Simultaneous use of Sec 44AD and Sec 44ADA

Suresh Thiyagarajan  on 19 July 2019


Though we have seen a lot of interpretations regarding simultaneous use of sec 44AD(relating to business) and sec 44ADA (relating to profession specified u/s 44AA). Let us analyze these two sections on an individual basis.

A person who is running an eligible business can opt to pay tax under the presumptive taxation scheme as per sec 44AD. However, his gross receipts or turnover should not exceed Rs. 2 crores during the year. And depending upon the nature of receipts, the tax will be charged on 8% or 6% on the turnover.

If a person is carrying on profession, then a specific provision 44ADA can be opted by him for payment of tax on a presumptive basis. The person should be an eligible assessee as per sec 44AA and his gross receipts or Turnover during the year should not exceed Rs. 50 lakhs. 50% of the above Turnover will be subject to tax under 44ADA.

First, let's look at some practical scenarios where the above situation can arise:

i) A doctor carrying on his medical practice (eligible u/s 44AA) and simultaneously selling medicines (business u/s 44AD)

ii) An architect engaged in providing blueprints to buildings (eligible u/s 44AA) and simultaneously selling cement (business u/s 44AD)

iii) A person who is engaged in interior decoration (eligible business u/s 44AA) and simultaneously selling other fashionable household items (business u/s 44AD)

Above are some of the practical scenarios which might arise where a person will be an eligible assessee as per sec 44ADA and he will be carrying an eligible business u/s 44AD.

A person could be earning income from the above two sources, let’s a take a scenario of a doctor. He might be engaged in medical consulting and he may simultaneously be running a pharmacy. Now, being a doctor, he is an eligible assessee u/s 44AA and he can opt to be pay under sec 44ADA but in respect to his pharmacy which is a business, he will be eligible to pay tax u/s 44AD. Now the problem arises if he has the same PAN where both professional income and business income combined together to be shown under the same name. In this case, he may be open to opt presumptive taxation for either professional income under sec 44ADA or selling of medicines u/s 44AD. But will he be eligible to opt for both sections simultaneously?  

Let’s read the section for further interpretation.

Under Sec 44AD (6) it reads as;

"The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to -

(i)  a person carrying on profession as referred to in sub-section (1) of section 44AA;
(ii)  a person earning income like commission or brokerage; or
(iii)  a person carrying on any agency business"

From the above reading, we can conclude that sec 44AD(6) neglects out of its purview of a person engaged in profession specified u/s 44AA. From a plain reading, the underlying idea of introducing this section is to keep out person engaged in professional services to not avail these services. Thus, the more appropriate section 44ADA is introduced which taxes professional receipts @50% on gross receipts (as service incomes will not result in more expenses, hence the 50%)

However, there is nowhere it specified that both these sections are to be read together which makes it inclusive and opting of one will make other section inapplicable. Another angle of viewing is that presumptive taxation has been brought for the benefit of taxpayers and these sections should not be interpreted in a strict angle. If we take the above view then sec 44AD and sec 44ADA can be simultaneously be opted and tax can be paid accordingly under each section.

Nevertheless, it is hard to get to a conclusion based on the above interpretations since both sides of the interpretations make a valid point for consideration.

Arguments in favor of the assessee:

i) Since nowhere it is specified that a person who is opting to pay tax under 44ADA should not opt for sec 44AD.

ii) These two sections were brought for the benefit of small taxpayers and it should not be interpreted from a strict angle.

iii) If I decide to show my profit u/s 44ADA and not show income on business u/s 44AD it will nullify my benefit of availing the scheme.

Arguments in favor of the Revenue: 

i) Sec 44AD and sec 44ADA were introduced for small taxpayers and these provisions should not be viewed as a shield and exploit it by interpreting in everyone's favor. Thus it demands to be viewed on its absolute terms without any further interpretations. Thus, sec 44AD(6) makes it ineligible for any person who is carrying on the profession and it does not matter he carries on business simultaneously.

ii) Moreover, the T.O limit will be Rs. 2.5 crores (2 crores u/s 44AD and 50 lakhs u/s 44ADA) if both these sections are taken together. In that case, the assessee is exploiting the sections to his/her benefits without appreciating the spirit of introducing the above sections.

Conclusion:

Since the above interpretation does not take us anywhere near to a proper conclusion. We can expect an explanation or notifications to be released by the department concerning the above issue.


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