Taxpayer opted out of section 44AD cannot opt in for the next 5 years: Interesting Income Tax

Query

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query on IT return

Query from the Reader of www.thetaxtalk.com

I have partnership firm . I had not filed my return for FY 16-17. In FY 15-16, I had filed return with loss of Rs. 5 Lakh. I had audited the balance sheet. Now my total sale is 20 lac. How can I file return with flat 8% profit and what will be my tax liability? [Mr. Rati]

Opinion:

[By CA Naresh Jakhotia, Nagpur- Author at www.thetaxtalk.com ]

Its a very interesting issue raised by you as section 44AD is amended by the FA 2016 so as to provide that the benefit of section 44AD cannot be availed by the taxpayer for the next 5 years if they have opted out of it in anyone of the year.

Before replying to interesting issues in your query, first let us understand the law.

Section 44AD reads as under:

Special provision for computing profits and gains of business on presumptive basis.

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” :

[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 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 sub-section (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 incomes” 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].

  1. Sub. by Act No. 28 of 2016, (w.e.f. 1-4-2017).

The relevant part of section 44AD which bars the benefit of section 44AD is as under:

(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).

Effectively, going by the word of amended section 44AD, prima facie it can be said that anyone have opted out of section section 44AD in FY 2016-17 cannot opt back in for the next 5 years.

Now, comes an interesting issues.

You have mentioned that you were having loss in FY 2015-16. Since loss was there, you were not covered by the provision of section 44AD. Read again, section 44AD which says that Section 44AD applies only if the income exceeds the basic exemption limit. The relevant part is reproduced here under:

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.]

In short, even though, you have carried out the audit u/s 44AD, it is done so voluntarily and not by compulsion and not by virtue of section 44AD. The audit report is filed by you voluntarily and not by any legal backing.

In our considered opinion, by virtue of above conclusions, you can still opt for section 44AD as it is not in violation of law.

-thetaxtalk date: 28/3/2018 

email: mail@thetaxtalk.com


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