AMIT BAJAJ ADVOCATE

I. Amendments to section 44AD:

The existing provisions contained in the said section (applicable to individual, HUF or partnership firm) provides that notwithstanding anything to the contrary contained in section 28 to 43C, in the case of an assessee engaged in an eligible business having total turnover or gross receipts not exceeding one crore rupees, a sum equal to 8% of the total turnover or gross receipts, or, as the case may be, a sum higher than the aforesaid sum 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 "Profit and gains of business or profession".

Further, under the existing scheme as per proviso to section 44AD(2), 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) of section 44AD subject to the conditions and limits specified in section 40(b).

Proposal:

Clause 26of the Bill seeks to amend section 44AD of the Income-tax Act relating to special provision for computing profits and gains of business on presumptive basis.

The proposed section 44AD seeks to provide for estimating income of eligible assessee who is engaged in an eligible business, at a sum equal to 8% of the total turnover or gross receipts, or, as the case may be, a sum higher than the aforesaid sum earned by the assessee whose total gross receipts does not exceed two crore rupees.

It is further proposed to omit the proviso to section 44AD(2) and accordingly, in case of eligible assessee being a firm, the salary and interest paid to its partners shall not be allowed to be deducted from the income computed under sub-section (1) of section 44AD.

Further, it is proposed to substitute sub-sections (4) and (5) of the aforesaid section to provide that where an assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).

It is further proposed by way of sub-section (5) that, an assessee to whom the provisions of sub-section (4) are applicable 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 44AA and get them audited and furnish a report of such audit as required under section 44AB.

All these amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017- 2018 and subsequent years.

Example:

Suppose an eligible assessee declares his income under Section 44AD(1) for A.Y. 2017-18. Then as per new Section 44AD(4), he has to file returns for next 5 assessment years i.e. from A.Y. 18-19 to A.Y. 2022-23 by declaring his total income by applying section 44AD(1).

Now, if the link breaks in between and say in A.Y. 2020-21 assessee (having turnover below 2 Crores) do not opt for section 44AD(1) regime, then he shall not be eligible to take benefit of section 44AD for next 5 assessment years i.e. from A.Y. 2021-22 to 2025-26!

It appears that, if the link breaks in between due to compulsory application of section 44AB (i.e. gross receipts exceeds above 2 Crores) then the provisions section 44AD(4) shall not apply.

Further, omission of existing sub-section (4) means that, provisions of Chapter XVII-C, relating to advance payment of tax shall apply to an eligible assessee declaring income under Section 44AD. Consequential amendment is also proposed under Section 211 of the Income tax Act relating to instalments of advance tax and due dates. According to which, an eligible assessee in respect of eligible business referred to in section 44AD opting for computation of profits or gains of business on presumptive basis, shall be required to pay advance tax of the whole amount in one instalment on or before the 15th March of the financial year.(Applicable w.e.f. 01.06.2016)

Necessary implications of interest on short/non payment of advance tax as above have been taken care of by way of an amendment under Section 234C of the Act.(Applicable w.e.f. 01.06.2016)

II. Amendments to section 44AA:

In view of the amendment under Section 44AD as above, necessary amendment under Section 44AA of the Income tax Act relating to maintenance of accounts by certain persons carrying on profession or business is proposed by Clause 24 of the Bill.

Existing clause (iv) of section 44AA(2) is proposed to be replaced so as to provide that every person carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax, keep and maintain such books of account and other documents for computing his total income in accordance with the provisions of this Act.

III. Insertion of new section 44ADA:

Current scenario:

Currently, the presumptive tax regime does not apply to an assessee, who is carrying onprofession as referred to in subsection (1) of section 44AA or earning income in the nature of commission or brokerage or carrying on any agency business and who has claimed deduction under any of the section 10AA, 10A, 10B, 10BA or deduction under any provisions of Chapter VI-A.

Proposal:

Clause 27of the Bill seeks to insert a new section 44ADA in the Income-tax Act relating to special provision for computing profits and gains of profession on presumptive basis, in line with the existing section 44AD as applicable to business only.

The proposed new section 44ADA seeks to provide that 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".

It is further proposed that any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1)of the proposed section, be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

It is also proposed that the written down value of any asset 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.

It is also proposed to provide that an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) of the proposed section 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 under sub-section (1) of section 44AA and get them audited under section 44AB.

The above amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017- 2018 and subsequent years.

Fallouts of the Insertion of new section 44ADA:

(a) The new presumptive tax regime for professionals is applicable only to assessees engaged in a profession as referred to in sub-section (1) of section 44AA.

Section 44AA(1) applies to every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette.

[Notified professions : (a) The profession of authorised representative; and (b) 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 17(E), dated 12-1-1977 / Profession of Company Secretary—Notification : No. SO 2675, dated 25-9-1992/Profession of Information Technology—Notification : No. SO 385(E), dated 4-5-2001. ]

(b) In many ventures, issue arises as to whether it is business or profession for the purpose of income-tax act. Due to insertion of new section 44ADA, the ever going litigation is going to increase further as to what is business and what is profession. There is no straight jacket formula and the juduciary resolves the issue having regard to the facts and circumstances of each case independently.

(c) The 50% net profit formula proposed by section 44ADA for professionals appears to be on higher side as compared to the Easwar committee recommendations of 33.33% net profit of total receipts.

IV. Amendments to section 44AB:

Existing clause (b) to section 44AB provides that every person carrying on a profession is required to get his accounts audited before the specified date if his gross receipts in a previous year exceed twenty-five lakh rupees.Similar threshold limit in case of business is one crore rupees as per clause (a).

Clause 25of the Bill seeks to amend section 44AB of the Incometax Act relating to audit of accounts of certain persons carrying on business or profession.

Proposal:

It is proposed to amend the said clause (b) so as to increase the threshold limit to fifty lakh rupees.

Though not mentioned in the Finance Bill, by necessary implications of amendments in section 44AD, the threshold limit for the purpose of section 44AB in case of assessees engaged in business is assumed to be increased to two crores from one crore.

In view of insertion of new section 44ADA, existing clause (d) of the section 44AB is proposed to be amended so as to provide that in the case of an assessee, who is covered under the new proposed section 44ADA, the audit of books of account is required if he claims that the profits and gains from the profession are lower than the profits and gains computed in accordance with the provisions of sub-section (1) of the proposed new section 44ADA and if his income exceeds the maximum amount which is not chargeable to income-tax.

Further, in view of the amendment under Section 44AD as above, as a necessary implication, a new clause (e) is proposed to be inserted below amended clause (d) so as to provide that every person carrying on the business shall, if the provisions of sub-section(4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax, keep and maintain such books of account and other documents for computing his total income in accordance with the provisions of this Act.

V. Conclusion:

The amendment under Sections 44AB and 44AD to increase the respective threshold limit from twenty five lacs and one crores to fifty lacs and two crores respectively is a welcome amendment for small business mans from audit compliance point of view. Whereas, the amended clause (4) to section 44AD is inserted to prevent the possible misuse of the presumptive tax regime by the taxpayers. Though the new presumptive tax regime introduced for professionals is also welcome step in order to reduce the compliance burdon of the small professionals, the net profit requirement of 50% of total receipts apeears to be on higher side. Rest of the amendments under Sections 44AA and 44AB are consequential in nature.