Section 44AD vs. 44ADA: Why taxpayers are facing scrutiny on TDS under Section 194J

Taxpayers and professionals are increasingly finding themselves under the scanner of the Income Tax Department (ITD) due to a mismatch between TDS deducted under Section 194J and the presumptive taxation scheme chosen in their income tax return.

Tax expert CA Himank Singla recently pointed out that scrutiny cases are being triggered when substantial receipts appear in Form 26AS with TDS under Section 194J, but the taxpayer reports income under Section 44AD (Presumptive Business) instead of Section 44ADA (Presumptive Profession). This, he said, has emerged as another “practical pain point” for taxpayers and professionals alike.

In such cases, the ITD is questioning why the income should not be taxed under Section 44ADA, which applies to specified professionals at a presumptive rate of 50% of gross receipts. Tax officers are demanding extensive documentation, including:

Full books of accounts (Balance Sheet, P&L, capital account)

Bank statements with narrations for all credits and debits

Proof of source for cash deposits and credits

Office address proof, trade license, and year-on-year comparisons

Party-wise reconciliation of Form 26AS, ITR, and TDS credits

This has left many small taxpayers anxious, though experts clarify that the situation is not as alarming as it may appear.

Understanding the law

The confusion stems from the interaction of three different provisions:

Section 44AD (Presumptive Business): Applies to eligible businesses (excluding specified professions, commission, brokerage, or agency income) with turnover up to Rs 2 crore (or Rs 3 crore if 95% of receipts are digital). Income is presumed at 8% of turnover (6% for digital payments).

Section 44ADA (Presumptive Profession): Applies only to specified professionals under Section 44AA (such as doctors, lawyers, architects, engineers, accountants) with receipts up to Rs 75 lakh. Income is presumed at 50% of gross receipts.

Section 194J (TDS on Professional/Technical Fees): Mandates TDS deduction on payments for professional services, technical services, royalty, non-compete fees, and director remuneration (other than salary). Importantly, Section 194J is not restricted only to specified professions—it applies broadly to any professional or technical service payments.

This means that just because TDS is deducted under Section 194J, it does not automatically mean that the taxpayer must file under Section 44ADA. The correct section depends on the nature of the taxpayer’s income, not the section under which TDS has been deducted.

The mismatch problem

Explaining the issue, Anita Basrur, Partner at Sudit K. Parekh & Co. LLP, said: “The Income Tax Act provides separate rules for tax deduction and for income computation. The TDS under Section 194J is applied by the payer depending on the nature of the payment, but the taxpayer’s choice of presumptive scheme depends on the actual nature of their own income. Where this does not align—for instance, TDS under Section 194J but filing under Section 44AD—the system may flag the case for scrutiny.”

It is understood that the tax department uses automated systems to compare TDS entries in Form 26AS with the income heads reported in the ITR. If 194J entries are high, the system presumes that 44ADA applies, leading to queries when the taxpayer opts for 44AD.

What taxpayers should do

Tax experts emphasize that taxpayers should not panic. If their business is genuinely eligible for Section 44AD, they are fully entitled to use that scheme, even if TDS has been deducted under Section 194J. The key is to explain the position clearly and provide supporting evidence.

In response to ITD notices, taxpayers should be prepared to:

Explain the nature of their business and why it qualifies under Section 44AD.

Provide relevant business proofs—licenses, invoices, and contracts.

Submit reconciliations between receipts in 26AS, bank accounts, and reported turnover.

Highlight that the classification under Section 44AD is based on law, not the payer’s choice of TDS section.

By clarifying these points, taxpayers can effectively resolve the mismatch and avoid adverse tax treatment.

What does this mean

The scrutiny of cases involving Section 194J TDS and presumptive taxation has exposed a compliance gap between TDS deduction rules and presumptive income provisions. While Section 194J casts a wide net, Section 44ADA is limited to specified professions, and many taxpayers rightly fall under Section 44AD despite having 194J deductions.

As CA Himank Singla noted, this mismatch is a practical pain point—but not an insurmountable one. With proper explanation and documentation, taxpayers can defend their position and continue to avail the benefits of presumptive taxation under Section 44AD where applicable.