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The profession, business hiatus
February, 17th 2007
The touchstone for determining whether one is pursuing his business or profession should not be whether it is run on organised lines with support of other people.

Is a doctor carrying on his professional work in a clinic in business or in profession? This question craves for an answer because under the income-tax law a professional is required to get his accounts audited if the gross receipts from his profession during the relevant previous year were in excess of Rs 10 lakh, whereas the cut-off point for this purpose for businessmen, corporeal or incorporeal, is Rs 40 lakh.

There is a view that when a doctor sets up a clinic and runs it with a clutch of helpers nurse, attendant, etc he morphs into a businessman and, hence, can evade the clutches of tax audit till he starts grossing Rs 40 lakh per annum.

This view appears to be slightly over-optimistic if not misplaced because the doctor concerned is after all pursuing his profession albeit with the help of a few people. In other words, running a profession with help on organised lines does not by itself change the character of his pursuit from profession to business. If the business argument were to be accepted, every CA and every advocate would be running a business and not profession because both employ extensive support services, such as that of data entry operators, assistants, and so forth. The truth is both are very much pursuing their profession.

How to identify

The touchstone for determining whether one is pursuing his business or profession should not be whether it is run on organised lines with support of other people. Rather it should be whether the buck stops with the professional: Is he going to share/hog profits as well as share/hog losses? This touchstone can easily apply both to sole-proprietorships and firms.

If, on the other hand, if the professional works in a company-hospital and is paid only his fees, obviously the company is in business and the doctor alone is in profession. The company-hospital obviously cannot be assessed as a professional because it runs with shareholders' money who have admittedly set up a business of hospital. Ditto for a trust-run hospital.

Therefore, if a doctor runs a clinic and takes both the profits and losses in his stride, he ought to be assessed as a professional and mandated to get his accounts audited if his gross receipts are in excess of Rs 10 lakh. That such receipts include cost of medicines and diagnostic services should not change the character of his pursuit.

Ditto for a professional firm of doctors or chartered accountants. Of course the taxman would be at his wit's end if and when limited liability partnerships (LLPs) take off in this country because the LLP Bill itself does not throw much light on the tax status of an LLP.

Why dual norms

Of course, one must be a professional in the first place to fall under the category of professionals for the purpose of tax audit under Section 44AB. The list of professions enumerated in Section 44AA for the purposes of maintenance of accounts should be helpful in this regard. Even otherwise, it is now well settled that a professional is one who is a member of an esoteric body endowed with powers to grant membership subject to possession of the prescribed qualifications and to discipline the erring members.

The reason why Parliament has chosen dual norms for mandating tax audit is easily discernible professional fee has a high amount of profit margin vis--vis the turnover of a trader. Perhaps Parliament feels that as a rule of thumb this differential is four times. It should, therefore, not allow professionals to thumb their noses at it on the specious ground that they are in business when they are in fact carrying on their profession.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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