Whether tax audit is compulsory for a specified professional whose gross receipts from the profession do not exceed Rs. 50 Lakhs but the net profit declared is less than 50% of such gross receipts?
The provisions of the income tax laws are amended every year by the Finance Bill/Act during the course of presentation of Budget in the parliament. These amendments reflect the expectation of the tax payers obtained during the implementation of the tax proposals of the previous year as well as the desire of the government to collect more revenue to meet the demands of national development and also to stop tax evasion.
Of late, the government has embarked upon an exercise for simplification of the tax system so as to reduce the compliance burden, facilitate the ease of doing business for small professionals and to bring parity between small businessmen and small professionals.
One of such measure of simplification introduced by the government is the provision of Alternate System of Taxation. For example:
1) Section 115BA. The income-tax payable in respect of the total income of a manufacturing domestic company, shall, at the option of such person, be computed at the rate of twenty-five per cent., if the conditions contained in sub-section (2) are satisfied.
2) Section 115BAA. The income-tax payable in respect of the total income of certain domestic companies. shall, at the option of such person, be computed at the rate of twenty-two per cent, if the conditions contained in sub-section (2) are satisfied.
3) Section The income-tax payable in respect of the total income of a domestic company, at the option of such person, be computed at the rate of fifteen per cent, if the conditions contained in sub-section (2) are satisfied.
4) Section 115BAC. The income-tax payable in respect of the total income of individuals and Hindu undivided family shall, at the option of such person, be computed at the rate of tax given in the following Table, if the conditions contained in sub-section (2) are satisfied. The rates of taxes and the slab of income in this table are different from the table given in the Finance Act.
5) Section 115BAD. The income-tax payable in respect of the total income of a co-operative society resident in India, shall, at the option of such person, be computed at the rate of twenty-two per cent if the conditions contained in sub-section (2) are satisfied:
6) Section 44AD provides for an alternate system for computing profits and gains of business of an eligible assessee engaged in an eligible business on presumptive basis. According to this section a sum equal to six percent/eight per cent of the total turnover or gross receipts of the assessee on account of such business or a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax.
7) Section 44ADA provide for an alternate system for computing profits and gains of specified professions. According to this section, in case of an assessee, being an individual or a partnership firm other than a LLP who is a resident in India, and 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, 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”.
The alternate system of taxation is optional for the assessee. He may choose to either exercise this option or just ignore this option and continue with the normal system of taxation. Choice is of the assessee and the department can’t impose it on him to force him to declare net profit of not less than 50 percent of the gross receipts.
The above system of taxation is different from the normal system of taxation which is generally followed by many assessees. Under the above sections what is taxed is a presumptive income calculated according to the methods given in these sections. This presumptive income is deemed to be the actual taxable income.
Compulsory audit of accounts of certain persons carrying on business or profession.
The government needs strict measures to prevent tax evasion due to the complex system of taxation and for this it has prescribed compulsory audit of accounts of certain persons carrying on business or profession. The audit provisions are contained in section 44AB.
Section 44AB provides that every specified professional,-
(a) carrying on specified profession shall, if his gross receipts in profession exceed Fifty lakh rupees in any previous year; or
(d) carrying on the profession shall, if the profits and gains from the profession are deemed to be the profits and gains of such person under section 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year;
get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
While there is no issue on the interpretation of clauses (a), (b), (c) and (e) above, there is a misunderstanding on interpretation of clause (d) when read with section 44ADA(4)
These provisions are interpreted by many like as under:-
(i) in case of specified professionals tax audit u/s 44AB(b) is compulsory if the gross receipts exceed Rs. 50 Lakhs; and
(ii) in every case where the gross receipts do not exceed Rs. 50 Lakhs but the net profit declared is less than 50% of such gross receipts (Sec 44ADA(4)) then tax audit is compulsory u/s 44AB(d).
This clause (ii) needs clarification.
Section 44ADA of the Income Tax Act was added under the presumptive taxation scheme, which was introduced in the Income Tax Act with effect from 1 April 2017. It was introduced to help small professionals in using a simpler taxation system with a lesser burden of compliance. Accordingly the income of any professional under this section is considered to be 50% of the total gross receipts for the year. The professionals under this scheme are not required to maintain books of accounts. However, if they claim that their income is less than 50% of the total gross receipts and if the total income exceeds the basic exemption limit, they cannot be classified under Section 44ADA. In such a case, they will have to maintain books of accounts as per Section 44AA and these need to be audited as per Section 44AB. Unlike the restriction placed on businesses that have opted for the scheme under Section 44AD, the professionals under Section 44ADA can opt-in and opt-out at any time. The professionals can do so without the five-year lock-in period.
Section 44ADA.(1) Notwithstanding anything contained in sections 28 to 43C, in case of an assessee, being an individual or a partnership firm other than a limited liability partnership as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009.), who is a resident in India, and 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”.
Section 44ADA(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) ( i.e.50% of the gross receipts) 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 (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB(d).
Section 44AB(d) carrying on the profession shall, if the profits and gains from the profession are deemed to be the profits and gains of such person under section 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year.
The use of the words “Shall be deemed “ in section 44ADA(1), which is the charging section too, seems to suggest that this provision is mandatory in each and every case when an eligible professional declares net profit which is less than 50% of the gross receipts. But this is not so.
The use of the word “shall” in a statutory provision, though generally taken in a mandatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, that unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding, would be invalid. On the other hand, it is not always correct to say that where the word ‘may” has been used, the statute is only permissible or directory in the sense that non-compliance with those provisions will not render the proceedings invalid-(State of U. P. v. Manbodhan Lal Srivastava, AIR 1957 SC 912).
Like many Alternative System of Taxation which are optional and the option rests with the assessee whether to exercise that option or not, the scheme of taxation for the specified professionals as per section 44ADA is also optional and it is for the assessee to take a call whether to exercise that option or not. The assessee have two alternate choices here:-
a) The assessee may opt to be outside the tax audit provisions under 44AB(b) (gross receipts not exceeding Rs. 50 Lakhs) Or
b) The assessee may opt to exercise the option under section 44ADA(1) and declare income at 50% of such gross receipts and thus, again be outside the tax audit provisions under section 44ADA(4) (gross receipts not exceeding Rs. 50 Lakhs).
Thus, it is clear that the scheme of taxation u/s 44ADA(1) is a beneficial provision for the assessee and it is for the assessee to decide whether to use this beneficial provision or not. However, if the assessee chooses to adopt this option, then sub-section (1) becomes mandatory in the sense that after exercising this option the assessee have no further choices except to declare income at 50% of the gross receipt or face tax audit u/s 44ADA(4) r.w.s. 44Ab(d). The department has not prescribed any form to be filed for exercising this option. By choosing ITR Form meant for presumptive taxation or filling the columns of the ITR meant for presumptive taxation, the assessee can be deemed to have exercised this option.
It had never been the intension of the parliament while enacting this section 44ADA(4) to provide that in each & every case where the gross receipts do not exceed Rs. 50 Lakhs but the net profit declared is less than 50% of such gross receipts (Sec 44ADA(4)) then tax audit shall be compulsory u/s 44AB(d).
Had it been the intension of the parliament to provide for compulsory audit then it would have included one more clause in section 44AB itself like:
44AB. Every person:
(a) …………………………………………………
(b) carrying on profession shall, if his gross receipts in profession exceed Fifty lakh rupees in any previous year; or
(c) carrying on profession shall, if his gross receipts in profession does not exceed Fifty lakh rupees and the income declared is less than fifty per cent of such gross receipts in any previous year; or (to be inserted)
(d) ……………………………………………
(e) ……………………………………………….
(f) ………………………………………………..
get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed
In this connection, the following quotation from Crawford on ‘Statutory Construction’ is pertinent: ” The question as to whether a statute is mandatory or directory depends upon the intent of the legislature and not upon the language in which the intent is clothed. The meaning and intention of the legislature must govern, and these are to be ascertained, not only from the phraseology of the provision but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other………..”
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