SOME BARELY TOUCHED ANGLES OF PRESUMPTIVE TAXATION UNDER SECTION 44AD OF INCOME-TAX ACT, 1961

What do we generally think after reading above line? It could be,

1.  Computing taxable income on some  estimates

2.    Estimation at given tax limit (6%, 8% or higher)

3. No need of maintaining books of accounts

4.    No tax Audit

5.   Books to be maintained and tax audit, if income below given percentage

6.  No separate disallowances like cash payments as per section 40A(3), non-compliance of TDS provisions etc.

& what about issues like,

1.   Whether profit at 8% (0r 6%) can be declared even if actual profit is higher than that?

2.   Whether assessee be required to get his books of accounts audited where the profit at a rate lower than that prescribed and his Total income is below basic exemption limits?

3.  Under what provisions the Tax Audit would be conducted in case where turnover is above Rs. 1 Crore but below Rs. 2 Crore (assuming profit is below given limits)

4. Whether additions under section 68 can be made for unexplained cash credits?

5.  What would be the WDV of depreciable assets in the year when provisions of 44AD cannot be applied which were applicable earlier?

Let’s discuss the above raised issues in seriatim:

1.    Whether profit at 8% (or 6%) can be declared, even if actual profit is higher than that?

1.1. Let’s go through the Relevant extract of section 44AD of The Income-tax Act, 1961 (‘the Act’) which is as under,  

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession"   

1.2. From the above reproduced relevant extract it can be observed that two phrase ‘claimed to have been earned’ and ‘shall be deemed’ are vital to understand the depth of the provision.

a.   The word ‘claim’ means “To demand or assert as a right”, as per Blacks law dictionary it means “A legal assertion; a legal demand”.

b.   Right is an entitlement, in current context, conferred upon the assessee i.e. the Right provided is a prerogative of an assessee.

c.    Whereas the phrase ‘Shall be deemed’ infers a presumption.

1.3. In view of above emphasized words and phrase, any amount of profit declared at 8% (or 6% as the case may be) or at a higher amount will have to be considered as total income of the assessee.  

1.4. What at all can be questioned by the tax authorities is total turnover or gross receipts since it’s the base on which given percentage needs to be applied.

For example Mr. XYZ has turnover of Rs.50 Lac and profit of Rs.9 Lac, whereas he reports Rs.40 Lac as his turnover on which 8% income is computed. In such situation, tax authorities can question the differential excess cash or bank entries relating to the turnover or gross receipts.

Whereas, had Mr. XYZ for the turnover of Rs.50 lac declared profit at 8% i.e. 4 Lac instead of Rs.9 Lac, then there is no provision so as to question the difference in profit shortly declared.

1.5. Above analogy can be drawn from Hon’ble Punjab and Haryana High Courts decision in case of CIT Vs. Surinder Pal Anand (ITA No. 156 of 2010) and Hon’ble Allahabad High Court’s decision in case of CIT Vs Shri. Nitin Soni (ITA No. 74 of 2009).

Relevant extract from Nitin Soni’s case is as under (though provisions under question was 44AE it is equally relevant for 44AD)

“It is not in dispute that the assessee has got eight trucks. It was also not disputed by the learned standing counsel for the department that the provisions of Section 44AE of the Act are applicable. Emphasis was laid by him that the additions made in the hands of the assessee was justified as the assessee has income more than that which is calculated as per Section 44AE of the Act. It is difficult to accept the aforesaid submission of the learned standing counsel. The very purpose and idea of enactment of such provision like Section 44AE of the Act is to provide hassle free proceedings. Such provisions are made just to complete the assessment without further probing provided the conditions laid down in such enactments are fulfilled. The presumptive income, which may be less or more, is taxable. Such an assessee is not required to maintain any account books. This being so, even if, its actual income in a given case, is more than income calculated as per sub-section (2) of Section 44AE, cannot be taxed” .

1.6. Accordingly, declaring a higher profit is at the prerogative of the assessee.

1.7. However, a further question which looms up is, if in one year profit declared is less than actuals and then in subsequent year provisions of section 44AD are not applicable owing to which books of accounts are required to be maintained, in that case, what would be the amount of opening capital that would be disclosed? If actual amount of profit is capitalized then there could be a chance of section 68 getting triggered.

2.    Whether assessee be required to get his books of accounts audited where the profit at a rate lower than that prescribed and his Total income is below basic exemption limits?

2.1. Generally, if an assessee whose profit is less than given percentage i.e. 8 or 6% is required to get his books of accounts audited.

2.2. But the question is, if an assessee, otherwise eligible under 44AD, has profit less than 8% (or say 6%) AND his total income is below basic exemption limit, then, whether he is required to get his books of accounts audited?

2.3. Let’s have a look at relevant provisions of Income-tax Act, 1961 i.e. sub-section 5 of section 44AD

(5). Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.]

2.4. Above provisions can be dissected in following manner,

a.   Eligible assessee should have declared income not according to the section 44AD (1) i.e. declared below 8% (or 6%)

b.   Total income of the assessee i.e. income from eligible business as per section 44AD and all other incomes in aggregate is above basic exemption limit

c.    Then eligible assessee will be required to maintain books of accounts and get the same audited.

2.5. To cut the long story short, along with lower profit margin there MUST be income above basic exemption limit for bringing the eligible person under the net of audit.

 

2.6. Accordingly, the eligible person whose profit is below 8% (or 6%) and at the same time his total income is below basic exemption limit then there would be NO REQUIREMENT to maintain books of account and  NO REQUIREMENT to get the same audited and even then he would be covered by provisions of section 44AD.

3.    Under what provisions the Tax Audit would be conducted in case where turnover is above Rs. 1 Crore but below Rs. 2 Crore (assuming profit is below given limits)

3.1. Books of accounts are required to be audited u/s 44AB of the Act. Which is conducted by a Chartered Account as per section 288 of the Act. In case of person carrying on business, tax Audit is mandatory when sales, turnover or gross receipts exceeding Rs. 1cr or when profit below 8% (or 6%) as per section 44AD is declared (i.e. as per sub-section 4 and 5 of section 44AD).

3.2. However, provisions of section 44AB i.e. Tax audit provisions are not applicable when person declares profit and gains as per section 44AD(1) of the Act is his sales, turnover or gross receipts (further referred as ‘turnover’) for previous year are less than or equal to Rs.2 Cr.

3.3. That is to say, till turnover of Rs.2 Cr there won’t be tax audit u/s 44AB if  profit and gains is declared according to section 44AD(1) i.e. 8% (or 6%) or higher than that.

3.4. The question is, if the person violates the condition of section 44AD(1) then the books of accounts which he would be required to get audited would be u/s 44AD or 44AB if his turnover is between than 1 Cr and 2Cr?

3.5. The provision of clause ‘e’ of section 44AB, specifically and particularly covers the cases where person is required to get audited when he is declaring profit below given limits of section 44AD. So, such audit’s arising out of non-declaration of profits as per section 44AD(1) are audited u/s 44AB only, even if turnover is between 1 Cr and 2 Cr.

3.6. Next question, whether tax-audit arising out of section 44AD would be counted while determining total tax-audit assignments conducted by a Chartered Accountant (‘CA’)?

3.7. As per ICAI guidelines total number of tax-audits which a practising CA can conduct is 60 (which was 40 prior to 01^st April, 2018). Doubts were raised by majority of CA in respect of inclusion of audits conducted under sections 44AD, 44AE and 44AF of the Income-tax Act, 1961 in the specified number of tax audit assignments so a clarification dated 23^rd August 2011 was issued by ICAI wherein proviso to para 4 of respective guideline was reproduced which stated as follows,

“Provided also that the audits conducted under section 44AD, 44AE and 44AF of the Income-tax Act, 1961 shall NOT be taken into account for the purpose of reckoning the “specified number of tax audit assignments”

3.8. Next question, what would be the due-date for furnishing ITR of partners of such partnership firm whose books are required to be audited u/s 44AD?

3.9. As per Explanation 2 of section 139(1) the due date of furnishing ITR of working partners whose firm is audited under any provisions of Income-tax Act, 1961 would be the second due date i.e. 30^th September of the assessment year.

Stay connected for discussing remaining questions.

CA. Bhuvanesh Kankani

+91 9421847944