The recent ruling by the Mumbai bench of ITAT in case of Pramod Lele , held that the expression ‘Management consultancy’ could not be brought within the ambit of ‘Technical consultancy’ and it is still a debatable issue whether it constitutes a business receipt or a professional receipt. The bench ruled out that classifying the management consultancy receipt as business or profession, constitutes a ‘reasonable cause’ u/s 273B and thus, penalty levied u/s 271B for not getting the accounts audited as required u/s 44AB, is deleted.

Author, CA A. Sekar, analyses the judgment and elucidates the observations made by the ITAT in this article. Distinguishes between the terms ‘business’ as per Sec. 2(13) and ‘profession’ as per Sec. 2(36) and remarks “All professions are businesses, but not all businesses are not  professions”. He agrees with ITAT on the fundamental feature that to constitute a profession, some advanced skills are needed to be acquired by advanced education and special training. However, points out that no attention was drawn to Explanation (2) u/s 9(vii) according to which the definition found in bilateral treaties, the fees for ‘technical services’ includes consideration received for rendering any managerial, technical or consultancy services, thus, the author raises a question that whether inclusion of the term consultancy under one umbrella of Sec. 9(vii) is sufficient to conclude that the word ‘technical consultancy’ used in Sec. 44AA would also cover all the stated services.

Business vs Profession receipts - Is it debatable?

The Mumbai Bench of the ITAT in the case of Pramod Lele found that on the facts of that case, the bonafide belief that the assessee’s receipts constitute business receipts as against the revenue’s plea that they are professional  and the different interpretations of the tax payer and revenue makes it a debatable issue thus rendering it a reasonable cause in the context of levy of penalty under Section 273B of the Income tax Act 1961 (“the Act”).  The Hon’ble ITAT has not stopped with that finding.  It has also been concluded that the expression “Technical Consultancy” would only mean rendering of technical services and the expression “management consultancy” could not be brought within the ambit of “technical consultancy”

Let us begin with the definitions of “Business” and ‘Profession” before looking at the term “technical consultancy”. The definition of the term “Business” found in Section 2(13) of “the Act” is an inclusive definition and not being exhaustive, is indicative of extension and expansion and not restriction. It says, “business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”  Similarly, the word” Profession” has been defined in Section 2(36) of “the Act”, again an inclusive definition which simply says, “profession includes vacation”.

According to Shorter Oxford Dictionary, Business includes a state of occupation, profession, or trade; profession in a sense any calling or occupation by which a person habitually earns living.

The word “vocation” is a word of wider import than the word ‘profession”.  Vocation need not be for livelihood nor for making any income nor need it involves systematic and organized activity. It need not be an organized activity, nor it has to be indulged in with a motive of profit[1]

Coming back to differentiate between business and profession,  one may usefully refer to the definition of business in Section 2)5) of Excess Profits Tax Act which says “business including any trade, commerce or manufacture or any profession or vocation, but does not include a profession carried on by an individual or by individuals in partnership, if the profits of the profession depend wholly or mainly on his or their personal qualifications unless such profession consists wholly or mainly in the making of contracts on behalf of other persons or the giving to other persons of advice of a commercial nature in connection with the making of contracts”  This definition was in the context of taxing the increased profits due to war conditions and rightly so, it is obvious that profits made wholly or mainly on the personal qualifications of the person making the profit, would not amount to business profits [2]. However, the distinction between profits made wholly or mainly on the personal qualifications of the person making the profit and commercial/business profits has been clearly established.  That there is a difference between income from business and income from profession has been recognized.

It may be pointed out that the main difference between ordinary commercial business and profession therefore lies in the amount of knowledge or skill employed in carrying it on though that may not be sole criterion. All professions are businesses, but not all businesses are not  professions, and it is only those are professions, the profits of which are dependent mainly upon personal qualifications and in which no capital expenditure is required or only capital expenditure of a comparatively small amount[3]. The test of quantum of capital expenditure might have lost its relevance in the present-day scenario of high capital expenditure incurred even by professionals. Adverting to personal qualifications, being the primary concern, to determine an income, being professional income or business income, it was observed by the Apex Court that a profession involves occupation requiring purely intellectual or manual skill[4].

Viewed in the context of different interpretations, one may be tempted to take a view that the ITAT has rightly assumed that the issue is still debatable when it comes to conclude whether an activity constitutes business or profession.  However, one fundamental feature underlying in all the judicial pronouncements is the fact that to constitute a profession, it requires some advanced skill acquired by advanced education and special training.  It appears that in this background only, Section 44AA of “the Act” groups together legal, medical, architectural, accountancy, technical consultancy or interior decoration or any other profession as is notified for the purposes of maintenance of books of accounts.  Management Consultancy, being conspicuously absent in the above list, makes the case stronger that the said activity would constitute business.

But the issue does not seem to rest there.  The issue before the ITAT revolves around the applicability of Section 44AB of the Act with its attendant consequential provisions. Here again, the revenue makes out a distinction for the meaning of the term ‘profession” used in Section 44AB(b) in contrast to presumptive taxation in respect of professionals under Section 44ADA where the words used are “engaged in a profession referred to in sub-section (1) of Section 44AA”.  Does it mean that the law has contemplated that the list contained in Section 44AA along with the notified ones, is not the exhaustive list of professions?  Has this aspect been not brought to the notice of the Hon’ble ITAT?

The other categorical finding given by the ITAT is that the expression “Management Consultancy” could not be brought within the ambit of “technical consultancy”. Again, it appears that the attention of the ITAT has not been drawn to Explanation (2) under Section 9(vii) of the Act.  In accordance with the definition found in bilateral treaties, the fees for “technical services” has been defined as consideration for the rendering of any managerial, technical or consultancy services.  All these three kinds of services viz., managerial, technical or consultancy services, having been grouped under “technical services” u/s 9 of the Act, would it not be sufficient to conclude that the word “technical consultancy” used in Section 44AA would also cover all the services grouped under technical services?

Let the debate continue.

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[1] P. Krishnamenon v Commissioner of Income tax [TS-5016-SC-1958-O]

[2] P. Stanwill Co., Auctioneers vs Commissioner of Income tax [TS-5065-HC-1952(Allahabad)-O]

[3] Christopher Barker & Sons v Inland Revenue Commissioners (1919) 2 K.B.

[4] CIT v Manmohan Das [TS-5-SC-1965-O]