Context of the Section: The family of provisions on presumptive taxation applicable to residents originated as under:
Insertion by Finance Act 1994 wef. 01-04-1994 i.e. A.Y. 1994-95:
44AD: Presumptive taxation of civil construction (8% of Gross Receipts)
44AE: Presumptive Taxation of Transport Business
44AE: Presumptive Taxation of Transport Business
WEF ASSESSMENT YEAR
Presumptive Income for month or part of month during which owned
Heavy Goods Vehicles
There after in Finance Act 1997, w.e.f. 01-04-1998, i.e. A.Y, 1998-99 another section in row was inserted
44AF: Presumptive taxation of retail business (5% of total Turnover)
Recent Changes made:
Recent Changes made:
Now by virtue of Finance Act 2009, section 44AD has been substituted with new avatar to encompass entire range of businesses wef AY 2011-12. In this new era, while section 44AE still holds the ground, section 44AF has been put to rest w.e.f. AY 2011-12.
The new section 44AD is as follows:
44 AD (1)
- Notwithstanding any thing contained in section 28 to 43C
- In case of eligible assessee
- Engaged in a eligible business
- A sum equal to 8% of total turnover or gross receipts or
- As the case may be
- A sum higher than 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”
Who is eligible asessee ?
Explanation (a) to section 44AD defines eligible assessee as under:
i) Individual who is resident
ii) HUF which is resident
iii) Partnership Firm which is resident
Does not include:
· Limited liability partnership firm (Under section 2(23), firm includes LLP but for section 44AD LLP has been de aligned from firm)
· A person claiming deduction under
i) Sections 10A, 10AA, 10B, 10BA or
ii) Chapter VIA under heading “C-Deduction in respect of certain incomes”
By Implication following persons are also not covered:
- Non resident Individual, HUF , firm
- AOP or Body of Individuals
- Local Authority
- Artificial Juridical Person
Business carried on By Trust
Number of case laws treat the Trust at par with Individual :
i) Deepak Family Trust 211 ITR 575
ii) Ramesh Mahesh Sanjay Trust 231 ITR 752
iii) L.R. Family Trust 262 ITR 520
iv) Niti Trust 221 ITR 435
v) L. MuthuKrishanan 260 ITR 526
vi) Gopal Srinivasan Trust 39 ITD 322
v) Shri Rajesh B. Rathi Trust 8 ITD 273
vi) Educational Trust Fund 12 ITD 563
vii) J.E, Chinoy Charitable Trust 12 ITD 571
l Whether 44Ad shall apply ?
l Pan registrered as AOP
What is eligible business ?
As per Explanation (b) to section 44AD, eligible business means:
l Any Business except the business of plying, hiring or leasing goods carriages covered by 44AE(because there is special treatment for transport business under section 44AE)
1.If more than 10 goods carriages are owned by assessee, then he will get covered under 44AD and not 44AE.
2. If assessee is carrying out business of plying, hiring or leasing goods carriages which have not been owned by him but have been hired by him, then also 44AD shall apply and not 44AE.
l Whose total turnover or gross receipts in the previous year does not exceed Rs.60 lakhs
l It means if turnover is 60 lakhs then also it is eligible business
Hence following gets covered:
- Job Work
- Civil Construction
- Supply of labour
- Service Business
- Speculative Business
However following do not get covered:
· Profession There are two categories of profession:
1. Specified Profession
The following have been listed out as professions in section 44AA and
notified thereunder (Notifications No. SO-17(E) dated 12.1.77 and No.
SO 2675 dated 25.9.1992):
(iii) Authorised Representative
(iv) Company Secretary
(vi) Film Artists/Actors, Cameraman, Director, Singer, Story-writer, etc.
(vii) Interior Decoration
(x) Technical Consultancy
2. Non Specified profession
Other professions not covered above are non specified professions.
Section 44AD shall neither apply to specified profession nor apply to non specified profession.
The following activities have been held to be business :-
(i) Advertising agent
(ii) Clearing, forwarding and shipping agents - CIT v. Jeevanlal
Lallubhai & Co.  206 ITR 548 (Bom).
(iv) Insurance agent
(v) Nursing home
(vi) Stock and share broking and dealing in shares and securities -
CIT v. Lallubhai Nagardas & Sons  204 ITR 93 (Bom).
(vii) Travel agent.
Hence section 44AD shall apply to above businesses.
Multiple Eligible Businesses
l If assessee is running multiple eligible
businesses, having different methods of Accounting, turnover of all those businesses shall be determined as per method of accounting regularly employed for respective businesses.
l Further the turnover so determined shall be clubbed to determine whether limit of 60 lakhs gets exceeded.
l If in case of mutiple busineses aggregate turover is less than 60 lacs and in some cases 8% or more Income is shown and in some cases lesser 8% income is shown. Can assessee get away by getting audited only those businesses where income lesser than 8% is reflected or accounts of all the business are required to be audited, even if separate books of accounts are maintained for different businesses ?
Practical Application of 44AD
l Assessee having loss from shares business and commission income against which there is no expense, how to apply 44AD ?
l Club Turnover of both Shares as well as commission. Calculate 8% there on . Club loss from shares as well as commission income. If it exceeds 8% books and audit not required, other wise get the accounts audited
Whether single report or consolidated report for multiple businesses
l If auditors are different then multiple audit reports
l Need for separate business specifically when relief claimed for individual businesses
l However consolidated report also required because tax conducted for assesse.
l Further deduction under Ch VIA can’t be given unless a consolidated report is prepared
l Auditor consolidating the report can rely on the work performed by other auditors
Business as well as Profession
l If gross receipts form business are say Rs. 55 lakhs and gross receipts from profession are say Rs. 10 lakhs whether 44AD shall apply, aggregating gross receipts to 65 lakhs
Answer: Yes it shall apply to business part?
l Whether 44AB shall apply?
l If Gross receipts form profession 17 lacs and tuirnover of eligible business is 40 lacs, what is position of 44AD & 44AB
l As per para 5.16, tax audit of business as well as profession
l In revised section 44AD there is no exclusion clause of turnover unlike old 44AD(5) and 44AE(5)
Nursing Home and Hospitals-Business or Profession ?
l Receipts of the nursing home consisted of only room rents, theatre rent, pre and post operative nursing care, whereas the professional fee is charged by the surgeons and doctors treating the patients, and the same is not part of the income of the nursing home. (Shalini Hospitals(2007) 108 ITD 534 Hyd)
Eligible as well as ineligible business
l Gross receipts from manufacturing business : 50 lakhs
l Gross receipts from transport business:20 lakhs
l Whether 44AD shall apply ?
Answer :Yes , 44AD shall apply to manufacturing business.
l Whether 44AB shall apply ?
Answer: No because turnover of transport business to be excluded u/s 44AE(5).
= zero Sale
l Loss from baddebts = 10 lacs
l Whether 44AD shall apply ?
Total Turnover or Gross receipts
Not defined in 44AD. As per Guidance Note on Tax Audit, these terms should be construed in accordance with method of accounting regularly employed by the assessee. As per section 145(1), the assessee can follow either cash or mercantile system of accounting.
Total Turnover or Gross receipts
Includes(or does not exclude)
Excludes (or does not include)
Cash Discount allowed to parties
Discount allowed in Invoice
Commission on Sales
Sale of Shares held as stock in trade
Price of goods returned even if sold in earlier year
Profit on sale of import license
Cash Assistance against exports
Sale Proceeds of property held as investment property
Customs or Excise duty repaid as drawback
Shares held as investments
Interest received by money lender
Commission, brokerage received in chit fund business
Net Surplus arising out of reimbursement of expenses incurred except in case of package tours
Net Exchange difference
Hire Charges of cold storage
Insurance claims for non fixed assets
In speculative transactions, daily positive and negative differences to be considered as turnover
How to establish turnover when books of accounts are not maintained:
- Record of daily sales
- Stock Records
- Bank Statement
- Account Statements of parties
- If sale bills are not maintained, the purchase bills and GP ratio of earlier years can be used to establish sales.
- Returns filed under VAT, service tax or excise (branding case)
Multiple Entities- Clubbing of Turnover
l Where the assessee is proprietor of more than one concern, aggregate of all the businesses to be taken into consideration for the purposes of compliance of limit of 40 lakhs (now 60 lakhs)
Asst. CIT & Anr. V. Dr. K. Satish Shetty 310 ITR 366(Kar.)
l As per Para 5.17 of ICAI Guidance Note on Tax Audit, where assessee carries on more than one business activity, the results of all business activities should be clubbed together in determinig whether limit of 40 lakhs (now 60 lakhs) has been exceeded or not.
Salary and Interest to partner-Whether part of Turnover
l Turnover of Eligible Business = 59 lacs
Salary and Interest from Firm= 2 lacs
l As per Para 5.13(x) of Guidance Note on Tax Audit Share profit of Partner to be exculded from Turnover
l As per clause 13 of F.3CD, items falling with in scope of S.28, if not credited to P&L to be disclosed
l Section 28(v) considers salary interest to partner subject to limits u/s 40(b)
l Hence one school of thought is that Salary and Interest to partner should be part of turnover
l Further even if if for earning interest asessee need not engage in business(see s. 44AD), still in case of assessee engged in money lending business interest income is considered part of gross receipts as per para 5.12(iv) of Guidance Note on Tax Audit , hence as to how the colour of money can change when money instead of being lent is invested as capital in firm
Business carried from gifted funds-Whether Turnover to be clubbed
l Wife carrying business from funds gifted by husband and her income to be clubbed in hands of husband u/s 64, whether turnover also to be clubbed in hands of husband ?
l If wife is carrying on business, one can not say that simply because income is to be clubbed hence turnover should also be clubbed, hence turnover to be seperately considered.
l Can be used as planning tool to avoid Audit.
Turnover of Prepaid Distributors of Telecom Companies
l Billing in favour of Prepaid Distributor, what is position of 44AB/44AD
l As per para 5.9 of Guidance Note on Tax Audit, the question to be considered is whether all significant risks and rewards of owner ship are transferred.
l Further as per Cir.452 dtd 17.03.86, remuneration consists of only commission and distributor is not interested in profits of constituent.
l Hence only commission should be considered.
Speculative and Derivative Transactions-How to determine turnover
l Speculative Transactions:
Para 5.11(a): Aggregate of Positive and negative differences to be considered as turnover
l Derivatives: 5.11(b) Turnover =
a) Total of favourable and unfavourable differences
b) premium received on sale of options
Write Back of Provisions
l During Financial year 2009-10,provision of Rs. 300000 created against rent. Liability crystallised at Rs. 200000 during 2010-11. Excess Provision written back. Whether part of Gross receipts ?
l No. as per para 5.13(xii) of Guidance Note on Tax Audit.
Material Supplied by Contractee
l Contract value = 70 lacs
l Material supplied by contractee=38 Lacs
l Invoice value =32 lacs
l Whether 44AD shall apply ?
Advance Received from Flats
Krishna Builders (ITAT-Luckhnow)(91 ITD 124)
Assessee received advance for sale of flats and ranked it as sundry creditors. He recognised revenue on completion of project ITAT Held: If project continues for 5 year and assessee recognizes revenue after 5 years in his books of accounts which are audited after 5 years only, then how can expenses which have been incurred in relation there to be verified……… and if there are any audit guidelines contrary to same then they are against the provision of audit.
l Mumbai Tribunal in case of M/s. Siroya Developers has held differently (12-01-2011)
“The figure of turnover/gross receipts will be computed on the basis of method of accounting followed by ‘A’ Ltd. If the income were recognized only on completion of the project, the amount received against agreements for sale of flats in 1982 and 1983 would be treated as advance against sales and will not form part of sales in these years. The credit to sales account will be given in such a case only in the year 1984 and therefore if the total sales exceeds Rs. 40 lakhs, it will be necessary to get the accounts for the year 1984 audited u/s. 44AB. If ‘A’ Ltd. Is recognizing the income on a proportionate basis every year on the basis of sale of flats in each year ‘A’ Ltd will have to get its accounts audited u/s. 44AB for the year 1984 if the figure of saleof flats in that year exceeds 40 lakhs.”
Non application of section 28 to 43C
It implies that:
- No disallowance under section 40A(3) for payments exceeding Rs. 20000 made otherwise than through account payee cheque.
- No disallowance for freight payment made in cash exceeding 35000
- No disallowance for failure to deduct or deposit TDS
- No disallowance for personal use of assets
- No disallowance under section 43B
- No addition to income for cessation of liability
- No addition for excessive payment to relative u/s 40A(2)
Further it implies that:
- Section 44 shall continue to apply for Insurance Business
- Income of trade, professional association shall continue to be calculated under 44A
Cash Credits found higher than presumptive Income
l It has been held by Hon’ble Punjab and Haryana High Court in case of CIT Vs. Surinder Pal Anand, that assessee need not explain each and every entry of cash deposit unless such entry had no nexus with gross receipts.
l Hence, the assessee is under obligation to explain the following:
l Credits higher than Gross Receipts
l Credits having no nexus with Gross Receipts of eligible business(es)
l Credits having nexus with Gross receipts=
+opg. Debtors-Closing debtors Sale
Unexplained Cash credits, Investments, money, bullion, jewellery, expenditure
Section 44AD does not over ride section 68,69,69A,69B,69C,69D, so assessee has to establish that cash credit, investments etc relates to or is subscribed from income of eligible business. There can not be a blanket exemption in this regard.
Retraction to Presumptive Income
l An assessee engaged in retail trade disclosed net profit less than that prescribed u/s 44AF, got his accounts audited and was assessed. Additions u/s 40A(3) was made. Later assessee agreed to be assessed u/s 44AF. Can disallowance be deleted?
l Similar facts came in the case of Gopal Singh K. Rajpurohit v. ACIT 94 TTJ (Ahd.) 865 wherein it has been held that the additions should be deleted as assessee has agreed to be assessed u/s 44AF.
As per the books of accounts of the assessee, turnover was less than 40 lakhs. But during search operations, additional sales was found and assessee included the same in block assessment. Can the A.O impose penalty u/s 271B for not getting the accounts audited?
Similar Facts came in the case of Brij Lal Goyal v. ACIT  88 ITD 413 (Del.), wherein it was held that the additional sales found as a result of search, was not recorded in the books of accounts regularly kept in the course of business by the appellant. Merely because the appellant accepted the additional sales for the purpose of assessment of the relevant year on the basis of entries in the seized documents, the same would not constitute accounts of the appellant maintained in the regular course of business and on that basis alone liability cannot be fastened on the assessee by holding him to have committed the default.
(2) Any deduction allowable under the provisions of section 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed:
Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40
It implies that no deduction for :
· Rent, rates, taxes, repair and insurance for building and plant and machinery (Section 30,31)
- Depreciation allowance (Section 32)
- Unabsorbed Depreciation not be allowed to be carried forward and set off (32(2))
- Tea, Coffee, Rubber development (33AB)
- Weighted deduction for Scientific Research
- No deduction on account of bonus, interest or bad debts or PF deposit under section 36
- No deduction for capital expenditure under section 35AD
- interest and salary to partner shall be allowed as deduction to the extent allowable u/s 40(b)
Deduction under Chapter VI and VI-A
Deduction under chapter VI (Set off and carry forward of losses)
As per Universal cargo Carriers Inc Vs. CIT (1987) 165 ITR 209(
), current and brought forward losses can be set off. This decision has been rendered in context of section 44B and should equally apply to 44AD. Cal.
Deduction under Chapter VI-A
Deduction under Chapter VI-A shall be available except for Deduction
available under Chapter VI-A under heading “C-Deduction in respect of certain incomes.”
Section 44AD (3)
The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
Resident individual having a machinery of Rs. 1,00,000/- as on 31-03-2011 eligible for depreciation under section 32 @ 15%.In A.Y 2011-12, he opts for Section 44AD. In the Assessment Year 2012-13, his turnover is Rs. 65 lakh, so he calculated his profit as per normal provisions of the Act. In A.Y 2013-14, he again opts for Section 44AD, In this Assessment year he sold the Assets for Rs. 80,000/-.
Calculation of WDV:
WDV as on 31-03-2011
Less: Depreciation @ 15%
WDV as on 31-03-2012
Less: Depreciation @ 15%
WDV as on 31-03-2013
WDV as on 31-03-2014
Calculation of Capital Gains
Less WDV as on 31-03-2013
Short Term capital gain U/s 50
The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.
Note: Chapter XVII-C deals with provisions relating to Advance Payment of Tax.
Following issues arise from the above provisions:
How to calculate advance tax where assesee is having both income from eligible as well as ineligible business or income under other heads ?
For example Gross receipts of eligible business are 60 lakhs and presumptive income is Rs. 480000. Other Income of assessee is Rs. 4 lakhs.
How to calculate advance tax?
Option 1 : Calculate advance tax on Rs. 8,80,000 and calculate average tax on 4,00,000 and pay advance tax accordingly.
Option 2 : Calculate advance tax on Rs. 4,00,000 only.
The matter requires to be resolved.
From the understanding of Law, it is clear that the assessee have to pay advance tax on interest income of Rs.5.00 lac. But how this tax calculation is to be made is no where define in legislature?
Notwithstanding anything contained in the foregoing provisions of this section, 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 sub-section (2) of and get them audited and furnish a report of such audit as required under
Corresponding Provisions in Section 44AA and Section 44AB are as follows:
44AA(2): Every person carrying on business or profession (non specified) shall
iv) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum income not chargeable to income tax during such previous year
keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
(d) carrying on business shall if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income tax in any previous year
Get his accounts of such previous year audited by accountant before the specified date and furnish by that the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
From the combined reading of section 44AD,44AA, 44AF, what comes out is even if assessee shows his income less than 8% but if his income is lesser than exemption limit,
i) he is not required to maintain books of accounts in respect of eligible business.
It implies the income limit of Rs. 120000 and turnover limit of Rs. 10,00,000 shall be applicable to non specified profession only.
ii) He is not required to get the accounts audited.
8% = 480000
i) PGBP Income= 480000
Income = 380000
Books of accounts not to be maintained
Audit not required
ii) PGBP Income = 400000
Income = 280000
Books of accounts to be maintained
Audit to be done u/s 44AB
iii) PGBP Income = 200000
Total Income = 130000
Books of accounts not to be maintained
Audit not required
Analysis of section 44AD(5)
l Notwithstanding anything contained in forgoing provisions of this section
It implies 44AD(5) over rides entire stream of section 44AD(1) to 44AD(4), implying there by while 44AD(1) over rides section 28 to 43C only,44AD(5) may also over ride s. 44AA.
l Further eligible assesee in respect of eligible business is required to maintain books of accounts as required u/s 44AA(2), if income is lesser than 8% but more than exemption limit.
l Having concluded that 44AD(5) over rides 44AA, the relevance of income and turnover limits prescribed under 44AA(2) for earlier years gets diluted and now to decide about books for previous year you have to look at income to be determined in future assessment year. This is a complete departure of policy on determination for maintaining books and irrational too. Earlier past governed the future but now the future will govern the past.
Books of accounts for Business
l For Individuals, HUF, Firm (excluding LLP) resident in
- Not claiming deduction under 10A,10AA,10B,10BA or under CH VI-A under heading “Deduction in respect of certain Incomes” and
- Not carrying on business of plying ,hiring, leasing goods carriages
Or carrying on business of plying, hiring, leasing more than 10 goods carriages owned at any time during the financial year and
- Not having total turnover exceeding 60 lacs.
l Books of accounts for business to be maintained u/s 44AA(2)(iv)
If PGBP income is lower than 8% of Turnover but Total Income is more than exemption limit. In all other cases books of accounts need not be maintained for eligible business carried on by eligible assessee
= Rs. 5000000 PGBP =Rs. 150000 TI= 140000. A/C not required Sale
=50,00,000 PGBP= 150000,TI= 170000. In last three years,PGBP<120000 and turnover<1000000,A/Cs to be maintained Sale
Books of accounts for Business
For Individuals, HUF, Firm (excluding LLP) resident in
- Claiming deduction under 10A,10AA,10B,10BA or under CH VI-A under heading “Deduction in respect of certain Incomes” or
- Having total turnover exceeding 60 lacs
- For Non Resident Individual, Non resident HUF, Non resident Firm, LLP, Company, AJP, Local Authority, AOP,BOI:
Books of accounts for business to be maintained u/s 44AA(2)(i)/(ii)
if PGBP Income exceeds Rs. 120000 or turnover exceeds Rs, 10 lacs during any one of 3 earlier years or likely to cross the
limits in first year
Books of accounts for Profession
l Books of accounts for non specified profession to be maintained if PGBP Income exceeds Rs. 120000 or turnover exceeds Rs, 10 lacs during any one of 3 earlier years or likely to cross the limits in first year.
l Books of accounts for specified profession to be maintained if gross receipts exceed Rs. 150000 for 3 consecutive years or likely to exceed Rs. 150000 in first year.
Accounts required u/s 44AA not maintained whether still audit to be done
l S.J Agarwal and Co. v. ITO 114 ITD 27(Pune) (SMC)
Merely because the assessee has not kept or
maintained such books of account and other documents as are required under section 44AA, that would not by itself be sufficient to say that any other accounts whatsoever maintained by the assessee, shall not be required to be audited under section 44AB.
Whether TDS provisions shall apply if accounts are audited under section 44AB in respect of eligible business
TDS provisions apply to Individual or HUF if the accounts are audited under 44AB(a)/(b) but in case of 44 AD, the accounts are audited u/s 44AB(d), hence TDS provisions shall not apply in succeeding year.
Return form to be filled in
l As per General Instruction No.2 appended to ITR-4S(Sugam), Sugam to be used when assessee is having business Income computed according to special provisions of 44AD and 44AE.
l Section 44AD as well as 44AE do not cover only situations where income is shown equal to presumptive income but also cases where higher income is shown
l But SCH BP on ITR-4S is :
E1. Gross Turnover or Gross Receipts
E2. Total presumptive Income u/s 44AD(8% of E1)
E3. Presumptive Income from Heavy Vehicles
E4. Presumptive Income from Other Vehicles
E5 Total Presumptive Income under 44AE (E3 + E4)
E6. Income Chargeable under Business (E2 + E5)
Hence the format does not allow reflecting income higher than presumptive Income.
l Further as per General Instruction No.4 appended along ITR-4S, if assessee maintains books of accounts u/s 44AA, then ITR-4 is required to be filed. Hence for filing ITR-4S one has to take stand that assessee is not maintaining account books. If you are showing income at 8% or higher income and also maintained books of accounts, ITR-4 is to be filled in.
l For Speculation business also ITR-4S can not be filled in (Inst. No. 3(e))
Delayed filing of ITR
 320 ITR 498(Mad) CIT v. apex Laboratories Pvt. Ltd.
l Held that no penalty is imposable u/s 271B for non-compliance with the provisions of section 44AB on the ground that the returns were filed belatedly. Penalty is leviable only if the assessee fails to get his accounts audited and obtain a report.
Grounds on which penalty u/s 271B can be avoided
l Resignation of tax auditor
l Bonafide interpretation of definition of turnover based on expert advice
l Death or physical disability of partner in charge
l Labour Problems
l Loss due to theft,fire or other reason beyond assessee’s controll Natural Calamities