Case Law Details
Shazia Khan Vs ITO (ITAT Lucknow)
Summary: The Income Tax Appellate Tribunal considered whether the assessee’s receipts from referral and facilitation services for financial products were taxable under the presumptive taxation scheme of Section 44AD or Section 44ADA of the Income-tax Act, 1961. The Assessing Officer had rejected the assessee’s claim under Section 44AD and computed income under Section 44ADA at 50% of gross receipts solely because tax had been deducted at source under Section 194J. The CIT(A) affirmed this approach. The Tribunal observed that the deductor’s decision to deduct tax under Section 194J could not bind statutory authorities in determining the true nature of income. The Assessing Officer and CIT(A) were required to independently examine whether the assessee’s activities constituted professional services covered under Section 44ADA or business activities eligible under Section 44AD. Since no such examination had been undertaken, the Tribunal set aside the appellate order and remanded the matter to the Assessing Officer for fresh adjudication after providing adequate opportunity to the assessee.
Core Issue: Whether receipts can be treated as professional income and subjected to section 44ADA merely because the payer deducted tax at source under section 194J, thereby denying the assessee’s claim of presumptive taxation under section 44AD.
Facts:The assessee declared income under the presumptive taxation scheme of section 44AD on gross receipts of ₹28,28,900 and returned income of ₹4,99,730. During scrutiny assessment, the Assessing Officer noticed that tax had been deducted at source under section 194J on the receipts. Based solely on this fact, the AO concluded that the receipts represented professional income and that section 44AD was inapplicable. He accordingly applied section 44ADA and estimated income at 50% of gross receipts, i.e., ₹14,14,450, resulting in an addition of ₹9,14,716 being the difference between income declared and income computed under section 44ADA. The assessee contended that she was engaged in referral and facilitation services relating to financial products and that her activities constituted business rather than a specified profession.
CIT(A) Findings: The CIT(A) upheld the assessment order and agreed with the AO that the receipts were professional in nature, primarily relying upon the fact that the payer had deducted tax under section 194J.
ITAT Findings: The Tribunal held that deduction of tax at source under section 194J by the payer does not conclusively determine the nature of income in the hands of the recipient. The implicit characterization adopted by the deductor is not binding upon the income-tax authorities. The AO and the CIT(A) were required to independently examine the nature of services rendered and determine, on the basis of evidence and material on record, whether the receipts constituted professional income or business income.
The Tribunal observed that both lower authorities proceeded solely on the basis of the TDS provision applied by the payer without undertaking any independent inquiry into the true character of the receipts. Such an approach was legally unsustainable. However, the Tribunal also noted that the assessee had failed to comply with various notices during assessment proceedings and had not furnished adequate explanations or supporting material despite opportunities provided by the AO.
Considering these circumstances, the Tribunal held that the issue required fresh examination. The orders of the AO and CIT(A) were therefore set aside and the matter was restored to the Assessing Officer for a de novo assessment after providing reasonable opportunity of hearing to the assessee.
Principle: The section under which tax is deducted at source by the payer does not conclusively determine the character of income in the hands of the recipient. Classification of receipts as business income or professional income must be based on an independent examination of the nature of activities and surrounding facts. Eligibility for presumptive taxation under section 44AD cannot be denied merely because TDS was deducted under section 194J.
Held: Deduction of tax under section 194J, by itself, is not sufficient to treat receipts as professional income and deny the benefit of section 44AD. The nature of receipts must be independently examined by the tax authorities. Since such examination had not been undertaken and the assessee had also failed to properly participate in the assessment proceedings, the matter was remanded to the AO for fresh adjudication and de novo assessment in accordance with law. The appeal was partly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
(A) This appeal vide I.T.A. No.396/LKW/2026 has been filed by the assessee for assessment year 2024-25 against impugned appellate order dated 18.03.2026 (DIN & Order No.ITBA/NFAC/S/250/2025-26/1087537958(1) of Ld. Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. The grounds of appeal are as under:-
“1. That the learned CIT(A) erred in law and on facts in confirming the addition of 29,14,716 by holding that the provisions of section 44ADA are applicable to the appellant.
2. That the learned CIT(A) failed to appreciate that the appellant is engaged in referral and facilitation services for financial products and not in any profession specified under section 44AA(1) of the Income-tax Act.
3. That the learned CIT(A) erred in holding that the services rendered by the appellant require specialized professional expertise so as to fall within the ambit of section 44ADA.
4. That the learned CIT(A) failed to appreciate that the appellant’s activities constitute business activity and therefore income declared under section 44AD at 8% of gross receipts is in accordance with law.
5. That the learned CIT(A) erred in placing reliance on deduction of tax under section 194J as a determining factor for classification of income as professional income.
6. That the addition of 29,14,716 being the difference between income declared and income estimated under section 44ADA is arbitrary, unjustified and liable to be deleted.
7. That the appellant craves leave to add, alter, amend or withdraw any ground of appeal at the time of hearing.”
(B) In this case, assessment order dated 05.12.2025 was passed by the Assessing Officer (‘AO”, for short) u/s 143(3) of the Income Tax Act, 1961 (‘Act”, for short) whereby the assessee’s total income was determined at Rs.14,14,446/- as against returned income of Rs.4,99,730/-. The assessee had opted for Presumptive Taxation Scheme (‘PTS”, for short) u/s 44AD of the Act. However, the Assessing Officer took the view that out of the total receipts of Rs.28,28,900/-, an amount of Rs.14,14,450/- being 50% of the total receipts is treated as ‘income from business or profession’ on account of professional fees. The only basis on which the Assessing Officer took this view was that there was tax deducted at source u/s 194J of the Act. The relevant portion of the assessment order is reproduced as under: –
‘3.6 Conclusion drawn:
In view of the above, you are hereby required to show cause as to why assessment may not be concluded as per the provisions of section 144 of the I. T. Act and following additions may not be made to your return of income:
3.6.1 On examination of the return of income and financial statements furnished by the assessee, it is observed that the receipts in question are from professional and technical services for which tax has been deducted at source under section 194J of the Income Tax Act, 1961, the assessee’s income must be computed as per section 44ADA of the Income Tax Act, 1961or the regular provisions of the Income Tax Act. The presumptive scheme under section 44AD is specifically not permitted for professional fees, and therefore, the claim of lower presumptive income under 44AD of the Income Tax Act, 1961 is not applicable in the case of the asssessee. Professional income, in this case, will be computed as per provisions of section 44ADA of the Income Tax Act, 1961, wherein 50% of the total receipts of Rs 28,28,900/-, i.e., Rs 14,14,450/- is treated as income as ‘income from business or profession’. The difference between the income declared in the return under the head ‘income from business or profession’ (Rs 4,99,734) and the correct presumptive income as per provisions of section 44ADA of the I.T. Act, 1961 (Rs 14,14,450) comes to Rs. 9,14,716, which is added to the total income as undisclosed income. Penalty proceedings u/s 270A(9)(a) for underreporting of income in consequence of misreporting is to be initiated separately.”
(B.1) The assessee’s appeal against the assessment order was dismissed by the Ld. CIT(A) vide impugned appellate order dated 18.03.2026. The Ld. CIT(A) confirmed the assessment order, again based on the fact that tax was deducted at source u/s 194J of the Act. The present appeal has been filed by the assessee against the aforesaid impugned appellate order dated 18.03.2026 of the Ld. CIT(A).
(C) At the time of hearing, there was no representation from the assessee’s side. In the absence of any representation from the assessee’s side, the Ld. Departmental Representative was heard and materials on record were perused. On perusal of the records, it is found that the only basis on which the Assessing Officer and the Ld. CIT(A) have passed orders was the fact that there was tax deducted at source from out of receipts of the assessee, u/s 194J of the Act. The implicit view taken by the tax deductor, by deduction of tax at source u/s 194J of the Act, that the payments made to the assessee were in the nature of professional fees, cannot be regarded as binding upon the statutory authorities under Income Tax Act. Therefore, the view taken by the Assessing Officer and the Ld. CIT(A), solely relying on the deduction of tax at source u/s 194J of the Act that the payments receipts by the assessee were in the nature of professional fees, falls short of the requirements necessary to arrive at such a conclusion. The Assessing Officer and the Ld. CIT(A) ought to have independently examined the nature of the receipts and arrived at their own conclusion on the basis of the material available on record, without being influenced solely by the fact that tax had been deducted at source under Section 194J of the Act. However, it is also found that despite numerous opportunities provided during the assessment proceedings, there was no compliance from the assessee’s side. Even, in response to the show-cause notice issued by the Assessing Officer, no explanation or supporting material was furnished by the assessee. In view of the foregoing, it is held that the entire issue in dispute as to whether the receipts of the assessee are covered u/s 44AD of the Act or not covered u/s 44AD of the Act, based on tax deducted at source u/s 194J of the Act, requires fresh examination at the level of the Assessing Officer. In view of the foregoing, the order of learned CIT(A) is set aside and issues in dispute are restored back to the file of the Assessing Officer with the direction to pass de novo assessment order in accordance with law after providing reasonable opportunity of being heard to the assessee.
(D) In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on 09.06.2026 in open court, in virtual mode.
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