Can assessee opt for Sec 44AD and Sec 44AE together? - Part III

• Click here to read Part 1 - Presumptive Taxation Scheme u/s Section 44AD
• Click here to read Part 2 - Interplay of Section 43CA vs. Section 44AD

Now a question arises that whether an assessee can take the benefit of sec 44AD and sec 44AE together. To resolve this issue when we have to see the provisions of sec 44AD which reads - ".............an eligible assessee engaged in an eligible business............. 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............."It clearly lays down that sec 44AE is not eligible business and it does not make the assessee ineligible to take the benefit of sec 44AD.The business covered under 44AE is not mentioned in 44AD(6), but only excluded from definition of "Eligible Business".So these two provisions can be claimed simultaneously

A) Example

Mr. X a Resident individual, is carrying on two businesses, the turnover of which is as under -

• Business A (Eligible Business) Rs.70 Lacs
• Business B (Transport u/s 44 AE) Rs.8 Lacs

Section 44AD and 44AE both are applicable. In the above said case, turnover of both the business shall not be clubbed and both the business shall be chargeable to tax u/s 44AD and 44AE of the Act respectively.

B) A sum equal to eight percent of the total turnover or gross receipts of the assessee in the previous year on account of such business

The minimum rate of the profit is 8% on Total Turnover or Gross Receipts of the Assessee. Now, the question arises what does Total Turnover or Gross Receipts means?

For the calculation of Total Turnover or gross receipts reference of section 145 & Section 145A must be given. Section 145 of the Income Tax Act, 1961 deals with the method of accounting to be followed by the assessee. It gives an option to the assessee that while calculating the income under the head Business/Profession assessee may opt for Cash system or accrual system of accounting. This is the reason Section 44AD also gives reference to the word Gross Receipts with intent to cover those cases where assessee follows the cash system of accounting. Gross Turnover means without including any purchase cost & any other direct or indirect cost. It should be the Gross revenue which is received or to be received by the assessee from the sale of goods or services.

Therefore where the Purchase of Goods or services & other expenditures are inclusive of taxes or not is not a matter of concern for the assessee who is covered by Section 44AD. However, whether tax, duties, cess, etc. which is collected by the Assessee covered u/s 44AD should be part of turnover or not is a matter of consideration. As per Section 145A(ii), the valuation of goods or services shall be adjusted including the amount of any tax, duty, cess, or fess by whatever name called............... It means CGST/SGST/IGST etc. collected from the buyer by the assessee should also become part of the Gross Turnover. There are divergent views on this point.

C). ..............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"

It is to be noted that in Section 44AD, the assessee must have to declare a minimum of 8% of the Gross turnover or gross receipts as his deemed income. However, Section 44AD(1) further gives an option to the assessee to claim more than 8% in his return of Income. It means it is the option given to the assessee & not to the Revenue to presume higher income of the assessee while making an assessment.

Ms. SURBHI AGARWAL V. PRINCIPAL COMMISSIONER OF INCOME TAX-2 -Jaipur ITAT

• The ld. A/R of the assessee has submitted that the case of the assessee is covered under section 44AD of the Act as the turnover of the assessee is Rs.85 lacs which is not exceeding the limit provided under section 44AD. The ld. A/R further submitted that the assessee has declared profit of Rs.7.64 lacs which is 8.99% of the turnover. Therefore, even if there is a payment in cash which is hit by the provisions of section 40A(3), once the case of the assessee is covered under section 44AD and assessee has declared more than 8% of profit on the said turnover, then no further disallowance is called for.

• The ld. D/R has submitted that the assessee has not filed the return of income under section 44AD of the Act but the income declared in the return of income as per the books of account maintained by the assessee. Therefore, the assessee cannot take the plea of section 44AD even if the turnover of the assessee is less than the limit provided under the said provision.
• Tribunal held -Once the assessee has filed the return of income declaring the income based on the business results shown in the books of account then the AO is required to examine the correctness of the return of income and claim of the assessee in the context of business results shown as per the books of account.

• Merely because the turnover of the assessee for the year under consideration is less than the limit provided under section 44AD, would not preclude the ld. PCIT to exercise his jurisdiction under section 263 regarding violation of provisions of section 40A(3) of the Act. Thus44AD has to be ‘claimed’.
• Once income declared as per books of accounts, assessee cannot claim that since turnover is within limits of 44AD, therefore disallowances u/s 40A (or others) would not apply.

Meaning of words ‘claimed to have been earned by the eligible assessee’

The section has been amended for the benefit of the assessee and the words claimed to have been earned by the eligible assessee. By the introduction of these words in section 44AD(1), the legislature shows his intention to accept specified income as returned income even if higher sum is earned by eligible assessee unless it is claimed by assessee in his Income Tax Return. The word "Claim" signifies the right of assessee to the extent to opt between actual profits and presumptive profits. It is further to be noted that to claim the profits upto presumptive rate is the right of the assessee and if the actual profits are more than the presumptive profits then it is an obligation of assessee to declare the actual profits to the department. In other words, the scheme of presumptive taxation provides both right- to the extent of presumptive profits and obligation to the extent of actual profits. It cannot be said that if an assessee who has opted for presumptive taxation is not liable to produce the evidence of the actual profits shown by him. The distinction between Right and obligation is very necessary here. The language of section 44AD(1) requires claims to have been made by an assessee for returning higher income. If there is no claim made by assessee in return for higher income, there is no higher income. The assessee, who has opted presumptive taxation system, is under no obligation to explain individual entry of cash deposit in bank unless such entry has no nexus with gross receipts

Example- Mr. Sham is carrying on business. The Turnover is Rs.90 Lacs. The profit as per his books or calculation is Rs.9 Lacs. However, he opts to return the income under section 44AD @ 8% i.e. Rs.7.20 lacs. Now a question arises regarding the power of AO to assess the difference of Rs.1.8 lacs as undisclosed income. In this case Mr. Sham has claimed the income of Rs.7.20 lac as in his return of income as his claim. The assessee is free to exercise this option at his will. 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. 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". It means that 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. Another pertinent point is that if 8% of profits have been declared, then 92% of the receipts have been expended. This amount is neither saved nor invested. AO can make addition if he is having sufficient evidence that the difference between actual profits and presumptive profits have been invested. In other words, the assessee cannot invest the difference between the actual profits and declared profits in any asset.

D). ...........................Provided that this sub-section shall affect as if for the words "eight percent", the words "six percent" had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed] during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year

The presumptive rate of income would be 8% of total turnover or gross receipts. However, Proviso to sub-section (1) provides that the presumptive rate of 6% of total turnover or gross receipts will be applicable in respect of amount which is received

• By an account payee cheque or
• By an account payee bank draft
• By use of electronic clearing system through a bank account OR through such other electronic mode as may be prescribed.

During the previous year or before the due date of filing of return under section 139(1) in respect of the previous year.It is to be noted that the payment should have been received by an account payee cheque or an account payee bank draft. The payment received by crossed cheque shall be treated as cash payment received. In this connection it is to be noted that the difference between crossed cheque and account payee cheque is that the crossed cheque is being endorsed in favour of a person other than the drawee making it difficult to trace the constituent of the money. Keeping this idea in mind, the crossed cheques are not being considered payment as other than cash. This payment will be treated as cash.

However the assessee can declare in his return an amount higher than presumptive income so calculated, claimed to have been actually earned by him.Therefore here we can see that instead of adopting the accrual method, we have to focus on actual receipt of the sum.

Other Electronic Prescribed by CBDT

The Central Board of Direct Taxes has prescribed other electronic modes to provide for the followings as an acceptable electronic mode of payments-

(a) Credit Card;
(b) Debit Card;
(c) Net Banking;
(d) IMPS (Immediate Payment Service);
(e) UPI (Unified Payment Interface);
(f) RTGS (Real Time Gross Settlement);
(g) NEFT (National Electronic Funds Transfer), and
(h) BHIM (Bharat Interface for Money) Aadhaar Pay”͖

For this purpose, a new Rule 6ABBA with the heading ‘Other electronic modes’ is introduced in the Income Tax Rules, 1962. This rule has been given a retrospective effect and will come into force from 01- 09-2019 even though the notification was issued on 29-01-2020.

This proviso to sub-section (1) has been inserted w.e.f. 01/04/2017 to promote digital transactions. The government has offered incentive to the seller for accepting payment by banking channels or digital means by allowing lower rate of income. This was particularly necessary to encourage digital transactions after demonetization.

Assessee accepting payment through account payee cheque/ account payee draft or ECS through bank or other electronic mode can declare income at 6 % of turnover/ sales or gross receipts. However, the payment must be received before the due date of filing of return.

Example:M/s ABC, a partnership firm, is engaged in the trading business of ready made garments. Its turnover for the previous year 2020-21 is Rs.1,10,00,000. It follows mercantile system of accounting. It has received the amount of its turnover in the following manner

Rs.5,00,000 is not received by the firm till the due date of filing return of income for the current previous year. The profits and gains as per the books of account maintained as per section 44AA is RS.6,80,000. What would be the total income of the firm for A.Y.2021-22, if it wishes to make maximum tax savings without getting its books of accounts audited?

Solution:

M/s ABC is eligible for presumptive taxation as per Sec 44AD, since his turnover is upto 2Cr.

Presumptive PGBP income = Turnover/ Gross Receipt x 8% but if turnover or gross receipt is received by account payee cheque/DD/ECS upto due date of return of return filing u/s 139(1) and the PGBP Income = Turnover/ Gross Receipts x 6%.

M/s ABC have not got the books of a/c audited so they can opt for presumptive taxation.

Income 7,20,000 i.e. [(6% of 80,00,000) +(8% of 30,00,000)]

Amount received through account payee cheque or ECS before the due date of filing

= 70,00,000+10,00,000 = 80,00,000

Profit chargeable to tax under presumptive taxation

Note: It is to be noted that amount received through crossed cheque will be treated as cash.

Example: Mr. X, an individual carrying business of laptop Turnover of Rs.80 Lacs during the F.Y. 19-20. He has received the payments as:

• Rs.60 Lacs in cash
• Rs.10 Lacs by account payee cheque during the previous year
• Rs.4 Lacs by ECS through bank account upto 31^st July 2019
• Rs.6 Lacs has not been received yet.

Now, since the Turnover is below Rs.2 Cr, he has the option of availing benefits of section 44AD. Mr. X can exercise this option and declare income as