Introduction
Many doctors choose a presumptive income taxation showing 50% of their receipts as income, even though they are working in hospital as a job on full time basis, but is it legal? An assessment was opened for one of the doctor’s questioning the same.
In this article we will be discussing that amazing judgment, by High Court of Madras which quashed an income tax reassessment notice which was been issued to a medical professional, Sankarnaryanasamy Selvanarayanan, who had claimed the benefits under Section 44ADA of the Income Tax Act, 1961. The Madras court’s decision in the above case focussed on the criteria for determining whether an individual is a professional or an employee and the appropriate application of TDS provisions under the Act.
Case citations: Sankarnaryanasamy Selvanarayanan vs. Income-tax Officer, W.P.(MD) No.8575 of 2022 and W.M.P.(MD) Nos.6313 and 6314 of 2022 dated 25.06.2024
What happened in this case?
The assessee, Sankarnaryanasamy Selvanarayanan, is a medical professional or we can say a doctor who is specialised in anesthesia. For the assessment year 2018-19, he filed his income tax return in ITR-3, claiming benefits under Section 44ADA, which defines presumptive taxation scheme for professionals. The hospitals where he provided services deducted TDS under Section 194J, which pertains to fees for professional services.
What is presumptive taxation u/s 44 ADA?
Section 44ADA of the Income Tax Act provides presumptive taxation for certain professionals like doctors, Chartered Accountants etc. It allows individuals who are eligible to show income under this section to pay 50% of the tax of their gross income for those professionals whose gross total professional income under section 44ADA less than ₹50 lakhs and those engaged in specified occupations can opt for this scheme.
What is gross income?
The gross income for an individual is also known as gross pay which means this is individual’s total earnings which is calculated before any taxes or any other deductions. In other words total income received by the individual plus deductions such as TDS and TCS.
However, the Assessing Officer (AO) argued that TDS was required to be deducted as per the Section 192, which applies to income under salaries. Based on this, the AO issued a notice under Section 148A(b) of the Income Tax Act, suggesting that the income had escaped assessment due to incorrect filing. The AO also argued that the assessee should have filed returns using ITR-1 or ITR-2 instead of ITR-3.
What is Section 148A(b) of the Income tax Act?
As per the section, the assessing officer is required to issue a notice to the taxpayer providing information and adverse material suggesting that income has escaped assessment, or income have not shown properly. The taxpayer can respond with their own material and evidence. Government had introduced this Section in the budget 2021, or finance act of 2021.
What was the High court’s Analysis and Decision on this?
Justice C. Saravanan of the High Court of Madras examined the facts and arguments presented by both sides. The court highlighted the following key points in its judgment:
First one is the difference between Professional status and Employee Status in which the court noted that the Assessing Officer did not provide any documents to substantiate the claim that the assessee was an employee of the hospitals. The assessee’s nature of work involved consulting at several hospitals and receiving remuneration for his services, which were paid on a monthly basis. However, this did not necessarily imply an employer-employee relationship which is a primary condition of salary income
Second is the appropriate TDS Section in which the court emphasized that without concrete or solid evidence to prove the assessee’s status as an employee, the deductions made under Section 194J (professional fees) were appropriate. The mere fact that payments were made monthly did not convert the nature of the payments from professional fees to the salary income.
Third one is Reopening of Assessment for which the reasons that were stated in the notice which was issued under Section 148A(b) were found insufficient to justify reopening the assessment. The court pointed out that the department failed to provide any documents supporting its claim that the assessee was an employee and that deductions should have been made under Section 192.
Forth one which court stated was Relevant Precedents in which the court referenced the decision in Dr. Mathew Cherian v. Assistant Commissioner of Income Tax, where it was held that the nature of the relationship between a professional and the hospital is one of equals and not of master-servant. This precedent supported the assessee’s claim of being a professional rather than an employee.
What happened in the case of Dr. Mathew Cherian v. Assistant Commissioner of Income Tax?
During a survey at a hospital, documents were seized, leading authorities to conclude that there was an employer-employee relationship between the hospital and its doctors. The authorities asserted that the doctors should be classified as employees, and thus their income should be taxed as “Salary” instead of “professional income.” Consequently, show-cause notices were issued to the doctors under section 148A(b).
The Assessing Officer concluded that the hospital exercised complete control over the doctors concerning work timings, holidays, call duties, termination, private practice entitlement, increments, and other service rules
In this what was interpreted by the court?
As I stated above, the relationship between the hospital and the doctors was deemed as equals, with the hospital providing administrative infrastructure and the doctors offering professional skills. The variable remuneration and lack of statutory benefits supported the absence of an employer-employee relationship.
Hence the court emphasized that rules and regulations ensure streamlined operations but do not necessarily indicate a contract of service. The doctors have full responsibility for medical decisions, without the hospital’s liability, further established an equal relationship rather than a master-servant dynamic. Given the above facts, the court found the order under section 148A invalid, concluding that the “information” with the Revenue did not substantiate tax escapement.
Citations of case: Dr. Mathew Cherian v. Assistant Commissioner of Income Tax (2023) 450 ITR 568 (Mad.)(HC)
Conclusion
The High Court of Madras quashed the reassessment notice under section 148 which was issued to Sankarnaryanasamy Selvanarayanan, holding that there was not justified for reopening the assessment. The court’s decision underscores the importance of proper classification of professional services and the necessity of concrete evidence when determining the nature of payments and the appropriate TDS provisions.
This ruling serves as a significant reference for medical professionals and other freelancers who operate across multiple institutions, reinforcing the principle that the nature of their work and the absence of an employer-employee relationship are crucial in determining the appropriate tax treatment.
Thanks for reading, the author can be contacted at aman.rajput@mail.ca.in
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