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Section 44AD(6)

What the Income Tax Act, 1961 reads?
 
"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 in the nature of commission or brokerage; or
(iii)  a person carrying on any agency business."
 
Our Analysis
 
The above amendment has been brought by Finance Act 2012 w.r.e.f A.Y. 2011-12. As regards this amendment, the following needs to be considered:
 
  • So far as Profession is concerned it is well established that Business and Profession are different and hence this section is not applicable in case of Profession and as section 44AD covers only Business, this section was even otherwise not applicable to Profession. This amendment is simply clarificatory in nature and hence even its retrospective applicability is not an issue.
 
  • Further, and significantly so, there was much hue and cry, in the entire sector deriving income in the form of Commission or Brokerage that the provision of 8% is too much and harsh as the margin is much lesser in such business and hence they were compulsorily forced to get their accounts audited.
 
  • Here, it is pertinent to note that in such business, what constitutes Turnover is not the entire Sales or Purchase Value but only the Commission or Brokerage so earned. This view is expressed in the Guidance Note on Tax Audit issued by the ICAI and is by now a trite law from judicial angle as well.
 
  • So, when your Turnover itself is restricted to the commission or brokerage income, where is the question of 8% presumptive rate on turnover, being harsh? Instead it should be a beneficial provision indeed for such business.
 
(However, the intention of Finance Ministry seems to be much different. It can very well be argued that in such business the profitability is much higher than 8% and to stop the assessees from disclosing income @ 8%, this amendment has been made so that the taxability is governed by normal provisions of the Act which would hopefully result in higher income than 8%.)