Section 44AD does not give a license to the assessee to declare lower income despite the assessee having earned higher income


Section 44AD does not give a license to the assessee to declare lower income despite the assessee having earned higher income



A person has purchased goods for Rs. 10 Lakh and has sold it for Rs. 25 Lakh thereby earning a profit of Rs. 15 Lakh as he was not having any expenses. Presumptive scheme of taxation u/s 44AD allows the person to offer the income of Rs. 2 Lakh (8% of turnover of Rs. 25 Lakh) only as against actual income of Rs. 15 Lakh. Whether such person can invest the amount of Rs. 15 Lakh in Bank FDR or any other mode and say that the amount earned is Rs. 15 Lakh but section 44AD allows him to offer income of Rs. 2 Lakh only and so he has offered Rs. 2 Lakh only as Income? Whether ITO can still add Rs. 13 Lakh to income if they notice it during survey, search or other assessment proceeding? Can such person pleads that he has earned Rs. 15 Lakh but since the relevant section has allowed to file the income at Rs. 2 Lakh as against actual income of Rs. 15 Lakh?

Let us try to know about it.

Section 44AD of the Income-tax Act, 1961-2020 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 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 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 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.

Almost all the presumptive scheme provision be it section 44AE, 44ADA, etc have wording similar to this only, It says

“ a sum equal to % turnover or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned …”

Whether the word “or as the case may be” is an obligation or privilege to the taxpayers that need to be considered to get an answer. The term ‘as the situation may be’ has been defined in legal lexicon as ‘whichever the case may be’.

Going by this definition, it would mean that the taxpayers have to offer the real income of Rs. 15 Lakh or the presumptive income of Rs. 2 Lakh, whichever is higher. Further, the word ‘or’ can be said to be disjunctive and it only mean either of the two and as it is qualified with words ‘as the case may be’ and ‘whichever is higher’.

In my view,

  1. An assessee filing the return of income is under an obligation to offer its correct and true income in accordance with the provisions of the Act.
  2. The presumptive scheme of taxation allows taxpayers to offer income higher than the prescribed rate. In short, it is the minimum rate u/s 44AD which has to be considered and higher income option is open for the taxpayers which have to be used if taxpayers have higher income.
  3. One of the arguments by the taxpayers is that AO cannot do anything even if they find that the taxpayers have income of Rs. 15 Lakh and not Rs. 2 Lakh. In my view, this may not be correct interpretation of the law. The powers of the AO are very wide & exhaustive. AO can assess correct income on the basis of investment if they have sufficient documentary evidence which is very much possible during survey, search & assessment proceeding. AO can bring to tax the higher income in such cases
  4. Though the presumptive scheme of taxation is introduced with an aim to relieve the taxpayers form the requirements of maintaining the books of accounts, however, it doesn’t not relieve the taxpayers from justifying its investment sources. In short, it may not be taken as a permission to show lower income even if taxpayers are earning higher income.
  5. The concept of making disclosure in the ITR forms with respect to few Balance Sheet data in ITR -4 or ITR 4S was appear to have been introduced with this concept only.
  6. Not offering true or correct income may even result in the application of section 69, 69A or section 69C of the Act if the investment or the expenditure is in excess of the returned income.
  7. Section 44AD does not give a license to the assessee to declare lower income despite the assessee having a higher income

Almost similar issue was dealt by Ahmedabad bench of ITAT in the case of Shivani Builders Vs. ITO [2007] 295 ITR (AT) 281.

The relevant paragraphs of the order reproduced below brings  out the import of the presumptive sections which we are discussing:

“10. It is, thus, clear that the law envisages all the three situations, laying down appropriate procedure for all of them, i.e., the assessee disclosing a higher, lower, or an amount equal to the presumptive income (reckoned at the rate of 8 per cent. of the turnover). In the present case, the assessee contends to have declared its income at the presumptive rate, being covered by the provisions of section 44AD, of which, clearly, there is no doubt, being engaged in the (civil) construction of residential flats, namely, Chanchalba Apartments. The provision of section 44AA, i.e., with regard to mandatory maintenance of books of account, would apply to an assessee engaged in such business, only, if the assessee chooses to be taxed at lower than the presumptive rate of 8 per cent. This is, to our mind, clearly in the nature of a, and the only, concession accorded by the statute to the relevant class of assessees, to which assertion of the assessee there can be no doubt, it being statutorily recognized/enacted. However, the moot point remains if the reverse is also true, i.e., where the assessee, despite the said concession, chooses to maintain the books of account, preferring to rely thereon for various other purposes, both apart from, and under the Act (e.g. interest on partner’ s capital, which would come to be worked out at a sum inclusive of their share in the net profit as disclosed as per the said books), can it ignore the book results and claim to be entitled to a lower presumptive rate of income than that revealed by such books. To our mind, clearly not.
The law does not accord a privileged status to the assessees engaged in this line of business, but only, considering the vagaries that attend thereto, drawn a higher bar for the purpose of maintenance of books, i.e., than that normally obtains under section 44AA. As such, it cannot be anybody’ s case that though he admittedly earns more, he could still be liable to be assessed to income-tax at a lower income by virtue of the said concession. The said section (section 44AD), would not, to our mind, operate to curtail the scope of income as defined under section 2(24) read with section 5 of the Act, so that where the assessee admittedly earns a higher income, the character of which as income (as defined under section 2(24)) is undoubted, it would be liable to tax on that basis, which in all cases has to be only on the basis of real income, even as held by the learned Commissioner of Income-tax (Appeals). The assessee’ s plea of the said interpretation as amounting to be penalizing it for the maintenance of its books, is, in our view, wholly misconceived ; the act of paying tax on the basis of income earned cannot, by any stretch of imagination, be considered as amounting to being penalized ; the law, as also stated earlier, not creating a privileged class out of such assessees (so as to violate article 14 of the Constitution of India), but thereby only providing a window of concession for a limited purpose.

11. The assessee, by maintaining its accounts, also derives benefit of ” capital” that becomes available to it for employment in its business or otherwise, besides, as admitted, complying with the other laws incident on its business, and which, provide for the maintenance, or otherwise require information derived from, the books of account. The said ” capital” can only be explained w.r.t. the assessee’ s books, and not otherwise, so that it cannot be that while it proves the source (of capital) w.r.t. its accounts, but claim, all the same, for their being ignored, for the purpose of assessing its liability to tax. The concession, cannot, in our view, be interpreted to imply a standard deduction at 92 per cent. of the turnover, as advocated by the learned authorised representative., even as the same may, under the facts of a given case, as where the assessee does not maintain books of account, and provides clear evidence of its gross receipt, turnover, well amount to that. In fact, the assessee, in such a case, is at liberty to declare any amount equal to or higher than 8 per cent. as it deems fit and proper (sub-section (1)). And which only further goes to show that the assessee cannot, except at the cost of tax, take advantage of, as sought to be done, higher capital/income generated. For, why would an assessee, its receipt being same/ fixed, choose to be assessed at a higher income, and consequently, bear a higher tax liability, i.e., if no other advantage/benefit accrues to it? The said concession, or its equivalent of standard deduction at 92 per cent., cannot be taken or assumed as a matter of prescription/ right, the matter being subject to factual considerations, and the limited right granted cannot transgress the basic or the fundamental scheme of the Act.
12. That apart, we also consider that the assessee’ s claim does not stand the test of section 44AD itself. This is so as section 44AD(1) itself provides for a case where the assessee chooses to declare a higher income, which would, in that case, be deemed as the income chargeable to tax under the head ” Profits and gains of business or profession” in preference to the presumptive income equal to 8 per cent. (of the gross receipt). The return of income is not a single document consisting of just the relevant prescribed form, but, rather, is a comprehensive document, including within its ambit several other documents, i.e., as are deemed necessary by law to substantive and prove the various figures that go into the computation of income as well as relating to the calculation and discharge of the tax (and interest) liability.
Section 139(9) enlists all such accompanying documents, in the absence of which the return is deemed defective, and further, on the defect not being removed within the prescribed time, empowers the Assessing Officer to treat the return as non est.

Now, therefore, it cannot be that the statements that mandatorily form a part and parcel of the return of income as required to be furnished, reveal a higher income, while the assessee states a lower figure in the relevant form, making the return itself as internally inconsistent.
The returned income has, therefore, necessarily to be in accordance and in conformation with the underlying documents which form an integral part thereof, so that the assessee cannot arbitrarily claim to be assessed at a lower figure by virtue of a concessionary measure provided under the Act to alleviate a particular hardship, i.e., of the maintenance of accounts and, therefore, also their audit. And which hardship it itself bears, or chooses to bear, considering the several other factors that impinge on the said requirement, and thus, in effect, choose not to avail of the benefit.

13. However, at the same time, we also consider that the law (section 44AD(1)) itself providing for the deeming of the higher income (as returned) as the assessee’ s income chargeable to tax, there cannot be any further disallowance on the ground that the relevant expenditure has not been, or could not be, subject to a proper verification. Once the assessee’ s income, in terms of the underlying documents, stand worked out at a sum higher than the presumptive income, the same has to be accepted as such, excepting for prima facie adjustments in respect of clear inadmissible, e.g. (say) personal expenses, income-tax, etc. For otherwise, it would amount to transgressing the clear provision of law (which ” deems” such higher sum as its income), and penalizing the assessee for having chosen to be assessed at a higher sum, in terms of the section itself, and which vests the option in him.” (Emphasis supplied)

In conclusion, in our humble view, the provisions of presumptive taxation are enacted to facilitate computation of total income and filing of return of income. It does not give a license to the assessee to declare lower income despite the assessee having a higher income. The assessee is legally bound to return higher income if the same is higher than the benchmark given.