2022 (6) TMI 415 - AT - Income Tax

Applicability of provision u/s 44ADA - quantifying the turnover of the assessee - whether or not the sales tax or/and VST/CST is includable while quantifying the turnover to determine the applicability of Section 44AD? - HELD THAT - As in this case, the accounts are not audited and there is nothing on record to show that the method of accounting followed by the assessee is not inclusive method. Since Section 145A of the Act is clear in its import that for the purpose of determining the income chargeable under the head profits and gains of business/profession , the valuation of purchase and sales of goods shall be adjusted to include the tax component also and it was so understood by the ICAI the turnover shall include the tax component unless the assessee maintains a separate tax account in respect of sales tax or/and VST/CST wherein credit is made on collection and debit is made on payment. Admittedly in this case, the assessee did not get their accounts audited for this particular assessment year though it was not so for the earlier assessment years. In these circumstances, we are of the considered opinion that for the purpose of quantifying the turnover of the assessee, the sales tax or/and VST/CST cannot be excluded. On this account, we cannot find fault with the observations of the Ld. CIT(A). Now coming to the net profit relevant for taxation is concerned, CIT(A) estimated the same at 25% of the gross turnover but the figures furnished by the assessee by way of written submissions, show that the net profit was 12.82%, 12.54% and 5.52% for the AYs.2014-15, 2015-16 and 2016-17 respectively - we find that estimate of the same at 25% is very high and taking a pragmatic view, we estimate the same at 12.5% of the gross receipts/turnover. AO is directed to re-compute the income under the head profits and gains of business/profession of the assessee at 12.5% of the gross receipts/turnover. Appeal of assessee allowed in part.

Summary

Issues:
Determining taxable income under Section 44AD of the Income Tax Act, 1961 based on turnover and gross receipts, inclusion of VAT/CST/Service Tax in turnover for presumptive income calculation, interpretation of turnover for tax audit purposes, and estimation of net profit for taxation.

Analysis:
1. The case involved an appeal by the assessee against an order determining total income by invoking provisions of Section 44ADA due to undisclosed receipts with TDS deductions. The Ld. CIT(A) found the gross business receipts exceeded the threshold for Section 44ADA but erred in not considering Section 44AD, estimating taxable income at 25% of total turnover.

2. The assessee contended that VAT/CST/Service Tax should not be included in net profit calculation as they lack profit elements. Citing precedents, the AR argued that certain taxes should not be part of gross receipts for presumptive income calculation, relying on decisions concerning similar provisions like Section 44BB and Section 80HHC of the Act.

3. The Revenue argued that turnover, gross receipts, and sales are crucial for tax audit, emphasizing the inclusion of VAT/CST in turnover as per Section 145A. They highlighted that the ICAI's guidance defines turnover as the aggregate amount of sales or services rendered by an enterprise, supporting the inclusion of these taxes in turnover.

4. The Tribunal analyzed the submissions and facts, noting the absence of audited accounts for the relevant assessment year. Referring to precedents, the Tribunal emphasized that unless the assessee maintains separate tax accounts, taxes should be included in turnover. Considering Section 145A and ICAI guidance, the Tribunal upheld the inclusion of VAT/CST in turnover for Section 44AD applicability.

5. Regarding net profit estimation, the Ld. CIT(A) had set it at 25% of gross turnover, but the Tribunal found this excessive based on the assessee's historical net profit percentages. Adjusting the estimation to 12.5% of gross receipts/turnover, the Tribunal directed the Assessing Officer to recompute the income accordingly.

6. Ultimately, the Tribunal partially allowed the assessee's appeal, emphasizing the correct inclusion of VAT/CST in turnover for Section 44AD applicability and adjusting the net profit estimation to 12.5% of gross receipts/turnover for taxation purposes.

This detailed analysis covers the issues of turnover calculation, inclusion of taxes in presumptive income, and net profit estimation as addressed in the ITAT Hyderabad judgment.