PRESUMPTIVE TAXATION FOR BUSINESS

[Mr. M. GOVINDARAJAN]

Presumptive basis

Section 44AD (1) of the Income Tax Act, 1961 (‘Act’ for short) provides that an eligible assessee engaged in eligible business may be allowed to compute his business income on presumptive basis.

Eligible assessee

Explanation to this section defines the expression ‘eligible assessee’ as-

• an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm; and
• who has not claimed deduction under any of the-

• section 10A - Special provision in respect of newly established undertakings in free trade zone etc.,
•  10AA - Special provisions in respect of newly established undertakings in Special Economic Zones,
•  10B - Special provisions in respect of newly established 100% export-oriented undertakings,
•  10BA - Special provisions in respect of export of certain articles or things; or
•  deduction under any provisions of Chapter VIA under the heading ‘C.-Deductions in respect of certain incomes’ in the relevant assessment year.

Eligible business

The explanation to this section also defines the expression ‘eligible business’ as-

• any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
• whose total turnover or gross receipts in the previous year does not exceed an amount of Rs. 2 crores.

If the amounts received during the previous year, in cash, does not exceed 5% of the total turnover or gross receipts of such previous year, the limitation will be Rs. 3 crores instead of Rs. 2 crores. The receipt of amount or aggregate of amounts by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the receipt in cash.

Profits

A sum equal to 8% 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’.

The eligible assessee can presume his income to be 6% instead of 8% of higher amount 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 or through such other electronic mode as may be prescribed during the previous year or before the due date specified in section 139(1) in respect of that previous year.

Non-application

Section 44AD(6) of the Act provides that the provisions of this section shall not apply to-

• a person carrying on profession as referred to in sub-section (1) of section 44AA;
• a person earning income in the nature of commission or brokerage; or
• a person carrying on any agency business.

Consequences

The following are the consequences if an eligible assessee opts for Section 44AD-

• 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. - Section 44AD (2)/
• 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. - Section 44AD(3).
• 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 5 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). - Section 44AD (4)
• 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 (2) and get them audited and furnish a report of such audit as required under section 44AB. - Section 44AD (5).

Case laws

In ‘Commissioner of Income Tax v. Sahu Constructions Private Limited’ - 2013 (10) TMI 374 - ALLAHABAD HIGH COURT it was held that where the profits of the assessee are computed on presumptive basis under Section 44AD the other deduction including depreciation shall not be allowable.

In ‘Commissioner of Income Tax v. Surinder Pal Anand’ - 2010 (6) TMI 404 - PUNJAB AND HARYANA HIGH COURT, it was held that once the assessee opted for presumptive income scheme under Section 44AD the assessee is not under any obligation to explain individual entry of cash deposit in bank unless such entry has no nexus with gross receipts.

In ‘Shail P. Shah, HUF v. The Principal Commissioner of Income Tax, Ahmedabad - I’ -2024 (3) TMI 170 - ITAT, Ahmadabad, the ITAT observed that as per Commissioner of Income Tax (Appeals), the assessee declared Net Profit from business & profession which is more than 8% of the total turnover of the business as per Section 44AD and profit was earned from transactions of derivative and commodity transactions. The Principal Commissioner of Income Tax observed that the assessee has not disclosed its total turnover and has not claimed the profit as per the actual calculations. The ITAT observed that it is not a correct one. The assessee at the stage of assessment order has given all the details including total turnover which was summarized and put together and give the profit quantification of the total turnover as per Section 44AD of the Act. Therefore, invocation of Section 263 of the Act in the present case is not justifiable when the assessee has given all the details. The ITAT held that the Assessment Order is not at all erroneous or prejudicial to the interest of Revenue and, therefore, the order passed under Section 263 of the Act is not justified. The ITAT allowed the appeal.

In ‘Yogis Angel Entertainment & Décor Private Limited v. Income Tax Officer, Ward - 27 (4), New Delhi - 2024 (2) TMI 689 - ITAT, New Delhi, Commissioner of Income Tax (Appeals) has only taken cue from the provisions of Section 44AD but not applied said section. The Commissioner of Income Tax (Appeals) estimated based on the entirety of the business. Having gone through the record, in the absence of any other details, the ITAT held that the interest of justice would be well served by directing the revenue authorities to ‘estimate’ profit @ 5%. The appeal of the assessee on this ground is partly allowed.

In ‘Amcon Car rentals v. Principal Commissioner of Income Tax, Panaji, Goa’ - 2023 (11) TMI 445 - ITAT, Panaji, the turnover of the assessee is more than Rs. 1 crore. The assessee did not get is accounts audited. But the assessee had estimated the profit @ 8% of its total receipts under Section 44AD. The ITAT, Panaji observed that Assessing Officer has not conducted any enquiry or verification regarding why the assessee had not got its accounts audited nor had verified whether in the business of assessee, sec. 44AD would be applicable and how the assessee had claimed deduction of remuneration paid to partners. The assessee has not only failed to get its accounts audited, but while taking benefit and recourse u/sec. 44AD, it had even deducted the remuneration paid to partners, which is not allowable as deduction u/sec. 44AD of the Act.
Computation of presumptive income from business under Section 44 AD

1. Gross Turnover or Gross Receipts (A is limited to Rs. 2 Crores, however if Ab is less than or equal to 5% of A1 then the limit under A is extended to Rs. 3 Crores.)-
2. Through account payee cheque or a/c payee bank draft or bank electronic clearing system received or prescribed electronic modes received before specified date;
3. Receipt in cash;
4. Any other mode then (a) and (b);
5. Presumptive income under Section 44AD

1. 6% of Aa or the amount claimed to have been earned, whichever is higher;
2. 8% of (Ab+Ac) or the amount claimed to have been earned, whichever is higher;
3. Total (a+b).

Note —If Income is less than the above percentage of Gross Receipts, it is mandatory to have a tax audit.

Income Tax Return

The professional who opts presumptive taxation under Section 44AD he shall file income tax return in ITR-4 -Sugam for the Assessment Year 2024-25. ITR-4 has six sections that one needs to fill before submitting the form in online mode and a preview page where you one can validate all your details filled. The sections are as follows:

• Personal Information
• Gross Total Income
• Disclosures and Exempt Income
• Total Deductions
• Taxes Paid
• Total Tax Liability

Due date of filing the income tax return is 31^st July 2024.

Discussions to this article

[VINEET JAIN]

if i am regulary filling ITR under 44AD. but in this year there is only bank Chages and accounting chrges depriciation expenses. and there is no sale. then 44 ad is applicable. if not then tax audit is applicable on me