The CPC has re-cast my client's s.44AD return as a s.44ADA return under s.143(1)(a) because her clients deducted tax under s.194J. Is a consultant a professional for this purpose?
No, on this order. The word 'consultancy' does not appear in s.44AA(1), which speaks of 'technical consultancy', and technical consultancy means the rendering of technical services; a consultant is therefore carrying on a business and may return income under s.44AD. The rate at which a client deducts tax while paying the assessee is of absolutely no relevance to the character of the receipt in the recipient's hands, and the adjustment made by the Assessing Officer and the CPC under s.143(1)(a) was held bad in law.
Decided by the ITAT (Shri Sandeep Singh Karhail, Judicial Member and Shri Gagan Goyal, Accountant Member (Income Tax Appellate Tribunal, Mumbai Bench 'SMC')) on 2022-03-14, reported as I.T.A. No. 782/Mum/2021, Assessment Year 2017-18. It bears on section 44AD, section 44ADA, section 44AA, section 44AA(1), section 143(1)(a), section 143(2), section 194J, section 154 of the Income Tax Act 1961, in Presumptive Taxation & Audit, Assessment & Scrutiny and How Tax Law Is Read matters.
The gateway question — is the activity a profession referred to in s.44AA(1)? — decides both s.44ADA and s.44AD, because s.44AD(6)(i) excludes the same professionals that s.44ADA(1) requires. This order attacks that gateway on two fronts that recur constantly. The first is textual: s.44AA(1) lists legal, medical, engineering and architectural profession, accountancy, technical consultancy, interior decoration, and professions notified by the Board; 'consultancy' at large is not on that list, and the Bench held technical consultancy to mean rendering technical services. The second is evidential: the department's usual proof that the assessee is a professional is that the payer deducted under s.194J, and the Bench rejected that squarely — the payer's choice of TDS section decides nothing about the character of the receipt in the recipient's hands. The third strand is procedural and is worth as much as the other two: a claim cannot be disallowed by prima facie adjustment under s.143(1)(a) for want of evidence, the officer's only course being a notice under s.143(2), so an intimation that re-characterises a return without enquiry is bad in law. The practical limit of the order is that the Bench also thought the returned figure fair on the facts — the assessee had declared Rs 14,66,462 on receipts of Rs 32,40,000, about forty-five per cent — so the relief is not purely a matter of law.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee returned income of Rs 14,66,462 under s.44AD for AY 2017-18 out of total receipts of Rs 32,40,000 from consultancy services, treating the receipts as receipts of a business. The Assessing Officer and the CPC, acting under s.143(1)(a), computed her income at Rs 32,48,462. The Revenue's case was that because her clients had deducted tax at source under s.194J while paying consultancy fees, she was to be treated as engaged in the profession of consultancy rather than in the business of rendering consultancy, and that consultancy was covered by the expression 'technical consultancy' in s.44AA. The assessee's case was that she was engaged in the business of rendering consultancy services and was entitled to return income under s.44AD.
The appeal was allowed and the Assessing Officer directed to accept the returned income of Rs 14,66,462. The action of the Assessing Officer and the CPC under s.143(1)(a) was held bad in law and not sustainable. The rate at which clients deduct tax while making payments to an assessee is of absolutely no relevance in determining the character of the receipt in the recipient's hands or in determining whether the assessee is engaged in business or profession. The expression 'consultancy' does not form part of the professions mentioned in s.44AA, and 'technical consultancy' means only the rendering of technical services (paragraphs 10, 11 and 13).
The Bench first dealt with the prima facie adjustment, holding that an assessee's claim of deduction or relief cannot be disallowed by way of prima facie adjustment under s.143(1)(a) for want of evidence and that the assessee must be given an opportunity to produce the evidence before the claim is adjudicated; where the law requires no evidence to be filed with the return, the officer has no power to reject the claim without calling on the assessee to substantiate it, and additional tax levied on a presumption that there is no evidence is not sustainable. It relied on the Delhi High Court's decision in S.R.F. Charitable Trust v. Union of India [1992] 193 ITR 95 for the proposition that the officer's only option is to require proof by issuing a notice under s.143(2), and concluded that the action under s.143(1)(a) was bad in law. Turning to the character of the receipts, it held that the payer's choice of TDS rate or section is of absolutely no relevance to the character of the receipt in the recipient's hands or to whether the recipient is in business or in a profession. It then set out s.44AA(1), noted that the expression 'consultancy' does not form part of the professions listed there, and held that 'technical consultancy' would only mean rendering of technical services. Having set out s.44AD, it observed that the declared income of Rs 14,66,462 out of receipts of Rs 32,40,000 worked out to around forty-five per cent of gross receipts, which was fair enough, and set aside the orders of the authorities below.
In this regard, we hold that at what rate of tax the clients deduct while making payments to the assessee is of absolutely no relevance to determine the character of receipt in the hands of the assessee recipient and for determining the status of the assessee as to whether he is engaged in business or profession.
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Handle my notice → Ask a CA on WhatsAppNo, on this order. The word 'consultancy' does not appear in s.44AA(1), which speaks of 'technical consultancy', and technical consultancy means the rendering of technical services; a consultant is therefore carrying on a business and may return income under s.44AD. The rate at which a client deducts tax while paying the assessee is of absolutely no relevance to the character of the receipt in the recipient's hands, and the adjustment made by the Assessing Officer and the CPC under s.143(1)(a) was held bad in law. This was decided by the ITAT (Shri Sandeep Singh Karhail, Judicial Member and Shri Gagan Goyal, Accountant Member (Income Tax Appellate Tribunal, Mumbai Bench 'SMC')) and bears on section 44AD, section 44ADA, section 44AA, section 44AA(1), section 143(1)(a), section 143(2), section 194J, section 154 of the Income Tax Act 1961. It is reported as I.T.A. No. 782/Mum/2021, Assessment Year 2017-18. The gateway question — is the activity a profession referred to in s.44AA(1)? — decides both s.44ADA and s.44AD, because s.44AD(6)(i) excludes the same professionals that s.44ADA(1) requires. This order attacks that gateway on two fronts that recur constantly. The first is textual: s.44AA(1) lists legal, medical, engineering and architectural profession, accountancy, technical consultancy, interior decoration, and professions notified by the Board; 'consultancy' at large is not on that list, and the Bench held technical consultancy to mean rendering technical services. The second is evidential: the department's usual proof that the assessee is a professional is that the payer deducted under s.194J, and the Bench rejected that squarely — the payer's choice of TDS section decides nothing about the character of the receipt in the recipient's hands. The third strand is procedural and is worth as much as the other two: a claim cannot be disallowed by prima facie adjustment under s.143(1)(a) for want of evidence, the officer's only course being a notice under s.143(2), so an intimation that re-characterises a return without enquiry is bad in law. The practical limit of the order is that the Bench also thought the returned figure fair on the facts — the assessee had declared Rs 14,66,462 on receipts of Rs 32,40,000, about forty-five per cent — so the relief is not purely a matter of law. If it applies to you, the first step is this: When a s.143(1)(a) intimation moves a return from s.44AD to s.44ADA, take the procedural point first: an adjustment of this kind is a re-characterisation, not a prima facie inadmissibility, and the officer's route is s.143(2).
The assessee returned income of Rs 14,66,462 under s.44AD for AY 2017-18 out of total receipts of Rs 32,40,000 from consultancy services, treating the receipts as receipts of a business. The Assessing Officer and the CPC, acting under s.143(1)(a), computed her income at Rs 32,48,462. The Revenue's case was that because her clients had deducted tax at source under s.194J while paying consultancy fees, she was to be treated as engaged in the profession of consultancy rather than in the business of rendering consultancy, and that consultancy was covered by the expression 'technical consultancy' in s.44AA. The assessee's case was that she was engaged in the business of rendering consultancy services and was entitled to return income under s.44AD. The matter was decided on 2022-03-14 by the ITAT (Shri Sandeep Singh Karhail, Judicial Member and Shri Gagan Goyal, Accountant Member (Income Tax Appellate Tribunal, Mumbai Bench 'SMC')). On those facts the ITAT held as follows. The appeal was allowed and the Assessing Officer directed to accept the returned income of Rs 14,66,462. The action of the Assessing Officer and the CPC under s.143(1)(a) was held bad in law and not sustainable. The rate at which clients deduct tax while making payments to an assessee is of absolutely no relevance in determining the character of the receipt in the recipient's hands or in determining whether the assessee is engaged in business or profession. The expression 'consultancy' does not form part of the professions mentioned in s.44AA, and 'technical consultancy' means only the rendering of technical services (paragraphs 10, 11 and 13).
The Bench first dealt with the prima facie adjustment, holding that an assessee's claim of deduction or relief cannot be disallowed by way of prima facie adjustment under s.143(1)(a) for want of evidence and that the assessee must be given an opportunity to produce the evidence before the claim is adjudicated; where the law requires no evidence to be filed with the return, the officer has no power to reject the claim without calling on the assessee to substantiate it, and additional tax levied on a presumption that there is no evidence is not sustainable. It relied on the Delhi High Court's decision in S.R.F. Charitable Trust v. Union of India [1992] 193 ITR 95 for the proposition that the officer's only option is to require proof by issuing a notice under s.143(2), and concluded that the action under s.143(1)(a) was bad in law. Turning to the character of the receipts, it held that the payer's choice of TDS rate or section is of absolutely no relevance to the character of the receipt in the recipient's hands or to whether the recipient is in business or in a profession. It then set out s.44AA(1), noted that the expression 'consultancy' does not form part of the professions listed there, and held that 'technical consultancy' would only mean rendering of technical services. Having set out s.44AD, it observed that the declared income of Rs 14,66,462 out of receipts of Rs 32,40,000 worked out to around forty-five per cent of gross receipts, which was fair enough, and set aside the orders of the authorities below. In the words reproduced by the source cited on this page: "In this regard, we hold that at what rate of tax the clients deduct while making payments to the assessee is of absolutely no relevance to determine the character of receipt in the hands of the assessee recipient and for determining the status of the assessee as to whether he is engaged in business or profession." The decision followed or applied S.R.F. Charitable Trust v. Union of India [1992] 193 ITR 95 (Delhi) — relied upon.
It was decided by the ITAT on 2022-03-14 and is reported as I.T.A. No. 782/Mum/2021, Assessment Year 2017-18. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 44AD, section 44ADA, section 44AA, section 44AA(1), section 143(1)(a), section 143(2), section 194J, section 154, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed and the Assessing Officer directed to accept the returned income of Rs 14,66,462. The action of the Assessing Officer and the CPC under s.143(1)(a) was held bad in law and not sustainable. The rate at which clients deduct tax while making payments to an assessee is of absolutely no relevance in determining the character of the receipt in the recipient's hands or in determining whether the assessee is engaged in business or profession. The expression 'consultancy' does not form part of the professions mentioned in s.44AA, and 'technical consultancy' means only the rendering of technical services (paragraphs 10, 11 and 13). It arises in Presumptive Taxation & Audit, Assessment & Scrutiny and How Tax Law Is Read matters, on section 44AD, section 44ADA, section 44AA, section 44AA(1), section 143(1)(a), section 143(2), section 194J, section 154 of the Income Tax Act 1961, and was decided by Shri Sandeep Singh Karhail, Judicial Member and Shri Gagan Goyal, Accountant Member (Income Tax Appellate Tribunal, Mumbai Bench 'SMC'). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Test the activity against the actual words of s.44AA(1) rather than against the department's description — 'technical consultancy' is the entry, and it is not satisfied by consultancy that is not technical. Do not let the s.194J deduction be treated as an admission: the argument that the payer's TDS section fixes the character of the receipt was rejected here in terms. Check whether the Board has notified the profession under s.44AA(1); if it has not, the closed list is the whole list. Where the returned presumptive figure is well above eight per cent, say so — it strengthens the case that the return was honest and it is what the Bench relied on in directing acceptance of the returned income.
Validity check could not be completed. Validity check could not be completed. I did not check whether this order has been appealed, followed or doubted. It is a Tribunal order and binds no other Bench. This library already carries Arthur Bernard Sebastine Pais v. DCIT (CPC) on the re-casting of a s.44AD return as a s.44ADA return under s.143(1)(a); the present order is entered for the distinct holding on the meaning of 'technical consultancy' in s.44AA(1) and on the irrelevance of the payer's TDS section, and the two should be read together. The order does not address s.44AD(6)(i), under which the same s.44AA(1) list operates as an exclusion from s.44AD. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two defects in the report should be recorded. First, the paragraph numbering is not continuous: the order carries TWO paragraphs numbered 10 — the first dealing with the comparison of s.154 and s.143(1)(a)(iii) and concluding that the action of the Assessing Officer and the CPC under s.143(1)(a) was bad in law, the second beginning 'We find that the case of the Revenue seems to be...' and dealing with s.194J and technical consultancy. The quote used here is from the SECOND paragraph numbered 10, which was re-read on the indiankanoon docfragment endpoint and came back in identical words. Second, the concluding sentence of paragraph 11 is garbled in the report as printed — it reads 'the expression Consultancy' could not be brought within the ambit of consultancy'' where the sense requires 'technical consultancy' at the end — so that sentence has deliberately not been quoted. The order also refers to the assessee as 'he' in paragraphs 10 and 11 although the appellant is a woman, which is a slip in the report. Paragraph 12 reproduces s.44AD with the two crore ceiling and without any proviso to sub-section (2), consistent with AY 2017-18, but the reproduction also carries the words 'or through such other electronic mode as may be prescribed' in the proviso to sub-section (1), which was inserted only later; that is a mismatch in the report and not a finding. The Bench is described in the header as the Mumbai 'SMC' Bench yet is constituted by two Members. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed and the Assessing Officer directed to accept the returned income of Rs 14,66,462. The action of the Assessing Officer and the CPC under s.143(1)(a) was held bad in law and not sustainable. The rate at which clients deduct tax while making payments to an assessee is of absolutely no relevance in determining the character of the receipt in the recipient's hands or in determining whether the assessee is engaged in business or profession. The expression 'consultancy' does not form part of the professions mentioned in s.44AA, and 'technical consultancy' means only the rendering of technical services (paragraphs 10, 11 and 13).
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Is a notice under s.143(2) a jurisdictional precondition, or merely a procedural step the Assessing Officer can skip?
My return was only processed under 143(1). Does that stop the department reopening it later?
We paid stock exchange transaction charges without TDS. Are those fees for technical services under 194J?
No s.143(2) notice was issued at all. Does s.292BB save the assessment?