Only those whose gross receipts from the Profession are Rs. 50 lakh or less in a financial year, can opt for the provisions of section 44ADA. This is a limit of Rs. 50 lakh increased to Rs. 75 lakh, available 95% of receipts through recognized banking channels.
It is necessary to reduce the percentage of profit:
There is a great need for it amendment of this section. As The Chamber of Tax Consultants (CTC) in the pre-budget memorandum has indicated: income from any professional cannot be as high as 50% considering the current overheads that are necessary to earn income. Rental fees, staff fees and various other expenses increase every year and usually a professional will be able to earn a net income of around 25 to 30% of their gross receipts. Setting a higher percentage for the purpose of the presumptive tax scheme is a disincentive factor for taxpayers to benefit from the presumptive tax scheme. CTC recommends that the profit percentage be reduced to 25%.
Bhavik Hempushpa Dholakia, a chartered accountant, agrees: “Nowadays professionals are very dependent on IT infrastructure and IT services which are very expensive. Some professionals like chartered accountants, or valid professionals need to stay updated in the field of knowledge. Membership fees and subscriptions to online databases and professional association journals are a large part of operating costs and these costs continue to rise. Office infrastructure costs – including rent and staff costs, and maintaining vehicles have increased over the years.
Dholakia pointed out that taxpayers using the presumptive taxation scheme are not required to maintain books of account or be audited. However, if he considers that the income from the profession is less than 50% of the gross receipts, then a book of account should be maintained and this should be audited under section 44AB.
Sonalee Godbole, partner, Kalyaniwalla and Mistry, a chartered accountant firm added, “Section 44ADA applies to sole proprietorships or partnerships (not LLPs), having a turnover of less than Rs. 50 lakh or 75 lakh (as described above). This is a individual professionals with limited practices or small-sized companies, who do not have the bandwidth to maintain all the documents and account preparation.With increased support staff salary and increased administrative costs cost, net profit decreases below 50%. In these cases, individual professionals or companies must comply with tax audit provisions, which increases costs. It is therefore recommended that the profit percentage be reduced to 25%.
Can the cost be examined during the assessment?
Godbole stated,
“
According to section 44ADA, 50% of the gross receipts from the profession or an amount higher than 50% claimed to have been received by the taxpayer is treated as profits and gains from the profession. A taxpayer is not required to maintain books of account if he is covered under section 44ADA and therefore the tax officer cannot investigate the expenses incurred and allow such expenses under the IT Act. However, if the taxpayer has declared 50% of the gross receipts as professional income and the withdrawals in cash and checks issued are less than 50% of the gross professional receipts, the tax officer can assess the higher income under section 44ADA.
According to Dholakia, the purpose of this provision is to give relief to small-medium professionals to stay out of the obligation to maintain many records or small bills, vouchers, and also account books. “A professional is not required to maintain an account book and retain expenditure vouchers, if gross professional receipts do not exceed the threshold limit.”
“Furthermore, the entire scheme is based on the declaration of gross receipts from professionals. Thus, it is gross receipts from professionals that can, at least, be required to prove the veracity of. It just means, there is no responsibility for the taxpayer to prove that the expenditure has been made for the purpose profession.
Dholakia added, “Though the onus remains on the Assessing Officer under section 44ADA to prove that the outflow is not for professional purposes. It is important to note that using this scheme of presumptive taxation, taxpayers generally do not care about the outflow of professional receipts as to what they are used for.” to earn professional income or to use it for personal expenses or to increase capital. As a precautionary measure, taxpayers must monitor the composition of expenses made through bank accounts to ensure that more than 50% of expenses are fully and exclusively for the purpose and pursuit of the profession and not for personal.the benefit of the doubt can only be availed if there is a cost incurred from the cash withdrawal.
Godbole concluded by saying, “Though maintaining books of account is not required to establish opting for section 44ADA, clarity is needed on the minimum documents to be maintained and whether a taxpayer can claim 50% of gross receipts as income. when the total withdrawal is less than 50%.
