By CA Surekha S Ahuja
Introduction — Presumptive Comfort Stops Where Representation Begins
The presumptive taxation regime under Section 44AD of the Income-tax Act, 1961 was crafted to ease compliance for small independent businesses—those assuming entrepreneurial risk and generating turnover through trading or manufacturing activity. However, the law draws a deliberate boundary: persons carrying on agency business or earning income in the nature of commission or brokerage are excluded from its ambit under Section 44AD(6)(iii).
This exclusion reflects legislative design, not accident. The presumptive scheme presumes business risk, not representational remuneration. Where an assessee earns by acting on behalf of another—without assuming ownership or trading risk—the nature of income changes. It is no longer “business income” of the kind Section 44AD intends to simplify, but “agency income,” where gross receipts do not represent turnover in the commercial sense.
The recent decision of the Income Tax Appellate Tribunal, Bengaluru Bench, in Roshan Mohan v. ITO [[2025] 180 taxmann.com 248] reaffirms this distinction with clarity. The Tribunal held that a Public Relations (PR) and communication agency cannot claim presumptive taxation under Section 44AD, as its operations are agency-based and hence expressly excluded by Section 44AD(6)(iii). Further, a revised return adopting Section 44AD contrary to statutory ineligibility was held invalid under Section 139(5).
This ruling marks a significant reaffirmation of the principle of statutory fidelity—that simplification provisions cannot override express legislative prohibitions.
Factual Background
The assessee, engaged in the business of public relations and communication services, initially filed an income-tax return declaring income of ₹16.44 lakh for Assessment Year 2018–19. The original computation was split as follows:
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Income on part of the turnover was offered under Section 44AD, and
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Balance receipts (on which TDS was deducted under Section 194J) were offered under Section 44ADA as professional income.
Subsequently, the assessee filed a revised return, applying Section 44AD uniformly to the entire business turnover and computing income at 6% thereof. It was contended that Section 44ADA was not applicable and that all receipts arose from a single, integrated business.
The Assessing Officer rejected this revised computation, holding that the assessee’s PR and communication activity was an agency business, falling within the exclusion under Section 44AD(6)(iii). The CIT(A) confirmed this view, leading to an appeal before the Tribunal.
Legal Provisions and Framework
Section 44AD — Presumptive Scheme for Eligible Businesses
Under Section 44AD(1), eligible assessees engaged in eligible business may declare income at 8% (6% for digital receipts) of total turnover up to ₹2 crore, without maintaining detailed books or audit.
However, sub-section (6) carves out clear exclusions, providing:
“The provisions of this section shall not apply to—
(iii) a person carrying on agency business, or a person earning income in the nature of commission or brokerage.”
The legislative purpose is unambiguous — representation-based or facilitative income cannot be equated with entrepreneurial income.
Section 139(5) — Validity of Revised Return
A revised return is intended to correct errors or omissions in the original return. It cannot be invoked to claim benefits contrary to statutory eligibility, nor can it be used to transform the nature of income computation beyond what the law permits.
Tribunal’s Findings
The ITAT Bengaluru Bench, while dismissing the assessee’s appeal, reasoned as under:
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Nature of Business Determinative
The assessee’s activity—managing public relations, communication strategy, and media representation—constituted an agency function on behalf of clients. Such activity is representational in nature, involving no trading or ownership risk. -
Express Exclusion under Section 44AD(6)(iii)
The Tribunal observed that agency businesses are categorically barred from the presumptive scheme. The statutory exclusion is not conditional upon turnover or the type of service, but upon the nature of the relationship between the assessee and the client. -
Invalidity of Revised Return
Since the revised computation sought to apply Section 44AD contrary to this exclusion, the Tribunal held it to be not in conformity with Section 139(5). A revised return cannot be used to substitute an impermissible method of computation. -
Inference from TDS under Section 194J
The clients had deducted TDS under Section 194J, which applies to fees for professional or technical services. This reinforced that the assessee’s receipts were not business turnover, but professional/agency fees, confirming the ineligibility under Section 44AD.
Accordingly, the Tribunal upheld the rejection of the revised return and confirmed the assessment order.
Held: The assessee’s PR/communication business constituted an agency business excluded by Section 44AD(6)(iii); revised return invalid under Section 139(5).
Result: In favour of Revenue.
Interpretation and Analysis — Agency vs. Entrepreneurship
The exclusion of agency business under Section 44AD(6)(iii) is a substantive limitation grounded in the economic distinction between representation and enterprise.
| Parameter | Presumptive Eligible Business (44AD) | Agency/Commission Business (Excluded) |
|---|---|---|
| Ownership of goods/services | Undertaken on own account | Acts on behalf of others |
| Business risk | Entrepreneur bears market risk | Risk borne by principal/client |
| Income nature | Profit from business turnover | Commission or facilitation fee |
| Indicative TDS Section | 194C/194A (contractual/business) | 194H/194J (agency/professional) |
The Tribunal’s decision upholds that presumptive taxation cannot be stretched to cover income streams detached from entrepreneurial risk, as doing so would distort the statutory design and invite misuse.
Jurisprudential Alignment
The ITAT Bengaluru’s reasoning aligns with judicial precedents:
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ITO v. India Fashion Agency [(2019) 110 taxmann.com 51 (Delhi-Trib.)] — Held that commission-based entities are excluded from Section 44AD.
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ACIT v. Surinder Pal Anand [(2010) 192 Taxman 264 (P&H)] — Emphasized that presumptive provisions apply only to independent business activities.
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K.D. Kamath & Co. v. CIT [(1971) 82 ITR 680 (SC)] — Distinguished principal-agent relationships in business law; agency income cannot be equated with business profits.
Professional Learning — Compliance and Advisory Takeaways
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Assess Nature of Engagements:
Classify receipts based on contractual substance. If the assessee merely represents clients, Section 44AD cannot be invoked. -
TDS Code as Indicator:
Where TDS is under Section 194J, income is likely professional/agency-based, not business turnover. -
Avoid Hybrid Computation:
Applying 44AD to part and 44ADA to part of the same activity may invite litigation unless business and professional segments are functionally distinct. -
Revised Return Limitations:
A revised return cannot override statutory ineligibility. It can rectify factual mistakes, not jurisdictional disqualifications. -
Documentation Discipline:
Clearly define whether the business model involves agency representation or independent supply of services; draft client agreements accordingly.
Conclusion — Fidelity to Statutory Design
The ruling in Roshan Mohan v. ITO stands as a timely reaffirmation that presumptive schemes cannot be stretched beyond legislative intent. The comfort of Section 44AD is available only to genuine business owners — those who bear market risk and generate independent turnover.
A PR or communication agency, though commercially active, essentially operates as a representative intermediary. Its income, being professional or facilitative in nature, is outside the framework of Section 44AD and must be offered under normal provisions or, where appropriate, Section 44ADA.
The case reinforces a subtle but essential principle of tax interpretation —
“Presumptive taxation rewards enterprise, not intermediation.”
In taxation, who you represent often determines how you are taxed.
