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Section 45(2) of Income Tax Act deals with the cases where a capital asset is converted into stock in trade. Whenever a capital asset is converted into stock in trade by an assessee it is deemed as transfer of capital asset and attracts capital gain provisions, in spite of the fact that the ownership of such capital asset doesn’t change by such conversion.

Relevant provisions:

Section 2(47)(iv) while defining the term “Transfer” in relation to a capital asset provides for that it includes “in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment”

Section 45(2): “Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.”

Section 2(22B) defines the Fair Market value in relation to a capital asset as follows:

(i) The price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and

(ii) Where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act

From the above relevant provisions, the following points can be summed up:

Capital Gain shall be computed in the year when such converted asset is sold: Although conversion of a capital asset into stock in trade is treated as transfer in relation to a capital asset but section 45(2) provides that capital gain/loss shall be calculated on such converted asset in the year in which such asset is actually sold.

Cost indexation shall be done till the year of conversion: Although the transfer of capital asset in case of its conversion into stock in trade, is deemed to have taken place in the year of conversion but the capital gain/loss is computed in the year of sale of such asset.

Hence the indexation of cost of acquisition and improvement will be done (in case of long term capital asset) by considering the C.I.I of the year of conversion. In the above example the C.I.I of year 2009-10 will be considered (since it’s the year of conversion) while calculating capital gain/loss in the year 2010-11.

F.M.V to be the sale consideration in case of conversion while calculating capital gains: As per above discussion transfer of capital asset into stock in trade is treated as transfer in relation to capital asset and capital gain/loss is computed in the year of sale of such asset. The question arises in mind that in such case what shall be the sale consideration which is to be used while calculating capital gain/loss. As per section 45(2) the sale consideration will be equivalent to the Fair Market Value of such asset as existing on the date of conversion. F.M.V has been defined u/s 2(22B) as provided above.

Business Income also to be calculated in the year of sale: After the conversion of capital asset into stock in trade of business of assessee, where the Fair Market Value on the date of conversion is  considered as full sale consideration of such capital asset for the purpose of capital gain/loss computation, such fair market value is considered as cost of such asset as converted into stock in trade in the books of accounts and at the time of sale of such stock in trade the sale price (as realized from sale of such stock in trade asset)  will be deducted from the fair market value of such asset as existing on the date of conversion(Since it’s the cost price of stock in trade) and the profit arising therefrom, if any shall be treated as Income U/H business and profession.

Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the form of registration, storage etc. expenses incurred on completing transfer.

Cost of Acquisition with Reference to Certain Modes of Acquisition (Section – 49)

1. Where the capital asset became the property of the assessee:
2. on any distribution of assets on the total or partial partition of a Hindu undivided family;
3. under a gift or will;
4. by succession, inheritance or devolution;
5. on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before 1.04.1987;
6. on any distribution of assets on the liquidation of a company;
7. under a transfer to a revocable or an irrevocable trust;
8. by transfer from its holding company or subsidiary company;
9. by transfer in a scheme of amalgamation;
10. by an individual member of a Hindu Undivided Family giving his separate property to the assessee HUF anytime after 31.12.1 969.

cost of acquisition of the asset shall be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be, till the date of acquisition of the asset by the assessee.

If the previous owner had also acquired the capital asset by any of the modes above, then the cost to that previous owner, who had acquired it by mode of acquisition other than the above, should be taken as cost of acquisition.

2. Where shares in an amalgamated Indian company became the property of the assessee in a scheme of amalgamation the cost of acquisition of the shares of the amalgamated company shall be the cost of acquisition of the shares in the amalgamating company.
3. Where a share or debenture in a company, became the property of the assessee on conversion of bonds or debentures the cost of acquisition of the asset shall be the part of the cost of debenture, debenture stock or deposit certificates in relation to which such asset is acquired by the assessee.
4. Where shares, debentures or warrants are acquired by the assessee under Employee Stock Option Plan or Scheme and they are taken as perquisites u/s 1 7(2) the Cost of Acquisition would be the valuation done u/s 17(2).

The cost of acquisition of the original shares held by the share holder in the demerged company will be reduced by the above amount.

6. Where Capital Gains is not levied on a transfer of capital asset between a Subsidiary Company and a Holding Company or vice-versa but the conditions laid down are violated subsequently and Capital Gains is to be levied, the cost of acquisition to the transferee company would be the cost for which such asset was acquired by it.
7. Where the capital asset is goodwill of a business or a Trade Mark or Brand Name associated with a business, right to manufacture, produce or process any article or thing, right to carry on any business, tenancy rights, stage carriage permits or loom hours, the cost of acquisition is the purchase price paid by the assessee and in case no such purchase price is paid it is nil.
8. Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the Fair Market Value on the date on which the capital asset became the property of the previous owner.
9. Where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation cost of acquisition of such asset is the Fair Market Value of the asset on the date of distribution.
10. Where share or a stock of a company became the property of the assessee on:

• the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares;
• the conversion of any shares of the company into stock;
• the re-conversion of any stock of the company into shares;
• the sub-division of any of the shares of the company into shares of smaller amount; or
• the conversion of one kind of shares of the company into another kind. Cost of acquisition of the share or stock is as calculated from the cost of acquisition of the shares or stock from which it is derived.

11. The cost of acquisition of rights shares is the amount which is paid by the subscriber to get them. In case a subscriber purchases the right shares on renunciation by an existing share holder, the cost of acquisition would include the amount paid by him to the person who has renounced the rights in his favor and also the amount which he pays to the company for subscribing to the shares. The person who has renounced the rights is liable for capital gains on the rights renounced by him and the cost of acquisition of such rights renounced is nil.

12. The cost of acquisition of bonus shares is nil.
13. Where equity share(s) are allotted to a share holder of a recognised stock exchange in India under a scheme of demutualisation or corporotisation approved by SEBI, the cost of acquisition of the original membership of the exchange is the cost of acquisition of the equity share(s). The cost of acquisition of trading or clearing rights acquired under such scheme of demutualisation or corporatisation is nil.
14. Where any other capital asset has become the property of the assessee before 1st day of April, 1981, the cost of acquisition of the asset to the assessee or the previous owner (depending upon the mode of acquisition) or the fair market value of the asset on 1.4.1981, at the option of the assessee would be its cost of acquisition.
15. Where the capital gain arises from the transfer of specified security or sweat equity shares, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account while computing the value of the respective fringe benefit.
16. Where the capital asset, being a share or debenture of a company, became the property of the assessee in consideration of transfer of bonds or debentures or Global Depository Receipts purchased in foreign currency, the cost of acquisition shall be deemed to be that part of the cost of debentures or bond or deposit certificate in relation to which such asset is acquired by the assessee.

Cost of Acquisition of Depreciable Assets [Section 50]:

As already discussed under the chapter on ‘Profits and gains of business and profession’, all depreciable assets except in case of electricity companies are part of block of assets.

Where the full value of the consideration as a result of the transfer of any part or entire block of asset exceeds the cost of acquisition of that block of depreciable assets, there will be a capital gain, which will always be a short-term capital gain. The cost of acquisition of a block of depreciable assets is the written down value of the block at the beginning of the year plus actual cost of any asset falling within the same block, acquired during the year.

In other words, the excess of the sale consideration over the aggregate of the following three amounts shall be the short-term capital gain:

• Expenditure in connection with the transfer;
• The written down value of the block of assets in the beginning of the year;
• The actual cost of any asset falling within the block of asset acquired during the previous year.

As per section 56(1), income of every kind, which is not to be excluded from the total income under this Act, shall be chargeable to income-tax under the head “Income from Other Sources” if it is not chargeable to Income-tax under any of the first four heads specified in Section 14.

In other words, the following conditions must be satisfied before an income can be taxed under the head “Income from Other Sources”:

• There must be an income;
• Such income is not exempt under the provisions of this Act;
• Such income is not chargeable to tax under any first four heads viz., “Income from Salary”, “Income from House Property”, “Profits and Gains of Business or Profession” and “Income from Capital Gain”.

Income from other sources is, therefore, a residuary head of income.

• Building or Land Appurtenant thereto. The scope of this head of income is limited to the income from buildings or lands appurtenant (attached or situated in the vicinity of building) to buildings only. Buildings include residential houses, bungalows, docks, warehouses, any block of bricks or stone work covered by a roof etc. Land which is not appurtenant to any buildings does not come within the scope of this section.
• Annual Value. The meaning of word ‘Annual value’ is very significant because the annual value of the building or land appurtenant thereto is to be taxed and not the rent received. The annual value is to be determined according to the provisions of section 23 of Income-tax Act. These are discussed later in this chapter.
• The Assessee should be the owner of the property. It is only the owner of the house property who can be taxed under this head of income. The tax under this section is in respect of the legal or beneficial owner and not the occupation or possession of house property’. Therefore, income from subletting, will be chargeable under the head ‘Income from other sources’ and not under house property’. So only the owner, may be legal or deemed owner, is liable to tax under this head of income, unless the house property is used by him for the purposes of his own business or profession.
• The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income- tax, shall be chargeable to income tax under the head” Income from house property”.

1) The property should be consisting of any building or land apparent thereto.

• Income from letting vacant land is chargeable to tax under “Income from Other source – Section 56” not under this head “Income from House Property – Section 22”.
• The purpose for which the building is used by the tenant is immaterial. Thus income from letting godown, shop, house, factory, showroom etc will be taxable under this head.

2) The assessee should be the owner of the property

• If the property is sublet by the lessee/tenant then the income from sublet received by the lessee/tenant should be chargeable to tax under “Income from Business/Profession – Section 28”, if the lessee/tenant is carrying on business of letting/subletting otherwise under “Income from Other Sources – Section 56”.
• Deemed Ownership.
• Co-ownership.
• Income from building made by tenant/lessee on leasehold land is taxable under this head.
• If there is any dispute regarding title of the property then the income shall be chargeable to tax in the hand of the recipients of income.

3) The property should not be used for Business/Profession carried on by the assessee himself of which profit is chargeable to tax.

• If the owner of the property is an individual/HUF who is a partner in a firm and such property is used by that firm for carrying of business/profession, then property is considered to be used for business purpose.
• If the property is owned by HUF and any members of the HUF is partner in his individual capacity then income shall be taxable under this head.
• If the property is let out by a person for any purpose which is incidental to business then property is considered to be used for business purpose.
  For Ex :- If an assessee gives his property to his employees, directors etc for purpose incidental to business , whether on rent or otherwise, then income from such property is taxable under “Income from     Business/Profession – Section 28”.
• If propery is given on rent for purpose like for marriage, organising fair etc then it is not taxable under this head but under “Income from Business/Profession – Section 28”
• If property is located outside India then also tax is computed under this head.

4) If the property is used by the assessee for a business of letting of properties then the income derived from such business has to be shown in the head “Income from Business/Profession”. 

STCG ( Short-term capital asset ) An asset held for a period of 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property from FY 2017-18. For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017. 2. LTCG ( Long-term capital asset ) An asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier. Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). The assets are:

1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

Capital asset is held for more than 12 months it shall be treated as long term capital asset

• Equity or preference shares held in a company listed in recognized stock exchange in India
• Any other security listed in recognized stock exchange in India
• Units of UTI (whether quoted or not)
• Units of an equity-oriented fund
• Zero coupon bonds (whether quoted or not)
• Unlisted Equity or preference shares held in a company (if transfer of such shares takes place on or before 10th July, 2014)
• Units of mutual fund specified under section 10(23D) other than equity oriented fund (whether quoted or not, if transfer of such shares takes place on or before 10th July, 2014)

The receipts/incomes which are chargeable to tax under the head Income from Other Sources include the following:

(i) Interest on Bank Deposits, Loans or Company Deposits, Securities

(ii) Income from letting out of Machinery, Plant or Furniture etc. and also land which is inseparable from such machines, plant or furniture (if it is not chargeable as income from business/profession)

(iii) Any sum received under Key-man Insurance Policy including Bonus, if not charged under the head “Business or Profession” or “Salary”.

(iv) Winning from Lotteries, Crossword Puzzles, Races including Horse Races, Card Games and Other Games of any sort or from Gambling or Betting of any form or nature etc.

(v) Any sum received by employer from his/her/it’s employees as contributions to any provident fund or Superannuation fund or fund under ESI Act or any other fund for the welfare of such employees, but not deposited in the employee’s a/c by the due date of deposit.

(vi) When a closely held company issues its shares at a price which is more than its fair market value, the amount received by the company in excess of fair market value.

(vii) Income by way of Interest received on compensation or on enhanced compensation.

(viii) Any sum of money received by the transferor as an advance or otherwise in the course of negotiations for transfer of a capital asset which is not finally transferred and such advance is forfeited due to breach of contract on the part of transferee.

(ix) Any sum exceeding Rs.50,000/- received by any person without any consideration.

(x) For transfer of immovable property whose stamp value exceeds Rs. 50,000

a) The whole of stamp value, if consideration for transfer is nil; and

b) Where the stamps value is less than the consideration paid, the difference between the stamp value and the consideration paid is treated as income of the seller.

(xi) For transfer of movable property whose fair market value exceeds Rs. 50,000

a) The whole of fair market value, if consideration for transfer is nil; and

b) Where the fair market value is less than the consideration paid, the difference between the fair market value and the consideration paid is treated as income of the seller.

However, the sum of money or any other property received from any relative [means Spouse/ Brother/ Sister/ Brother or Sister of the Spouse/ Brother or Sister of either of the Parents/Any Lineal Ascendant or Descendant/ Any Lineal Ascendant or Descendant of the Spouse/ of the Individual] or on the occasion of marriage of the individual or under a will or inheritance or in contemplation of death of the payer/donor or from any local authority [as per section 10(20)] or from a fund/foundation/university/other educational institution/hospital/medical institution/any trust, institution referred to in clause(23C) of section 10 or any trust, institution registered u/s. 12AA, or from an individual by a trust created or established solely for the benefit of relative of the individual shall not be treated as an income from other sources.

(xii) Any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto.

(xiii) Family Pension (received by legal heirs of an employee).

(xiv) Income from sub-letting of house property by a tenant.

(xv) Agricultural income from agricultural land situated outside India.

(xvi) Interest received from Income Tax department on delayed refunds.

(xvii) Remuneration received by Members of Parliament

(xviii) Casual Receipts and Receipts of non-recurring nature.

(xix) Income from Royalty, Insurance Commission

(xx) Examiner-ship Fees received by a teacher (not from employer).

(xxi) Director’s Commission for Standing as Guarantor to Bankers.

(xxii) Dividend on shares (if dividend distribution tax has not been paid.)

• Rent, rates, taxes, repairs and insurance for owned buildings as well as buildings taken on rent (Section 30)

It is to be noted that the above-mentioned expenditure shall not be the Capital Expenditure.

• Repairs and insurance of machinery, plant and furniture (Section 31)

 It is to be noted that the above-mentioned expenditure shall not be the Capital Expenditure.

• Depreciation on capital assets (Section 32):

All assessee can claim the depreciation on capital assets as deduction under this section. The condition to claim the deduction is :

(i) Asset must be owned by the assessee or if asset is on lease then assessee can claim the depreciation on cost incurred upon the improvement or renovation etc.

(ii) Asset must be used for business purpose, if asset is used partly for residential purpose and partly for business purpose, then deduction available of depreciation on asset use for business purpose.

• Expenditure on Scientific Research (Section 35)
• Amortisation of preliminary Expenses (Section 35D):

If an Indian company or resident non-corporate assessee have incurred some expenses before the commencement of the business is eligible to take deduction after the commencement of the business by amortised the amount in each year.

• Premium paid in respect of insurance against risk of damage or destruction of stocks / stores used for business or profession [Section 36(1)(i)]
• Medical Insurance paid by the employers [Section 36(1) (ib)]
• Bonus or commission paid to employees [Section 36(1)(ii)]
• Interest on borrowed Capital [Section 36(1)(iii)]:

If an assessee has taken the business or profession loan, then he is eligible to take the deduction of interest amount paid on such borrowing under this section.

• Contributions to recognized provident fund and superannuation fund [Section 36(1)(iv)]
• Contributions to approved gratuity fund [Section 36(1)(v)]
• Employees contributions to staff welfare schemes [Section 36(1)(va)]
• Bad Debts [Section 36(1)(vii)]
• Banking Cash Transaction Tax [Section 36(1)(xiii)]
• Securities Transaction Tax [Section 36(1)(xv)]
• Commodities Transaction Tax [Section 36(1)(xvi)]
• Any Other Expenses not being personal or capital expenditure mentioned under section 30 to 36 of Income Tax Act, incurred wholly and exclusively for business (Section 37(1))
• Expenditure on Advertisement (Section 37(2B)):

If any expenditure is incurred in respect of advertisement of any political party is not allowed as deduction under income tax. Any other expenses related to advertisement can be claimed as deduction.

Recovery against any Allowance or Deduction Allowed earlier [Section 41(1)]

(A) Recovery by the same assessee [Section 41(1)(a)]:

Where an allowance or deduction has been made in the assessment for any year in respect of

• Loss
• Expenditure
• Trading Liability

incurred by the assessee and subsequently, during any previous year, he (the same assessee) has obtained, whether in cash or in any other manner, whatsoever:

• Any amount in respect of such loss or expenditure; or
• Some benefit in respect of such trading liability by way of remission or cessation thereof,

then, the amount obtained by the assessee or the value of benefit accruing to him shall be deemed to be profit and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year.

It may be mentioned that the business or profession, in respect of which the allowance or deduction has earlier been made, may or may not be in existence in the previous year in which such amount is obtained or the benefit accrued to him.

(B) Recovery by the Successor in Business or Profession [Section 41(1)(b)]:

If in the above case, instead of the assessee, the successor in business has obtained, whether in cash or in any other manner whatsoever:

• Any amount in respect of which loss or expenditure was incurred by the predecessor; or
• Some benefit in respect of trading liability referred to in clause (a) above by way of remission or cessation thereof,

the amount obtained by successor in business or the value of benefit accruing to the successor in business shall be deemed to be income under the head profits and gains from business or profession of the successor of that previous year.

Sale of Assets used for Scientific Research [Sec. 41(3)]:

Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds, together with the amount of deduction allowed under section 35, exceeds the amount of the capital expenditure, such surplus or the amount of deduction allowed, whichever is less, is chargeable to tax as business income in the year in which the sale took place.

Recovery of Bad Debts [Sec. 41(4)]:

Where any bad debt has been allowed as deduction under section 36(1)(vii) and the amount subsequently recovered on such debt is greater than the difference between the debt and the deduction so allowed, the excess realisation is chargeable to tax as business income of the year in which the debt is recovered.

Amount withdrawn from Special Reserve created and maintained by certain Financial Institutions [Sec. 41(4A)]:

Where a deduction has been allowed in respect of any special reserve created and maintained under section 36(1)(viii), by certain financial institution, etc. if any amount is subsequently withdrawn from the special reserve, it shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn, whether the business is in existence in that previous year or not.

Recovery of any sum in case of Discontinued Business [Section 176(3A)]:

Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.

Recovery of any sum in case of Discontinued Profession [Section 176(4)]:

Where any profession is discontinued in any year on account of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been received before such discontinuance.

According to section 29, the profits and gains of a profession are to be computed in accordance with the provisions contained in sections 30 to 43 D. It must, however, be remembered that in addition to the specific allowances and deductions stated in sections 30 to 36, the Act further permits allowance of items of expenses under the residuary section 37(1), which extends the allowance to items of expenditure not covered by sections 30 to 36, where these are allowable according to accepted commercial practices.

Profession means exploitation of ones skills and knowledge independently. Profession includes vocation.

Professional Income is income from exercise of any profession or vocation which calls for an intellectual or manual skill. It covers doctor, lawyers, accountants, consulting engineers, artists, musicians, singers etc.

The expression ‘Profession’ has been defined in Section 2(36) of the Act to include any vocation. In the case of a profession, the definition given in the Act is very much inadequate since it does not clearly specify what activities constitute profession and what activities do not.

According to the generally accepted principles, the meaning of the term ‘profession’ involves the concept of an occupation requiring either intellectual skill or manual skill controlled and directed by the intellectual skill of the operator.

For instance, an auditor carrying on his practice, the lawyer or a doctor, a painter, an actor, an architect or sculptor, would be persons carrying on a profession and not a business.

The common feature in the case of both profession as well as business is that the object of carrying them out is to derive income or to make profit. The process of making the profit would be the main area of difference between the two while the ultimate object is common to both

Profession [Section 2(36)]

A profession is an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, e.g., lawyer, accountant, engineer, surgeon, author etc. So, profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill. Under section 2(36) profession includes vocation.

Vocation simply means a way of living for which one has special fitness. A vocation does not involve any organized or systematic activity like business. So vocation simply means any type of activity in which a person is engaged and he earns his livelihood from such activity. The practice of a religion may also amount to vocation. Writing of articles in the magazines is also a vocation.

Profession involves an exercise of intellect and skill based on learning and experience. It requires purely intellectual skill or manual skill on the basis of some special learning.

Profession includes services provided by the professionally qualified or technically qualified person according to their qualification.

There are certain basic rules that apply when you are assessing your taxable income from profession, these are as follows:

(i) Continuation of Profession

The chargeability to tax under Section 28 is based primarily upon the condition that the assessee must have carried on a profession at any time during the accounting year, though not necessarily throughout the accounting year.

(ii) Existence of continuity in the business or profession is not an essential condition

The existence of continuity in the profession is not an essential condition for making the assessee liable to tax under this head. Thus, receipts arising from the exercise of a profession would still be chargeable to tax under this head although they may be both casual and non-recurring in nature.

(iii) Profession must be carried on during the previous year

Income is chargeable under the head “Profits & gains of business or profession” only if the business is carried on by the assessee during the previous year. It is not necessary that the business should continue throughout the year or till the end of previous year.

Maintenance of books of accounts

Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act. [Section 44AA(1)]

Professionals carrying on the professions are required to maintain books of accounts in accordance with Rule 6F of the Income tax Rules.

Books of account [Rule 6F]

BOOKS OF ACCOUNT AND OTHER DOCUMENTS TO BE KEPT AND MAINTAINED UNDER SECTION 44AA(3) BY PERSONS CARRYING ON CERTAIN PROFESSIONS.

6F. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and maintain the books of account and other documents specified in sub-rule (2):

Provided that nothing in this sub-rule shall apply in relation to any previous year in the case of any person if his total gross receipts in the profession do not exceed one lakh fifty thousand rupees in any one of the three years immediately preceding the previous year, or, where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount.]

(2) The books of account and other documents referred to in sub-rule (1) shall be the following, namely:

Explanation : In this rule,—

Professionals in legal, medical, engineering, architecture, accountancy, technical consultancy and interior decoration have to maintain books of accounts. Sec 44AA casts an obligation on an individual or HUF carrying on business or profession, other than these professions, to maintain books of accounts and documents provided that the income and total sales, turnover or gross receipts, exceeds Rs 2.5 lakh and Rs 25 lakh, respectively.

Compulsory Audit: Sec. 44AB

Individuals and HUFs have to get their accounts audited if their total sales, turnover or gross receipts from their business exceed Rs 2 crore and gross receipts from his profession exceed Rs 50 lakh. Penalty leviable u/s 271B for failure to get accounts audited or to furnish a report of such audit is up to Rs 1.5 lakh.

Sec 271J provides for a penalty on an accountant, merchant banker or registered valuer who furnishes incorrect information in a report or certificate. The amount of penalty is Rs 10,000 for each such inaccurate report or certificate.

The section 44ADA is as follows:

44ADA. (1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA 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”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

Eligible Profession: The presumptive taxation scheme under section 44ADA for estimating the income of an assessee:

• who s engaged in any profession referred to in section 44AA(1 ) such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette; and
• whose tota gross receipts does not exceed fifty akh rupees in a previous year

Profession referred to u/s 44AA(1): Every person carrying on:

• Legal
• Medical
• Engineering
• Architectural Profession
• The Profession of Accountancy
• Technical Consultancy
• Interior Decoration
• Any Other Profession as Is Notified by The Board In The Official Gazette

Other notified professions:

(a) The profession of authorized representative; and

(b) the profession of film artist (actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue writer and dress designer)

(c) the Profession of Company Secretary

(d) the Profession of Information Technology

Meaning of authorised representative:

Explanation to Rule 6F

Authorised representative means a person who represents any other person, on payment of any fee or remuneration before any Tribunal or authority constituted or appointed by or under any law for the time being in force, but does not include an employee of the person so represented or a person carrying on legal profession or a person carrying on the profession of accountancy.

Eligible Business-Financial consultancy

EXAMPLE : An Individual who is doing financial consultancy business and the service receiver while he is paying service charge, he is deducting TDS u/s 194 J. Whether he can offer income u/s 44ADA?

1. No. Sec. 44ADA will be applicable only to the Notified Professions. It is a inclusive definition, it doesn‘t cover financial consultancy business, hence he can‘t offer income u/s 44ADA.

Presumptive rate of income: Presumptive rate of income would be a sum equal to 50% of the total gross receipts, or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee.

No further deduction would be allowed:  Section 44ADA (2): Under the scheme, the assessee will be deemed to have been allowed the deductions under section 30 to 38. Accordingly, no further deduction under those sections shall be allowed.

Written down value of the asset:  Section 44ADA(3):The written down value of any asset used for the purpose of the profession of the assessee will be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of depreciation for the relevant assessment years.

Maintenance of books of accounts and audit:

A very interesting issue is that whether a professional who has opted presumptive system of taxation has to maintain books of account also. To resolve this issue firstly we have to see the provisions of section 44AA(1) of the Act given earlier in this book.

From the perusal of above section, it is clear that it is mandatory for the professional who is covered under Section 44ADA to maintain books of accounts even though he has opted for the presumptive taxation scheme. Although, the Memorandum to the Finance Bill, 2016 provides that an assessee opting for Section 44ADA would not be required to maintain books of account under Section 44AA(1), the same has not been brought out clearly in the Section 44AA. Section 44AA is silent in relation to the assessee who is covered by Section 44ADA. Moreover the provisions of Sec 44ADA overrides sec 28 to 43C and not sec 44AA of the Act. Hence, on combined reading of 44AA(1), 44AA(3) read with Rule 6F, the specified professionals would need to maintain books of account even if they opt for section 44ADA.

However, as per the FAQs on presumptive taxation issued by Income Tax Department provides that if assessee declares income u/s 44ADA, there is no need to maintain books of account. The FAQ issued is provided here

“If a person adopts the presumptive taxation scheme of section 44ADA, then he is required to maintain books of account as per section 44AA?

In case of a person engaged in a specified profession as referred in sections 44AA(1) and opts for presumptive taxation scheme of sections 44ADA, the provision of sections 44AA relating to maintenance of books of account will not apply. In other words, if a person opts for the provisions of sections 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of Specified profession.

From the above FAQ it can be concluded that person opting for sec 44ADA would not be required to maintain books of account. However, the FAQs do not have any legal backing and it may change in future.

Option to claim lower profits:Section 44ADA(4): An assessee mayclaim that his profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under section 44ADA(1); and if such total income exceeds the maximum amount which is not chargeable to income-tax, he has to maintain books of account under section 44AA and get them audited and furnish a report of such audit under section 44AB.

Issues related to Sec 44ADA:

• Applicability of Section 44ADA to a partner of firm receiving remuneration and/or interest from the firm

A very interesting is that whether the provisions of Section 44ADA shall be applicable to the remuneration and other receipts by a partner from a professional services firm? In this connection, it is to be noted that the Income Tax Act, 1961 vide Section 40(b) states that the firm is eligible to claim remuneration as deduction to the extent specified therein and such remuneration is deductible in hands of the firm. The balance amounts are subjected to tax as profits in the hands of the firm. In other words, the eligible remuneration is deductible in the hands of firm and taxable in hands of partners, the remainder (profit) is taxable in hands of the firm and exempted in the hands of partners u/s 10(2A).

Hence, in the hands of the partner, the following will be the impact:

1. Remuneration which was allowed as deduction in firm will be taxable
2. Profit which was taxed in the hands of the firm will be exempt.