The professionals have been brought under the ambit of Presumptive Taxation for the first time in history of Indian Taxation by virtue of Section 44ADA proposed in the Union Budget 2016. It would be a welcome step provided that the proposed Net Profit (NP) rate would be rational.

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 maximum of 30% 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 havoc 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.

It is also worthy to mention here that the rate of Presumptive income on Professionals was recommended @33.33% in the draft report of Justice R.V Easwar Committee to simplify provisions of the Income Tax Act in this January month itself, which (33.33%) was widely opposed.

But the bureaucrats in corridor of North Block remembered only to cover the professionals under presumptive taxation, following only one part of the recommendations made in the report of Justice R.V Easwar Committee. However, these bureaucrats set aside the recommended NP rate of 33.33% on such professionals, while drafting the budget proposals and chosen for much higher rate of 50% in a very abrupt and tyrant manner.

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.

 How Hypothetical and absurd position, provisions of Section 44ADA of Income Tax Act would be creating. 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 a chaos 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 an absurd situation 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. Taxation has a limit which should not be crossed while making laws!!!!

The ICAI, ICSI, other professional bodies, their various Associations and every partnership firm of professionals should strongly oppose the harsh provisions of Sec 44ADA proposed in Finance Bill 2016.

Let’s lodge our strong protest against the harsh budget proposals u/s 44ADA on the professionals firms on pan India basis at all platforms well in time.

Hope that the DTC of ICAI would raise this matter of serious concern before the appropriate authorities and pursue appropriately in order to protect the interests of lakhs of professionals and partnership firms, they are associated with.

(Article is Compiled Jointly by CA Dr Arpit Haldia and CA Dilip Khetan)

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Category : Income Tax (25333)
Type : Articles (14824)
Tags : Budget 2016 (435) CMA (327) ICAI (2191) ICSI (403) Section 44ADA (4)

19 responses to “Section 44ADA a Provision to tax more than Actual Income”

  1. roop kumar says:

    in the above example of firm having 30L as Gross income, how the remuneration on presumed profit of 15L be 24.75L? on first 3L it is 2.7L ( @90%) and for next 12L it will be 7.2L (@60%) total 9.9L towards remuneration and interest under 40b. then how come 39L to be the income for assuming profit of 15L? this provision is not mandatory and if a firm feels it is high it can definitely go for normal filing after audit?
    I have a question, if a professional wants to take benefit of 44ADA but has other non professional income like, profit/loss from speculation/trading shares and winning from lotteries/races and bank interest etc. can he file normal ITR3 (now) and show professional income @50% of reciepts filling up that part of B/S and P& L in return as case where books of account are not maintained.?

  2. G S BUDYAL says:

    Gross receipts means what whether it includes tax also or not

  3. Murali says:

    I am an online tutor. I get income through paypal from USA based company. A local company from india deducts TDS for some other work related to tutoring. Do I come under this session? If so, how to calculate tax?

  4. AMIT S says:

    Any update on this Provision for Partnership Firm..?

    Since there will be huge set back to Partnership Firms in Professional Field…

    First they will be Taxed on 50% of the Total Receipt and then again the Interest and Remuneration of the Partners will be taxed in the hand of Individual partner…

    For Example it there total Receipt of Partnership Firm is only 10 Lacs then the firm need to pay tax on min 5 Lacs under 40ADA.. irrespective of what is the actual Net Profit….
    So the total Tax would be 154500/- on Total Receipt of 10 Lacs…
    And there is no news since the Budget 2016 on this Provision…So it means no changes yet 🙁

  5. Alnoor Dadvani says:

    i think you need to re-look at the above article in so far as it says that a Firm of professionals will not be allowed deduction for interest and salary to Partners… read Section 44ADA in the Finance Bill 2016

  6. CA DEVKI NANDAN JHAMB says:

    Sir, pls sign the Social petition created to oppose the proposed 50% presumptive profits on all professionals

    change.org/p/finance-ministary-cut-presumptive-rates-of-profit-from-50-to-1-3-of-gross-receipts-on-professionals

  7. shivdas says:

    sir, i am working in a hospital.
    getting 50000 pm as fixed professional income under 194 j.
    As per 44ADA how to calculate tax.
    pls guide me.

  8. CA.K.VISHWESHWARA BHAT says:

    It is sad that, small professional will loose most of their attestation function hereafter. Like DISA qualification is of no use in getting bank audit.

    The elected representative are not acting for the benefit of the members/ furtherance of the profession.

    In fact what action is taken even after 2 years for signing more number of tax audit ?

  9. kishor says:

    is it a mandatory change for all professionals having gross receipt < 50 lakhs OR it is offered as a option that professional can select? If he/she/firm do not want to opt for presumptive option scheme as proposed, he/she can declare income as earlier provision of declaring income as gross receipt less allowable expenses. If this is a option one can exercise than this new provision can be very good for individual / sole professional whose expenses are far less than 50 %, while allowing others who feel income is less than 50 % to go as per earlier provision. Please advise

    • CA Dr Arpit Haldia says:

      It is a mandatory requirement to show atleast 50% of gross receipts as Income or go for audit. Therefore, the very basis of the provision comes into question as they are forcing the assessee with back to the walls to either declare an abnormal income or go for Audit.

      As a professional also I do feel, the provision needs to be toned down otherwise partnership firms will feel more offended rather than welcoming the provisions.

  10. CA. M. Lakshmanan, Madurai says:

    I fully agree with the views expressed and the F.M. should relook into the provisions and correct the flaws.

  11. Jai Kumar Jain says:

    Your working of remuneration of Rs.24.75 lacs on profit of Rs.15 lacs seems wrong. In any case presumtive 50% income on gross receipts is on very high keeping in view applicable ST 15% and more so without interest and remuneration to professional partners. This needs immediate attention and remedial representation by all concerned.

    • CA Dr Arpit Haldia says:

      Kindly do the reverse calculation that how much income needs to be shown before remuneration in order to arrive at income of 15 Lacs after remuneration…

      For First 300000 of gross Income : Profit Rs 30000 and allowable Remuneration Rs 2.7 Lacs

      Next 36.75 Lacs of Gross income: Profit Rs 14.70 Lacs (@40% of 36.75 Lacs) and allowable Remuneration Rs 22.05 Lacs

      Aggregate Gross Income 39.75 Lacs:
      Profit Rs 15 Lacs and Allowable Remuneration Rs 24.75 Lacs..

  12. Nageswara Dutt says:

    The proposed amendment taxing professional income should be made at 5% and not 50%

  13. Nageswara Dutt says:

    The provision proposed to be introduced is unethical and clearly non-application of mind. It appears that there is no prope home work done and completely ignored the basic principles of taxation and allied provisions. A distinction clearly needs to be drawn for other businesses and that of professional. The profession as such carries lot of home work, application of mind on various tax laws, various Acts both domestic and international. In this process, he should involve in various meetings, explore ideas to defends clientele and above all the interest of revenue. Subscription to journals, attending seminars, travel, books etc and above all travel and conveyance for which it is difficult maintain books and vouchers need to be considered while amending the provision of presumptive taxation. In the fitness of things and comparing to other presumptive taxation provisions, it is justified if the rate of presumptive income is fixed at 5%. It appears 5% wrongly stated in the budget speech as 50%. This seems to be a obvious mistake. In any case, the presumptive taxation of professionals should be only five per cent of gross receipts which will meet the ends of justice.

  14. Sandy says:

    Firms in that case should not opt for the section. Obviously it is only meant for independent professionals/practicing CAs etc. Firms should continue the way before anyone heard of 44ADA. Why to create chaos..? ICAI had never asked for presumptive scheme. So why it’ll demonstrate..? Even If it should it should only to highlight that use of 44ADA will be limited and not DEMAND, harsh humari maange etc.
    Khana mila hai to jaisa hai khao ya mat khao.
    Its good for salaried professionals to opt for professional fees instead of salary and go for 44ADA.
    Will save something for them..
    Demand/words in above article is/r absurd!

  15. sharad mohan says:

    I have already written to ICAI regarding this…

  16. Daxesh Thakkar says:

    Under existing provisions of Section 44AD eligible assessee can take
    benefit of presumptive taxation Scheme if his turnover or gross receipts
    in previous year does not exceed an amount of one crore rupees. Such
    threshold limit has been proposed to be increased from one crore rupees
    to two crore rupees. However the FM has not amendment in provision of section 44AB for audit limit enhance of Rs.2 instead of Rs.1 corer of present provision. this contradictory provision of financial bill.

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