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Facts
The assessee, engaged in commission and consultancy income, declared income under Section 44ADA. The Assessing Officer (AO) disallowed this, treating commission income of Rs. 4,55,000 as income from other sources. A gift of Rs. 1,41,500 from his sister was also examined.
Held
The Tribunal held that commission income does not fall under the professions covered by Section 44ADA, hence the AO's action to assess it as income from other sources is upheld. However, regarding the commission income, only net income after expenditure is taxable, and the matter was restored to the AO for verification of expenditure. The gift from the sister was held to be not taxable.
Key Issues
Whether commission income can be taxed under Section 44ADA and whether a gift from a relative is taxable.
Sections Cited
44ADA, 56, 57, 56(2)(x)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘SMC’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The present appeal has been instituted by the assessee against the order of the Ld. CIT(A) u/s 250 of the Act dt. 05.11.2019.
The assessee in the memo of appeal raised multiple grounds numbered 1 to 6, which we, for the sake of brevity are not inclined to reproduce here.
The brief facts of the case are that the assessee, an individual, is engaged in the business of earning commission and consultancy income and deriving income from letting out house property. For the assessment year under consideration, the assessee filed the return of income declaring a total income of ₹3,87,620/- which comprises of Income from house property of Rs. 1,42,847/-, Commission Income & Consultancy receipts declared as professional income u/s 44ADA of the Act to the tune of Rs. 3,71,500 (being 50% of gross receipts of Rs. 7,43,000/-). The gross total income of the assessee worked out to Rs. 5,14,347/- and assessee claimed deduction u/c VI-A to the tune of Rs. 1,27,085/. The case was selected for complete scrutiny under CASS to examine large- value cash deposits made during the demonetization period. Regarding the source of cash deposits, the assessee submitted that he had earned commission income of ₹455,000 from M/s. S.A. Plywood Industry, had received a sum of ₹1,41,500 as a gift from his sister, and had also deposited personal savings amounting to ₹1,03,500 only. In support of the commission income, the assessee furnished a declaration from M/s. S.A. Plywood Industry stating that such commission was paid to him in cash. With regard to the gift received from his sister, the assessee submitted a declaration to the effect that the cash gift was given out of love and affection, along with the PAN details and bank statement of the sister.
3.1 It was explained that both the aforesaid amounts were received in cash and, therefore, the assessee deposited the same into his bank account during the demonetization period. The assessee further stated that he had opted for the presumptive scheme under section 44ADA of the Act in respect of the commission income and accordingly declared .
50% of the gross receipts of ₹7,43,000, amounting to ₹3,71,500, as taxable professional income.
3.2 However, the Assessing Officer did not accept the contention of the assessee regarding the offering of commission income under section 44ADA of the Act, holding that the said provision does not permit commission income to be brought to tax under the presumptive scheme. The Assessing Officer accordingly proceeded to assess the commission receipts of Rs. 4,55,000 under the head “Income from Other Sources” under section 56 of the Act.
Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld. CIT(A) who held that the commission income earned by the assessee is out of scope of section 44ADA of the Act.
Aggrieved by the order of Ld. CIT(A), the assessee preferred an appeal before us.
The Ld. AR before us submitted that the Ld. CIT(A) erred in treating commission income of ₹4,55,000 as “Income from Other Sources”, even though the said amount already formed part of the gross receipts of ₹7,43,000 declared by the assessee under section 44ADA of the Act. It was contended that such treatment has resulted in double taxation of the very same income.
6.1 Without prejudice to the above, the Ld. AR further submitted that even if such receipts are held to be taxable under the head “Income from Other Sources” under section 56 of the Act, the assessee ought to . have been allowed corresponding business expenditure under section 57 of the Act. It was argued that around 50% of the receipts represent the average business expenditure incurred in earning such commission income and, therefore, the same should be granted as deduction while computing the taxable income.
On the hand, the Ld. DR strongly supported the order of the Ld. CIT(A) and submitted that the commission income of ₹4,55,000 was rightly assessed under the head “Income from Other Sources”. It was argued that the assessee failed to establish that the said commission income was derived from the profession declared under section 44ADA of the Act. Mere inclusion of the amount in gross receipts does not automatically make it eligible for presumptive taxation unless the nature of income squarely falls within the scope of section 44ADA.
7.1 With respect to the alternative claim for deduction under section 57, the Ld. DR submitted that the assessee failed to furnish any evidence whatsoever in support of the alleged expenditure. The claim of 50% expenditure was purely ad hoc, unsubstantiated, and based on conjectures. It was emphasized that deductions under section 57 are allowable only on actual expenditure laid out wholly and exclusively for earning such income, which the assessee failed to prove. Accordingly, the Ld. DR prayed that the order of the Ld. CIT(A) be upheld, and the appeal of the assessee be dismissed.
We have carefully considered the rival submissions and perused the materials available on record. The limited issue before us is regarding two things as follows:
(i) Whether the commission income can be offered to tax under presumptive scheme of section 44ADA; and (ii) Whether the gift received from relative is taxable 8.1 It is an admitted position that the assessee deposited cash during the year was explained as commission income of ₹4,55,000, gift from his sister amounting to ₹1,41,500 and other business receipts of ₹1,46,500, aggregating to ₹7,43,000. The assessee furnished confirmation from M/s. S.A. Plywood Industry in support of the commission income and also placed on record confirmation, PAN and bank statement of the sister in respect of the gift.
8.2 Before examining the claim of the assessee under section 44ADA, it is necessary to briefly note the scope and scheme of the said provision. The presumptive taxation scheme originally existed only for business income. With a view to extend similar relief to professionals and to reduce the compliance burden of small taxpayers earning professional income, section 44ADA was introduced in the Act by the Finance Act, 2016 with effect from 1 April 2017.
8.3 Section 44ADA applies to an assessee engaged in any of the professions referred to in section 44AA(1), such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession notified by the CBDT, whose gross receipts do not exceed ₹50 lakh in a previous year, which limit has since been increased to ₹75 lakh by the Finance Act, 2023, subject to prescribed conditions. The scheme is available only to individuals and partnership firms and does not extend to limited liability partnerships. An assessee opting for this scheme is not required to maintain books of . account or get them audited. However, where the assessee claims that his income from profession is less than 50% of the gross receipts, he is required to maintain books of account and get them audited under section 44AB of the Act. It is also noticed that in practice the professional receipts may be applied for business purposes, personal use or capital accretion and, therefore, the presumption of 50% income cannot mechanically apply in every case and must be examined in the light of the facts on record.
8.4 Applying the above statutory framework to the facts before us, we find that the assessee has not demonstrated whether he was carrying on any profession specified in section 44AA(1) or not. The activity carried on by the assessee is earning commission income, which, by itself, does not fall within the notified categories. Accordingly, the assessee was not entitled to opt for section 44ADA of the Act and to that extent the action of the Assessing Officer in rejecting the applicability of the presumptive scheme is upheld.
8.5 In so far as the amount of ₹1,41,500 received from the sister is concerned, the relationship is not in dispute, and the assessee has produced documentary evidence in support of the same. The said receipt is therefore covered by the exclusion provided in section 56(2)(x) of the Act and cannot be brought to tax.
8.6 With regard to the commission receipts of ₹4,55,000, even though the same is liable to be assessed under the head “Income from Other Sources”, only the net income can be subjected to tax and not the gross receipts. The assessee has claimed that approximately 50% of . such receipts represent the average expenditure incurred for earning the said income. In principle, we accept that reasonable expenditure is required to be allowed while computing income under section 56 read with section 57 of the Act. However, since the exact quantum of expenditure has not been properly examined by the lower authorities, we deem it appropriate to restore the matter to the file of the Assessing Officer for the limited purpose of verifying the claim of expenditure and recomputing the taxable income in accordance with law. While doing so, the Assessing Officer shall grant reasonable opportunity of being heard to the assessee and shall consider the claim of expenditure on the basis of evidence produced. For guidance, we note that the assessee has claimed that about 50% of the receipts represent expenditure; the Assessing Officer may take the said percentage as a prima facie benchmark, subject to verification.
8.7 The addition made on account of the gift of ₹1,41,500 from the sister stands deleted. The addition relating to commission receipts of ₹4,55,000 are set aside to the file of the Assessing Officer for limited verification in terms of the above directions.
8.8 Since the assessee had earlier included the gift amount of ₹1,41,500 while computing presumptive income and paid tax thereon, the Assessing Officer shall, while giving effect to this order, exclude the said amount from computation and grant consequential relief, including refund, if any, in accordance with law.
8.9 In view of the relief granted on the principal additions, we do not adjudicate the remaining grounds at this stage and the same are left open.
In the result, the appeal of the assessee is partly allowed for statistical purposes.