In the Union Budget presented on 24 July 1991, the then Finance Minister Dr. Manmohan Singh announced the constitution of two important committees—one on financial sector reforms under the chairmanship of M. Narasimham and another on tax reforms under the chairmanship of Raja J. Chelliah. The Tax Reforms Committee (TRC) was entrusted with the task of reviewing and restructuring India’s direct and indirect tax system with a view to making it simpler, more rational, and efficient. In its report, the Tax Reforms Committee (TRC) advocated a presumptive form of taxation for select businesses and trades.
In order to simplify the taxation of hard-to-tax groups and ensure that they contribute their fair share of taxes, it was felt that presumptive taxation had increasingly found acceptance as a leading option. The TRC proposed the introduction of presumptive taxation for small businesses, where the presumption would be rebuttable and based on the taxpayer’s own estimate of turnover. The 1992 and 1993 Budgets implemented some of the TRC proposals.
For instance, under the presumptive tax scheme proposal, traders and manufacturers with business income were to be allowed the option of paying a lump-sum tax of Rs. 1,000, without filing a return, if they estimated their total business turnover to be between Rs. 300,000 and Rs. 500,000. This proposal was implemented in 1992, although the lump-sum tax was fixed at Rs. 1,400.
In another proposal, traders or manufacturers could also have income from other sources such as brokerage, commission, interest, dividends, or property income. The presumptive option was not to be denied if such income was modest. For brokerage income, the limit was proposed at Rs. 25,000, taxable at a flat rate of 20 per cent. The scheme was also to remain available if receipts from other sources did not exceed Rs. 10,000. However, the taxpayer was not to be permitted to claim any refund of tax deducted at source on such receipts. This proposal was not implemented.
In another proposal, persons with turnover above Rs. 500,000, brokerage or commission exceeding Rs. 25,000, or other receipts above Rs. 10,000 were to be permitted to pay taxes under the Estimated Income Scheme (EIS). This proposal was also not implemented.
It was proposed that 10 per cent of receipts from contracts for the construction of roads, bridges, buildings, other public works, and transportation should be presumed, by law, to be income. This proposal was substantially implemented in the 1994–95 Budget through the introduction of section 44AD.
It was also proposed that efforts should be made to introduce the EIS on the basis of physical indices. For transport operators, it was proposed that a truck with an inter-State permit be presumed to yield an income of Rs. 4,000 per month, while a truck with a State permit be presumed to yield an income of Rs. 3,000 per month. This proposal was implemented in the 1994–95 Budget through the introduction of section 44AE.
The then Finance Minister Dr. Manmohan Singh, in his Budget Speech for 1994–95, presented an estimated income scheme for select businesses. It read as under:
“115. In addition, I am introducing a new estimated income scheme for contractors with a turnover of up to Rs. 40 lakhs and for truck owners who own up to ten trucks. In the case of contractors, the net profit will be estimated at 8 per cent of the gross receipts. In the case of truck owners, the income will be estimated at Rs. 24,000 per truck per year for Light Commercial Vehicles and Medium Motor Vehicles, and Rs. 30,000 per truck per year for Heavy Transport Motor Vehicles. In both these cases, no further deduction on account of depreciation, interest, or other expenses will be allowed. In both cases, the scheme is optional. This scheme is based on the recommendation of the Chelliah Committee on Tax Reforms. The scheme will be simple and free of irritants, and I expect an enthusiastic response.”
In order to further reduce the compliance burden on small businesses and professionals, it has been consistently proposed to increase the threshold limit of total sales, turnover, or gross receipts specified under section 44AB for compulsory audit of accounts in the case of persons carrying on business as well as profession. Such increases were made in 2010, 2012, and 2017.
Following the success of presumptive taxation for small businesses under sections 44AD and 44AE, the Finance Act, 2016 introduced section 44ADA to extend similar benefits to specified professionals. A new section 44ADA was introduced under the heading “Presumptive taxation scheme for persons having income from profession”.
In the Memorandum to the Finance Bill, it was stated that the existing scheme of taxation provided a simplified presumptive taxation scheme for certain eligible persons engaged in eligible businesses, but not for persons earning professional income. In order to rationalise the presumptive taxation scheme, reduce the compliance burden on small taxpayers earning professional income, and facilitate ease of doing business, it was proposed to introduce a presumptive taxation regime for professionals.
Accordingly, section 44ADA was proposed to provide for estimation of income of an assessee engaged in any profession referred to in section 44AA(1), such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, or any other profession notified by the Board, whose total gross receipts did not exceed fifty lakh rupees in a previous year. The income was proposed to be estimated at a sum equal to fifty per cent of the total gross receipts or, as the case may be, a higher sum earned by the assessee.
Special provision for computing profits and gains of profession on presumptive basis
Section 44ADA(1) provides as under:
“Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being an individual or a partnership firm other than a limited liability partnership, who is a resident in India and engaged in a profession referred to in section 44AA(1), and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total 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 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’.”
Controversy
Section 44ADA(1), however, contains a drafting variation not found in the Memorandum to the Finance Bill. The provision states that 50 per cent of the gross receipts or “a sum higher than the aforesaid sum claimed to have been earned by the assessee” shall be deemed to be the profits and gains of the profession. This phrase may give rise to differing interpretations.
Departmental Interpretation
The above wording has led some Assessing Officers to view 50 per cent of gross receipts as merely a minimum presumptive income threshold. According to this interpretation, where the facts indicate a higher profit margin, income may be assessed at a figure exceeding 50 per cent of the gross receipts.
This language change has created a common perception in the Assessing Unit that the 50 per cent threshold prescribed under section 44ADA is a minimum limit and that the assessee may be required to declare income at 50 per cent of gross receipts or the actual higher income if the true income is claimed to be higher.
Such an interpretation appears inconsistent with both the language and the legislative intent of section 44ADA. The provision was introduced as a compliance-simplification measure for small professionals. Once the prescribed conditions are satisfied, the statute deems 50 per cent of the gross receipts to be the taxable professional income.
While undisclosed receipts may be brought to tax, the law does not appear to authorise substitution of the statutory presumptive rate with a higher profit percentage on disclosed receipts. The Assessing Unit may end up estimating the income of a professional taxpayer at a rate higher than the prescribed rate of 50 per cent and allow less than the admissible 50 per cent expenditure, which may not be permissible under the law.
The 50 per cent rate is constant. It is neither to be read as a minimum nor as a maximum. It is inflexible and cannot be altered. It is only the gross receipts that may undergo a change where any receipt earned has not been declared by the taxpayer in the return of income, since the section refers to the words “a sum higher than the aforesaid sum”. The expression ‘aforesaid sum’ here may arguably refer to the gross receipts themselves rather than to the deemed income computed at 50 per cent of such receipts.
In other words, the Assessing Unit has no power to assess the gross receipts earned at a rate higher than the statutory rate of 50 per cent. Any contrary view would dilute the certainty and simplicity that presumptive taxation seeks to achieve and would run contrary to the recommendations of the Raja Chelliah Committee that inspired these reforms.