No Section 44ADA Addition for Consultancy Income by 10th-Passed Assessee

Vishnu Dattatraya Ponkshe Vs Central Processing Centre (ITAT Mumbai)

Introduction: In a recent decision, the Income Tax Appellate Tribunal (ITAT) Mumbai provided a crucial ruling in the case of Vishnu Dattatraya Ponkshe vs. Central Processing Centre (CPC). The case pertains to the assessment year 2017-18 and revolves around the taxation of income earned from a consultancy business. The ITAT’s decision clarifies the applicability of Section 44ADA of the Income Tax Act in such scenarios.

1. Background of the Appeal: The appellant, Vishnu Dattatraya Ponkshe, challenged an order passed by the Commissioner of Income Tax/National Faceless Appeal Centre (CPC) under Section 250 of the Income Tax Act for the assessment year 2017-18.

2. Income Under Section 44AD: The appellant had declared income under Section 44AD of the Income Tax Act, which prescribes a presumptive income scheme. The income was calculated at 8% of receipts from the consultancy business related to stamp duty and registration.

3. Addition Under Section 44ADA: The Assessing Officer (AO)/Central Processing Centre (CPC) added a portion of the income, specifically the amount on which Tax Deducted at Source (TDS) was deducted under Section 194J (fees for professional and technical services). This resulted in an addition of Rs. 2,40,640 under Section 44ADA of the Act.

4. Appeal to the Commissioner: Displeased with the addition, the appellant appealed to the Commissioner of Income Tax. The Commissioner considered that the deductors were large corporations who had deducted tax under Section 194J. Consequently, the Commissioner determined that the receipts of Rs. 4,81,280 were related to professional and technical services and should be taxed at 50% under Section 44ADA.

5. ITAT’s Analysis and Ruling: The ITAT carefully examined the facts of the case and noted that the amount of Rs. 4,81,280, on which TDS was deducted, was part of the total receipts of Rs. 8,30,800, on which the appellant had declared income at 8% under Section 44AD. Both the AO/CPC and the Commissioner had incorrectly applied the provisions of Section 44ADA, which specifically pertain to professionals in fields like law, medicine, engineering, and more.

6. Section 44AA and Ineligibility: The ITAT highlighted that the appellant lacked the qualifications to be considered a professional in the fields mentioned in Section 44AA of the Act. The appellant’s qualifications did not align with the criteria set out in Section 44AA, which is a prerequisite for falling under Section 44ADA.

7. Deletion of Addition: In light of the appellant’s qualifications and the incorrect application of Section 44ADA, the ITAT ruled in favor of the appellant. The addition of Rs. 2,40,640 was deemed inappropriate and was deleted.

8. Conclusion: The ITAT Mumbai’s decision in the Vishnu Dattatraya Ponkshe vs. Central Processing Centre (CPC) case brings clarity to the taxation of income earned from a consultancy business. The ruling underscores the importance of correctly applying the provisions of the Income Tax Act and highlights that Section 44ADA is specific to certain professions, excluding consultancy businesses in this context. This decision sets a precedent for similar cases, ensuring fair and accurate tax assessments for businesses like consultancies.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal has been preferred by the Assessee against the order dated 07.03.2023 impugned herein passed by the learned Commissioner of Income Tax/National Faceless Appeal Centre, Delhi (NFAC) (in short ld. Commissioner) under section 250 of the Income Tax Act, 1961 (in short the Act) for AY 2017-18.

2. In the instant case, the Assessee by filing its of income u/s 44AD of the Act shown its income @8% on receipts of Rs.8,30,800/- from the business of consultancy qua stamp duty and registration. The amount of Rs.8,30,800/- included the receipt of Rs.4,81,280/- on which TDS was deducted under section 194J of the Act (fees for professional and technical services) and therefore the AO/CPC added the income @50% under section 44 ADA of the Act, which resulted into making the addition of Rs. 2,40,640/-.

3. The Assessee being aggrieved challenged the said addition before the learned Commissioner, who by taking into consideration that all the deductors are big corporates and deducted tax under section 194J of the Act, construed that the receipts of Rs.4,81,280/- related to professional and technical services and is covered under section 44ADA of the Act and therefore taxable @50%. The Ld. Commissioner ultimately computed the total income of the Assessee to the tune of Rs.2,68,640/- (2,40,640/- + 27,982/- @8% of Rs.3,49,500/-) and restricted the income of Rs. 3,49,500/- u/s 139(1) of the Act to the tune of Rs.2,68,602/- only.

4. The Assessee being aggrieved is in appeal before us.

5. We having heard the parties and perusing the material available on record and giving thoughtful consideration to the peculiar facts and circumstances of the case, observe that the amount of Rs.4,81,280/- on which TDS was deducted under section 194J of the Act, in fact is part of the total receipt of Rs.8,30,800/- on which the Assessee has declared income @8% under section 44AD. However, both the authorities below applied the provisions of section 44ADA of the Act, which in fact deals with persons carrying on legal, medical, engineering or architectural profession or profession of accountancy, technical consultancy or interior decoration or any other profession as is notified by the Board in the official gazette. Admittedly the Assessee is just a 10^th/matriculation passed and do not have any qualification to act as a legal, medical, engineering or architectural professional or professional accountancy or technical consultancy of interior decoration or any other profession as is notified by the Board in the official gazette, as prescribed under section 44AA of the Act. As the Assessee’s case does not fall under the provisions of section 44ADA of the Act and therefore the addition sustained by the learned Commissioner to the extent of Rs.2,40,640/- is liable to be deleted.

6. In the result, the appeal filed by the Assessee stands allowed.

Pronounced in the open Court on 29^thAugust, 2023.