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Changes in Section 44ADA to exclude HUF by Amendment to Finance Bill 2021

changes-in-section-44ada-to-exclude-huf-by-amendment-to-finance-bill-2021

Finance Bill, 2021 as introduced in the Lok Sabha on 1st February 2021 has amended the provisions of Section 44ADA of the Income Tax Act, 1961 (“Act”) to restrict LLP from availing the benefits of presumptive taxation scheme under that section. This was done by amending section 44ADA to provide that income can be declared under section 44ADA only by a resident person being an individual,  Hindu undivided family or a partnership firm other than a  limited liability partnership (LLP).


Finance Bill, 2021 has rationalised the provisions of presumptive taxation for professionals under section 44ADA.


Section 44ADA of the Act relates to special provision for computing profits and gains of profession on a presumptive basis. Sub-section (1) of the said section provides that notwithstanding anything contained in sections 28 to 43C, in case of an assessee, being a resident in India 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.


The provisions of section 44ADA of the Act were made applicable to an individual, Hindu undivided family (HUF) and partnership firm but not a Limited Liability Partnership (LLP) as defined under clause (n) of sub-section (1) of section 2 of Limited Liability Partnership Act, 2008. This is the reason that LLPs are required to maintain books of accounts in any case under LLP Act.



It is proposed to make this position clear in the law. 


Hence it is proposed to amend sub-section (1) of section 44ADA of the Act to provide that the provision of this section shall apply to an assessee, being an individual, HUF or partnership firm, not being an LLP as defined under clause (n) of sub-section (1) of section 2 of Limited Liability Partnership Act, 2008. All other provisions like being a resident in India 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, shall remain same.



For this purpose an amendment was proposed by the Finance Bill, 2021 originally vide clause 12 as under-


Amendment of section 44ADA. 


12. In section 44ADA of the Income-tax Act, in sub-section (1), for the words “in the case of an assessee, being a resident in India, who”, the words, brackets, letter and figures “in case of an assessee, being an individual, Hindu undivided family or a partnership firm other than a limited liability partnership as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, who is a resident in India, and” shall be substituted.


It appears that the wordings of above restriction were inspired from the provisions of section 44AD. There is a difference between section 44AD and section 44ADA. Section 44AD applicable to business income whereas section 44ADA applies to Professional Income. Hence, a HUF can carry on business so as to opt for section 44AD but a HUF cannot carry on a profession. However, as per the original Finance Bill, 2021 introduced in the LokSabha wrongly allowed HUF to opt for section 44ADA.


Though the intention was to restrict LLPs from claiming the benefit of ection 44ADA since LLPs are compulsorily required to maintain books of accounts, the original proposed amendment inadvertently allowed HUF to take the benefit of section 44ADA which is not possible.


This has been corrected in the Finance Bill 2021 as passed by the Lok Sabha on 23.03.2021 by once again amending the proposed amendment in the original or initial Finance Bill, 2021.


The final proposed amendment to section 44ADA as per Clause 14 of the Finance Bill, 2021 as passed by the LokSabha is reproduced below-


Amendment of section 44ADA


14. In section 44ADA of the Income-tax Act, in sub-section (Z), for the words “in the case of an assessee, being a resident in India, who”, the words, brackets, letter and figures “in case of an assessee, being an individual or a partnership firm other than a  limited liability partnership as defined under clause (n) of sub-section (7) of section 2 of the Limited Liability Partnership Act, 2008, who is a resident in India, and” shall be substituted.


This time, the words ‘Hindu undivided family’ is omitted.


As per the changes proposed by clause 14 of the Finance Bill, 2021 as passed by the Lok Sabha seeks to amend section 44ADA of the Income-tax Act relating to special provision for computing profits and gains of profession on a presumptive basis. 


Sub-section (1) of the said section provides that notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India 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 of profession”. 


It is now proposed to amend the said sub-section so that the assessee referred to therein shall, inter alia, mean an individual or a partnership firm other than a Limited Liability Partnership (LLP) as defined under clause (n) of sub-section (1) of section 2 of Limited Liability Partnership Act, 2008. 


Thus, Hindu Undivided Family (HUF) is excluded from the eligibility of opting presumptive taxation scheme under section 44ADA. This ambiguity in the initial introduced Finance Bill is cured in the passed Finance Bill, 2021.


This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.


Read more Articles on Finance Bill, 2021

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Download Finance Bill, 2021 as introduced in Loksabha

Download Memorandum Explaining the Provisions in the Financial Bill 2021

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