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Applicability of tax audit and presumptive taxation in case a person is carrying on both Business and Profession

The limits specified for getting your accounts audited are different in case of business and profession. Some persons are engaged in carrying on both business and profession at the same time. Now a question may arise in the case of an assessee carrying on business and at the same time engaged in a profession as to what are the limits applicable to him under section 44AB for getting the accounts audited.

Tax Audit in case of a Person Carrying on both Business and Profession

Let us first discuss the limits specified in case of a business

Turnover (44AB/44AD) - Business

Limits specified in case of a Profession

Gross Receipts (44AB/44ADA)- Professionals

Case where the receipts from any of his business or profession are exceeding the limits specified under Sec 44AB

In such a case if his professional receipts are, say, rupees fifty six lacs but his total sales, turnover or gross receipts in business are, say, rupees thirty five lacs, it will be necessary for him to get his accounts of the profession and also the accounts of the business audited because the gross receipts from the profession exceed the limit of rupees fifty lacs. If however, the professional receipts are, say, rupees twenty six lacs and total sales turnover or gross receipts from business are, say, rupees ninety lacs it will not be necessary for him to get his accounts audited under the above section, because his gross receipts from the profession as well as total sales, turnover or gross receipts from the business are below the prescribed limits.

Para 5.20 of Guidance Note of ICAI

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 44ADA and his gross receipts or Turnover during the year should not exceed Rs.50 lacs. 50% of the above Turnover will be subject to tax under 44ADA. But in some cases an assessee is doing both business and profession simultaneously.

 

It is often seen that architects/interior designers [profession referred in Section 44AA(1)] also supply material, labour, etc. under their own name or carry on such contractor business in addition to the profession referred above. So, in such cases, these persons cannot avail the benefit of Section 44AD for contractor business or for turnover from supply of material because they are also engaged in profession as referred above and such profession is outside the purview of this scheme as referred to in subsection (6) of section 44AD. Same will be the case of doctors/medical professionals who are providing medical, nursing home, medical consultation (OPD) services and in addition to that are also carrying on business activities like medical supplies, supply of surgical goods etc.

Example: Assessee is doctor by profession but he is also engaged in medicine sale - Rs.82 lacs. His Professional Receipts are Rs.42 lacs ,Net Profit offered in profession - 26 lacs. Can he opt for Sec. 44AD?

Since profit from profession is more than 50%, he can opt for Sec. 44ADA. However, he cannot opt for Sec. 44AD since he is a professional (as per Sec.44AD(6).No Tax Audit since T/o less than 1 cr. [44AB(a)].

Example: Mr. X is a medical practitioner, having clinic and medical shop. His turnover/gross receipts are as under:

  • Fees from Profession - Rs.40 lacs
  • Sales in medical Shop- Rs.70 lacs
  • Advise whether sec 44AB / 44ADA is applicable to him.
 

Every person -

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year ; Or

(b) carrying on profession shall, if his gross receipts in profession exceed fifty lacs rupees in any previous year;

In the present case tax audit is not applicable as the gross receipts from profession and sales from business is below threshold limits specified u/s. 44AB(b) and 44AB(a).

Whether a particular activity can be classified as 'businesses' or 'profession' will depend on the facts and circumstances of each case

The term "business" is defined in section 2(13) of the Act, as under: "Business" includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The word `business' is one of wide import and it means activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. The expression "business" does not necessarily mean trade or manufacture only. Whether a particular activity can be classified as 'business' or 'profession' will depend on the facts and circumstances of each case. Barendra Prasad Roy v ITO[1981]129ITR295(SC) Sec 2(36) defines profession to include vocation. The profession is not defined under the Act except in section 44AA (1) for maintenance of Books of account which are listed as under: - The expression "profession" involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale, of commodities. SC has stated 'The expression 'profession' involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale, of commodities.' •CIT Vs. Manmohan Das (Deceased)[1966]59ITR699(SC), •CIT Vs. Ram KripalTripathi [1980]125ITR408(All)

Following have been classified to be Business as per judicial decisions:

  • Insurance Agent
  • Nursing home
  • Management consultants
  • Coaching classes
  • Stock broking
  • Dealer in shares/securities
  • Gain on sale on investments
  • Clearing, forwarding and shipping agents
  • Financial Planning Advisors
  • Group of Doctors practicing jointly as partners of a partnership firm

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 44ADA of the Act and he can opt the provisions of presumptive taxation. But in respect to his pharmacy which is a business, he will not be eligible to opt the provisions of sec 44AD of the Act by virtue of the restriction of sec 44AD(6) of the Act. But he will not be eligible to opt for both sections 44AD and sec 44ADA simultaneously.

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 the reading of the above section, it is clear that a person who is a specified professional cannot opt sec 44AD of the Act, but there is no bar for such persons to opt sec 44ADA on their professional income. It is to be noted that in sec 44ADA of the Act there is no restriction regarding the opting for presumptive taxation. It is important to know the intent of the law makers. If such professions or other specified businesses as referred in Section 44AD(6) were also provided, by way of an exception, in the definition of 'eligible business' along with the business referred in Section 44AE, instead of subsection (6)then such professions and specified businesses would have been able to avail the benefit of Section 44AD in respect of businesses like contractor business, medical supplies, patient room rent, etc. as now it will also fall under 'eligible business'

Example: Whether the following persons would be considered to be engaged in business or profession for the purposes of Section 44AD and Section 44ADA

  • Mr. A is a yoga teacher
  • Mr. B is cost accountant
  • Mr. C is a Chartered Accountant engaged in running coaching classes is business or profession
  • Mr. D is a software developer who prepares and sells computer software to companies.
  • Mr. E is an astrologer

Solution:

Mr. A

Yoga teacher is not a specified under section 44AA(1). So income from yoga classes would be considered as business income and he shall be eligible for section 44AD if his turnover is less than Rs.2 crores.

Mr. B

Cost accountant is not a specified profession under section 44AA(1). So his income would be considered as business income and he shall be eligible for section 44AD if his turnover is less than Rs.2 crores.

Mr. C

Income from coaching classes run by a Chartered Accountant is a return from professional activity. Profession includes vocation and teaching is a vocation

Mr. D

Preparing a software and selling the same to others is a business activity. In this case the professional skills are utilised for commercial purposes.

Mr. E

An Astrologer is not a specified under section 44AA(1). So income of Astrologer would be considered as business income and he shall be eligible for section 44AD if his turnover is less than Rs.2 crores.

Conclusion

In the nutshell we can conclude that the provisions of Section 44AD would be applicable on person having business income or professional income from non-specified professionals under section 44AA(1). There are two different schools of thought regarding income of non-specified professionals.

First School of Thought- Sec 44ADA of the Act deals with professional income of persons specified u/s 44AA(1) of the Act. Sec 44AD(6) restricts application of sec 44AD to specified professionals u/s 44AA(1). No restriction has been provided under section 44AD regarding the professions not specified u/s 44AA(1). Hence, the professions not specified u/s 44AA(1) are also eligible for availing benefit of sec 44AD of the Act.

Second School of Thought- Some professionals are of the view, that though sec 44AD(6) does not restrict non-specified professionals, but they are not eligible to claim the benefit of declaring profit at the rate of 8%/ 6% of their receipts. Rather, they should maintain proper books of accounts and declare their income accordingly.

Due to the above divergent views, some clarification from Central Board of Direct Taxes is required in this regard.

Interplay of Sec 44AD and 44ADA of the Act

In a case, where a person carries on both business and profession, he can opt the presumptive taxation in case of his professional income u/s 44ADA of the Act and he cannot opt the presumptive taxation on his business income by virtue of sec 44AD(6) of the Act. It implies that a person who carries on both business and profession cannot opt sec 44AD and 44ADA of the Act simultaneously. Following are some of the practical scenarios which might arise where a person will be engaged in both business and profession

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

Person B is an architect engaged in providing blueprints to buildings (eligible u/s 44AA) and simultaneously selling cement (business u/s 44AD)

Person C is engaged in interior decoration (eligible business u/s 44AA) and simultaneously selling other fashionable household items (business u/s 44AD) an eligible assessee as per sec 44ADA and he will be carrying an eligible business u/s 44AD.

Person D is a teacher (not eligible u/s 44AA) and simultaneously has a book publishing business (business u/s 44AD).

Person

Business Turnover

Gross Receipts of Profession

Total

Type of Profession

Is Sec. 44AD Applicable?

Is Sec. 44ADA Applicable?

A.

60 Lacs

35 Lacs

0.95 Cr

44AA

No

Yes

B.

2.85 Cr

32 Lacs

3.17 Cr

44AA

No

No

C.

75 Lacs

65 Lacs

1.4 Cr

44AA

No

No

D.

90 Lacs

35 Lacs

1.25 Cr

Non 44AA

Yes

No

E.

1.60 Cr

45 Lacs

2.05 Cr

Non 44AA

No

No

Person E is a teacher (not eligible u/s 44AA) and simultaneously has a bakery (business u/s 44AD).

Now let us discuss the reason for applicability/ non applicability of Sec. 44AD/ 44ADA in the above cases :

Person A - The gross receipts from business as well as from profession are below the threshold limit of Sec. 44AD/44ADA but still he is only eligible for presumptive taxation U/s 44ADA because as per section 44AD (6), a person who is a specified professional cannot opt sec 44AD,but there is no bar for such persons to opt for sec 44ADA on their professional income. It is to be noted that in sec 44ADA there is no restriction regarding the opting for presumptive taxation.

Person B - The gross receipts from business exceed the threshold limit of Sec 44AD but the professional receipts are within the specified limits. But still it cannot opt for Sec. 44ADA because it will be necessary for him to get his accounts of the business and also the accounts of the profession audited because the gross receipts from the business exceed the limit of 2 Cr.

Person C- The professional receipts exceed the threshold limit of Sec 44ADA of the Act but the business receipts are within the specified limits. But still it cannot opt for Sec. 44AD of the Act because as per section 44AD (6) of the Act, a person who is a specified professional cannot opt sec 44AD of the Act.

Person D - Both the gross receipts from business and the professional receipts are within the limits specified under section 44AD/44ADA of the Act. But it can only opt for presumptive under section 44AD of the Act and not under Sec. 44ADA of the Act because the profession is not a specified profession as per section 44 AA(1) of the Act. He is entitled to opt sec 44AD of the Act on the total turnover of Rs. 1.25 crores.

Person E - Both the gross receipts from business and the professional receipts are within the limits specified under section 44AD/44ADA. But it cannot opt for presumptive taxation under section 44AD /44ADA because the profession is not a specified profession as per section 44 AA(1). Also the combined receipts from the business and non-specified profession exceed the threshold limit. Let us discuss this point in detail.

Tax Audit requirements when the assessee is carrying on two or more businesses

It may be noted that in cases where the assessee carries on more than one business activity, the results of all business activities should be clubbed together. In other words, the aggregate sales, turnover and/or gross receipts of all businesses carried on by an assessee would be taken into consideration in determining whether the prescribed limit (Presently Rs.1 crore w.e.f. A.Y. 2013-14) as laid down in section 44AB has been exceeded or not. However, where the business is covered by section 44B or 44BBA turnover of such business shall be excluded. Similarly, where the business is covered by section 44AD or 44AE and the assessee opts to be assessed under the respective sections on presumptive basis, the turnover thereof shall be excluded. So far as a partnership firm is concerned, each firm is an independent assessee for purposes of Income-tax Act. Therefore, the figures of sales of each firm will have to be considered separately for purposes of determining whether or not the accounts of such firm are required to be audited for purposes of section 44AB. However, if Assessee opts to be assessed under respective sections on presumptive basis, the turnover thereof should be excluded

From the perusal of above one can conclude following

Tax audit u/s 44AB is applicable to an assessee (assuming he is not an eligible assessee) where turnover of business exceeds Rs.2 crores - Clause (a) of section 44AB. Now the issue is if such assessee is carrying out three businesses and having turnover of Rs.70 L in each business. Now the total turnover is Rs.2.10 Cr which exceeds the limit of Rs.2 Cr. The question here is the limit of Rs.2 Cr is to be applied business wise or turnover of all business is required to be clubbed. Though section 44AD talks about 'eligible business' however looking towards para 5.21 of the guidance note on Tax Audit, it appears that turnover of all business need to be considered. However at this juncture one may refer to the contrary judgment of Honorable Karnataka High Court in Asstt. CIT v. Dr. K. SatishShetty [2010] 188 Taxman 32, The Karnataka High Court held that the conjoint reading of the provisions of section 44AB and section 2(13) (definition of 'business') "does not show anywhere that in case assessee is carrying on many businesses, then the aggregate of businesses has to be arrived at and thereafter, the same is required to be audited." The Court further observed that "......section 44AB does not show or contemplate that all businesses are required to be consolidated for working out the aggregate of turnover." The practical difficulty in applying this judgment is the moment one puts Rs.2.10 Cr as turnover (Refer the above example) in the turnover column in return of income, either system may not allow to upload the return or if allows then notice u/s 139 may come treating the return as defective as in the ITR there is no provision to enter the eligible businesswise turnover and profitability details. However in the above example assuming the assessee is an 'eligible assessee' and all three business are 'eligible business' and he decides to offer the income u/s 44AD, he would be facing the same practical difficulty as discussed above and the same difficulty under both the scenario is precisely because the ITR does not allow to enter business wise details.

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