When law doesnot meet logic – Presumptive taxation scheme u/s 44AD

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When law doesnot meet logic – Presumptive taxation scheme u/s 44AD

Ease of business & simplicity of tax laws are the most used words in theory, seldom in reality. There are various provisions in the Income Tax Act which lacks logic. Let us have a look at one such provision, section 44AD which was enacted to provide relief to the businessmen from maintenance of books of accounts. This is one of the most commonly used sections by the small businessmen, with turnover not exceeding Rs. 2 Crore. It provides immunity to the businessmen from books of accounts if the income offered for taxation is minimum 8% of the turnover (6% if payment is accepted in digital mode). It is applicable to Individual, HUF, Partnership firm who are (a) engaged in business [& not profession] (b) not earning income by way of commission or brokerage (c) not in agency business.

Evolution of section 44AD:

Originally, taxpayers were simply required to report turnover & income in the ITR forms. Later, this simplicity got vanished as ITR forms sought details like debtors, creditors, stock, cash, Gross profit etc also from such taxpayers which obviously requires some book keeping. To make it more rigid, sub-section (4) & (5) in section 44AD was amended by FA-2016 which in a simplified manner reads as under:

(4) Where assessee declares income u/s 44AD in any year & if he declares profit in any of the 5 subsequent years not u/s 44AD then he shall not be eligible to offer income u/s 44AD again in the next 5 years.

(5) Taxpayers covered by (4) above and in whose case total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain the books of A/c & must also them audited.

It means that if a person has once opted for section 44AD, he has to compulsorily offer the income on presumptive basis for minimum of next 5 years. If Person decides to quit section 44AD within next 5 years then he has to compulsorily get the books of accounts audited further for next 5 years even if the profit offered for taxation is more than 8% or 6% of the turnover, if income exceeds the amount not chargeable to tax.

For example, M/s A, a partnership firm, has started his business of builder-ship in the FY 2014-15 with 12 flats scheme and has a turnover as under:

FY Turnover Remarks
2014-15 Nil Scheme under construction
2015-16 35 Lakh Sold 1 Flats
2016-17 70 Lakh Sold 2 Flats
2017-18 1.75 Crore Sold 5 Flats
2018-19 35 Lakh Sold 1 Flats
Unsold Stock  = 3 Flats

M/s A has opted for opted for section 44AD till FY 2016-17 by offering income @ 8% (though his actual income may even be less than 8%) as the presumptive scheme of taxation is more convenient & easy. Now, due to sudden increase in the turnover in the FY 2017-18, firm decides (a) not to opt for section 44AD (b) offer income on actual basis as majority of the stock is sold in this year and (c) gets books of accounts audited. Since in FY 2017-18 (i.e., within a period of 5 years) firm quitted section 44AD, it cannot offer the income in the FY 2018-19 on presumptive basis & has to compulsorily gets his books of account audited even though his turnover is mere Rs. 35 Lakh if firm have some taxable income. Same will continue for the next 5 years till 2023-24 wherein firm will be required to get his books of account audited even if its turnover is meager or have small total income of say Rs. 100/- from sale of scrap etc.

The purpose of section 44AD was to provide an ease in business and taxation. The amendment has made it worst, a beneficial provision has turned out to be a penal provision. There exists no proper logic for such abrupt or illogical provisions. To comply, taxpayers will now be required to keep the track of 5 years return filing period and may be required to get the books of accounts audited even if the profit offered for taxation is reasonably well above the accepted ratios. Logic behind introduction of presumptive taxation scheme got diluted with the passage of time.

Exception:

  1. 5 Years rule as referred above is not applicable (as of now) to section 44ADA which is applicable for professionals who can offer income on presumptive basis @ 50% of the gross receipts. Similarly, no such rule exists for presumptive taxation scheme for truck owner who can offer income on presumptive basis u/s 44AE.
  2. If the person has already offered income on presumptive basis u/s 44AD continuously for 6 years (1+5) then above rule of getting the accounts audited after quitting section 44AD will not be applicable.

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