Section 44AD of Income Tax Act, 1961 which provided for presumptive income scheme for civil contractors has been substituted w.e.f 01-04-2011 and the new substituted section provides presumptive income schemes applicable to all eligible assesses carrying on eligible business. Here below the provisions of new section 44AD have been examined.
To whom the provisions of section 44AD is applicable: The provisions of section 44AD are applicable to an eligible assessee carrying on eligible business. Section 44AD is not applicable to the professionals i.e Doctors, Lawyers, engineers or architects, accountants etc.
Eligible assessee means a resident individual, HUF or a partnership firm but not limited liability partnership and who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of chapter VIA under the heading “C.—Deductions in respect of certain incomes(i.e deduction under any provisions of section 80HH to 80RRB) in the relevant assessment year.
Eligible business means any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE and whose total turnover or gross receipts does not exceed Rs 60 lakhs in the previous year.
Earlier such presumptive income scheme was available to retailers and civil contractors only but this new section 44AD covers not only retailers but also wholesalers, property dealers, beauty saloons and all businesses except the professionals and the persons covered u/s 44AE, if the gross turnover or gross receipts doesnot exceed Rs. 60 lakhs in the previous year.
How much income is presumable under this scheme: To get the benefit of presumptive scheme u/s 44AD the eligible assessee carrying on eligible business must declare his net profit atleast @ 8% of gross receipts or gross turnover. If the assessee declares more than 8% than such higher income shall be treated as his deemed income u/s 44AD. Thus the assessee can also declare income u/s 44AD more than 8%.
No need to maintain any sort of regular books of accounts: If a person declares profit u/s 44AD @ 8% or more of his gross receipts or gross turnover then he will not be required to maintain any sort of regular books of accounts for the purpose of Income Tax Act.
But it is advisable that some temporary books of accounts like sale books or day books etc., must be maintained so as to prove that the assessee has gross turnover or gross receipt below Rs. 60 lakhs and he is eligible to get benefit of section 44AD.
If the assessee has been maintaining books of account or other records under any other law say under VAT or sales tax law then such books may be produced (if needed) before AO to prove that the gross receipts are below Rs 60 lakhs.
Section 44AD(1) contains non abstante clause: Section 44AD starts with the words Notwithstanding anything contained in section 28 to 43C….. Thus the presumptive income scheme as contained u/s 44AD is applicable irrespective of any provisions contained u/s 28 to 43C.
Thus in my view disallowance of expenses u/s 40A like for excessive payments to relatives or payment of an expenditure in excess of Rs 20000 in one day will not apply, if the income has been declared u/s 44AD.
No deduction u/s 30 to 38 will be provided from such profit declared u/s 44AD and all such deductions are deemed to have been fully allowed already. However in case of partnership firm remuneration and interest on capital paid to partners shall be admissible as deduction from such income declared u/s 44AD subject to the conditions and limits prescribed u/s 40(b).
The written down value of assets of a person declaring income u/s 44AD will be calculated as if depericiation on such assets has been allowed and claimed in such year.
Unabsorbed depericiation cannot be set off against income declared u/s 44AD since such set off is allowable u/s 32(1) and provisions of section 28 to 43C are not applicable to section 44AD. Similar view has also been taken in DCIT v. Sunil M. Kankariya [2008] 298 ITR (AT) 205(ITAT-Pune).
No need to deposit advance tax: If income is declared u/s 44AD then the provisions of chapter XVII-C (Provisions relating to advance tax) do not apply. Thus there is no need to deposit any advance tax if income is declared u/s 44AD.
What if profit is declared less than 8%: The presumptive income scheme is not compulsory and is optional only. One can opt to declare his income below 8% of gross receipts or gross turnover, but in such case as per section 44AD(5) if his total income exceeds basic exemption limit then he will have to maintain books of accounts as prescribed u/s 44AA(2) and also get his books of accounts audited u/s 44AB.
The books of accounts will be required to be maintained and audited u/s 44AA(2) and 44AB respectively, only if both the conditions i.e declaring of income lower than 8% and exceeding of income above exempted limit, get fulfilled.
For example If income is declared less than 8% of gross receipts but the total income doesnot exceed the exempted limit then no books of accounts will be required to be maintained u/s 44AA(2) and no audit u/s 44AB will be required.
It is to be further noted here that section 44AD(5) also contains no abstante clause it also starts with the words "Notwithstanding anything contained in the foregoing provisions of this section....". Thus if an assessee doesnot declare income u/s 44AD i.e lower than 8% and his total income exceeds exempted limit then not only he will have to maintain regular books of accounts u/s 44AA and get them audited u/s 44AB, but the provisions of advance tax and provisions from section 28 to 43C will also be applicable.
Which return Form to be used for declaring Income u/s 44AD: For presumptive schemes a new form Sugam has been notified from the A.Y 2011-12, If you are declaring income u/s 44AD then Sugam form should be filed up.
Some important case laws:
Income declared u/s 44AD- Assessee not liable to explain each entry of cash deposit:It has been held by Hon'ble Punjab & Haryana High court in CIT v. Surinder Pal Anand, that where the assessee has declared his income u/s 44AD(Presumptive Income scheme) then addition cannot be made on the basis of cash deposits in the bank account, if such cash deposit correlates with the gross receipts of the assessee. In my view this Judgement should also apply to other presumptive income sections like Section 44AF,44AE, 44AD(new) etc.
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? 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 [2004] 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 cource 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.
Conclusion: The scheme is good for small businessmen assesses and relive them from burden of maintaining/auditing of regular books of accounts.
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