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October 12, 2020

Section 44AD does not mandate assessee to maintain books of accounts – Chandigarh ITAT

by shivam jaiswal in Income Tax, Legal Court Judgement

Section 44AD does not mandate assessee to maintain books of accounts – Chandigarh ITAT

As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited. However, to give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA and 44AE. Presumptive taxation scheme lets the taxpayers declare their taxable income at a prescribed rate irrespective of actual profit/gains and in turn relieves them from the burden of maintaining regular books of account and getting the same audited.

Who are eligible taxpayers who can claim presumptive taxation under Section 44AD?

The presumptive taxation scheme of section 44AD can be adopted by following persons carrying out any business other than business covered under Section 44AE:

  • Resident Individual
  • Resident Hindu Undivided Family
  • Resident Partnership Firm (not Limited Liability Partnership Firm)
  • Any person who has not claimed deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year

What is the monetary threshold under Section 44AD?

The presumptive taxation scheme of section 44AD can be opted by the eligible persons, if the total turnover or gross receipts from the business does not exceed Rs 2 crores

Click here to Know Relation between Presumptive Taxation Section 44AD and Tax Audit under Section 44AB

What is the manner of computation of taxable business income in case a person is adopting presumptive taxation scheme under section 44AD?

In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at:

  • 6% of total turnover or gross receipts of a tax year received by account payee cheque/bank draft, ECS through bank account on or before due date of filing the return of income
  • 8% of total turnover or gross receipts of a tax year in all other cases

Let us refer to the case of Nand Lal Popli Vs DCIT (ITAT Chandigarh), where the issue under consideration was that whether the Assessing Officer, for making the impugned addition with the presumption that an amount to the extent of 92% of the gross receipts was the expenditure incurred by the assessee was correct or not?

Facts of the Case:

  • The assessee was a civil contractor and had declared its profits under section 44AD of the Income Tax Act, 1961 amounting to Rs.3,02,050 against the gross receipts of Rs.37,75,444.
  • The Assessing Officer (AO) on the basis of these figures inferred that the assessee had incurred expenses to the tune of Rs.34,73,394 (Rs.37,75,444 – Rs.3,02,050).
  • However, he observed that it was contrary to the expenses shown in the cash flow statement of Rs. 18,49,264.
  • The explanation of the assessee was that an amount of Rs. 16,24,130 was paid from the bank account on various dates which was not reflected in the cash flow statement.
  • Since no documentary evidence was filed to prove that these payments were towards contract work, the AO made an addition of Rs.32,24,130.

Appeal before CIT(A):

  • The assessee stated before the CIT(A), that the profits were declared as per the scheme of presumptive taxation @ 8% which the AO could not disturb.
  • The CIT(A) dismissed this ground of appeal raised by the assessee stating that the assessee could not substantiate that the payments made through bank were all related to his contract business.
  • It was imperative on the assessee’s part to discharge the burden to substantiate his claim that Rs 34,73,394 were actually expended solely towards his civil work.
  • Therefore, the issue was decided against the assessee.
  • Aggrieved by this, the assessee appealed before the Income Tax Appellate Tribunal (ITAT). 

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Observations of the ITAT on the provisions of Section 44AD

  • The issue to be decided by the ITAT was whether accepting the case of the assessee as taxable under the presumptive taxation as provided under section 44AD, the AO can make addition under section 69C making the cash flow statement provided by the assessee the basis of his addition.
  • The provisions of the Section 44AD were clear that in case of an eligible business based on the gross receipts/total turnover, the income under the head ‘profits & gains of business’ shall be deemed to be @ 8% or any higher amount.
  • The first important term here was ‘deemed to be’, which proved that in such cases if there was no income to the extent of such percentage, then to that extent, income would be deemed.
  • It was undisputed that ‘deemed’ meant presuming the existence of something which actually was not.
  • Therefore, it was clear that though for the purpose of levy of income tax 8% or more may be considered as income, but actually this was not the actual income of the assessee.
  • Putting the above analysis, in converse, it could be inferred that the same was also true for the expenditure of the assessee.
  • If 8% of gross receipts were ‘deemed’ income of the assessee, the remaining 92% were also ‘deemed’ expenditure of the assessee.
  • The actual expenditure may not be 92% of gross receipts, but only for the purposes of taxation, it was considered to be so.
  • To take it further, it can be said that the expenditure may be less than 92% or it may also be more than 92% of gross receipts.
  • Further, on the reading on the substantive part of the provision, it was quite clear that an assessee availing the benefit of such presumptive taxation can claim to have earned income @ 8% or above of the gross receipts.
  • In that case, the provisions of sub-section (5) of the Section 44AD will be applicable. According to Section 44AD(5), an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) 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 section 44AA(2) and get them audited and furnish a report of such audit as required under section 44AB
  • From the combined reading of sub-section (1) and sub-section (5), it was apparent that the obligation to maintain the books of account and get them audited was only on the assessee who opted to claim the income being less than 8% of the gross receipts.

Observations of the ITAT on the present case

  • Applying the above to the facts of the present case, ITAT observed that the AO, for making the impugned addition had started with the presumption that an amount to the extent of 92% of the gross receipts was the expenditure incurred by the assessee, which was a totally wrong premise.
  • If the income component was estimated, then how the expenditure component on the basis of said income could be considered to have been ‘actually’ incurred?
  • This was not a case, where the AO had doubted the gross receipts or gross turnover of the assessee.
  • Accepting the same, estimating income @ 8% on the same at presumptive rate, AO preferred to make further addition under section 69C of the Act.
  • The argument of the Departmental Representative that the turnover of the assessee was doubted by the AO was totally ill-found, in view of the same.

Observations of the ITAT on maintenance of Books of Accounts

  • It was a fact that the assessee had not maintained books of account and that is why he had opted for 8% income as per section 44AD.
  • The section also did not put obligation on the assessee to maintain books of account, in view of the fact that his income has been assessed as per section 44AD, he cannot be punished for not maintaining the same.
  • The argument of the Departmental Representative that the assessee was maintaining books of account was not supportable.
  • Keeping or preparing a cash flow statement cannot be considered as keeping the books of account.

Observations of the ITAT on the argument of the Departmental Representative that the addition was made under section 69C, on which there is no bar under section 44AD

  • The only constrain provided under section 44AD was the applicability of provisions of section 30 to 38.
  • According to Section 69C, where in any financial year an assessee had incurred any expenditure and he offered no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not satisfactory, in the opinion of the AO, then the amount covered by such expenditure or part thereof, may be deemed to be the income of the assessee for such financial year.
  • Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.
  • The crucial words of section 69C for the present appeal were ‘any financial year an assessee has incurred any expenditure’.
  • But can we say on the facts & circumstances of the present case that the assessee has ‘incurred’ any expenses?
  • From an analysis of section 44AD, ITAT had held that the assessee had not incurred the expenses to the extent of 92% of the gross receipts.
  • Therefore, in the present case, the provisions of section 69C could not be applied.
  • Asking the assessee to prove to the satisfaction of the AO, the expenditure to the extent of 92% of gross receipts, would also defeat the purpose of presumptive taxation as provided under section 44AD.
  • Since the scheme of presumptive taxation was formed to avoid the long drawn process of assessment in cases of small traders or in cases businesses where the incomes are almost of static quantum of all the businesses, the AO could have made the addition under section 69C, once he had carved out the case out of the glitches of the provisions of section 44AD.
  • No such exercise was done by the AO in this case.

Observations of the ITAT on the case law relied on by the Departmental Representative

  • The only case law relied on by the Departmental Representative was that of the Tribunal (Ahmedabad Bench) in the case of Shivani Builders (supra).
  • On perusal of the said order, ITAT observed that the basis of finding given in this order was mainly on the fact that the assessee had failed to record its turnover correctly in its books.
  • However, no such finding was there in the present case.
  • In this case, the AO himself while computing the income of the assessee had made the business income to be taxable @ 8% of the gross receipts as provided under section 44AD of the Act.

Therefore, this appeal was allowed in favour of the assessee. Section 44AD does not mandate assessee to maintain books of accounts. Therefore, once the assessment of the assessee was completed u/s. 44AD, there cannot be any application of section 69 of the Income Tax Act.

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