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, section 44ADA and section 44AE.
Meaning of presumptive taxation scheme
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. A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited. For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below:
The presumptive taxation scheme of section 44AD.
The presumptive taxation scheme of section 44ADA.
The presumptive taxation scheme of section 44AE.
The Central Board of Direct Taxes (CBDT) explained the intention behind introducing the above provisions in Circular No. 684 dated 10 June 1994. As per the said circular, Reforms Committee chaired by Dr Raja J. Chelliah had also recommended gradual introduction of the Estimated Income Method in certain areas to facilitate better tax compliance. Accordingly, Section 44AD was inserted in the Income tax Act (Act) with a view to providing for a method of estimating income from the business of civil construction or supply of labour for civil construction work. This section was applicable to all the assessee whose gross receipts from the above mentioned business did not exceed INR 40 Lakhs. The income from such business was estimated @ 8% of the gross receipts paid or payable to the assessee. Further, Section 44AE provided for a method of estimating income from the business of plying, hiring or leasing trucks owned by a tax payer owning not more than 10 trucks.
Section 44AE was not applicable to the persons who did not own any truck but operated trucks taken on hire. It was clarified that all deductions under Sections 30 to 38 including depreciation, would be deemed to have been already allowed and no further deduction would be allowed under both these sections. The written down value would be calculated, where necessary, as if depreciation as applicable had been allowed. It was further clarified that in the case of firms, the deduction for salary and interest to partners to the extent permissible under clause (b) of section 40 would be allowed. However, originally in both the Sections such deduction to firms was not clearly provided for. Therefore, a proviso to sub-section (2) of Section 44AD and to sub-Section (3) of Section 44AE was inserted by the Finance Act, 1997 with effect from April 1, 1994 to provide that in case of firm, the deduction on account of salary and interest paid to partners would be allowed, subject to conditions and limits specified in clause (b) of Section 40. Schemes under both the Section 44AD and 44AE were optional.
Thereafter, the Section 44AD was amended by the Finance (No. 2) Act, 2009 from Assessment Year 2011-12, which provided applicability of this section to “eligible assessee” and for “eligible business”. The Finance Act, 2016 introduced a new Section 44ADA incorporating a similar scheme for presumptive taxation of professionals from Assessment Year 2017-18. Section 44ADA is applicable to a person who is a resident of India and having income from profession referred in section 44AA(1) viz., legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration and any other profession as notified by the CBDT; and the gross receipts on account of such profession do not exceed INR 50 lakhs. Once the above said conditions are satisfied, the assessee has an option to declare either 50% or more of the gross receipts as income from such profession. While arriving at such presumed income it would be deemed that all deductions under the provisions of Sections 30 to 38 have been given effect to and the written down value of the assets used for the purposes of such profession would be deemed to be calculated as if the person would have claimed depreciation.
Disallowance for personal purposes u/s. 38 is highlighted in SHRI RAM KARAN YADAV VERSUS ITO – 2018 (9) TMI 1090 – ITAT JAIPUR and Unabsorbed depreciation loss u/s. 32(2) in DCIT VERSUS SUNIL M. KANKARIYA – 2007 (1) TMI 242 – ITAT PUNE-B
However, if the person claims his income from profession to be lower than 50% of the gross receipts from such profession and whose total income exceeds the maximum amount not chargeable to income-tax then the person has to maintain the required/specified books of account, documents and get the accounts audited as per the provisions of the Section 44AB i.e. obtain a report in Form 3CA or 3CB along with the Form 3CD, as the case may be.
1) Deduction of partners’ remuneration and interest
With effect from Assessment Year 2017-18, second proviso to sub-section 2 of Section 44AD has been omitted which provided for deduction under Section 40(b) with regard to the salary and interest to partners. Therefore, the issue would arise is whether a deduction under section 40(b) with regard to the salary and interest of partners can be claimed. The CBDT vide its Circular no. 684 dated 10 June 1994 while explaining the scope of Sections 44AD and 44AE stated that the deduction under section 40(b) of partners’ salary and interest would be allowed from the income computed on the presumptive basis.
However, later the CBDT issued another Circular No. 737 dated 23 February 1996 holding that Circular No. 684 dated 10 June 1994 was erroneous to the extend it allowed deduction under section 40(b) and deleted the relevant portion of the earlier circular with retrospective effect from 1994. This gave rise to wide spread litigations but the controversy was laid to rest by the Finance Act, 1997 which inserted the proviso in Sections 44AD and 44AE specifically providing for deduction under section 40(b) with retrospective effect from Assessment Year 1994-95. The High Courts [Goswami & Bros v. UOI (250 ITR 359) (Raj) and Ranjan Constructions & Ors v.CBDT (232 ITR 76) (Ori)] struck down the CBDT Circular No. 737 dated 23 February 1996 in light of the said amendment.
Section 44ADA does not contain the provision similar to that of Sections 44AD and 44AE extending the deduction under Section 40(b) and more over the Finance Act, 2016 has omitted the said proviso from section 44AD though not from section 44AE. This would give rise to fresh round of litigation. It would be open for an assessee to argue that only deductions under Sections 30 to 38 have been specifically deemed to have been allowed but not under other sections and hence, the deduction of partners’ salary and interest under section 40(b) is to be allowed.
Applicability of Section 44ADA to a partner of firm receiving remuneration and/or interest from the firm. What will happen in case of partner of a professional firm who receives remuneration in the form of salary and interest from the firm. Such receipts would normally be taxed as professional income by virtue of Section 28(v) and therefore, the issue that would arise for consideration is whether such a partner can opt for the presumptive scheme under Section 44ADA. In this connection, attention is invited to the decisions of Kolkata bench of the Income Tax Appellate Tribunal in the case of Amal Ganguli v. DCIT (ITA No. 2135/Kol/2008) and Sagar Dutta v. DCIT (ITA No. 692/Kol/2012) wherein it was held that a partner would be liable to tax audit under Section 44AB if his salary from the partnership firm exceeds the threshold limit prescribed under Section 44AB. In the case of Amal Ganguli, the Tribunal observed that partner is carrying out his profession as a partner of the firm though not individually. Further, it held that if the salary, commission, bonus or interest received by a partner of the firm exceeds the limit prescribed for tax audit then the partner has to comply with the tax audit provisions in his individual capacity also. This implies that where a person is carrying out his professional as a partner of a firm, he satisfies the condition laid out in Section 44ADA of being ‘engaged in a profession referred to in Section 44AA(i) and once the salary and interest are taxed as income from profession, all other sections of Chapter IV-D – “Profits and gains of business or profession” would apply to such income. Consequently, the provisions of Section 44ADA should also be applicable to the partner of a professional firm. It can be contended that in case of a partnership, salary, bonus, interest etc. are nothing but profits of the firm provided to the partner on different accounts implying that taxation of salary, interest in the hands of the partner is nothing but extension of taxation of profits of the firm in different hands.
However, if this argument holds good, then the effect of, disallowances as a consequence of non-observation of TDS and TCS provisions, disallowance of cash payments and allowability of government taxes/duties, employee welfare fund contributions etc. on cash/ payment basis, also need to be given effect to. In other words, the income from profession would be 50% of the gross receipts which would be further increased or decreased as per the provisions of Sections 40, 40A(Disallowance u/s 40A(3) highlighted in case of BV. PRABHU VERSUS INCOME TAX OFFICER – 2010 (1) TMI 882 -ITAT, BANGALORE and 40(a)(i)(a) in case of JAHARLAL MUKHERJEE VERSUS I.T.O., WARD-29 (1), KOLKATA), 41, 43A, 43B (GOOD LUCK KINETIC VERSUS ITO, WARD-2, MARGAO – 2015 (6) TMI 648 – ITAT PANAJI) and 43C, the resultant amount would be the income from such profession.
In RM. Chidambaram Pillai (1977 AIR 489) (SC), it was held that a firm is not a ‘legal person’, though it has some attributes of a personality. In Income-tax law, a firm is a unit of assessment, by special provisions, but is not a full person. Thus, salary to a partner may be considered as only share of profit under a different name. In view of the above, partner receiving the remuneration in the form of salary or interest can be covered by the provisions of Section 44ADA, subject to fulfilment of other conditions. Reference can be made to MR. A. ANANDKUMAR VERSUS ACIT – 2019 (2) TMI 165 – ITAT Chennai
Addition made under Section 69 when income was offered under presumptive scheme of Section 44AD
The Income Tax Appellate Tribunal of Jaipur in the case of ITO v. Devi Singh Solanki (99 TTJ 890) in the context of addition made under Section 69 when income was offered under presumptive scheme of Section 44AD, it held that Section 44AD has limited overriding effect only over Sections 28 to 43C; but not over the other sections of the Act. Reference can also be made to CIT v. G. S. Tiwari & Co (41 Taxmann.com 17) (All). Hence, the argument put forward in the above para may not sustain.
2) Share of profits of a partner – Gross receipts for the purpose of Section 44ADA
One of the condition for applicability of Section 44ADA is that the ‘total gross receipts’ of the assessee engaged in the profession should not exceed INR 50 lakhs. Whereas Section 44AD provides ‘total turnover or gross receipts’. The words gross receipts or total turnover are not defined in the Act and therefore, one needs to understand their meaning under commercial parlance. The Guidance Note issued by the Institute of Chartered Accountants of India on “Tax Audit” clarifies that in case of gross receipts of the business it will include all receipts whether in cash or in kind arising from carrying on of the business and it specially provides that for the purposes of Section 44AB it would exclude partners share of profit which is exempt under section 10(2A). Though the said exclusion is provided for arriving at the gross receipts of the business; the same logic can be extended while arriving at the gross receipts of the profession. The Mumbai Bench of the Income Tax Appellate Tribunal in the case of ACIT v. India Magnum Fund (81 ITD 295) also held that in order to trigger the provisions of Section 44AB, there should be first computation of profits and gains of business or profession i.e. computation of total income as per Section 4. As the income exempt under Section 10 does not form part of the total income, such exempt income cannot be subjected to the provisions of Section 44AB. Consequently, one may argue that share of partners profit which is exempt under section 10(2A) would not be considered for the purposes of the gross receipts.
3) Maintenance of books of account
Section 44AA deals with maintenance of books of account. The books of account are not required to be maintained by assessees who opt to offer income under presumptive taxation. In other words, if the assessees intend to offer income lower than the specified percentage, then they are required to maintain the books of account. This is specifically provided in Section 44AA only with reference to those assessees who are covered by Sections 44AD and 44AE. However, Section 44AA is silent in relation to the assessees who are covered by Section 44ADA. This implies that the Section 44ADA overrides only Sections 28 to 43C and not Section 44AA and therefore, Revenue may take a stand that it is mandatory for the professional who is covered under Section 44ADA to maintain books of accounts though he has opted for the presumptive taxation scheme. Although, the Memorandum to the Finance Bill, 2016 provides that an assessee opting for Section 44ADA would not be required to maintain books of account under Section 44AA(1), the same has not been brought out clearly in the Section 44AA. One may rely upon the legislative intent put forth by the Memorandum to the Finance Bill and also the fact that without the exception to maintain books of account the very purpose of the presumptive taxation scheme would be defeated.
The Finance Act, 2016 further amended sub-section 4 of Section 44AD with effect from Assessment Year 2017-18 whereby if a person opts for the presumptive taxation scheme, he is also required to follow the same scheme for next 5 years. If he fails to do so, then presumptive taxation scheme will not be available to him for the next 5 years. For example, an assessee claims to be taxed on presumptive basis under Section 44AD for Assessment Years 2017-18, 2018-19 and 2019-20 and he offers income on the basis of the presumptive taxation scheme. However, for the Assessment Year 2020-21, he opts not to be governed by the presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of the presumptive taxation scheme for the next five Assessment Years, i.e. for Assessment Years 2021-22 to 2025-26. Further, he is required to keep and maintain books of account and he is also liable for tax audit as per Section 44AB from the Assessment Year in which he opts out from the presumptive taxation scheme. This would be irrespective of threshold limit of gross receipts prescribed under Section 44AB. Similar consequences of not following the presumptive taxation scheme continuously for 5 years are absent in the case of assessees who are covered by Section 44ADA.
Can a professional declare his income equal to 50% of his gross receipts as per provisions of Section 44ADA “EVEN” if his actual income comes to, say 75% of his gross receipts after meeting all his expenses related to profession?
Can the Department in future claim the difference of his investments and returned income as undisclosed income in later years?”
One of the views which was vehemently argued was that the assessing officer (AO) has no option but to accept the income declared as per benchmark set in the respective sections i.e. Sections 44AD, 44ADA, 44AE.
The Punjab and Haryana High court in Naresh Kumar v. CIT 393 ITR 389 has held cash deposited in bank is chargeable under section 69A as the assessee failed to link purchases and sales and the deposit of money in bank by the assessee returning income based on 44AF. So, it is incorrect to say that AO cannot take any action and apply section 69, 69A, 69C etc. It all will depend on facts of each case. Punjab and Haryana High court distinguished and overruled its own decision in CIT v. Surinder Pal Anand 48 DTR 135 in which cash deposited in bank was held from business itself. 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.
4) Whether actual profit declared must be higher as per books than presumptive
This can be highlighted with an example. Suppose Mr A is in trading business. His turnover is Rs 120 Lakhs, Commission income is Rs 2 Lakhs, Net Profit is Rs 15 Lakhs, and total income is 14 Lakhs and he files return for Rs 14 Lakhs. Is sec 44AD applicable as net profit is above 8%.
In this case since the assessee is receiving commission income, he is not eligible to claim benefit of Sec.44AD and 44AB(A) is applicable. Also as turnover exceed Rs 1 Cr. Audit also has to be carried out.
Income at the higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%. Income at a lower rate (i.e., less than 8%), can be declared. However, if assessee does so, and his income exceeds the basic exemption limit, then he will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.
With regards to sec 44AE, if the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can also be declared as per the wish of the assessee.
5) Whether the GST component will be calculated while calculating the Gross turnover for the applicability of the 44AD/44AE/44ADA?
This is a debatable and unending issue and no direct reference can be made to the judgment of the hon’ble courts and tribunals. Whether the GST component should be included while calculating the threshold limit of the 2 crores, reference can be made to the judgment of the hon’ble SC in case of the Chowranghee Sales Bureau Pvt Ltd back in the 1961 where the apex court has held the indirect tax component should be included while calculating the gross turnover or the sale receipts. Referring to the above judgment the SC has further provided the two judgments in case of the Jonnalla Narashimharao and co (1993) (SC 2000ITR 58) AND CIT v T. Naggi Reddy (1993) (1200 ITR 253) where the apex court has followed its own decision in case of the the Chowranghee Sales Bureau Pvt Ltd. Section 145A also provides the inclusive method while calculating the gross turnover and the sale receipts. However the said section limits itself to the computation of the income from the profits and gains from the business and profession. Thus keeping the view the literal interpretation the said section is restrictive in nature and cannot be applied while calculating the threshold limits in case of the applicability of the section 44AD limit of the 2 crores. Thus it is crystal clear while calculating the threshold limit of 2 crores the GST component will be excluded.
E.g. If an assesse has the turnover of the Rs 1.90 lakhs along with the GST component of the 20 Lakhs, now whether the GST component will not be included and assesse will be entitled to the benefit of the section 44AD. Another question that arises is whether the tax rate of the 8 percent or 6 percent as the case may be, will be applied to the GST component. Section 145A speaks that while calculating the turnover the said amount shall be adjusted to include the effect of the any taxed charged. Thus keeping in view the said section the turnover shall also include the GST component while calculating the 8 percent limit. However when one reads the section 44AD it starts with the non obstantate clause and reads as follows “Notwithstanding to the sections 28 to 44DB”. Accordingly it can be inferred that section 145A is not applicable to the section 44AD since the section 145A is itself applicable to the computation of the income in case of the profits from the business and profession. So the merit has to be given to the method of the accounting regularly employed by the assesse. Therefore of the books of the accounts are maintained on the exclusive basis then the GST will not be included or vice versa
6) Implications of deduction u/s 43B
A very interesting issue on the disallowance u/s 43B of the Income Tax Act,1961 has been considered by Panaji Tribunal in case of Good Luck Kinetic v. ITO (2015) 58. The Tribunal held that 44AD starts with “notwithstanding anything to the contrary contained in Sec. 28 to 43C” whereas section 43B starts with the words “notwithstanding anything contained in any other provisions of this Act”. The non-obstante clause in Sec. 43B has far wider amplitude. Hence, disallowance could be made by invoking the provisions of Sec. 43B.
This is because the said provisions u/s 28 to 43C are provisions relating to the computation of business income of the Assessee. However, a perusal of the provisions of Sec. 43B shows that the said provision is a “restriction” on the allowance of a particular expenditure representing statutory liability and such other expenses, claimed in the profit and loss account unless the same has been paid before the due date of filing the return. Further, the non-obstante clause in Sec. 43B has far wider amplitude because it uses the words “notwithstanding anything contained in any other provisions of this Act”. Therefore, even assuming that the deduction is permissible or the deduction is deemed to have been allowed under any other provisions of this Act, still the control placed by the provisions of Sec. 43B in respect of the statutory liabilities still holds precedence over such allowance. This is because the dues to the crown has no limitation and has precedence over all other allowances and claims. The disallowance made by the AO by invoking the provisions of Sec. 43B of the Act in respect of the statutory liabilities are in order even though the Assessee income has been offered and assessed under the provisions of Sec. 44AF of the Act. Therefore, considering the view held by the aforesaid Tribunal, addition/ disallowance can be made u/s 43B even though the income has been declared u/s 44AD, 44ADA or 44AE Example: Mr. X, having turnover of Rs. 70,00,000 declared profit at 8% amounting to Rs. 5,60,000. He has not deposited employer share of EPF of Rs.25,000 up to due date of return filing. Also, he has not paid bonus amounting to Rs.40,000 to his employees. Whether addition can be made u/s 43B if Mr. X opts for sec 44AD? Yes, addition can be made u/s 43B even if income is declared u/s 44AD. In this case the income will be assessed as:
Profits declared u/s 44AD
Add:-Disallowances u/s 43 B
EPF not deposited up to due date of return filing
Bonus not paid up to due date of return filing
An important Issue X & Co. a partnership firm opts for Section 44AD during the Previous Year 2019-20 fails to pay interest of Rs.5 Lacs to the scheduled Bank. Assessing Officer while making the Assessment U/s 143(3) enhanced the assessment by Rs.4 Lacs by invoking the disallowances U/s 43B be a Non-Obstante Clause. The Firm paid such interest during the Previous Year 2020-21 & claim allowances of such Interest while filing the ROI. Assessing Officer disallows the Interest contending that Section 44AD(2) restricts the assessee claims of any expenditure U/s 30 to 38 & Interest Expenditure is governed as per Section 36. Comment on the action of the Assessing Officer. The Action of the Assessing Officer is not as per the law. Once the disallowances of interest were attracted U/s 43B the same will be allowed as per Section 43B itself. It means normally interest expenditure is allowed U/s 36 read with Section 43B on the payment basis if it is payable to the scheduled Bank. If Assessee fails to pay the interest then such interest will be disallowed as per Section 43B. Further, the proviso to Section 43B allows such expenditure during the Previous Year in which it is paid. Therefore, in the given case the Assessee firm is eligible to claim the Deduction of the Interest since such allowances are as per Section 43B & not as per Section 36. If Interest paid is further disallowed it will tantamount to Double Taxation. Additions can be made u/s 43B even if income is declared u/s 44AD.
Presumptive taxation is one way, though not the only way, by which the process of fiscal reform currently under way in the country may be further advanced. Another element to take into account in evaluating whether and how presumptive approaches should be used is that presumptions can involve the granting of a tax preference. Depending on how a presumption is determined and applied, it can result in a reduced burden for certain kinds of taxpayers. If the scope of the scheme is extended, a large set of the income earners may voluntarily opt for it, since fear of the taxman and lethargy in complying with the provisions of law will be reduced. Deterrent measures, such as penal interest, penalties and prosecutions, often have only a limited impact since they can be effective only if detection mechanisms are robust and implementation is unbiased. A presumptive scheme would in fact encourage greater compliance at all levels, thereby redirecting the policing efforts of the department. It will also lower litigation costs and reduce interest outflow for the government on account of refunds having to be issued in a vast majority of cases. The manner in which the scheme is devised will effectively reduce the interaction with the tax department and will create no ambiguity when it comes to determining the total income of the taxpayer opting for the scheme. The simplicity of the scheme would enable the taxman to instead focus his efforts in detecting cases of errant taxpayers who are outside the tax net altogether.