In a significant ruling, the Madras High Court has held that digital marketing services fall under the category of “business” and not “profession” for the purposes of Income Tax Act provisions. Consequently, the threshold for compulsory tax audit under Section 44AB will be ₹1 crore (now ₹5 crore, subject to conditions), not ₹50 lakh (as applicable to professionals). This verdict brings major relief to digital marketing consultants and agencies whose turnover falls below ₹5 crores and who receive all payments digitally.
Case Details
- Petitioner: V. Soundararajan, a digital marketing service provider
- Respondent: Income Tax Officer
- Issue: Whether digital marketing constitutes a “profession” under Section 44AB, thereby mandating audit beyond ₹50 lakh turnover
- Assessment Year: 2021-22
- AO’s Stand: Treated the petitioner as a “professional” and imposed penalty under Section 271B for not getting books audited beyond ₹50 lakh turnover
- Petitioner’s Argument: Digital marketing does not fall under “profession” defined in Section 44AA, so higher audit threshold should apply
Case Background
- Parties Involved: Vajra Global Consulting Service LLP vs. Assistant Director of Income Tax—Digital marketing service provider vs. assessing authority.
- Assessment Year: For the financial year 2020–21, when the petitioner’s turnover was below ₹5 crores and both receipts and payments in cash were under 5% of total transactions.
Legal Issue
Whether digital marketing, mainly carried out via computers, should be classified as a profession or business under the Income Tax Act—because this classification is critical in determining audit obligations under Section 44AB(a).
Legal Framework – Section 44AB(a)
Under the amended first proviso to Section 44AB(a):
- A business with turnover under ₹5 crores is exempt from compulsory audit, provided cash receipts and payments each do not exceed 5% of the total.
- However, if classified as a profession, the exemption under this higher threshold does not apply—professionals must get their books audited if turnover exceeds ₹50 lakhs.
Court’s Ruling & Reasoning
Justice Krishnan Ramasamy observed:
“Digital marketing is the business for persons who carry out the said activities. Merely because it is carried on through computers, it cannot be treated as a profession.”
The court held:
- Using digital tools or computers doesn’t transform a business into a profession.
- Digital marketing lacks the characteristics of “profession” as defined under Section 44AA.
- The petitioner met both audit-exemption conditions: turnover below ₹5 crores and cash transactions below 5%.
- Hence, audit exemption was restored, and no audit report was required under Section 44AB(a) for that financial year.
Broader Insights
- Key Distinction: “Profession” (tax audit threshold ₹50 lakh, irrespective of digital mode) vs. “Business” (audit threshold ₹5 crore with digital compliance).
- This ruling sets a helpful precedent for digital service providers—like agencies, marketers, online consultants—who use digital channels extensively and stay within cash-limit thresholds, as they can be classified as businesses and benefit from relaxed audit requirements.
Summary Table
| Aspect | Detail |
|---|---|
| Petitioner | Vajra Global Consulting Service LLP – digital marketing agency |
| Issue | Classification as profession vs. business under Income Tax law |
| Legal Pathway | Section 44AB(a) audit-exemption rules for businesses |
| Decision | Held as business, not profession; exempt from audit under conditions |
| Implication | Reduces compliance burden for digital marketers under ₹5 crore turnover |