Presumptive Taxation Scheme Section 44AD - Part I

Special provision for computing profits and gains of business on presumptive basis

44AD. (1) 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" :

Provided that this sub-section shall have effect as if for the words "eight percent", the words "six per- cent" 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.

(2) Any deduction allowable under the provisions of sections 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.

(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.

(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable 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 section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to-

(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;
(ii) a person earning income in the nature of commission or brokerage; or
(iii) a person carrying on any agency business.

Explanation.- For the purposes of this section,-

(a) "eligible assessee" means,-

(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and

(ii) 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" in the relevant assessment year;

(b) "eligible business" means,-

(i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.

We can decode the provisions of section 44AD(1) of the Act,by dividing the said section into following parts:

A. Notwithstanding anything to the contrary contained in sections 28 to 43C..........

Section 44AD of the Act begins with a non-obstante clause "(1) Notwithstanding anything to the contrary contained in sections 28 to 43C"..........Therefore by virtue of the non-obstante clause, Section 44AD of the Act has a superior position vis-à-vis the other provisions of the Income Tax Act 1961. Nevertheless, Section 44AD(2) of the Act also specifically mentions that any deductions allowable under Section 30 to 38 shall be deemed to have been given full effect. Therefore, there are no specific deductions available for the assessee opting for presumptive taxation under Section 44AD of the Act.

Therefore, Section 44AD (1) determines the taxability by invoking a deeming clause. Further, the section is titled as "Special provision for computing profits and gains of business on presumptive basis". Hence one may infer that Section 44AD is a self-contained code by its own means devoid of Section 28 to 43C as both chargeability and computation are embedded in it. Having inferred that Section 44AD(1) is a separate code by itself wherein it determines the profit computation without referring to Section 29 of the Act.Section 44AD(2) of the Act specifically mentions that the deduction allowable under Section 30 to 38 of the Act are deemed to have been allowed. Such a provision, prima facie appears unnecessary especially considering that Section 44AD (1) begins with a non-obstante clause "(1) Notwithstanding anything to the contrary contained in sections 28 to 43C" which on a literal reading specifies that Section 44AD will override all the other provisions relevant for computing profits and gains from business i.e., Sections 28 to 43C of the Act, even if the same are contrary.

It is to be noted here that the non-obstante clause stresses on the term contrary. However, a similar non-obstante clause employed in the newly inserted Section 44ADA of the Act (Special provision for computing profits and gains of profession on presumptive basis), mentions "Section 44ADA. (1) Notwithstanding anything contained in sections 28 to 43C". On a comparison of Section 44AD and Section 44ADA of the Act, the term 'contrary' is absent in the latter section. Now, aquestion arises that whether the term 'contrary' used in Section 44AD is superfluous. However it does not appear to be superfluous since the proviso to Section 44AD(2) prior to Finance Act 2016 amendment, specifically mentioned that while determining the income deemed to be profits and gains of business under Section 44AD of the Act, deduction under Section 40(b) shall be allowed subject to the limits specified.

Therefore, Section 44AD of the Act which appears to be a separate self-contained code, specifically uses the term contrary in its non-obstante clause so as to enable the eligible assessee to avail the deduction under Section 40(b) of the Act prior to Finance Act 2016.

The new Section 44ADA of the Act does not provide for any deduction while determining the presumptive profits and this may be considered the reason for the absence of the word contrary in the non obstante clause.

It means section 28 to 43C of Income Tax Act, 1961 is not applicable on eligible assessee carrying on eligible business. Hence, no disallowance / no deemed income under Section 40(a), 40A, 40A(3), 40A(3A), 41 can be made. It has been specifically provided that if the taxable income is to be calculated at eight percent or six percent of turnover or gross receipts, then in that case provisions of section 28 to 43C are not to be taken into consideration for the purpose of computing taxable income. It is pertinent to note whether any adverse inference can be drawn by which any amount that would have been added, while calculating taxable income, such amount can be added while calculating income on presumptive basis. By exclusion clause in respect of section 28 to 43C it seems that no disturbance can be made on account of provisions of sec 28 to 43C if the total income is arrived at on the presumptive basis.

Example: Mr. X has paid Rs.15,000 for purchase of goods in cash. Can disallowance be made u/s. 40A(3).

Ans- No disallowance can be made under section 40A(3) for the same.

Example: Mr. X has paid Rs.38,000 to transporter for freight in cash. Can disallowance be made u/s. 40A(3)?

Ans- No disallowance can be made under Section 40A(3).

Example: Mr. X has contributed certain sum to national Laboratory which qualifies for deduction under section 35(2)(AA). Can deduction be claimed u/s. 35(2)(AA)?

Ans- No, if he chooses section 44AD he will not eligible for benefit of this section.

Example: Mr. Y has claimed bad debts written off of Rs.50,000 in year 2014-15. In P.Y. 2019-20 he has recovered Rs.30,000.

Ans- Separate addition of bad debts recovered may not be made if the profits are declared under presumptive taxation scheme.

Example:A Firm engaged in the business of warehousing as mentioned u/s 35AD & total receipts doesn’t exceed Rs.200. Can he opt for Claim u/s 44AD?

Ans- Yes, the assessee who engaged in the business of warehousing u/s35AD can claim the benefits of Section 44AD. Since restrictions put via explanation to Section 44AD doesn’t apply to Section 35AD business. However, it is interesting to note that such person can’t claim the deductions u/s35AD since section 44AD overrides Section 35AD.

Issue on Disallowance U/S 43B

A very interesting issue on the disallowance u/s 43B of the Income Tax Act,1961 has been considered by Panaji Tribunal in case of Good Luck Kinetic v. ITO (2015) 58. The Tribunal held that 44AD starts with "notwithstanding anything to the contrary contained in Sec. 28 to 43C" whereas section 43B starts with the words "notwithstanding anything contained in any other provisions of this Act". The non-obstante clause in Sec. 43B has far wider amplitude. Hence, disallowance could be made by invoking the provisions of Sec. 43B.

This is because the said provisions u/s 28 to 43C are provisions relating to the computation of business income of the Assessee. However, a perusal of the provisions of Sec. 43B shows that the said provision is a "restriction" on the allowance of a particular expenditure representing statutory liability and such other expenses, claimed in the profit and loss account unless the same has been paid before the due date of filing the return.

Further, the non-obstante clause in Sec. 43B has far wider amplitude because it uses the words "notwithstanding anything contained in any other provisions of this Act". Therefore, even assuming that the deduction is permissible or the deduction is deemed to have been allowed under any other provisions of this Act, still the control placed by the provisions of Sec. 43B in respect of the statutory liabilities still holds precedence over such allowance. This is because the dues to the crown has no limitation and has precedence over all other allowances and claims. The disallowance made by the AO by invoking the provisions of Sec. 43B of the Act in respect of the statutory liabilities are in order even though the Assessee income has been offered and assessed under the provisions of Sec. 44AF of the Act.

Therefore, considering the view held by the aforesaid Tribunal, addition/ disallowance can be made u/s 43B even though the income has been declared u/s 44AD, 44ADA or 44AE

Example: Mr. X, having turnover of Rs.70,00,000 declared profit at 8% amounting to Rs.5,60,000. He has not deposited employer share of EPF of Rs.25,000 up to due date of return filing. Also, he has not paid bonus amounting to Rs.40,000 to his employees. Whether addition can be made u/s 43B if Mr. X opts for sec 44AD?

Yes, addition can be made u/s 43B even if income is declared u/s 44AD. In this case the income will be assessed as:

An important Issue X & Co. a partnership firm opts for Section 44AD during the Previous Year 2019-20 fails to pay interest of Rs.5 Lacs to the scheduled Bank. Assessing Officer while making the Assessment U/s 143(3) enhanced the assessment by Rs.4 Lacs by invoking the disallowances U/s 43B be a Non-Obstante Clause. The Firm paid such interest during the Previous Year 2020-21& claim allowances of such Interest while filing the ROI. Assessing Officer disallows the Interest contending that Section 44AD(2) restricts the assessee claims of any expenditure U/s 30 to 38 & Interest Expenditure is governed as per Section 36. Comment on the action of the Assessing Officer.

The Action of the Assessing Officer is not as per the law. Once the disallowances of interest were attracted U/s 43B the same will be allowed as per Section 43B itself. It means normally interest expenditure is allowed U/s 36 read with Section 43B on the payment basis if it is payable to the scheduled Bank. If Assessee fails to pay the interest then such interest will bedisallowed as per Section 43B. Further, the proviso to Section 43B allows such expenditure during the Previous Year in which it is paid. Therefore, in the given case the Assessee firm is eligible to claim the Deduction of the Interest since such allowances are as per Section 43B & not as per Section 36. If Interest paid is further disallowed it will tantamount to Double Taxation.

Issue of disallowance u/s 40

Sec 40 begins with "Notwithstanding anything to the contrary in sections 30 to 38" It is to be noted that Section 40 is clothed in a negative language and it says that certain amounts shall not be deducted while computing income under the head "profits &gains of business or profession whereas section 44AD begins with "notwithstanding anything to the contrary contained in sec 28 to 43C". On analysis of both the sections, the amplitude of non-obstante clause of section 44AD is higher than the non-obstante clause of section 40. Section 40 relates to disallowance of certain expenses due to non-deduction of TDS or non-deduction/ non-payment of equalisation levy, remuneration/ interest by firm to partners in excess of allowed etc.

Therefore, these expenses would not be disallowed even if TDS has not been deducted. However, the assessee may be deemed as assessee in default as per section 201 as sec 44AD override provisions of section 28 to 43C but not the provisions of TDS.

Example: Mr. X declaring income u/s 44AD has made payment of interest to non-resident. However, no TDS has been deducted. Whether the expense will be disallowed u/s 40(a)?

The interest expense will not be disallowed as sec 44AD overrides sec 40(a). The assessee was required to deduct TDS as per sec 195. Although, he has not deducted the TDS, expense will not be disallowed. However, he may be considered as assessee in default as per sec 201 and other penal provisions may be applicable as sec 44AD does not override TDS provisions.

SECTION 44AD/ 44ADA r.w. SECTION. 40(a)(ia)

In ITO v. Mark Construction [2012] 23 taxmann.com 398 (Kolkata) the assessee engaged in civil construction disclosed profits exceeding 8% by opting for section 44AD provisions. In the assessment, the Assessing Officer called for books of account of the assessee and the assessee took a plea that the income was offered under section 44AD and hence maintenance / production of books of account was not compulsory. The Assessing Officer made addition of Rs.32,62,140 by invoking section 40(a)(ia). The tribunal held that since the assessee has disclosed profits more than 8% of the gross receipts, no disallowance under section 40(a)(ia) could be made.

No TDS default disallowance u/s. 40(a)(ia) for assessee opting presumptive basis taxation u/s 44AD

Surat ITAT in the case of Shri Bipinchandra Hiralal Thakkar

[TS-539-ITAT-2020(SUR)]rules in favour of assessee-individual [who offered income to tax on presumptive basis u/s. 44AD @ 8% on gross turnover), deletes TDS default disallowance u/s 40(a)(ia) for AY 2013-14; Noting that assessee made interest payments on unsecured loans and job work expenses without deducting TDS u/s 194A/194C, AO made disallowance u/s. 40(a)(ia); However, ITAT refers to the non-obstante" clause at the beginning of section 44AD overriding the provisions of sections 28 to 43C; Relies on the judgement of SMS Bench Kolkata in the case of Jaharlal Mukherjee, wherein it was held ..the provisions of section 44AD of the Act overrides all other provisions contained in section 28 to 43C. Admittedly, the provisions of section 40(a)(ia)of the Act falls within this range of sections 28 to 43C of Chapter-XVII B of the I.T. Act." ; Rejects Revenue's stand that the dues to the crown has no limitation and has precedence over all other allowance and claims", opines that provisions of section 44AD have been enacted by the Legislature/Crown to provide benefit to small businessmen in terms of cost savings.

Issue of disallowance u/s 40A

Sec 40A relates to disallowance related to excess payment of related party, cash payment to a person in excess of Rs.10,000 in a day, payment to unapproved fund, mark to market losses etc. The comparison of sec 44AD and 40A is very interesting and different from sec 43B and sec 40. Sec 40A overrides all the other provisions of PGBP. The section begins with "The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act relating to the computation of income under the head "Profits and gains of business or profession". The non-obstante clause of this section seems to override provisions of sec 44AD. However, the Panaji Tribunal in case of Good Luck Kinetic v. ITO (2015) 58 relating to disallowance u/s 43B have considered two points:

1. Amplitude of non-obstante clause
2. Payment to crown i.e. statutory dues

The provisions of sec 40A are not related to statutory dues and such other dues. It just imposes restrictions on payments and disallows amount which is not paid as per the provisions of the Act. It is also to be noted that provisions of sec 40A of the Act are with regard to allowability of expenditure which has been actually incurred and claimed by the assessee from sec 30 to 38 of the Act. Therefore, if the assessee declares income as per the provisions of sec 44AD of the Act, no disallowance shall be made u/s 40A of the Act.