• Aug
  • 13
  • 2012

Provisions of Section 44AD – As Amended by Finance Act 2012

CA Sanjay Patel

LEGISLATIVE HISTORY of presumptive taxation in brief

i. Section 44AD is a part of the Presumptive Scheme of Taxation which reads as “Special Provisions for computing profits and gains of business on presumptive basis”.

ii. Such presumptive taxation u/s 44AD and 44AE was introduced by Finance Act 1994 w.e.f. A.Y. 1994-95.

Under that regime, section 44AD was applicable to assessees engaged in the business of civil construction or supply of labour for civil construction.

Whereas Section 44AE is applicable to assessee’s engaged in the business of plying, hiring or leasing of goods carriages where the assessee does not own more than 10 goods carriages at any time during the previous year.

iii. Yet another section 44AF was introduced by Finance Act 1997 w.e.f. A.Y. 1998-99 which was applicable to assessee’s engaged in retail trade of goods and merchandise.

Now, by virtue of Finance Act (No. 2) of 2009, and w.e.f. A.Y. 2011-12, both Section 44AD and Section 44AF have been substituted by New Section 44AD, which is considered as a paradigm shift in the entire scheme of presumptive taxation, and I would be discussing the same at length.

Further, the monetary limits have been amended by Finance Act 2010 and 2012. Also, a subsection no. 6 has been inserted by Finance Act 2012, w.r.e.f. A.Y. 2011-12 to exclude specified categories of assessees.

I have taken the Issues for Consideration in the paper book based on various subsections of section 44AD as well as Miscellaneous Issues for consideration.

Well a bare look at section 44AD of the Act, gives an impression that it is a step of Finance Ministry towards simplification of Tax Structure and Compliance applicable to Small Businessmen. Also the Section appears to be lucid in interpretation and application, but believe me it is not so as it appears to be.

With this background and without much ado, I start with the various provision of Section 44AD of the Act.

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”.

Ø On perusing the provisions of section 44AD one thing is crystal clear that the moment an eligible assessee is engaged in eligible business, Section 44AD is automatically applicable to such business, unless the case is covered by section 44AD(5). So only under a situation where the actual income is less than 8% of Gross Receipts or Turnover, the assessee can escape applicability of section 44AD of the Act, by maintaining Books of Accounts as per section 44AA clause (iv) and getting the same audited as per section 44AB clause (d).

In all other cases, the assessee is governed by the provisions of section 44AD only, whether the assessee declares income at the 8% or higher income or lower income in cases covered by 44AD(5) where the Total Income does not exceed the maximum amount not chargeable to tax.

Ø  Who is eligible assessee?

According to Explanation (a) to Section 44AD, Eligible Assessee means:

i. A Resident Individual,

A Resident HUF,

A Resident Partnership Firm

(But does not include a Limited Liability Partnership as defined u/s 2(1)(n) of the LLP Act, 2008.)

            AND

ii. Who, out of the above categories of assessees, has not claimed Deduction during the relevant year;

u/s 10A, 10AA, 10B and 10BA

OR

Deduction under any provision of Chapter VI-A under the Heading “Deduction in respect of certain incomes”.

Ø Thus, it is clear that the definition is exhaustive and it includes only what it expressly means. Hence, all other persons such as -

-          Non Resident; Individual, HUF and Partnership Firm

-          Company

-          Limited Liability Partnership

-          AOP / BOI

-          Artificial Juridical Person

Are impliedly not covered by the provisions of this section.

Ø   What is eligible business?

According to Explanation (b) to Section 44AD, Eligible Business means:

(i)  any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE;

AND

(ii)  whose total turnover or gross receipts in the previous year does not exceed an amount of Rs. 1 Crore. (Rs. 60 Lakhs for A.Y. 2012-13)

 Here as regards the business of plying, hiring or leasing of goods carriages is concerned, it is important to note that:

i. If more than 10 goods carriages are owned by assessee, then he will be outside the purview of Section 44AE and hence he will get covered under 44AD if the Turnover from such business does not exceed Rs. 1 Crore.

ii. If assessee is carrying out business of plying, hiring or leasing goods carriages which have not been owned by the assessee but have been hired by it, and the turnover therefrom does not exceed Rs. 1 Crore, then also 44AD shall apply instead of section 44AE.

Also, the definition of Business has been enlarged to cover each and every business, except as discussed, be it manufacturing, trading, construction, speculative, job work and so on and so forth.

Here the only thing that has to be borne in mind is the distinction between business and profession, because Section 44AD is applicable to Business and not Profession and Business is different from Profession.

Some activities have been held to be business:-

(i)    Advertising agent

(ii)  Clearing, forwarding and shipping agents – CIT v/s. Jeevanlal Lallubhai & Co. [1994] 206 ITR 548 (Bom).

(iii)  Couriers

(iv)   Insurance agent

(v)    Nursing home

(vi)  Stock and share broking and dealing in shares and securities – CIT v/s. Lallubhai Nagardas & Sons [1993] 204 ITR 93 (Bom).

(vii)  Travel agent.

Ø  What is Total Turnover or Gross Receipts?

Total Turnover means the amount received/receivable from clients in respect of business transaction of the assessee for the relevant Previous Year.

Gross Receipts are the amount received from clients for the services provided or to be provided and does not include the value of material supplied by the client.

The Turnover or Gross Receipts should be inclusive of -

- Sales Tax, Excise duty, Service Tax and other such Levies and Duties,

- Sales of unusable empties and Packages,

- Service Charges charged for delivery, etc.

◊  Now the next question arises as to the calculation of Total Turnover or Gross Receipts.

In this regard the applicability of Section 145 of the Act cannot be ruled out. Section 145 prescribes the Method of Accounting applicable to assessees for computing income from Business or Profession. Section 44AD does not override this section. Hence, as per this section the assessees have an option to choose either Mercantile or cash method and determine the Total Turnover or Gross Receipts Accordingly.

(If the method adopted is Mercantile, the Turnover can be calculated on the basis of Sales Bills / Purchase Bills and other ancillary records like Debit Note/ Credit Note, etc.

Whereas, if cash system is followed, the Receipts as per Bank Statement and Cash Records could be Grossed up, if there is any deduction like TDS, etc., to determine Turnover or Gross Receipts.)

Ø  Consider the following: -

-          Net Profit as per Books of Accounts – Rs. 10 Lakhs

-          Income @ 8% of Turnover – Rs. 8 Lakhs. (i.e. Turnover is Rs. 1 Crore.)

-          Income as per Normal Provisions of Act – Rs. 7.5 Lakhs.

For the purpose of comparison of Actual Income with income @ 8% of Turnover, which amount should be considered, Net Profit as per Books or Income from Business and Profession as per Normal Provisions of Act?

In this situation, it has to be borne in mind that the provisions section 44AD override sections 28 to 43 C of the IT Act.

Hence, the question of computation of income as per normal provisions does not arise.

Thus, income as per the records maintained by the assessee needs to be compared with presumptive income at the rate of 8% to find out whether the same is higher or lower than 8% of Turnover. If it is lower 44AD (5) comes into picture and if the same is higher, the assessee is at the option to disclose the same in the return of income.

Ø  Consider and comment on the following: -

-          The assessee filed return of income u/s 44AD of the Income Tax Act, and the assessing officer wants to disallow the following:-

i.                    Rs. 1 Lakh u/s 40(a)(ia)
ii.                 Rs. 1 Lakh u/s 43B
iii.               Rs. 1 Lakh u/s 40A(2)

As per section 44AD (1), this section overrides section 28 to 43C of the Act, and hence all those section could not be applied once the assessee is assessable u/s 44AD of the Act.

In this regard reliance can be placed on the decision of Ahmedabad Tribunal in case of Gopal Raj Purohit 94 TTJ 865.

(Here, though no disallowance is called for u/s 40(a)(ia), but if the assessee (assuming an Individual or HUF) is covered by clause (a) or (b) of section 44AB in the immediately preceding year, then he will be deemed to be an “assessee in default” u/s 201 of the Act, unless he satisfies the conditions stipulated therein for not being treated so.

Further, if the assessee satisfies the conditions for not being treated as “assessee in default”, he cannot escape the liability of Interest u/s 201(1A). However, as he is not an “assessee in default” the Penalty u/s 271C can be avoided.)

Ø Can assessee file Return u/s 44AD declaring Income @ 8% of Turnover (assuming Turnover is not exceeding Rs. 1 Crore) even though he has earned more than 8%?

Can the Assessing Officer add the Difference between actual income and disclosed income in the assessment proceedings?

{Let us assume that the Turnover of the assessee is Rs. 50 Lakhs and all the receipts are by cheque and the same is deposited in the only Bank account maintained by the assessee. There are no outstanding receipts at year end.

All the payments for expenses on revenue account are through cheques debited to the same account and there are no outstanding expenses at year end. The total expenses are Rs. 25 Lakhs.

Thus the balance of Rs. 25 Lakhs as per his bank account is the income as per the records of assessee.

He filed Return u/s 44AD declaring of Rs. 4 Lakhs @ 8% of Turnover.

Can the AO add the difference of Rs. 21 Lakhs to the income of assessee?}

First of all the assessee, being covered by section 44AD, is under no obligation to maintain books of accounts u/s 44AA.

Secondly, the turnover being less than Rs. 1 Crore and declared income not being less than 8% of Turnover, Section 44AB is not applicable to the assessee.

Further the assessee is given the option u/s 44AD (1) to declare higher income. The word used is 8% OR higher income.

Thus, the option is with the assessee to disclose higher income OR to file Return disclosing the income @ of 8% of Turnover.

Here the assessee is free to exercise any option at his will. He may morally show actual income and pay tax on it as an Honest citizen of the country, but such Honesty is not digressed even if he files return @ 8% as he is legally correct. (Here the decision of Honourable Supreme Court in case of Dr. Qureshi can be recalled where the apex court, condemning the High Court, held that “cases have to be decided on merits and legality instead of morality”.)

Legally he is given the option by the statute and such an option cannot be equated with obligation cast upon the assessee. There is a definite difference between OPTION and OBLIGATION and an Option granted to the assessee cannot be construed to be his obligation when his actual income is more than 8% of Turnover.

Also, the AO cannot make any addition on this count as there is no provision under the Act permitting to make such addition.

Further, the words used are “higher income claimed to have been earned by the assessee”.

Here if the assessee has not made a claim in the Return of Income regarding any higher income, it implies there is no claim for Higher Income made by assessee. AO cannot claim that the assessee has earned higher income, because under the statue, he is not entitled to do so.

44AD (2)

Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed:

Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

It implies the following: -

i. No deduction 35AD for any capital expenditure incurred by the assessee for specified business,

ii No carry-forward of depreciation u/s 32 or business loss, (except in cases covered by 44AD(5))

iii. No weighted deduction for contribution to research institutes, etc.

(Here, one thing that requires consideration is deduction of capital expenditure is available to assessees in case of specified business u/s 35AD. It is a newly inserted section by Finance Act (no. 2) of 2009 w.e.f. A.Y. 2010-11. Remember this was the same Finance Act which introduced New Section 44AD.

In my humble view, the provisions of section 44AD needs to be amended to exclude such businesses covered by section 35AD from its scope otherwise it implies that assessees covered by section 44AD cannot take benefit of section 35AD which promotes investments.

Such a situation will lead to unfair practices and will motivate assessees to bring down the profitability of business by manipulating books of account and to go for audit and get the benefit of such sections. {One can show less income as per books and get the same audited and compute income as per normal provisions of Act, because u/s 44AD income can be 8% of Turnover or higher, but it cannot be lower.)

(In my personal view, a consequential amendment should follow soon.)

Ø  In case of partnership firms where 44AD is applicable, how to compute Salary and Interest payable to partners u/s 40b?

As per the provisions of section 44AD(2), the deduction u/s 40b in respect of remuneration and interest to partners is allowable.

The interest to partners can be credited by preparing a Memorandum Capital Account of Partners where no books are maintained. Whereas where books are maintained the same can be credited as per the balance in capital account as per the books so maintained.

As regard remuneration, the deemed income @ 8% of Turnover or higher income, as reduced by Interest paid to partners shall be deemed to be the BOOK PROFIT for the purpose of 40b and Salary can be calculated accordingly. (Because such income @ 8% or higher income, is nothing but deemed income form business as per this section and the same is before allowances under section 40b.)

Ø  Consider and comment on the following: -

-          Turnover of assessee – Rs. 50 Lakhs

-          Income @ 8% – Rs. 4 Lakhs & Actual Income as per records of assessee is Rs. 4.5 Lakhs (after deducting current depreciation as per books of Rs. 5 Lakhs). Assessee declares Income of Rs. 4.5 Lakhs as per books as income u/s 44AD of the Act.

-          Unabsorbed Depreciation brought forward – Rs. 10 Lakhs

-          Unabsorbed Business Loss brought forward – Rs. 10 Lakhs.

Comment on the set off of brought forward loss and depreciation and it carry forward to subsequent years.

First of all it is worth considering that set off of brought forward unabsorbed business loss is governed by section 72 of the Act.

Whereas set off of brought forward depreciation is governed by section 32 (2) of the Act and as per section 32 (2) of the act, brought forward depreciation gets merged with and forms part of current depreciation.

As regards the set of brought forward business loss is concerned the same is available to the assessee as a reduction in Income in Order to arrive at the Gross Total Income of the assessee. (Reliance can be placed on Universal Cargo v/s CIT (Cal.) 165 ITR 209.)

Whereas, unabsorbed depreciation is not akin to business loss. Hence set off of the same is not permissible. (Reliance can be placed on Universal Cargo v/s CIT (Cal.) 165 ITR 209.)

Here, in the given example) total depreciation as per section 32 including brought forward depreciation as per section 32(2) comes to Rs. 15 Lakhs.

However, as per section 44AD(2), all deductions u/s 30 to 38 shall be deemed to have been given full effect to and no further deduction under those section shall be allowed.

So technically and legally speaking, the assessee cannot take set off of unabsorbed depreciation against income as per section 44AD of the Act.

(Here no set off or deduction for depreciation in the current year is not an issue that requires due consideration.

What is annoying indeed is the words “full effect” and “no further deduction under those sections shall be allowed”.

Does this mean that, the unabsorbed Depreciation of Rs. 10 Lakhs is reduced to “NIL” in the current year under consideration and hence the same cannot even be carried forward?

The answer is YES, because legally the language of section is very clear and unambiguous. But logically, this sounds unjust. But, it has been rightly said that what may be Logical may not necessary be Legal always and vice versa.

Look at the anomalous nature of the provision. On one hand assessee is paying tax on deemed income u/s 44AD, whereas on the other hand, the assessee is losing the benefit of brought forward depreciation of earlier years. This leads to double jeopardy. The provision seems to be arbitrary to this extent.

(This is the area which will give rise to maximum litigation.)

44AD (3)

The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

Here, it is significant to note that WDV has to be calculated as per section 32 of the Act for the purpose of arriving at closing WDV at year end and for the purpose of applicability of section 50 of the Act relating to Short Term Capital Gain / Loss in case of Depreciable assets.

FOR EXAMPLE: -

Mr. A, a Resident individual having a machinery of RS.1,00,000/- as on 31-03-2011 eligible for depreciation under section 32 @ 15%. In A.Y 2011-12, he is covered by Section 44AD. In the Assessment Year 2012-13, his turnover is Rs. 1.5 Crores, so he calculated his profit as per normal provisions of the Act. In A.Y 2013-14, he is again covered by Section 44AD, In this Assessment year he sold the Assets for Rs.80,000/-. What are the implications of the asset so sold under the Income Tax Act?

Calculation of WDV:

Particulars Amount
WDV as on 31-03-2011 1,00,000
Less: Depreciation @ 15% 15,000
WDV as on 31-03-2012 85,000
Less: Depreciation @ 15% 12,750
WDV as on 31-03-2013 72,250
Less : Sale Price 80,000
WDV as on 31-03-2014 Nil

Calculation of Capital Gains

Particulars Amount
Sale Consideration 80,000
Less WDV as on 31-03-2013 72,250
Short Term capital gain U/s 50 7,750

 44AD (4)

The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.

Chapter XVII-C deals with provisions relating to Advance Payment of Tax.

On plain reading of this subsection, we conclude that eligible assessees are exempt from payment of Advance Tax.

But the second part of Provision “in so far as they relate to eligible business” has created a blunder so far as practical computation of advance tax in concerned and has taken away the sheen out of the first part.

Ø   Consider and comment on the following: –

Income under section 44AD                           Rs 4 lakhs

            (Say Turnover is RS.50 lakhs)

Interest Income                                           Rs.5 Lakhs

Total Income                                                   Rs.9 lakhs

  Now the question is How to calculate Advance tax when the assessee has income u/s 44AD as well as some other income?

From the understanding of Law, it is clear that the assessee has to pay advance tax on interest income of Rs.5 Lakhs. But how this tax calculation is to be made is nowhere provided in the statute?

(However one may consider the following option: -

Option 1 : Calculate advance tax on Rs. 9 Lakhs and calculate average tax rate and then apply such average tax rate on 5 Lakhs and pay advance tax accordingly.

Option 2 : Calculate advance tax on Rs. 5 Lakhs only as if it is your total income.

The matter requires to be resolved at the earliest.)

44AD (5)

Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) 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.

This subsection talks of two cumulative conditions for applicability of 44AA and 44AB: -

i. The Income from eligible business is lower than 8% of Turnover or Gross Receipts,

AND

ii. The “TOTAL INCOME” exceeds the maximum amount not chargeable to tax.

Ø    Mr. A is having Turnover from Eligible Business of Rs. 30 Lakhs. He does not have any other income. His actual Income as per his records (books) is Rs. 125000/- and he wants to file Return declaring the said Income u/s 44AD of the Act. Comment in light of provisions of Section 44AD(5) of the Act.

@ What if there is Loss of Rs. 125000/- in the said example?

As both the conditions of section 44AD(5) are not satisfied in case of the assessee, the provisions of section 44AA and 44AB are not applicable and the assessee is still covered by section 44AD and his Income u/s 44AD will be Rs. 125000/-.

It is only when his total income exceeds the maximum amount not chargeable to tax, that he will be covered by 44AA and 44AB of the Act, and normal provisions of computation of Income from Business and Profession will apply.

  The situation will not change even in case of loss. The Return will be filed as per book results only.

 Ø    Let us assume that M/s. XYZ is a partnership firm. The relevant details are as under: -

-          Turnover from eligible business – Rs. 25 Lakhs

-          Net Profit as per books (before 40 b allowances) – Rs. 2 Lakhs

-          8% of Turnover – Rs. 2 Lakhs

Thus Income u/s 44AD (1) is Rs. 2 Lakhs.

Comment in light of provisions of Section 44AD(5) of the Act in case the firm pays Partners Interest and Remuneration of Rs. 100000/- each. Thus the TOTAL INCOME is Rs. NIL.

@ What if the firm does not pay Remuneration and Interest but even then the TOTAL INCOME is Rs. NIL because of set off of brought forward business loss of Rs. 2 Lakhs?

@ What if the Net Profit as per books (before 40 b allowances) is Rs. 1.5 Lakhs only and the firm pays Remuneration of Rs. 1.5 Lakhs, thereby reducing the TOTAL INCOME to Rs. NIL?

  In the present case in situation 1, the firm is not covered by 44AA and 44AB because the first condition of 44AD (5) that the income should be lower than prescribed u/s 44AD (1), is not applicable as the Income of the firm before allowances u/s 40 b is Rs. 2 Lakhs which is not lower that 8% of Turnover.

Here it is pertinent to note that the words used in 44AD (5) is lower than prescribed u/s 44AD(1), which means, in case of partnership firm, Income before allowances u/s 40 b of the Act, because the allowances are governed by section 44AD (2).

In situation 3, the firm is covered by first condition of 44AD (5), i.e. the income before 40 b allowances is lower than 8% of Turnover.

But, the TOTAL INCOME is Rs. NIL. Now the question arises for consideration is whether NIL amount is an amount and can it be considered as the maximum amount not chargeable to tax?

In Central Excise it is a trite law that NIL rate of duty is a specified rate of duty for all purposes of the Act and hence all provisions, notifications, etc. applicable to Exempted Goods are not applicable where the goods are chargeable at NIL rate of Tax. It implies that duty is leviable on goods at NIL rate.

Applying the same analogy here, one can say that NIL Income is the maximum amount not chargeable to tax in case of partnership firms and hence the second condition of 44AD (5), being not satisfied, the firm is not covered by 44AA and 44AB of the Act and is legally correct if it files NIL Return u/s 44AD of the Act. (The same logic can be extended to loss cases as well)

(However, the logic, though apparently correct, is highly technical in nature and may lead to furious litigation on the subject.)

 Ø   An eligible assessee is carrying on three eligible business, the turnover of which is as under :

-          Business A ( Manufacturing) Rs. 40 Lakhs

-          Business B ( Trading) Rs. 40 Lakhs

-          Business C ( Service) Rs. 40 Lakhs

Comment in view of provisions of section 44AB vis-à-vis section 44AD of the Act.

@ What if, in the same example, if the details are as follows: -

 Business A ( Manufacturing) Rs. 90 Lakhs

◊  Business B (covered by 44AE) Rs. 25 Lakhs.

If assessee is running multiple businesses, turnover of all those businesses shall be determined as per method of accounting regularly employed for respective businesses. Further the turnover so determined shall be clubbed to determine whether limit of Rs. 1 Crore gets exceeded. Thus section 44AB is applicable as it is Qua Assessee.

This view is based on ICAI’s Guidance Note on Tax Audit as well as the decision of Honourable High Courts in case of Bajrang Oil Mills (Raj.) 295 ITR 314 and in K. Satish Shetty (Kar.) 310 ITR 366.

(Now, the point that needs consideration is whether, even after applicability of section 44AB, can the assessee take advantage of section 44AD in respect of each business independently as the Turnover from each distinct business does not exceed Rs. 1 Crore?

(The assessee in such a case will be required to get the Turnover or Gross Receipts audited u/s 44AB. This view is possible only if it can be successfully argued that the word used in Section 44AD  “eligible business” is Singular in nature and hence the section is qua business and thus the benefit of said section is available applying the ratio that while Plural includes  singular the vice versa is not always true.

However, in case of Vineetkumar 46 SOT 97 (Rajkot Bench), w.r.t. section 56(2) has held that “singular incudes the plural”.)

Thus in this case, assuming 44AD(5) is not applicable, both section 44AD and 44AE are applicable to the assessee.

44AD (6)

The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to—

  (i)  a person carrying on profession as referred to in sub-section (1) of section 44AA;

 (ii)  a person earning income in the nature of commission or brokerage; or

(iii)  a person carrying on any agency business.

 ◊  The above amendment has been brought by Finance Act 2012 w.r.e.f A.Y. 2011-12. However, as regards this amendment, the following needs to be considered:

i. So far as Profession is concerned it is well established that Business and Profession are different and hence this section is not applicable in case of Profession and as section 44AD covers only Business, this section was even otherwise not applicable to Profession. This amendment is simply clarificatory in nature and hence even its retrospective applicability is not an issue.

ii. Now consider the retrospective applicability of clause (ii) and (iii) of this subsection.

What about all those who got there accounts audited (in case of lower income) and fled Return of Income in September instead of July. What about the Interest Liability u/s 234A and 234B? (Here 234C will remain unchanged as the assesse has already paid it while filing return.) (Once the case is selected for scrutiny assessment, even if the returned income is accepted as assessed, the AO or CIT(A) will simply say that “Charging Interest u/s 234A, 234B and 234C is mandatory in view of Honourable Supreme Court’s decision in case of CIT v/s. Anjum Ghaswala 252 ITR 1.”

Here it has to be borne in mind that Advance tax is not applicable in so far as it relates to eligible business only. So what about all those who filed Return u/s 44AD? What about Interest u/s 234B and 234C?

(However, the assessee cannot be penalized for no fault attributable to him. Thus, he is supposed to file return as per the law applicable as on that date as he cannot expected to foresee the amendments to be brought in future. Following the principle of Equity in Justice, the retrospective application of said clauses is inconsequential so far as it relates to the issues so discussed.)

iii. Further, and significantly so, there was much hue and cry, in the entire sector deriving income in the form of Commission or Brokerage that the provision of 8% is too much and harsh as the margin is much lesser in such business and hence they were compulsorily forced to get their accounts audited.

Here, it is pertinent to note that in such business, what constitutes Turnover is not the entire Sales or Purchase Value but only the Commission or Brokerage so earned. This view is expressed in the Guidance Note on Tax Audit issued by the ICAI and is by now a trite law from judicial angle as well.

So, when your Turnover itself is restricted to the commission or brokerage income, where is the question of 8% presumptive rate on turnover, being harsh? Instead it should be a beneficial provision indeed for such business.

(However, according to me, the intention of Finance Ministry seems to be much different. It can very well be argued that in such business the profitability is much higher than 8% and to stop the assessees from disclosing income @ 8%, this amendment has been made so that the taxability is governed by normal provisions of the Act which would hopefully result in higher income than 8%. If this is the real intention behind the amendment, soon amendments will come in the following years so as to exclude all businesses where they think that the profitability is higher than 8%.)

MISCELLANEOUS ISSUES

 Ø   Is section 44AD applicable to the assessee in search/survey cases, where the total of disclosed as well as undisclosed Turnover does not exceed Rs. 1 Crore?

 The answer is YES, because if both the assessee and business are eligible, 44AD automatically comes into equation without hesitation unless the case is covered by 44AD (5).

In this regard, reliance can be placed on the decision of ITAT Pune in case of Balaji Construction 72 ITD 559 and to some extent on ITAT Ahmedabad in case of Abhi Developers.

 Ø   Whether the provisions of section 68 and 69 to 69D are applicable to the assessee covered by section 44AD?

  Section 44AD does not over ride section 68 and 69 to 69D, so the assessee has to explain the cash credits, investments, etc. as required under those sections.

One may even argue that addition u/s 68 could not be made when no books are maintained as held in case of Ms. Mayawati. However, this decision is like the inconsequential in the sense that if a particular entry in say Bank pass Book cannot be equated with books, even then to set the controversy at rest, the AO or CIT(A) can very well add the same u/s 69A of the Act.

However, is the assessee supposed to explain each and every entry of credit/investment?

It is not so. It has been held by Hon’ble Punjab and Haryana High Court in case of CIT Vs. Surinder Pal Anand 192 Taxmann 264, that assessee need not explain each and every entry of deposit / investment unless such entry had no nexus with gross receipts.

Hence, the assessee is under obligation to explain only the deposits or investments higher than Gross Receipts or Turnover.

 Ø   Whether the eligible assessee can claim Deductions u/s 80C to 80GGC and 80U from the income computed u/s 44AD?

 The answer is YES, because section 44AD(2) says that only Deductions u/s 30 to 38 shall be deemed to have been allowed and given full effect to.

Thus, all Deductions u/s Chapter VI-A falling u/s 80C to 80GGC and 80 U are available to the assessee.

(As regards other Deductions under Chapter VI-A is concerned; it is pertinent to note that all the remaining Deductions are Deduction in respect to certain Incomes” and in such cases as per Explanation (a) to 44AD, such assessees are not eligible assessees for Section 44AD of the Act. So the question does not arise.)

 Ø    The assessee, being an Individual, had Turnover of Rs. 50 Lakhs for F.Y. 2011-12 and his actual profit for the year was Rs. 2.5 Lakhs. The profit being less than 8%, he got the accounts audited u/s 44AB and filed Return accordingly.

Now, the question is, whether he is required to comply with TDS provision under Chapter XVII-B of the Act for the F.Y. 2012-13 as his case was covered by Tax Audit for the immediately preceding F.Y.?

 The answer is NO, because only if an Individual or HUF assessee is covered by provisions of clause (a) and (b) of section 44AB of the Act for the immediately preceding F.Y., then they are required to comply with the provisions of TDS under Chapter XVII-B.

In the present situation, the case of assessee for F.Y. 2011-12 was covered u/s 44AD (5) and 44AB clause (d), and hence he is not required to comply with the TDS provision contemplated under Chapter XVII-B of the Act for the F.Y. 2012-13.

 Ø   Confusion in filing the Return of Income

 ◊  As per General Instruction No.2 appended to ITR-4S(Sugam), Sugam is to be used when assessee is having business Income computed according to special provisions of 44AD and 44AE.

Section 44AD as well as 44AE not only covers situations where income is shown @ 8% but also covers cases where higher income can be shown.

 But SCH BP on ITR-4S is :

E1. Gross Turnover or Gross Receipts

E2. Total presumptive Income u/s 44AD(8% of E1)

E3. Presumptive Income from Heavy Vehicles

E4. Presumptive Income from Other Vehicles

E5. Total Presumptive Income under 44AE (E3 + E4)

E6. Income Chargeable under Business (E2 + E5)

Hence the format does not allow reflecting income higher than presumptive Income.

Further as per General Instruction No.4 appended along ITR-4S, if assessee maintains books of accounts u/s 44AA, then ITR-4 is required to be filed. Hence if ITR-4S is filed one has to take stand that assessee is not maintaining account books.

As per Instruction No. 3(e), For Speculation business also ITR-4S cannot be filled in ITR 4S (Sugam).

 (Here it is significant to note that the definition of Eligible Business covers all businesses where the turnover is not exceeding Rs. 1 Crore except business referred to in Section 44AE. Thus, by no stretch of imagination one can say that Speculation business is not covered by 44AD.)

With this, I conclude my paper on section 44AD. I tried to cover up all the key issues and I have tried to bring to the fore, the glitches in practical applicability of 44AD. I once again put emphasis on the fact that the section, though apparently so simple and hardly running into one page, will lead to numerous controversies and we will ultimately have a plethora of case laws in the years to come.

To sum up, every Simplification of System, as these draftsmen say so, should be done with utmost care and extra caution and in such a way that is achieves the desired purpose rather than aggravating the controversies. It is well said that “problems cannot be resolved by the same level of consciousness that created them.”

(Author can be contacted at sanjay@kiranpatelco.com)


32 Responses to “Provisions of Section 44AD – As Amended by Finance Act 2012”

  1. Ambika says:

    Sir, I HAVE ONE ISSUE.. MY CLIENT HAS SALARY INCOME, BANK INTEREST INCOME AND PROPERTY RENT INCOME OF A.Y.13/14. HE IS AN INDIVIDUAL AND HE HAD PAID SELF ASSESSMENT TAX RS.58020/- HE HAD PAID ADVANCE TAX OF Rs. 20000 ON MARCH 23 2013, NOW IN INTIMATION 143(1) A.O. HAS LEVIED INTEREST U/S 234B & 234C. TAXABLE INCOME INCLUDING SECTION 44AD IS Rs. 1000970. INCOME UNDER SECTION 44AD IS Rs. 209648. TDS RS 62398. COULD U HELP ME WITH A SOLUTION? DUE DATE FOR FILING ORIGINAL RETURN WAS 05.08.2013 AND THE DATE OF FILING RETURN IS 21.03.2014. AS PER THE COMPUTATION IN THE INTIMATION 143(1), INT U/S 234B SHOWS RS 4404 AND U/S 234C SHOWS RS 2098. HOW DO I ARRIVE TO THEIR COMPUTATION?

  2. navin says:

    can i file return of coaching class under section 44AD

  3. Tapan says:

    I could not understand what will be the ‘eligible business’actually mean which does not effected u/s. 44AD:

    “Also, the definition of Business has been enlarged to cover each and every business, except as discussed, be it manufacturing, trading, construction, speculative, job work and so on and so forth.

  4. RAVINDRA says:

    I have earned Rs 4 Lakhs in current FY 2013-14. I have earned money from private Vocational classes at home like Stitching, Cooking, Painting and Tuition. Since all these are casual earnings, I have not maintained any book of accounts or record. Is it mandatory to maintain book of account to show proof of my income. Please help. Thanks. Regards. -

  5. Ashish rathi says:

    44AD (5)
    Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) 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.
    ◊This subsection talks of two cumulative conditions for applicability of 44AA and 44AB: –
    i. The Income from eligible business is lower than 8% of Turnover or Gross Receipts,
    AND
    ii. The “TOTAL INCOME” exceeds the maximum amount not chargeable to tax.

    MY QUESTION : DOES TDS PROVISION ARE APPLICABLE TO ASSESSEE AT TIME OF FIRST YEAR OF TAX AUDIT ?

  6. ADKB says:

    I have a loss in case of my firm and salary income which is above taxable limit. Will sec 44AD(5) be applicable to me? Or do i need to get my books audited?

    Thank you for the explanation. Would appreciate you replying to my query! Thanks again.

  7. MANDAR LELE says:

    SIR I HAVE ONE PROBLEM MY CLIENT HAS BANK INTERST INCOME AND PROPERTY RENT INCOME OF A.Y.12/13 HE IS SENIOR CITIZEN AND HE HAD PAID SELF ASSESSMENT TAX RS.40500/- HE HAS NOT PAID ADVANCE TAX, NOW IN INTIMATION 143(1) A.O.HAS LEVIED INTEREST U/S 234B & C AS ACCORDING TO ME IT SHOULD NOT BE LEVIABLE IS IT CORRECT OR NOT

  8. Neelam says:

    I have earned Rs 4 Lakhs in current FY 2013-14. I have earned money from private Vocational classes at home like Stitching, Cooking, Painting and Tuition. Since all these are casual earnings, I have not maintained any book of accounts or record. Is it mandatory to maintain book of account to show proof of my income. My husband has a separate PAN and I have a separate PAN. My husband is a Tax payer. How do I file my IT Return separately? Please help. Thanks. Regards.

  9. Arcot says:

    Hello ,

    I have gross receipts of Rs.30 Lacs. All Cheque + Cash payments into bank account
    I have only 10 Lacs business expenses (including purchases).
    So is it ok if I pay tax on only .08 * 30 = 2.4 Lac rupees – net profit.
    Or do I have to pay tax on 20 lac.

    The balance 20 lac will remain in my bank account.

    Also can you help differentiate between profession and service business.

  10. raghunath says:

    sales turnover is Rs.50,00,000, cash discount allowed Rs.87,000, chit dividend received Rs.66,000 interest earned Rs.20,000.

    in this scenario what will be turnover/gross receipts for the purpose of 44AD either Rs.50,00,000 or Rs.51,73,000

  11. KRISHNA says:

    Clear concept of section 44AD

  12. KRISHNA says:

    This is clear concept of Section 44AD

  13. sonal panjwani says:

    Sir wonderfully you have explained the concept.

    Please keep on writting for other sections as well.

  14. zulesh dedhia says:

    excellent article. sir, i run a small coaching class with gross receipts around 8 lacs (so no service tax applicable). can i take benefit of section 44ad. please advise at earliest.

  15. srinivas says:

    A Partner ship firm gross receipts received Rs 950000/- and expenses RS 892000/- Net profit as per books 58000/- . how to caliculate income tax as per books or u/s 44AD. please clarify the tax caliculation

    thanking you sir

  16. CA Ruhi Agarwal says:

    Very useful and clear description of Sec 44AD.
    Thank you…

  17. HARI says:

    sir
    if commission eaned by sub broker RS. 5 LAKH And profit is rs.10000.in such case
    tax audit required?

  18. Rusi says:

    truly ‘guru’ category author . . . keep it up

  19. CA Student says:

    sir,which form can i use for filing returns under 44AD For Patnership firm,ITR4S Shows only for individual and HUF… Plz reply…

  20. swapna says:

    good article so useful

  21. haseena says:

    sir,which form can i use for filing returns under 44AD For Patnership firm,ITR4S Shows only for individual and HUF.PLS replay immediatly

  22. ramdas says:

    sir i have one qus.,
    in calculating income u/s 44AD profit is presumptive ,so in capital account which income should be added actual or presumptive,
    please answer,,
    thank you

  23. CA Student says:

    Dear Sir,

    Is there a form available for filing returns u/s 44AD for partnership firms. ITR 4S shows that it is only for Individuals & HUF. If not, where do we declare partners remuneration

  24. pqr says:

    Plz reply
    thank you sir.

  25. pqr says:

    Sir want ask by this example . I sell goods to one comany XYZ Pvt.ltd. I am assessee as an individual by using firm name ABC ENTERPRISE. The good is sold through truck which is owned by me ( not a transport business as I purchase goods in my name and sold goods in my firm name paying vat). Yearly sale is rs 9900000 including vat and income rs1800000. Now my wife also own another truck in her name and sell goods purchased by her to same XYZ Pvt ltd. by using firm name ABC ENTERPRISE ( different vat reg no.) she is having another bank account with firm name of abc enterprise .Her turnover and income is also same as above. Futher cheque given by Xyz pvt ltd is of lumpsum amount ( not exceeding bills kept by both the party ) and on cheque it is written abc enterprise and cheques received by us is deposited in sometime in her account or in my account. My question is can both file return as per 44AD @ 8% each . Is AO has any power to club the turnover of both of us. Also to ask that by excess income rs 1008000( 1800000-792000) each on which no tax is paid I purchase any property, will that be consider from white money. And can i now do addition in same above business by my huf ( each party ie myself , wife and my huf has enough their own earned white capital )

  26. SANATKUMAR UPADHYE says:

    Sir, really its very useful article. Thanku for the same sir.

  27. CA Prachala Kabra says:

    Thanks sir your article is very useful for a Fresher CA who is in practice.Please carry on.

  28. CA RAKTABH BHASKAR says:

    thanks very much sir for this article. can i get much more from u on income tax matters. i am a fresher

  29. PRAKASH KOCHAR says:

    For commission earned by insurance agent as per circular No. 648 dt. 30.03.1993 : 201 ITR (Sta) deduction for expenses are allowed at prescribed rate only if the gross commission is less than 60000/-
    in article it is said that ACTIVITY OF INSURANCE AGENT IS HELD AS BUSINESS, as such is eligible and is covered u/s. 44AD.
    If the commission income is Rs. 10,000,00/- the net profit u/s. 4AD will be 80000/- but it is not as per the above circular under the circumstances whether income from LIC commission can be declared u/s. 44AD? kindly reply.

  30. G K Agrawal says:

    44AD(6) says  “Shall not apply to — : (i) a person ……(ii) a person……. (iii) a person …..”
    This means this section as a whole shall not apply to a person who is covered under (i) or (ii) or (iii).
    If a business man has commission income as well as eligible business income he will not be entitled to claim benefits under sec 44AD because he ( such ” a person ” ) will be covered under sub section(6) (i) (ii) and (iii) whci bars the “person” and not the “business”
    Kindly clarify and give your views.

  31. Pankaj Gupta says:

    I really appreciate the hard work done to elaborate complexities of section 44AD seemingly so simple in nature. Can u also give your views as to How Turnover will be calculated in the case of “Futures & Options”. As per ICAI guidance Note on Tax Audit u/s 44AB, it has been clarified that “Turnover” shall be adding the positive & negative margins. That means if there is profit margin of 50,000 & adverse margin of 60,000, the Turnover will be Rs. 1,10,000. Therefore to carry forward the loss, Tax Audit will become mandatory as the profit declared is below 8% of Turnover.

  32. C.A. YUNUS M. MANSURI says:

    Good articles and very usefull in day to day practice. I give maximum time to get information
    which is definately available . Exellent job, pl carry on.

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