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Section 44AD(1)

What the Income Tax Act, 1961 reads?
 
Section 44AD(1) provides that :
"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”."
 
Our Analysis
 
On perusing the provisions of section 44AD one thing is crystal clear that the moment an eligible assessee is engaged in eligible business, Section 44AD is automatically applicable to such business, unless the case is covered by section 44AD(5). So only under a situation where the actual income is less than 8% of Gross Receipts or Turnover, the assessee can escape applicability of section 44AD of the Act, by maintaining Books of Accounts as per section 44AA clause (iv) and getting the same audited as per section 44AB clause (d).
 
In all other cases, the assessee is governed by the provisions of section 44AD only, whether the assessee declares income at the 8% or higher income or lower income in cases covered by 44AD(5) where the Total Income does not exceed the maximum amount not chargeable to tax.
 
Q- Who is eligible assessee?
 
  • According to Explanation (a) to Section 44AD, Eligible Assessee means:
 
i.      A Resident Individual,
        A Resident HUF,
        A Resident Partnership Firm (But does not include a LLP)
            AND
ii.     Who, out of the above categories of assessees, has not claimed Deduction during the relevant year
        u/s 10A, 10AA, 10B and 10BA
               OR
        Deduction under any provision of Chapter VI-A under the Heading “Deduction in respect of certain             incomes”.
 
  • Thus, it is clear that the definition is exhaustive and it includes only what it expressly means. Hence, all other persons are impliedly not covered by the provisions of this section, such as –
 
–          Non Resident; Individual, HUF and Partnership Firm
–          Company
–          Limited Liability Partnership
–          AOP / BOI
–          Artificial Juridical Person
 
 
Q- What is eligible business?
 
  • According to Explanation (b) to Section 44AD, Eligible Business means:
(i)  any business except the business of plying, hiring or leasing goods carriages referred to in sec 44AE;
      AND
(ii)  whose total turnover or gross receipts in the previous year does not exceed an amount of Rs. 1 Crore. 
 
  • Here, as regards the business of plying, hiring or leasing of goods carriages is concerned, it is important to note that:
 
i. If more than 10 goods carriages are owned by assessee, then he will be outside the purview of Section 44AE and hence he will get covered under 44AD if the Turnover from such business does not exceed Rs. 1 Crore.
 
ii. If assessee is carrying out business of plying, hiring or leasing goods carriages which have not been owned by the assessee but have been hired by it, and the turnover therefrom does not exceed Rs. 1 Crore, then also 44AD shall apply instead of section 44AE.
 
  • Also, the definition of Business has been enlarged to cover each and every business, except as discussed, be it manufacturing, trading, construction, speculative, job work and so on and so forth. Here the only thing that has to be borne in mind is the distinction between business and profession, because Section 44AD is applicable to Business and not Profession and Business is different from Profession. Some activities have been held to be business:-
(i)    Advertising agent
(ii)  Clearing, forwarding and shipping agents – CIT v/s. Jeevanlal Lallubhai & Co. [1994] 206 ITR 548 (Bom).
(iii)  Couriers
(iv)   Insurance agent
(v)    Nursing home
(vi)  Stock and share broking and dealing in shares and securities – CIT v/s. Lallubhai Nagardas & Sons [1993] 204 ITR 93 (Bom).
(vii)  Travel agent.
 
Q- What is Total Turnover or Gross Receipts?
 
  • Total Turnover means the amount received/receivable from clients in respect of business transaction of the assessee for the relevant Previous Year. Gross Receipts are the amount received from clients for the services provided or to be provided and does not include the value of material supplied by the client.
 
  • The Turnover or Gross Receipts should be inclusive of –
– Sales Tax, Excise duty, Service Tax and other such Levies and Duties,
– Sales of unusable empties and Packages,
– Service Charges charged for delivery, etc.
 
Calculation of Total Turnover or Gross Receipts.
 
In this regard the applicability of Section 145 of the Act cannot be ruled out. Section 145 prescribes the Method of Accounting applicable to assessees for computing income from Business or Profession. Section 44AD does not override this section. Hence, as per this section the assessees have an option to choose either Mercantile or cash method and determine the Total Turnover or Gross Receipts accordingly.
 
(If the method adopted is Mercantile, the Turnover can be calculated on the basis of Sales Bills / Purchase Bills and other ancillary records like Debit Note/ Credit Note, etc. Whereas, if cash system is followed, the Receipts as per Bank Statement and Cash Records could be Grossed up, if there is any deduction like TDS, etc., to determine Turnover or Gross Receipts.)
 
Example no.1
 
–          Net Profit as per Books of Accounts – Rs. 10 Lakhs
–          Income @ 8% of Turnover – Rs. 8 Lakhs. (i.e. Turnover is Rs. 1 Crore.)
–          Income as per Normal Provisions of Act – Rs. 7.5 Lakhs.
 
For the purpose of comparison of Actual Income with income @ 8% of Turnover, which amount should be considered, Net Profit as per Books or Income from Business and Profession as per Normal Provisions of Act?
 
Answer
In this situation, it has to be borne in mind that the provisions of section 44AD override sections 28 to 43 C of the IT Act. Hence, the question of computation of income as per normal provisions does not arise.
 
Thus, income as per the records maintained by the assessee needs to be compared with presumptive income at the rate of 8% to find out whether the same is higher or lower than 8% of Turnover. If it is lower, Sec 44AD (5) comes into picture and if the same is higher, the assessee is at the option to disclose the same in the return of income.
 
Example no. 2
 
The assessee filed return of income u/s 44AD of the Income Tax Act, and the assessing officer wants to disallow the following:-
i.                 Rs. 1 Lakh u/s 40(a)(ia)
ii.                Rs. 1 Lakh u/s 43B
iii.               Rs. 1 Lakh u/s 40A(2)
 
Answer
◊As per section 44AD (1), this section overrides section 28 to 43C of the Act, and hence all those section could not be applied once the assessee is assessable u/s 44AD of the Act.
 
In this regard reliance can be placed on the decision of Ahmedabad Tribunal in case of Gopal Raj Purohit 94 TTJ 865.
 
(Here, though no disallowance is called for u/s 40(a)(ia), but if the assessee (assuming an Individual or HUF) is covered by clause (a) or (b) of section 44AB in the immediately preceding year, then he will be deemed to be an “assessee in default” u/s 201 of the Act, unless he satisfies the conditions stipulated therein for not being treated so.
 
Further, if the assessee satisfies the conditions for not being treated as “assessee in default”, he cannot escape the liability of Interest u/s 201(1A). However, as he is not an “assessee in default” the Penalty u/s 271C can be avoided.)
 
Q- Can assessee file Return u/s 44AD declaring Income @ 8% of Turnover (assuming Turnover is not exceeding Rs. 1 Crore) even though he has earned more than 8%?
Can the Assessing Officer add the Difference between actual income and disclosed income in the assessment proceedings?
 
{Let us assume that the Turnover of the assessee is Rs. 50 Lakhs and all the receipts are by cheque and the same is deposited in the only Bank account maintained by the assessee. There are no outstanding receipts at year end. All the payments for expenses on revenue account are through cheques debited to the same account and there are no outstanding expenses at year end. The total expenses are Rs. 25 Lakhs. Thus, the balance of Rs. 25 Lakhs as per his bank account is the income as per the records of assessee. He filed Return u/s 44AD declaring of Rs. 4 Lakhs @ 8% of Turnover. Can the AO add the difference of Rs. 21 Lakhs to the income of assessee?}
 
  • First of all the assessee, being covered by section 44AD, is under no obligation to maintain books of accounts u/s 44AA. Secondly, the turnover being less than Rs. 1 Crore and declared income not being less than 8% of Turnover, Section 44AB is not applicable to the assessee.
 
  • Further the assessee is given the option u/s 44AD (1) to declare higher income. The word used is 8% OR higher income.

 

  • Thus, the option is with the assessee to disclose higher income OR to file Return disclosing the income @ of 8% of Turnover.

 

  • Here the assessee is free to exercise any option at his will. He may morally show actual income and pay tax on it as an Honest citizen of the country, but such Honesty is not digressed even if he files return @ 8% as he is legally correct. (Here, the decision of Honourable Supreme Court in case of Dr. Qureshi can be recalled where the apex court, condemning the High Court, held that “cases have to be decided on merits and legality instead of morality”.)
 
  • Legally he is given the option by the statute and such an option cannot be equated with obligation cast upon the assessee. There is a definite difference between OPTION and OBLIGATION and an Option granted to the assessee cannot be construed to be his obligation when his actual income is more than 8% of Turnover.
 
  • Also, the AO cannot make any addition on this count as there is no provision under the Act permitting to make such addition.
 
  • Further, the words used are “higher income claimed to have been earned by the assessee”. Here if the assessee has not made a claim in the Return of Income regarding any higher income, it implies there is no claim for Higher Income made by assessee. AO cannot claim that the assessee has earned higher income, because under the statue, he is not entitled to do so.