
      Resident assessee who is • Individual (or) • Hindu undivided family (or) • Partnership firm (other than limited liability partnership)

      • I appreciate your efforts, i would like to invite your attention to wording of both sections. Section 44AD states ” eligible assessee” whereas section 44ADA states “assessee being resident” only. Section 44ADA(1) does not emphasis on “eligible assessee” Accordingly, in my view, section 44ADA covers all.

  7. V.S. Krishna Murthy

    What is the definition of gross receipts? If a CA gets interest on his FDs in banks, can this also be included in gross receipts along with professional receipts?

  8. is Partner getting remuneration from a professional firm is also eligible to take the benifit of Section 44ADA? If so, lets assume, remuneration from a professional firm is 10 lacs and interest on debit balance in capital is (-) 1 lac. Is the gross receipt in this case 9 lac? is this eligible to be taxed at 50%?

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