CAs Pankaj Agrwal and Sandeep Kumar Jain have dealt with the interesting issue whether a professional is entitled to rely on Section 44ADA of the Income-tax Act, 1961 and declare his income as being 50% of the gross receipts even though the actual income is in fact higher. They have also considered whether there is a risk of the Department claiming in later years that the difference between the actual income (reflected by investments) and returned income is “undisclosed income”
In a professional group discussion, a member raised the following query which evoked mixed response:
(a) 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?
(b) Can the Department in future claim the difference of his investments and returned income as undisclosed income in later years?”
1. 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. This perception was based on few decisions of courts and tribunals which led us to examine the issue and to present our understanding of law.
2. Since all sections dealing with presumptive taxation contain similar provisions, we would like to examine section 44ADA of the Income Tax Act, 1961 (“the Act”). The relevant provisions of section 44ADA is reproduced below:
“Special provision for computing profits and gains of profession on presumptive basis.
44ADA. (1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section 44AA and whose total gross receipt do not exceed fifty lakh rupees in a previous year, a sum equal to fifty percent of the gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gainsof business or profession (emphasis supplied).
……….”
3. The deeming provision of section 44ADA consists of two parts:
(i) a sum equal to fifty percent of the total gross receipts; or
(ii) a sum higher than the aforesaid sum claimed to have been earned by the assessee.
shall be deemed to be profits and gains of such profession chargeable to tax under the head “Profit & Gains of business or profession”
4. In order to find an answer to the query raised following questions need to be answered:
a) The meaning of phrase ‘as the case may be’ between the two options.
b) Whether the use of the word ‘claim’ in second part refers to a right or an obligation. Though higher income is not shown in return yet can an assessee while replying to queries or establishing investments claim that the same was earned from the said profession. If an assessee is having higher income, is it mandatory and obligatory to return such higher income.
c) Powers of the AO in examining such cases. Are his hands tied while making enquiry of investments made in excess of the returned income? Can he not invoke the relevant provision of presumptive taxation itself to say that you have not shown the correct income which you ought to have shown and defaulted in making correct verification and filing the correct return of income?
d) Application of section 69, 69A or section 69C of the Act when apparently the investment or the expenditure is in excess of the returned income.
5. One of the principals of interpretation is that effort should be made to give meaning to each and every word used by the legislature. C.J. Patanjali Shastry said, “It is not a sound principle of construction to brush aside words in a statute as being inapposite surplusage, if they can have appropriate application in circumstances conceivable within the contemplation of the statute”. (1) “In the interpretation of statute”, observed Das Gupta, J. : “the courts always presume that the Legislature inserted every part thereof for a purpose and the legislative intention is that every part of the statute should have effect. The Legislature is deemed not to waste its words or to say anything in vain. And a construction which attributes redundancy to the Legislature will not be accepted except for compelling reasons. (2) In view of these settled principles of interpretation, while interpreting the provisions of law due meaning and weight has to be given to each word and phrase.
6. Interpretation of the phrase “OR AS THE CASE MAY BE”
In every provision of presumptive taxation, this phrase ‘or, as the case may be’ has been used between 2 alternatives i.e. the presumptive rate and the claim of higher amount. What does the phrase ‘as the case may be’ mean? To our understanding the term means ‘as the situation may be’. As per legal lexicon also the meaning is ‘whichever the case may be’. So, in the present context, it would imply, the real income or the presumptive income whichever is higher will be the deemed income. The word ‘or’ is said to be disjunctive and it only means either of the two and as it is qualified with words ‘as the case may be’ and ‘whichever is higher’, the one which fulfills the requirement of ‘higher’ is to be chosen.
7. Interpretation of the word “CLAIM”
In the present context what is the meaning of the word “claim”. As per webster dictionary, it means ‘to state as a fact or as one’s belief (something that may be called into question); assert’. Every person, howsoever small he may be, knows how much he is earning. It may not be precise, but every one, even a street vendor knows how much he is earning. The word “claim” will mean his assertion as to his earnings. In return forms, mainly ITR-4, it requires presumptive income or ‘the amount claimed to have been earned whichever is higher’ to be returned. If he does not return the correct higher income, does it not mean, he claims his income is not higher than the presumptive income. By doing so, is he not making a wrong assertion, though he knows his income to be higher. If he is confronted during assessment or if his statement is taken and he states that he has returned income based on presumptive method though his income has been higher,will it not be self contradictory?
Decision of the Hon’ble Supreme Court and other courts and tribunals are referred and relied to the effect that any claim to be made has to be in return only. With due respect, those decisions cannot be applied here. Those decisions are in respect of claim of allowances. When there is a right, one may or may not exercise those rights and hence, the courts have held that such claims can only be made through returns. The same logic cannot be extended in the present scenario as it is an obligation and an assessee is required to return the correct income. This can further be explained with reference to the following example:
During Financial Year 2018-19, an assessee, a professional, has gross receipts of say ₹ 50 lacs. The assessee earns income of Rs. 40 lacs. However, while filing Return of Income for AY 2019-20, the assessee offers for tax income of Rs. 25 lacs i.e. 50% of the gross receipt. The assessee invests Rs. 40 lacs of income earned in Fixed Deposits. During assessment proceedings, the assessing officer enquires about the sources of Rs. 40 lacs to which the assessee replies that investment of Rs. 40 lacs is out of professional income. However, income offered for tax is Rs. 25 lacs u/s 44ADA.
The moot point is whether by way of explanation offered by the assessee in the above example, has the assessee `claimed’ to have earned a higher sum as envisaged in section 44ADA of the Act.
The explanation offered by the assessee that Rs. 40 lacs is out of his income from profession is an assertion of the fact that the assessee have earned Rs. 40 lacs as income from profession. Consequently, it can be said that during the assessment proceedings the assessee has claimed to have earned a sum higher than 50% of the gross receipts which he did not offer in return correctly.
Similarly, an assessee filing the return of income is under an obligation to declare correct and complete income in accordance with the provisions of the Act. The assessee makes a claim i.e. an assertion that something is true, in the return of income. So, this being an obligation, there is no choice but to return the correct income which an assessee claims to have earned.
8. POWER OF THE Asessing Officer
It is also being argued that the AO cannot do anything even if he finds that assesee has not returned the higher income. His hands are tied. In our considered view, it is not so. The powers of the AO are very wide. He is required to assess the correct income. He can certainly bring to tax the higher income by disregarding returned income even under the provisions of presumptive taxation. It should be borne in mind that the provisions are made for hassle free assessment and not for encouraging the declaration of income lower than real income. In other words, it does not give license for showing lower income than the income you earn. Even in return form ITR-4 which is exclusively designed for returning income under presumptive taxation, the financial information is required to be given . Such an information is asked for to know the growth in assets of the assessee. It is within the exclusive knowledge of the assessee how much he has earned, hence, it is incumbent upon him to make a true disclosure of income.
There are certain professional services in which, on the face, it can be said that the income content is almost 100% and which is also evident from the financial affairs of the assessee. Can it be said that AO has no power or authority to bring to tax the correct income, if an assessee has declared only 50% of his gross receipts as income.
9. Application of section 69, 69A or Section 69C
The next issue which arises for consideration is whether AO can apply section 69, or 69A in case he finds that investments made or apply section 69C in case he finds that the expenditure incurred is in excess of the income returned on presumptive basis. In our view, AO can hold that the source of investments or expenditure incurred is explained only to the extent of the income returned and the remaining investment or expenditure can be treated as unexplained.
10. Case Laws
We would now examine a few case laws on the issue.
(a) The Punjab and Haryana High court in Naresh Kumar Vs. 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 Vs. Surinder Pal Anand 48 DTR 135 in which cash deposited in bank was held from business itself.
(b) There are several decisions where AO have applied section 68 or section 69 to entries in bank account where debits and credits both were there and because of hassle free assessment, the courts have held that an assessee cannot be put to strict evidence as he is not required to maintain books of accounts and such verification is possible only with the help of books. However, it is not the ratio decidendi of these decisions that AO cannot apply section 69 etc. even if there are apparent investments which are not commensurate with his income.
(c) In the case of CIT Vs. Nitin Soni before the Allahabad High Court, the assessee was carrying on business of freight carrier and has returned his income based on section 44AE. The AO made certain additions under section 56 of the Act for low withdrawals. The court dismissed the departmental appeal on the ground that this provision requires hassle free proceedings and so, no probing enquiry can be made. Secondly, while making assessment under section 56, no source has been brought on record by the AO. The court has not interpreted the second limb of the provisions of the section. The reference of the court that income may be higher or lower is a passing remark and refer to a situation when income is within tolerant limit of bench mark and does not apply to a case where income is disproportionately higher.
(d) This issue has been dealt with by Ahmedabad bench of the Tribunal in the case of Shivani Builders Vs. ITO [2007] 295 ITR (A.T.) 281. The relevant paragraphs of the order reproduced below brings out the import of the presumptive sections which we are discussing:
“10. It is, thus, clear that the law envisages all the three situations, laying down appropriate procedure for all of them, i.e., the assessee disclosing a higher, lower, or an amount equal to the presumptive income (reckoned at the rate of 8 per cent. of the turnover). In the present case, the assessee contends to have declared its income at the presumptive rate, being covered by the provisions of section 44AD, of which, clearly, there is no doubt, being engaged in the (civil) construction of residential flats, namely, Chanchalba Apartments. The provision of section 44AA, i.e., with regard to mandatory maintenance of books of account, would apply to an assessee engaged in such business, only, if the assessee chooses to be taxed at lower than the presumptive rate of 8 per cent. This is, to our mind, clearly in the nature of a, and the only, concession accorded by the statute to the relevant class of assessees, to which assertion of the assessee there can be no doubt, it being statutorily recognized/enacted. However, the moot point remains if the reverse is also true, i.e., where the assessee, despite the said concession, chooses to maintain the books of account, preferring to rely thereon for various other purposes, both apart from, and under the Act (e.g. interest on partner’ s capital, which would come to be worked out at a sum inclusive of their share in the net profit as disclosed as per the said books), can it ignore the book results and claim to be entitled to a lower presumptive rate of income than that revealed by such books. To our mind, clearly not. The law does not accord a privileged status to the assessees engaged in this line of business, but only, considering the vagaries that attend thereto, drawn a higher bar for the purpose of maintenance of books, i.e., than that normally obtains under section 44AA. As such, it cannot be anybody’ s case that though he admittedly earns more, he could still be liable to be assessed to income-tax at a lower income by virtue of the said concession. The said section (section 44AD), would not, to our mind, operate to curtail the scope of income as defined under section 2(24) read with section 5 of the Act, so that where the assessee admittedly earns a higher income, the character of which as income (as defined under section 2(24)) is undoubted, it would be liable to tax on that basis, which in all cases has to be only on the basis of real income, even as held by the learned Commissioner of Income-tax (Appeals). The assessee’ s plea of the said interpretation as amounting to be penalizing it for the maintenance of its books, is, in our view, wholly misconceived ; the act of paying tax on the basis of income earned cannot, by any stretch of imagination, be considered as amounting to being penalized ; the law, as also stated earlier, not creating a privileged class out of such assessees (so as to violate article 14 of the Constitution of India), but thereby only providing a window of concession for a limited purpose.
11. The assessee, by maintaining its accounts, also derives benefit of " capital" that becomes available to it for employment in its business or otherwise, besides, as admitted, complying with the other laws incident on its business, and which, provide for the maintenance, or otherwise require information derived from, the books of account. The said " capital" can only be explained w.r.t. the assessee’ s books, and not otherwise, so that it cannot be that while it proves the source (of capital) w.r.t. its accounts, but claim, all the same, for their being ignored, for the purpose of assessing its liability to tax. The concession, cannot, in our view, be interpreted to imply a standard deduction at 92 per cent. of the turnover, as advocated by the learned authorised representative., even as the same may, under the facts of a given case, as where the assessee does not maintain books of account, and provides clear evidence of its gross receipt, turnover (as not exceeding Rs. 40 lakhs), well amount to that. In fact, the assessee, in such a case, is at liberty to declare any amount equal to or higher than 8 per cent. as it deems fit and proper (sub-section (1)). And which only further goes to show that the assessee cannot, except at the cost of tax, take advantage of, as sought to be done, higher capital/income generated. For, why would an assessee, its receipt being same/fixed, choose to be assessed at a higher income, and consequently, bear a higher tax liability, i.e., if no other advantage/benefit accrues to it? The said concession, or its equivalent of standard deduction at 92 per cent., cannot be taken or assumed as a matter of prescription/ right, the matter being subject to factual considerations, and the limited right granted cannot transgress the basic or the fundamental scheme of the Act.
12. That apart, we also consider that the assessee’ s claim does not stand the test of section 44AD itself. This is so as section 44AD(1) itself provides for a case where the assessee chooses to declare a higher income, which would, in that case, be deemed as the income chargeable to tax under the head " Profits and gains of business or profession" in preference to the presumptive income equal to 8 per cent. (of the gross receipt). The return of income is not a single document consisting of just the relevant prescribed form, but, rather, is a comprehensive document, including within its ambit several other documents, i.e., as are deemed necessary by law to substantive and prove the various figures that go into the computation of income as well as relating to the calculation and discharge of the tax (and interest) liability.
Section 139(9) enlists all such accompanying documents, in the absence of which the return is deemed defective, and further, on the defect not being removed within the prescribed time, empowers the Assessing Officer to treat the return as non est. Now, therefore, it cannot be that the statements that mandatorily form a part and parcel of the return of income as required to be furnished, reveal a higher income, while the assessee states a lower figure in the relevant form, making the return itself as internally inconsistent.
The returned income has, therefore, necessarily to be in accordance and in conformation with the underlying documents which form an integral part thereof, so that the assessee cannot arbitrarily claim to be assessed at a lower figure by virtue of a concessionary measure provided under the Act to alleviate a particular hardship, i.e., of the maintenance of accounts and, therefore, also their audit. And which hardship it itself bears, or chooses to bear, considering the several other factors that impinge on the said requirement, and thus, in effect, choose not to avail of the benefit.
13. However, at the same time, we also consider that the law (section 44AD(1)) itself providing for the deeming of the higher income (as returned) as the assessee’ s income chargeable to tax, there cannot be any further disallowance on the ground that the relevant expenditure has not been, or could not be, subject to a proper verification. Once the assessee’ s income, in terms of the underlying documents, stand worked out at a sum higher than the presumptive income, the same has to be accepted as such, excepting for prima facie adjustments in respect of clear inadmissibles, e.g. (say) personal expenses, income-tax, etc. For otherwise, it would amount to transgressing the clear provision of law (which " deems" such higher sum as its income), and penalizing the assessee for having chosen to be assessed at a higher sum, in terms of the section itself, and which vests the option in him.” (Emphasis supplied)
Conclusion
In conclusion, in our humble view, 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.
(2) Principles of Statutory Interpretation by Justice G. P. Singh Seventh Edition, page 59
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Please refer to the various IATA pronouncements. It is clear that whoever files returns under 44AD, the sections 68 and 69 are not applicable. Please refer to following Tribunal pronouncements.
Kokkarne Prabhakar V/S Income Tax ITA No.1239/Bang/2019
Thomas Eaper V/s Income Tax ITA No.451 /Coch/2019
Girish Yalakki Shettar V/s Income Tax ITA No.354/Bang/2019
Smt Honey Rahulan V/s Income Tax ITA No.150/Coch/2020
Dinesh Kumar Verma V/s Income Tax ITA NO. 1183/MUM/2019
Smt Sumit Gehlot V/s Income Tax ITA No. 176/Jodh/2019
Syed Maqsoodilaa V/s Income Tax ITA No.397/Bang/2019
Authors says small variation is allowed. But it is pure assumption. Where law states so ?. In absence of any law and if we accept the argument of the author, even 1 rupee more also and offence.
If more than 8% profit, then if we have to return real profit, then what is the need of this law. They could have made it clear that, this law is applicable to only for the people whose actual income is 8% or less. FM has clearly mentioned that, it is benefit given to small business.
This means, you have a provision, but if you use it and if it benefits you and if it can be prooved that the caused you benefits, then you have misused the provision. The Intent of Law is clear, if they would have wanted to keep “whichever is higher”, the law would have said so.
Hi CA Pankaj & CA Sandeep,
Very well explained. Thanks for such a detailed explanation with all relevant case laws. It is very clear to maintain a rough calculation of actual profits and compare with Deemed profits, and if there is vast variation, then better to show higher profit while filing income tax return.
There are clear judgements, which says section 69 cannot be applied in cases where return is filed under section 44AD. Refer the below judgement https://indiankanoon.org/doc/16818226/
Refer to this article from income tax department. Why we need to interpret some thing, which is already clear.
https://www.incometaxindia.gov.in/Tutorials/13.%20Tax%20on%20presumptive%20basis%20in%20case%20of%20certain%20eligible%20businesses.pdf
This is from ITDs FAQ. its available online:
“In case of a person adopting the provisions of section 44ADA, income will be computed on
presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person
can declare income higher than 50%.
In other words, in case of a person adopting the provisions of section 44ADA, income will not be
computed in normal manner but will be computed @50% of the gross receipts.”
Regarding the case of Nitin Soni,
The actual income of Nitin Soni was 29,21,738 or more as reported by AO.
But Nitin Soni could have claimed only 16k per month (section 44AE, 2000 * 8 = 16k) as income.
So his actual income was 29L+ and he could have claimed 192k as his income. We don’t know what income he claimed.
Therefore, how can you say income was within the tolerable limit in that case?
192k and 29L have a huge difference.
As per the authors, real income has to be presented, then what is the need for 44AD or 44ADA ?. They could have started and ended this article with suggestion to scrap these sections and advice people not to use these sections of the law. We urgently need one law such as …..Whichever law needs interpretations, needs relying on dictionary, relying on old judgements, needs some thinking, and whenever any litigation occurs about applicability of such law, judgement should be decided in favour of assessee.
What about the term notwithstanding anything contained in the sec 28 to 43c. Can personal expenses and money spent on buying capital (sec37) exempted like for example constructing a house. the law is silent on this. it is a loophole and a flaw in the law I think
How can an AO determine/verify the nature of business? If a professional shows her income as outcome of business income and shows 6-8% Income?
Through Regn Certificate. For Eg if iam a CA I will have COP. If iam a teacher I will probably have a B Ed degree. Similarly if iam a Contractor I will have a GST or a Regn cert from Shop and Establishment Act of the State. Their are numerous ways AO can verify the declared profession or business.
This fact is applicable not only in professional cases but also for BUSINESS INCOME cases. The only way revenue pint of view is the Act is to be amended as under:
THAT MAINTENANCE OF BOOKS OF ACCOUNTS IS MANDATORY. IF THE BOOK PROFIT IS LOWER THAN THE SPECIFIED PERCENTAGE THEN ONLY PRESUMPTIVE INCOME OFFERED.
JOTHI RAMALINGAM CHENNAI – 600 019 MOBILE:9382789630
Sir
Very useful article for fair understanding and use of provision of section 44ADA.
In case of presumptive taxation assessee is not required to maintain books of accounts. If the books of accounts are not maintained then you cannot arrive at any abrupt percentage of income and so how does one declare the income in the ITR. The article is silent on this aspect.
Further, this is a beneficial provision for small assesses as declared by FM. If one reads it in the author’s way then it becomes non-beneficial i.e. all the small assessees require to declare atleast a minimum percentage of income and otherwise they would be punished with applicabiity of tax audit for 5 years. This aspect has also not been dealt in the article.
Sir with due respect the article simply means that our capital(Including Personal Expenditure and Drawings) for that year cannot be more than 8% if we declare income u/s 44AD. Thus a person making investment of Rs 10 lac in Shares from his bank account and declaring income of 6 lacs as per 44AD is clearly at risk of undisclosed income as a person of sound mind is fully aware that his income is more than 6 lacs. This deeming provision in my opinion grants immunity on final trail of expenditure whether actually incurred or other wise. So a little bit of leeway is available and profit of 10-12% declared at 8% is acceptable but huge variation in my opinion is not what the intention of legislature is. In those cases where money is withdrawn from bank the immunity is granted that expenditure will not be verified. So it is a case to case basis.
Thanx
Very nice explained & detailed analysis considering from all angles very useful
Dear Sirs
The effect of viewing the provisions of Sec 44ADA in the above manner, would mean that only under 2 circumstances Sec 44ADA can be used:
1. For a professional whose real income is “exactly” 50% of his turnover
2. For a professional whose income is actually lower than 50%,but cannot undertake the hassle maintaining books and getting the same audited.
Is the view of the authors that this is the real intention of presumptive taxation under 44ADA?
In my opinion minor variations are allowable hence a 60-65 % profit declared @ 50% is acceptable range but huge variation which is apparently provable based on investment trail is not the intention of the legislature. The immunity is in my opinion on the trail of expenses to the level of 50%. If a person receiving 20 lacs in bank account withdraws just 2 lacs and declares income @ 50% is clearly at default. Bank statement is also part of books of account and we cannot say that we are not maintaining any books of accounts if we are aware of our bank account and entries their in.
In my opinion minor variations are allowable hence a 60-65 % profit declared @ 50% is acceptable range but huge variation which is apparently provable based on investment trail is not the intention of the legislature. The immunity is in my opinion on the trail of expenses to the level of 50%. If a person receiving 20 lacs in bank account withdraws just 2 lacs and declares income @ 50% is clearly at default. Bank statement is also part of books of account and we cannot say that we are not maintaining any books of accounts if we are aware of our bank account and entries their in.
This refers to sections 44AD etc on presumptive taxation. If the actual income is more than the limits prescribed under sections 44AD and 44ADA, is not en escapement of income? MORE OVER NON-MAINTENANCE OF BOOKS OF ACCOUNTS PAVES PATH for continuance of such habit even if the Gross receipts exceeds the limits. It is against the requirement of Section 44AA of the Act. An amendment is need to maintain books accounts even in such cases to admit the book profit or presumptive income WHICHEVER is more. JOTHI RAMALINGAM,mobile9382789630
Really good and detailed analysis.
Sir, very well explained considering all the angels of this topic. It will guide a lot to decide.