Insertion of Section 44ADA really facilitated “Ease Of Doing Profession” or is it a trap ??
On recommendation of Justice Easwar Committee, a new Section 44ADA has been inserted into the Income Tax Act (“The Act”) by Finance Bill 2016 i.e. Special provision for computing profits and gains of profession on presumptive basis. Will this section act as a great relief for professionals or will it increase the compliance burden? Here is an in-depth analysis of the same.
The relevant provision of the Act 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 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’.
Who will be affected?
As per Section 44ADA of the act, the resident assessee who are engaged in a profession referred to in Section 44AA(1) of the act, whose gross receipts does not exceed Rs. 50 lakh in a previous year will be affected by this section.
1. Resident Assessee who is individuals or HUF’s or partnership firm’s (Does not Include LLP’s, as they have been specifically excluded from this section)
2. Professions referred to in Section 44AA(1) are as follows:
- Technical consultancy
- Interior decoration
- Other notified professionals i.e. Authorized representatives, Film Artists, Certain Sports related persons, Company Secretaries & Information technology persons.
3. Gross receipts upto Rs. 50 Lakhs.
Benefits as per Section 44ADA:
The assessee (Who fall under the purview of this section) claiming their income to be 50% of the gross receipts or higher shall be eligible for the following benefits:
- Assessee need not maintain books & other documents required to be kept u/s 44AA.
- Assessee need not get the accounts audited u/s 44AB.
In light of the above benefits, it shall also be noted that, if the assessee claims his income to be less than 50% of the gross receipts of the previous year, it is now mandatory for him to maintain books of accounts as required to be kept under Section 44AA and also get them audited under Section 44AB. Kindly go through the illustration below to understand the situation in a more simplified manner:
Scenario Before Introduction of Section 44ADA:
Before introduction of Section 44ADA, when the gross receipts of a professional exceeded Rs. 25 Lakhs, then he was required to maintain books of accounts u/s 44AA and get them audit u/s 44AB. Hence, if the assessee had gross receipts of Rs 24.5 lakhs and he was claiming his income to be 10 lakhs after expenses i.e. Income = 40% (Approx) of the gross receipts, he was free from getting his books of accounts audited u/s 44AB.
Scenario After Introduction of Section 44ADA:
If we take the similar scenario as above, after introduction of Section 44ADA the same assessee will have to maintain books of accounts u/s 44AA and get them audited u/s 44AB, since he is claiming his income to be less than 50% of the gross receipts of the previous year.
The insertion of Section 44ADA is quite a tactical step by the Modi government, wherein it can now keep a close check on those assessee’s who were earlier claiming excessive expenses or evading taxes and avoiding tax audit under section 44AB. Whereas, this step will benefit those who were claiming genuine expenses provided they were below 50% of the gross receipts. Hence, the insertion of Section 44ADA will surely promote “Ease of Doing Profession” in India till some extent by reducing the compliance burden but it will also act as a trap for professionals claiming excessive expenses and avoiding tax audits.
Article by Abhinav Chhabra ( Linkedin Profile )