The ITAT Mumbai in Manoj Rajaram Sharma vs ITO held that the Assessing Officer (AO) cannot apply a 50% presumptive income rate under section 44ADA to an assessee engaged in business and eligible under section 44AD. The assessee, a Business Correspondent, declared income at about 35% of gross receipts under section 44AD. Although large bank credits were observed, the AO accepted the turnover but still applied a 50% profit rate, treating the activity as professional income. The CIT(A) upheld this approach. However, the Tribunal ruled that sections 44AD and 44ADA apply to distinct categories—business and specified professions respectively—and cannot be interchanged without legal basis. Since the AO accepted the turnover and failed to prove that the assessee carried on a specified profession or suppressed income, enhancing the profit rate was arbitrary and unlawful. The addition was deleted, reinforcing that presumptive taxation must strictly follow statutory provisions.
Core Issue Whether the Assessing Officer is justified in applying a 50% presumptive income rate (section 44ADA) to an assessee engaged in business and otherwise eligible under section 44AD, thereby overriding the statutory presumptive scheme.
Facts of the Case
The assessee, an individual, was engaged as a Business Correspondent (BC) with Fino Payments Bank and also carried on proprietorship business. He filed his return declaring income of ₹4.92 lakh under section 44AD, computing income at approximately 35% of gross receipts of ₹14.85 lakh.
During reassessment proceedings, the Assessing Officer observed large bank credits aggregating to ₹4.63 crore. The assessee explained that the bank account was a BC Merchant Account where transactions were carried out on behalf of customers and that only commission income accrued to him. Supporting documents such as bank statements, authorization letters, and confirmations were submitted.
The AO initially proposed estimation at 8% of total bank credits but ultimately accepted the turnover of ₹14.85 lakh and applied a 50% profit rate, treating the case akin to section 44ADA, thereby making an addition of ₹2.15 lakh.
Findings of the Assessing Officer (AO)
The AO held that:
(I) The assessee declared income at a lower rate compared to the nature of activities.
(II) Under presumptive taxation, income should be computed at 50% of gross receipts.
(III) Accordingly, income was recomputed at ₹7.07 lakh (50% of ₹14.85 lakh).
Thus, the AO effectively applied the logic of section 44ADA without establishing that the assessee was engaged in a specified profession.
Findings of the CIT(A)
The CIT(A) upheld the addition on the following reasoning:
(I) The assessee failed to fully substantiate that the bank deposits belonged to customers.
(II) The explanations were general and not supported by complete documentary evidence such as transaction-wise details.
(III) The estimation made by the AO was considered reasonable in absence of proper verification.
Accordingly, the addition of ₹2.15 lakh was confirmed.
Findings of the ITAT
The ITAT allowed the appeal of the assessee and held that the action of the AO was legally unsustainable.
The Tribunal observed that:
(I) The assessee was engaged in business activity as a Business Correspondent, not in a specified profession.
(II) Section 44AD and section 44ADA operate in distinct and mutually exclusive fields.
(III) The AO failed to bring any material on record to show that the assessee’s activity falls under professions covered by section 44ADA.
It was further held that:
(I) Once the assessee has opted for section 44AD and declared income higher than the prescribed rate (8%/6%), the AO cannot arbitrarily enhance the profit rate.
(II) Enhancement is permissible only if turnover is incorrect, or there is evidence of suppression, which was absent in the present case.
(III) The AO’s action of substituting 50% rate was without statutory authority and contrary to law.
The Tribunal also noted that:
(I) he AO himself accepted the turnover of ₹14.85 lakh, thereby accepting the nature of receipts as commission income.
(II) Having accepted the turnover, the AO could not disregard section 44AD and apply a different presumptive scheme.
Accordingly, the ITAT directed deletion of the addition and accepted the income returned by the assessee.
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