According to section 29, the profits and gains of a profession are to be computed in accordance with the provisions contained in sections 30 to 43 D. It must, however, be remembered that in addition to the specific allowances and deductions stated in sections 30 to 36, the Act further permits allowance of items of expenses under the residuary section 37(1), which extends the allowance to items of expenditure not covered by sections 30 to 36, where these are allowable according to accepted commercial practices.
| Admissible deductions (Sections 30 to 37) | Inadmissible deductions (Section 40) | Expenses or payments not deductible in certain circumstances (Section 40A) | Profits chargeable to tax (Section 41) | Other provisions |
Section 37(1) is a specific provision where deduction is provided for any expenditure laid out or expended wholly and exclusively for the purpose of the profession. On the other hand, a general provision has been made in section 28(i) read with section 29 for determination of “profits and gains of any profession” carried on by the assessee “in accordance with the provisions contained in sections 30 to 43D”.
Meaning of Profession
The expression ‘Profession’ has been defined in Section 2(36) of the Act to include any vocation. In the case of a profession, the definition given in the Act is very much inadequate since it does not clearly specify what activities constitute profession and what activities do not.
According to the generally accepted principles, the meaning of the term ‘profession’ involves the concept of an occupation requiring either intellectual skill or manual skill controlled and directed by the intellectual skill of the operator.
For instance, an auditor carrying on his practice, the lawyer or a doctor, a painter, an actor, an architect or sculptor, would be persons carrying on a profession and not a business.
The common feature in the case of both profession as well as business is that the object of carrying them out is to derive income or to make profit. The process of making the profit would be the main area of difference between the two while the ultimate object is common to both
Profession [Section 2(36)]
A profession is an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, e.g., lawyer, accountant, engineer, surgeon, author etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill. Under section 2(36) profession includes vocation.
Vocation simply means a way of living for which one has special fitness. A vocation does not involve any organized or systematic activity like business. So vocation simply means any type of activity in which a person is engaged and he earns his livelihood from such activity. The practice of a religion may also amount to vocation. Writing of articles in the magazines is also a vocation.
Profession involves an exercise of intellect and skill based on learning and experience. It requires purely intellectual skill or manual skill on the basis of some special learning.
Profession includes services provided by the professionally qualified or technically qualified person according to their qualification.
Profession includes “vocation”. Vocation means activities which are performed in order to earn livelihood. For example brokerage, music, dancing etc. Vocation also refers to any work performed on the strength of one’s natural ability for that work. Regularity and profit-motive are not necessary for an activity to be called a vocation.
Vocation
Vocation simply means a way of living for which one has a special fitness. A vocation does not involve any organized or systematic activity like business.
So vocation simply means any type of activity in which a person is engaged and he earns his livelihood from such activity. Any gain or receipt arising out of vocation is certainly taxable under this head of income.
Example : Writing of articles in the magazines is also vocation.
A profession is a vocation founded upon specialized educational training, the purpose of which is to supply objective counsel and service to others, for a direct and definite compensation, wholly apart from expectation of other business gain. For example the work of lawyer, doctor auditor engineer and so on.
Concept of profession
The word “profession” was subject matter of interpretation before the Hon’ble Rajasthan High Court in CIT v. Bhagwan Broker Agency (1995) 212 ITR 133 (Raj) Their Lordships have considered various decisions as well as definition given in the dictionary and after considering all these decisions and definitions, their Lordships have arrived at a conclusion that there should be some special qualification of a person apart from skill and ability which is required in carrying on any activity which could be considered as “profession”. This could be having education in a particular system either in the college or university or it may be by experience.
Delhi High Court in Vipul Medcorp TPA (P) Ltd. & Others v. CBDT dated 30.09.2011, On concept of profession : The term “profession” as traditionally understood involves the idea of an occupation requiring either purely intellectual skills or if any manual skill is involved such as in painting, sculpture or surgery, a skill controlled by the operator’s intellectual skill as distinguished from an occupation which substantially involves production or sale or arrangement for the production and sale of commodities (See Patridge v. Mallandine (1886) 18 QBD 276). The word “profession” as is currently known is wider than the old definition of learned professions such as the church, medicine and law. As per the definition clause section 2(36) of the Act, profession includes vocation. – [Vipul Medcorp TPA (P) Ltd. & Others v. CBDT dated 30.09.2011 (Del)].
The Allahabad High Court in P. Stanwill & Co. v. CIT (1952) 22 ITR 316 (All) observed that the main difference between ordinary commercial business and profession lies in the amount of knowledge or skill employed in carrying it on though that may not be the sole criterion.
General principles governing the computation of taxable income under the head “profits and gains of business or profession
There are certain basic rules that apply when you are assessing your taxable income from profession, these are as follows:
(i) Continuation of Profession
The chargeability to tax under Section 28 is based primarily upon the condition that the assessee must have carried on a profession at any time during the accounting year, though not necessarily throughout the accounting year.
(ii) Existence of continuity in the business or profession is not an essential condition
The existence of continuity in the profession is not an essential condition for making the assessee liable to tax under this head. Thus, receipts arising from the exercise of a profession would still be chargeable to tax under this head although they may be both casual and non-recurring in nature.
(iii) Profession must be carried on during the previous year
Income is chargeable under the head “Profits & gains of business or profession” only if the business is carried on by the assessee during the previous year. It is not necessary that the business should continue throughout the year or till the end of previous year.
Clearing and forwarding agency is not ‘profession’
The activity of clearing, forwarding and shipping agents does not amount to a “profession” – [CIT v. Jivanlal Lalloobhai & Co. (1994) 206 ITR 548 (Bom.)]
Stock-broking is not a profession
A stock broker cannot be said to be engaged in the practice of a profession. The real job of a stock broker is to make arrangements for sale of the shares or securities of others. Such activity clearly falls within the expression ‘business’ and not ‘profession’ – [CIT v. Lallubhai Nagardas & Sons (1993) 204 ITR 93 (Bom.)]
‘Profession’ is associated with intellectual/technical exercises based on learning/service
A profession is normally associated with the exercise of intellectual or technical equipment resulting from learning or service – [CIT v. Bhagwan Broker Agency (1993) 70 Taxman 453 (Raj.)]
Intellectual/manual skill must be involved
Profession involves occupation requiring purely intellectual or manual skill – [CIT v. Manmohan Das (1966) 59 ITR 699 (SC)]
Maintenance of books of accounts
Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act. [Section 44AA(1)]
Professionals carrying on the professions are required to maintain books of accounts in accordance with Rule 6F of the Income tax Rules.
Books of account [Rule 6F]
BOOKS OF ACCOUNT AND OTHER DOCUMENTS TO BE KEPT AND MAINTAINED UNDER SECTION 44AA(3) BY PERSONS CARRYING ON CERTAIN PROFESSIONS.
6F. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and maintain the books of account and other documents specified in sub-rule (2) :
Provided that nothing in this sub-rule shall apply in relation to any previous year in the case of any person if his total gross receipts in the profession do not exceed one lakh fifty thousand rupees in any one of the three years immediately preceding the previous year, or, where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount.]
(2) The books of account and other documents referred to in sub-rule (1) shall be the following, namely:—
| (i) | a cash book; | |
| (ii) | a journal, if the accounts are maintained according to the mercantile system of accounting; | |
| (iii) | a ledger; | |
| [(iv) | carbon copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him: | |
| Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees;] | ||
| (v) | original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed fifty rupees, payment vouchers prepared and signed by the person: | |
| [Provided that the requirements as to the preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.] |
Explanation : In this rule,—
| (a) | “authorised representative” means a person who represents any other person, on payment of any fee or remuneration before any Tribunal or authority constituted or appointed by or under any law for the time being in force, but does not include an employee of the person so represented or a person carrying on legal profession or a person carrying on the profession of accountancy; | |
| (b) | “cash book” means a record of all cash receipts and payments, kept and maintained from day-to-day and giving the cash balance in hand at the end of each day or at the end of a specified period not exceeding a [month]; | |
| (c) | “film artist” means any person engaged in his professional capacity in the production of a cinematograph film whether produced by him or by any other person, as— |
| (i) | an actor; | |
| (ii) | a cameraman; | |
| (iii) | a director, including an assistant director; | |
| (iv) | a music director, including an assistant music director; | |
| (v) | an art director, including an assistant art director; | |
| (vi) | a dance director, including an assistant dance director; | |
| (vii) | an editor; | |
| (viii) | a singer; | |
| (ix) | a lyricist; | |
| (x) | a story writer; | |
| (xi) | a screen-play writer; | |
| (xii) | a dialogue writer; and | |
| (xiii) | a dress designer. |
(3) A person carrying on medical profession shall, in addition to the books of account and other documents specified in sub-rule (2), keep and maintain the following, namely :—
| (i) | a daily case register in Form No. 3C; | |
| (ii) | an inventory [under broad heads,] as on the first and the last day of the previous year, of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession. |
(4) The books of account and other documents specified in sub-rule (2) and sub-rule (3) [other than those relating to a previous year which has come to an end] shall be kept and maintained by the person at the place where he is carrying on the profession or, where the profession is carried on in more places than one, at the principal place of his profession:
Provided that where the person keeps and maintains separate books of account in respect of each place where the profession is carried on, such books of account and other documents may be kept and maintained at the respective places at which the profession is carried on.
(5) The books of account and other documents specified in sub-rule (2) and sub-rule (3) shall be kept and maintained for a period of [six] years from the end of the relevant assessment year:
Provided that where the assessment in relation to any assessment year has been reopened under section 147 of the Act within the period specified in section 149 of the Act, all the books of account and other documents which were kept and maintained at the time of reopening of the assessment shall continue to be so kept and maintained till the assessment so reopened has been completed.
(6) Notwithstanding anything contained in sub-rules (1) to (3), it shall not be necessary for any person carrying on any of the professions specified in sub-rule (1) to keep and maintain the books of account and other documents specified in sub-rule (2) or sub-rule (3) in relation to any previous year commencing before the first day of March, 1983.
In case of a person carrying on medical profession
A person engaged in medical profession (i.e., a practitioner of any system of medicine – physicians, surgeons, dentists, pathologists, radiologists, vaids, hakims, etc.) has to maintain following items in addition to books of account prescribed by rule 6F:
- A daily case register in prescribed form (i.e., Form 3C), showing date, patient’s name, nature of professional services rendered (i.e., general consultation, surgery, injection, visit, etc.,) fees received and date of receipt; and
- An inventory under broad heads as on the first and last day of the previous year of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession.
Cases where Bookkeeping is not required
(i) Where the income does not exceed Rs 1,20,000 or total sales, turnover or gross receipts are not more than 10,00,000 in all preceding 3 years — no books of account are required to be maintained.
In case of a newly set up profession or business the same rule applies when income is expected to be less than Rs 1,20,000 or sales/turnover/gross receipts are expected to be less than Rs 10,00,000.
(ii) Where the income is more than Rs 1,20,000 or total sales, turnover or gross receipts are more than 10,00,000 in all preceding 3 years, such profession or businesses must maintain books of accounts and other documents which may enable the Assessing Officer to calculate their taxable income as per the Income Tax Act. No specific records are prescribed.
In case of a newly set up profession or business the same rule applies when income is expected to be more than Rs 1,20,000 or sales/turnover/gross receipts are expected to be more than Rs 10,00,000.
(iii) For Professions and Businesses covered under section 44AD and 44AE Businesses covered under section 44AD and 44AE are not required to maintain any books of accounts.
However taxpayers who claim that their income from business is lower than the presumed income calculated under section 44AD and 44AE must maintain books of accounts which may enable the Assessing Officer to calculate their taxable income as per the Income Tax Act. No specific records are prescribed.
In brief : Mandatorily keeps books of accounts
| Non specified professionals | Specified professionals/ persons | |
| Individual/ HUF | Other than Individual/ HUF | Mandatorily keeps books of accounts |
| (i) If income exceeds Rs. 2,50,000; or
(ii) Turnover exceeds Rs. 25,00,000 (from 01.04.2017) |
(i) If income exceeds Rs. 1,20,000; or
(ii) Turnover exceeds Rs. 10,00,000 |
|
Consequences of failure to keep and maintain books of account, etc.
Section 271A prescribes penalty provisions for failure to keep and maintain books of account, etc., and also for not retaining them for the prescribed period. If the tax payer fails to maintain accounting records as per the requirements of Section 44AA, a penalty may be levied under section 271A. The maximum penalty that can be charged is Rs. 25,000.
However, if the tax payer can prove there is a reasonable cause for failure to maintain accounting records – such penalty may not be levied.
It was held that No penalty can be levied if it is possible for the assessing officer to compute the total income based upon the documents though the books of account were not maintained. – [Mehta Parvesh v. ITO (1998) 60 TTJ 278 (ITAT Delhi); ITO v. Papelal Gaur (1994) 49 TTJ 126 (ITAT Nagpur)]
Computation of Taxable Income of professional
A professional could arrive at his taxable “Income under the head Profits and Gains from Business or Profession” by reducing all his profession related expenses from this gross receipts out of the profession. The profession related expenses could be salary (if you have engaged someone), rent for the premises from where you are carrying out your profession, internet expenses, mobile expenses, official travel, lunch expenses (met officially) etc.
The following models may help to understand the computation of professional income of professional like, a chartered accountant, a medical practitioner or an advocate etc.
(1) Professional Income of a Chartered Accountant
| A | Professional Receipts / Incomes | Amount
(in Rs.) |
Amount
(in Rs.) |
| (i) | Audit fee | 5,00,000 | |
| (ii) | Financial consultancy | 3,00,000 | |
| (iii) | Examiner’s fee | 1,00,000 | |
| (iv) | Gifts from clients | 2,00,000 | |
| (v) | Fees for Accountancy works | 8,00,000 | |
| (vi) | Any other receipts of professional nature | 5,00,000 | 24,00,000 |
| (B) | Less: Professional payments/expenses | ||
| (i) | Office expenses | 1,00,000 | |
| (ii) | Printing and stationery | 10,000 | |
| (iii) | Books and journals | 10,000 | |
| (iv) | Depreciation on office equipment | 50,000 | |
| (v) | Salaries to staff | 6,00,000 | |
| (vi) | Travelling & Conveyance | 10,000 | |
| (vii) | Membership subscription | 10,000 | |
| (viii) | Postage | 10,000 | |
| ix) | Stipend to trainees | 1,00,000 | |
| (x) | Any other expenditure | 1,00,000 | 10,00,000 |
| (C) | Professional Income [ A – B] | 14,00,000 | |
(2) Medical Practitioner
| A | Professional Receipts / Incomes | Amount (in Rs.) | Amount (in Rs.) |
| (i) | Consultancy fees | 5,00,000 | |
| (ii) | Visiting fees | 3,00,000 | |
| (iii) | Operation fees | 2,00,000 | |
| (iv) | Sale of medicines | 2,00,000 | |
| (v) | Examiner’s fees | 3,00,000 | |
| (vi) | Gifts from patients | 1,00,000 | |
| (vii) | Other professional receipts | 5,00,000 | 21,00,000 |
| (B) | Less: Professional payments/expenses | ||
| (i) | Staff salaries | 3,00,000 | |
| (ii) | Dispensary expenses | 2,00,000 | |
| (iii) | Travelling | 10,000 | |
| (iv) | Depreciation on equipments | 50,000 | |
| (v) | Books and journals | 50,000 | |
| (vi) | Cost of medicines | 3,00,000 | |
| (vii) | Printing and stationery | 10,000 | |
| (viii) | Expenditure to increase professional knowledge | 50,000 | |
| (ix) | Other expenditures relating to the profession | 1,00,000 | 10,70,000 |
| (C) | Professional Income [ A – B] | 10,30,000 | |
(3) An advocate/Legal Practitioner/Lawyer
| A | Professional Receipts / Incomes | Amount (in Rs.) | Amount (in Rs.) |
| (i) | Practicing /Legal fees | 10,00,000 | |
| (ii) | Consultancy fees | 8,00,000 | |
| (iii) | Special commission fees | 2,00,000 | |
| (v) | Gifts from clients | 1,00,000 | 21,00,000 |
| (B) | Less: Professional payments/expenses | ||
| (i) | Office expenses | 1,00,000 | |
| (ii) | Court paper and stamps | 10,000 | |
| (iii) | Books and journals | 10,000 | |
| (iv) | Depreciation on office equipment | 1,00,000 | |
| (v) | Salaries to staff | 5,00,000 | |
| (vi) | Travelling & Conveyance | 10,000 | |
| (vii) | Printing and stationery | 20,000 | |
| (viii) | Postage | 10,000 | |
| ix) | Telephone | 1,00,000 | |
| (x) | Expenditure to increase professional knowledge | 40,000 | |
| (xi) | Any other expenditure relating to the profession | 1,00,000 | 10,00,000 |
| (C) | Professional Income [A – B] | 11,00,000 | |
Profits and gains of profession on presumptive basis [Section 44ADA]
With effect from assessment year 2017-18, in case of a person adopting the provisions of sections 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However, such person can declare income higher than 50%. In other words, in case of a person adopting the provisions of section 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts.
(i) Eligible Profession [Section 44ADA(1)]
Every person carrying on following profession are eligible for adopting the provisions of section 44ADA of the Income-tax Act, 1961:—
(a) legal,
(b) medical,
(c) engineering, or
(d) architectural profession, or
(e) the profession of accountancy, or
(f) technical consultancy, or
(g) interior decoration, or
(h) any other profession as is notified by the Board in the Official Gazette.
(ii) Gross receipts [Section 44ADA(1)]
In the case of an assessee, being a resident in India, who is engaged in a profession referred to in section 44AA(1) and whose total gross receipts do not exceed 50 lakh rupees in a previous year, a sum equal to 50% of the 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 eligible 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”.
(iii) No further deduction under sections 30 to 38 [Section 44ADA(2)]
Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of section 44ADA(1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.
(iv) Written down value of any asset shall be deemed to have been calculated [Section 44ADA(3)]
The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
In other words, while computing income as per the provisions of section 44ADA, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.
A person who adopts the presumptive taxation scheme is deemed to have claimed all deductions of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.
In case of a person engaged in a specified profession as referred in sections 44AA(1) and opts for presumptive taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of books of account will not apply. In other words, if a person opts for the provisions of section 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.
A person can declare income at lower rate (i.e. less than 50%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.
(v) Not required to maintain books of account
In case of a person engaged in any profession referred to in section 44AA(1) and opted for perspective taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of books of account will not apply and also not required to get the accounts audited under section 44AB in respect of such income unless the assessee claims that the profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under section 44ADA(1) and his income exceeds the maximum amount which is not chargeable to income-tax.
(vi) Required to pay Advance tax
An assessee who engaged in a profession referred to in section 44ADA is liable to pay advance tax in a single instalment on or before the 15th of March every financial year. Further in respect of an assessee referred to in section 44ADA, interest under section 234C shall be levied, if the advance tax paid on or before the 15th March, is less than the tax due on the returned income.
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