Extract of Section 44ADA from Proposed Finance Bill 2016 – Special provision for computing profits and gains of profession on presumptive basis.
After section 44AD of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2017, namely:—
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.’.
Analysis of Provisions of New Section 44ADA
|Why this section is proposed?||• This section is proposed in line with the recommendation of Justice Easwar Committee for simplification of taxation of professionals
• Following objects are stated to be achieved through this proposal
o To bring parity between small businessmen (who enjoy presumptive taxation u/s 44AD) and small professionals
o To reduce compliance burden of small professionals
o To facilitate ease of doing profession
|How this is sought to be achieved?||This is sought to be achieved by inserting Section 44ADA in the Income Tax Act|
|Who is the eligible assessee?||Resident assessee who is
• Individual (or)
• Hindu undivided family (or)
• Partnership firm (other than limited liability partnership)
|Who are the beneficiaries?||Certain professionals referred to in section 44AA(1) of the Income Tax Act whose total gross receipts from profession does not exceed Rs. 50 lakhs in a financial year.|
|Who are the eligible professionals?||Persons engaged in any of the following professions:
• Legal • Medical • Engineering • Architecture
• Accountancy • Technical consultancy
• Interior decoration • Other notified professionals
o Authorized representatives o Film Artists
o Certain sports related persons o Company Secretaries and
o Information technology
|How much is the presumptive income to be offered?||Higher of:
• 50% of the gross receipts from profession (OR)
• Income from profession offered by the assessee
|Benefits of following this proposed section||• Assessee need not maintain books required to be kept u/s 44AA
• Assessee need not get the accounts audited u/s 44AB
|When shall the assessee be required to maintain books and to get the accounts audited?||If both the following conditions are satisfied, maintenance of accounts and audit are warranted:
• Income from profession is offered at a rate lower than 50% of gross receipts AND
• Total income of the assessee exceeds the basic exemption limit
|If the assessee follows this section, following items shall be deemed to be allowed||• All deductions from sections 30 to 38 (including depreciation and un-absorbed depreciation / allowances) shall be deemed as allowed; and
• Written down value (WDV) of depreciable assets shall be recomputed deducting depreciation which is deemed as allowed. E.g. If WDV (10% block) as on 01.04.2016 is Rs. 1,00,000, the depreciation deemed as allowed will be Rs. 10,000 and accordingly WDV as on 31.03.2017 will be Rs. 90,000.
|Effective date||The new section is proposed to be effective from 01.04.2017 (i.e. from Assessment Year 2017 – 18). In other words, advance tax in financial year 2016 – 17 may have to be calculated accordingly.
|Please note||• The decision as to whether this provision is to be adopted or not varies from case to case and the decision depends on the following parameters:
o Quantum of actual expenditure (i.e. not advisable for a professional having small net profit ratio)
o Interest on borrowings
o Depreciation available
o Quality of accounting systems etc.
• Businessmen covered u/s 44AD are permitted to pay the whole of advance tax by March 15. But no such concession is seen vis-à-vis a professional covered under 44ADA. That is to say, all the four installments may be paid.
• There is no provision in section 44ADA permitting a professional firm to deduct interest / remuneration paid to partners from the presumptive income offered.
• Whether or not the professional firm follows Section 44ADA, its partners can opt Section 44ADA with respect to working partners’ salary / interest received from the said firm
The Presumptive NP rate of 50% on Professionals and their Partnership Firms, as proposed in the Union Budget 2016 u/s 44ADA, is on very higher side and may cause very high tax incidence on such professionals and their partnership firms. Net Profit Rate should be fixed at a lower rate instead of proposed 50%.
Besides, interest and salary to the partners should be allowed to all partnership firms including firm of professionals out of the Presumptive NP of the firm, as per prevailing provisions of Sec 44AD in force applicable to business partnership firms at present. Its disallowance, as proposed in Finance Bill 2016 may create a hardship for professionals partnership firms, where huge amount is drawn as salary by working partners in accordance with the partners’ remuneration limits as suggested u/s 40(b) of the I.Tax Act.
The presumptive NP rate on professionals and their partnership firms should be capped to 30% which is also close to the rate of 33.33% recommended, after considering the finer details, minor aspects and lot of research, by Justice R.V Easwar Committee recently.
What kind of difficulties the, provisions of Section 44ADA of Income Tax Act would be creating is outlined in brief as under.
The provision are only applicable on professional and this case highlights the case of partnership firms.
The provisions provides as follows:
- a) 50% of the Gross Receipts would be treated as the Net Income of the assessee firm.
- b) No deduction towards Remuneration and Interest would further be allowed to the firm.
- c) The deduction towards Interest and Remuneration would be deemed to be allowed to the firm.
- d) The Remuneration and Interest would again be taxed in the hands of the partners as Individual Income.
Just want to highlight what difficult these provisions would be creating….
Consider following things in the light of above provisions:
- a) Gross Receipts of the Firm : Rs 30 Lakh
- b) Deemed Income as per the Provisions: 50% of Rs 30 Lakh: Rs 15 Lakh
- c) Partnership Deed provisions for remuneration are on similar lines as per 40 (b)
(It would be deemed that Remuneration and Interest as provided in the books has been allowed and firm has to pay tax on a Net Taxable Income of Rs 15 Lakh.
- d) Maximum Allowed Remuneration as per Section 40(b) of the Income Tax Act in case a firm declares normal taxable Income of Rs 15 Lakh would have been Rs 24.75 Lakh
How this figure has been arrived at
1) Total Income after allowing all expenses but before Interest and Remuneration works out to be : Taxable Income Rs 15 Lakh + Maximum allowable Remuneration as per 40 (b) Rs 24.75 Lakh i.e. Rs 39.75 Lakh
Working of Remuneration of 24.75 Lakh on a Profit of Rs. 15 Lakh ?
For First 30 Thousand of Profit- Rs. 2.70 Lakh Remuneration
For Next 14.70 Lakh Profit – 22.05 Lakh Remuneration
Hence, the government in a way is deeming a situation which is not proactible, wherein on a gross total income of Rs 30 Lakh, the firm is having Income after allowing all expenses but before remuneration and interest of Rs 39.75 Lakhs.??? They are denying a right to the assessee of a deduction for what they are eligible.
Is this provision Just and Equitable and whether a deeming provision allows government to estimate Income more than what is the gross receipts of the assessee ?