Section 44ADA a Provision to tax more than Actual Income

Section 44ADA a Provision to tax more than Actual Income

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.

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