Presumptive taxation is being followed by the huge number of the small taxpayers throughout the country. However ironically they are of the opinion that the government has relieved them with all the provisions of the income tax act and therefore does not take into the consideration the relevant provisions of the income tax act and ends up in receiving the notices from the income tax department.
In this article I will try to cover all the issues faced buy the assessee in the presumptive and the relevant provisions of the Act which needs to be taken into the consideration. For the purposes of the simplicity the relevant provisions of the section 44AD and 44ADA is reproduced as herein under.
44AD Special provisions for computing the profits and gains on the presumptive business
(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” :
Provided that this sub-section shall have effect as if for the words “eight per cent”, the words “six per cent” had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account 92[or through such other electronic mode as may be prescribed] during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.
(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.
(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.
(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).
(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.
(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.
Explanation.—For the purposes of this section,—
(a) “eligible assessee” means,—
(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of subsection (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and
(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain in-comes” in the relevant assessment year;
(b) “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 two crore rupees.
Section 44ADA Special provision for computing profits and gains of profession on presumptive basis.
(1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.
(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.
(3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment.
years.
(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession 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 (1) of section 44AA and get them audited and furnish a report of such audit as required
under section 44AB.
CASE STUDY NO 1
Q. A Doctor receiving the income by the away of the consultancy fees and also engaged in selling the medicines within his premises to the extent of the 20 Lakhs and 1.5 Crore?
Answer 1. In such cases what has been generally seen that the entities opt for the section 44AD and section 44ADA while filing the income tax returns and therefore ends up in receiving the scrutiny notices from the income tax department. Clause (i) of the sub section 6 of the section 44AD clearly provides that the assessee carrying on the profession as specified in the section 44AA will not be entitled to the benefit of this section, however interestingly no such requirement has been laid down in the section 44ADA of the act and therefore the assessee is entitled to the benefit of the section 44ADA in respect of the consultancy fees, however in case of the
pharm sales the assessee has to maintain the separate books of the accounts and get his accounts audited as per the section 44AB(1) of the act.
However the practically in such cases the assessee is not able to maintain the separate books of the accounts for the pharma sales and consultancy fees, therefore in such cases the assesse will be entitled to the benefit of the section 44AD if the total turnover form the business and the consultancy fees does not exceed 2 crore.
CASE STUDY 2
Q. Whether the credit in the bank account be asked to explain in case of the section 44AD and section 44ADA covered assesse or whether the assesse can offer the income at more then 8% or 8% is an absolute choice?
Answer: A number of the professionals opting for the section 44ADA although earning more than the 50% of the total receipts still shows in the income tax return at the rate of the 50% of the total receipts and sits back without thinking that they will be more or less handed with the income tax scrutiny or the reassessment notice soon because of the unexplained money as per the section 69A of the income tax act. While one read the section 44ADA it has been clearly mentioned that the profits and gain shall be the 50% of the total receipts or such higher amount as claimed to be earned by the assesse during the previous year. Also income tax return utility shows that the amount at the 50% of the total receipts or the higher amount as claimed to be earned by the assesse shall be deemed to be profits and gains of the assesse from the profession. Thus ignoring the above provisions when the professional file the income tax return showing the bank balances in the utility and when the AO matches the closing balance of the bank with the profit provided he asks the assesse to explain the undisclosed money and ends up in invoking the provisions of the section 69C read with the section 115BEE along with penalties and prosecutions.
Relevant judgement in case of the Shivani Builders (108 ITD 520) where the same issue has been discussed. However in many cases the bank account of the assesse does not reveal the major difference thus in such cases the same can be opted until the basic purpose of the introducing the section 44AD would be defeated. Thus it is advisable that before filing the income tax return the assesse should sit back and calculate the rate of the profit by anaylising the bank account since the books of the account are not maintained.
CASE STUDY 3
Q. Will the remuneration received by the partners will be included in the gross receipts form the profession while deciding the applicability of the section 44ADA of the act?
Answer: Since the partnership and the partner although considered as different from the income tax perspective yet the partner and the partnership firm is one and the same thing. Moreover the income tax provisions distinguish between the concept of the partner and the partnership firm. Section 45(2) comes out as an exception to the section 45 which mandates that the capital gains will occur only when there is a transfer of the capital asset, since there is no difference between the partner and firm the legislature in it thinking has decided to introduce the section 45(2) in the AY 1988-99 to charge the capital gains on the transfer of the asset by the partner to the partnership firm. Moreover the two Kolkata Tribunal Judgements in case of the ITA NO 2135/KOL/2008, ITA NO 692/KOL/2012 has held that the income earned by the partnership firm would be deemed to be in the same nature as earned by the
partner and therefore the said remuneration will be included in the gross receipts while invoking the section 44ADA of the income tax act.
CASE STUDY 4
Q. If in the AY 2019-2020 the assesse has opted for the section 44AAD and in the AY 2020-21 the turnover of the assesse becomes 3 crore will the tax audit is required to be conducted under section 44AB(e) of the act ?
Answer: Section 44AB (e) of the act mandated the carrying of the tax audit in two situations:
1. If the provisions of the sub section 4 of the act is violated.
2. If the total income exceed the maximum amount not chargeable to tax.
Since in the given case the turnover has exceeded the 2 crore the provisions of the section 44AD will not be applicable to the given case and hence there is no question of falling in the section 44AD (4) of the act. Accordingly the assesse has to maintain the books of the account as per the section 44AA and has to get his books of account audited as per the section 44AB (1) of the act and has to take care of the newly provisions of the act which is not an area to discuss at this point of time.
SOME OTHER ISSUES
1. The section 44AD exempts the assesse from maintain the books of accounts.
However it is ironical that for making bifurcation between the cash sales and digital sale one has to compulsory maintain the record of the books making the distinction between the cash sales and digital sales. There will be great difficulty for the person making the sales regularly on the credit basis as he has to maintain the books regularly and accordingly the very purpose of exempting the assesse from maintaining the books of account is defeated.
2. Whether the provisions of the section 40(a)(ia) is applicable in such cases.
The section starts with the non obsantate clause and therefore all the provisions of the section 28 to 44DA will not be applicable in such cases.(39 SOT 13 , 192 Taxman 264)
3 Whether the section 44AD is applicable where the assesse has rejected the books of account and turnover is higher than the limit of the 2 crores. (61 Taxman.com 14, 224 Taxman 358, 229 Taxman 357, 59 TTJ 723).
For more queries please mail at bklegaladvisors@gmail.com Contact for any income tax query- 7986255468.
Author Bio
How gross turnover is calculated ? whether it includes GST, cess collected?
Very good article..impressed to see it coming from a student. Keep it up.
Half way through the article and already realized that its been written by a student.
Nice attempt but unable to understand where exactly have you mentioned the solution to Case Study-1. When section 44AD clearly mentions that professional income is not covered under this section. Then how can you club both the income for 44AD? Please clarify.
Extending your Case Study 3 from Firm Level to Partner Level – If a Partner of the firm receives salary which is less than 50 Lacs, can the partner take benefit of section 44ADA on such salary which is effectively PGBP u/s 28?
We unnecessarily try to create controversy n giving nasty ideas to AO as simply offering 50% income is suffice, when we don’t maintain books how to know actual income further it will defeat the whole purpose of 44ADA. We have completed many assessments at 50% income without asking for books n easily without any hassles. If AO creates any problems I will go to Media.
In ITR 3 form, there is a provision for the sections 44AD, 44ADA & 44AE. If the assessee’s turnover is say 9500000/- relevant to his business where he maintains his bookd of accounts and from the other sources his turnover is above 2000000/- Can we make use of the normal business columns and also the 44AD presumptive business columns together.