By CA Naresh Jakhotia

Tax litigation often begins with a serious legal question but somewhere along the way turns into a comedy of assumptions.

One such recurring drama is now unfolding in scrutiny proceedings across the country — whether deduction of TDS under Section 194J automatically means the taxpayer must be taxed under Section 44ADA and not Section 44AD. Many assessments seem to follow a simple formula: “194J deducted = professional income = 44ADA applies.” Unfortunately for this shortcut logic, the law — and the Tribunals — do not agree.

The root of the confusion lies in the very different purposes of these provisions. Section 194J is a withholding mechanism. It casts a wide net and covers fees for professional services, technical services, royalty, director’s remuneration and several other payments. Companies, being cautious creatures, often deduct TDS under Section 194J even where the exact nature of the service is debatable. After all, excess deduction rarely invites penalty, but short deduction certainly does.

However, presumptive taxation provisions operate on an entirely different footing. Section 44ADA applies only to specified professions listed in Section 44AA(1). The list is limited and includes legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration and notified professions. It was never meant to cover every consultant who owns a laptop and gives advice.

Yet, in practice, when a taxpayer engaged in business advisory, liaisoning, project coordination, or transaction facilitation opts for Section 44AD, the assessment often raises a familiar objection: since the client deducted TDS under Section 194J, the income must be professional and therefore Section 44ADA must apply. This mechanical approach is now being dismantled by judicial precedents.

A significant ruling in this context is Rashmi Subhash Jha vs ITO (I.T.A. No. 782/Mum/2021, ITAT Mumbai, order dated 18.01.2023). In this case, the assessee had offered income under Section 44AD, but the Assessing Officer held that since TDS was deducted under Section 194J, the income must be professional and Section 44ADA should apply. The Tribunal rejected this reasoning. It observed in substance that the applicability of Section 44ADA depends on whether the assessee is engaged in a profession specified under Section 44AA(1). The Tribunal noted that TDS provisions cannot determine the true character of income and that deduction under Section 194J does not automatically establish that the assessee is carrying on a notified profession. The decision emphasised that classification must arise from the nature of activity and statutory definition, not from the payer’s tax deduction choice.

Another helpful precedent is Arthur Bernard Sebastine Pais vs DCIT (ITA No.1683/Bang/2019, ITAT Bangalore, order dated 09.10.2020). Here again, the department attempted to link Section 194J deduction with professional classification. The Tribunal clarified that Section 194J has a much wider sweep than Section 44ADA. It specifically noted that while the TDS section includes technical services and other categories, Section 44ADA is restricted only to professions recognised under Section 44AA. The Tribunal effectively held that withholding provisions are procedural and cannot override charging or classification provisions of the Act.

If one reads these rulings carefully, the judicial message is quite clear: TDS is evidence, not destiny.

The issue has become more relevant because the modern economy has blurred traditional professional boundaries. Earlier, the distinction was simple — doctors, lawyers, engineers and accountants were professionals; traders and contractors were businesses. Today’s workforce includes management consultants, digital compliance advisors, market strategists, outsourcing coordinators, process designers, regulatory facilitators and project mentors. Many of them operate in a commercial environment rather than a classical profession requiring statutory qualification.

Yet, corporate clients often deduct TDS under Section 194J simply to avoid litigation on their side. Ironically, that defensive deduction later becomes the basis of litigation for the recipient taxpayer. It is almost like being fined because someone else wore a helmet on your behalf.

The tax consequences of this misclassification are substantial. Section 44AD allows presumptive taxation at 8% (or 6% for digital receipts), while Section 44ADA fixes presumptive income at 50%. For a taxpayer with ₹80 lakh turnover, the difference between 6% and 50% presumptive income can be the difference between a manageable tax bill and a financial migraine. No wonder disputes are rising.

The correct legal test, as emerging from Tribunal jurisprudence, is threefold. First, the activity must be examined in substance: is the taxpayer rendering services as part of a notified profession? Second, the existence of specialised professional qualification or regulatory recognition must be considered. Third, the contractual and commercial nature of the engagement must be evaluated. Only after this exercise can one decide whether Section 44AD or Section 44ADA applies. The TDS section is at best a supporting indicator and not the deciding authority.

From a practical standpoint, taxpayers opting for Section 44AD in consulting-type activities should maintain clear documentation. Agreements should describe the work as business support, commercial advisory, coordination services or facilitation work where appropriate. Invoices should reflect the commercial nature of services rather than using vague professional terminology.

 A short note explaining why the activity does not fall under Section 44AA professions can be extremely useful during scrutiny.

For the department, these cases offer an equally important lesson. A mechanical reliance on Section 194J may not survive appellate review. As the service economy becomes increasingly hybrid, classification disputes will only multiply unless administrative guidance is issued.

A simple CBDT clarification stating that TDS deduction under Section 194J does not automatically trigger Section 44ADA could prevent hundreds of avoidable appeals.

Until such clarity arrives, taxpayers and officers alike would do well to remember a simple principle emerging from recent rulings: withholding tax provisions collect revenue, but they do not define its character. That task belongs to the charging provisions of the Act.

If this distinction is respected, the battle between Sections 44AD and 44ADA may finally move from courtroom drama to settled law.