Presumptive taxation u/s 44ad
This query is : Resolved
11 August 2016
Respected Experts,
1) Is presumptive taxation u/s 44AD specifically prohibited for business income derived from trading in futures and options?
2) Will a taxpayer being assessed u/s 44AD be legally right if he/she declares net profit just equal to 8% of turnover even if the actual net profit is more than 8%? I mean to ask whether declaring the actual profit (if more than 8%) is a legal obligation of the taxpayer?
Many thanks in advance!
1) Is presumptive taxation u/s 44AD specifically prohibited for business income derived from trading in futures and options?
2) Will a taxpayer being assessed u/s 44AD be legally right if he/she declares net profit just equal to 8% of turnover even if the actual net profit is more than 8%? I mean to ask whether declaring the actual profit (if more than 8%) is a legal obligation of the taxpayer?
Many thanks in advance!
12 August 2016
1 Not prohibited.
2 It is legally right to declare profit equal to 8% even if you earn more than 8%. No legal obligation to declare, actual profit if actual profit is more than 8%.
2 It is legally right to declare profit equal to 8% even if you earn more than 8%. No legal obligation to declare, actual profit if actual profit is more than 8%.
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12 August 2016
It is always expected from all asessee to FURNISH true and correct income and profit generated , there is NO ambiguity in it , so it is always prudent to Do so...
12 August 2016
return of income is the DECLARATION by the assessee. Having declared a profit of 8%, when in reality the profit is more than 8% partake the nature of FALSE declaration. The assessee may be at great risk in days to come.
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14 August 2016
Dohale and Joglekar Sirs, If it is not legally right, then presumptive taxation interpretation just means that in lieu of availing the benefit of non-maintenance of books of accounts one needs to declare a minimum net profit of 8%. If one is expected to declare actual when more than 8% then it is no more presumptive taxation. My interpretation of the 44AD provisions was that a small business owner avoids overheads of maintenance of books of accounts by declaring 8% profit regularly (sometimes the actual profit may be more than 8% and sometimes less than 8%).
I hope the principle of TRUE DECLARATION would also apply when one avails 30% maintenance deduction in respect of income from rental of house property. One might not have actually spent that amount on maintenance. Would one be held guilty for a FALSE declaration in this case also?
Please refer the following link http://taxheal.com/in-presumptive-taxation-ao-cant-ask-explanation-of-expenses-itat-chandigarh.html
It has the judgment of ITAT chandigarh. It says the keyword in 44AD is 'deemed' meaning the income would be assumed to be 8% which may or may not actually 8%. I am not questioning your wisdom. But, we must strive to get the correct interpretation of the section in the eyes of the law.
Views from more experts are requested.
I hope the principle of TRUE DECLARATION would also apply when one avails 30% maintenance deduction in respect of income from rental of house property. One might not have actually spent that amount on maintenance. Would one be held guilty for a FALSE declaration in this case also?
Please refer the following link http://taxheal.com/in-presumptive-taxation-ao-cant-ask-explanation-of-expenses-itat-chandigarh.html
It has the judgment of ITAT chandigarh. It says the keyword in 44AD is 'deemed' meaning the income would be assumed to be 8% which may or may not actually 8%. I am not questioning your wisdom. But, we must strive to get the correct interpretation of the section in the eyes of the law.
Views from more experts are requested.
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14 August 2016
I fully agree with you Mr. Anil Kumar.
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14 August 2016
Experts, Please share your valued opinions and help me take a well debated decision.
14 August 2016
See , it is like twisting or tweaking the issue of , NOT MAINTAINANCE of BOOKS of ACCOUNTS ( debit ,credit) by the people who fully or partially indulge in business governed u/s 44AD and simply assuming gross profit of minimum of 8 % or as per actuals , and self assess ONESELF to pay taxes either of 10% / 20% or 30 % bracket, take in case one earns 12 % profit as gross, so it will be UNFAIR and FALSE to STATE that he earned only 8% profit , and to FILE ITR accordingly
14 August 2016
Please allow me to put before you one practical life example faced by me during my SMALL tenure as income tax consultant. The story goes as follows and it dates back to financial year 1997-98 and onwards.
A partnership firm having 2 partners was having the business of "arresting leakage of water" in various projects like overhead water tanks, swimming tanks, river sheds, terraces, dams etc etc. The real profit % after all the expenses was around 56. (For the sake of easiness of calculation, let us take it as 50%)
Some CA who is of your view, about section 44AD, suggested them to show a profit of 8%. (For the sake of easiness of calculation of, let us take it as 10%)
The partners approached me for "second opinion". Looking at the then facts, I suggested them not to indulge into such an interpretation of section 44AD. and if at all they want to go by section 44AD, declare the % which is more or less, very close to the actual profit %.
But the SHORT RUN BENEFIT of paying less tax (30%...[tax slab] of 40%....[50%-10%]) proved to be more lucrative for them and they went ahead with 10 % profit.....5-6 years passed by.
Now try to understand the real beauty......
a turnover of average 30 lakh per year....kept aside a profit of around 12 lakh i.e. 40% of 30 lakh = 12 lakh. ok?
In those 6 years they almost accumulated and kept aside profit of around 72 lakhs with them
Needless to say, the partners invested the same in 2 lavish 3BHK flats, 2 sedan cars, 2 plots of n.a. land and some gold and jewellery.
In the financial year 2008-09, the partnership firm crossed the turnover limit and had to undergo tax audit. And accordingly the firm went for the same , without having any details as to OPENING BALANCEs....since they claimed that Books of accounts are NOT required to be maintained......(Well fair enough.....)
In the financial year 2009-10, the partners as well as firm received a notice u/s 133, 133B etc regarding explaining the source of 2 flats and 2 plots....... please read this with sections 68,69, 69A, 69B etc......
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The caselette has 2 facets.... A. When money starts accumulating, common man will invest some where. Be it in shares, gold, real estate etc etc.... and B. when 44AD is used as a SHIELD for non maintenance of books of accounts etc..... CAN it be equally act as SHIELD for sections 69, 69A......
Would appreciate if you could share your views on this........(So that, if required, I can tell you the actual COST that the firm had to pay for this notice....)
What is required and expected is a BIRD's eye view, Totality of the object view and NOT the stand alone view say for one year or 2-3 years.....The courts normally express their views on STAND alone basis....case specific and that too for a limited period as disputed by the parties....
A partnership firm having 2 partners was having the business of "arresting leakage of water" in various projects like overhead water tanks, swimming tanks, river sheds, terraces, dams etc etc. The real profit % after all the expenses was around 56. (For the sake of easiness of calculation, let us take it as 50%)
Some CA who is of your view, about section 44AD, suggested them to show a profit of 8%. (For the sake of easiness of calculation of, let us take it as 10%)
The partners approached me for "second opinion". Looking at the then facts, I suggested them not to indulge into such an interpretation of section 44AD. and if at all they want to go by section 44AD, declare the % which is more or less, very close to the actual profit %.
But the SHORT RUN BENEFIT of paying less tax (30%...[tax slab] of 40%....[50%-10%]) proved to be more lucrative for them and they went ahead with 10 % profit.....5-6 years passed by.
Now try to understand the real beauty......
a turnover of average 30 lakh per year....kept aside a profit of around 12 lakh i.e. 40% of 30 lakh = 12 lakh. ok?
In those 6 years they almost accumulated and kept aside profit of around 72 lakhs with them
Needless to say, the partners invested the same in 2 lavish 3BHK flats, 2 sedan cars, 2 plots of n.a. land and some gold and jewellery.
In the financial year 2008-09, the partnership firm crossed the turnover limit and had to undergo tax audit. And accordingly the firm went for the same , without having any details as to OPENING BALANCEs....since they claimed that Books of accounts are NOT required to be maintained......(Well fair enough.....)
In the financial year 2009-10, the partners as well as firm received a notice u/s 133, 133B etc regarding explaining the source of 2 flats and 2 plots....... please read this with sections 68,69, 69A, 69B etc......
.
.
.
.
The caselette has 2 facets.... A. When money starts accumulating, common man will invest some where. Be it in shares, gold, real estate etc etc.... and B. when 44AD is used as a SHIELD for non maintenance of books of accounts etc..... CAN it be equally act as SHIELD for sections 69, 69A......
Would appreciate if you could share your views on this........(So that, if required, I can tell you the actual COST that the firm had to pay for this notice....)
What is required and expected is a BIRD's eye view, Totality of the object view and NOT the stand alone view say for one year or 2-3 years.....The courts normally express their views on STAND alone basis....case specific and that too for a limited period as disputed by the parties....
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14 August 2016
In addition to Anil Kumar and Seetharaman)
@ S S Dahale : I would love to have your view / opinion on my caselette, if you dont mind.......
@ S S Dahale : I would love to have your view / opinion on my caselette, if you dont mind.......
14 August 2016
Bahhoot Khub kahha.... Dhanyawaad ;... By the way Mr. Joglekar , what Do You do right now? as mentioned above , as short tenure of consultant in IT
14 August 2016
There is few more aspects to 44AD......
A. It says............: in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover 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"
Please note the words ........a sum higher than the sum as declared by the assessee......
So there is a choice of declaration given to assessee...the presumption is NOT automatic.
B. So far as the question of books of accounts are concerned........44AD means to say that income tax department will not call for the books of accounts......that's all......
Now this definitely DOES NOT mean that books of accounts should NOT be maintained.......AND according to me, a businessperson of ordinary prudence will never make a mistake of NOT maintaining books of accounts, may be in his own way....which may not be as per IFRS or similar standards...... But I can never trust that a businessperson is NOT maintaining the books of accounts....
A. It says............: in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover 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"
Please note the words ........a sum higher than the sum as declared by the assessee......
So there is a choice of declaration given to assessee...the presumption is NOT automatic.
B. So far as the question of books of accounts are concerned........44AD means to say that income tax department will not call for the books of accounts......that's all......
Now this definitely DOES NOT mean that books of accounts should NOT be maintained.......AND according to me, a businessperson of ordinary prudence will never make a mistake of NOT maintaining books of accounts, may be in his own way....which may not be as per IFRS or similar standards...... But I can never trust that a businessperson is NOT maintaining the books of accounts....
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14 August 2016
I am in the profession from 1981-82....
15 August 2016
Joglekar Sir, I fully respect your views. The additional information that you have provided and more aspects that you have uncovered is definitely a help.
I have no formal knowledge of tax laws, so I won't immediately be able to comment on the interrelationship between 44AD and (68,69, 69A etc). But having worked for 25+ years in the field of IT s/w development for BFSI and completed CFA, I strive to have logical views and objective clarity on issues that impact us.
My view with my limited knowledge greatly enhanced by your inputs is that if courts uphold a taxpayer's stand for a given year that one is legally entitled to declare a profit of 8% despite having a much larger actual profit %, then one should be able to extend that argument in the years to come. Of course, at present I have no sound basis to have such a view. I won't risk relying on this view of mine unless I am able to support it with more information in the form of caselettes.
I would try to explore more (specifically about the long term effects of under-reporting profit) and share in this forum for valued opinion of experts like you on the same. I hope you would oblige.
I have no formal knowledge of tax laws, so I won't immediately be able to comment on the interrelationship between 44AD and (68,69, 69A etc). But having worked for 25+ years in the field of IT s/w development for BFSI and completed CFA, I strive to have logical views and objective clarity on issues that impact us.
My view with my limited knowledge greatly enhanced by your inputs is that if courts uphold a taxpayer's stand for a given year that one is legally entitled to declare a profit of 8% despite having a much larger actual profit %, then one should be able to extend that argument in the years to come. Of course, at present I have no sound basis to have such a view. I won't risk relying on this view of mine unless I am able to support it with more information in the form of caselettes.
I would try to explore more (specifically about the long term effects of under-reporting profit) and share in this forum for valued opinion of experts like you on the same. I hope you would oblige.
15 August 2016
My view expressed earlier does not seem to be absolutely unreasonable. I have been able to find some court judgments that say the provisions of sec 69 cannot be freely applied to the taxpayer who has been rightly assessed u/s 44AD or 44AF, especially if the bank deposits can be related to gross turnover/receipts. The concern seemed to be accumulation of income (over the long term) that have not been reported in the return by adopting provisions of 44AD and declaring net profit of 8% when the actual profit is much more. By going through the judgments mentioned below, the way seems to be able to establish relationship of the bank deposits with the gross turnover/receipts of the business. As courts have upheld that taxpayer is legally entitled to report a profit of 8% u/s 44AD even if the actual is more, if taxpayer is able to establish that bank deposits are related to the business transactions (and not unrelated or truly unaccounted) and the gross turnover/receipts are correctly reported in the ITR then one should be able to successfully contest the invocation of provisions of section 69 overriding those of section 44AD.
Punjab-Haryana High Court
Commissioner Of Income Tax vs Aggarwal Engg. Co. (Jal.) on 24 July, 2006
Equivalent citations: (2006) 206 CTR P H 648, 2008 302 ITR 246 P H
Bench: A K Goel, R Bindal
https://indiankanoon.org/doc/1682799/
The above judgment deals with application of provision of sec 68 and 69B when income has been assessed u/s 44AD.
The link https://indiankanoon.org/doc/134099742/ has a judgment that says invocation of provisions of 69/69C is unreasonable when taxpayer has declared income u/s 44AF and bank deposits can be related to the gross turnover/receipts.
Punjab-Haryana High Court
Commissioner Of Income Tax vs Aggarwal Engg. Co. (Jal.) on 24 July, 2006
Equivalent citations: (2006) 206 CTR P H 648, 2008 302 ITR 246 P H
Bench: A K Goel, R Bindal
https://indiankanoon.org/doc/1682799/
The above judgment deals with application of provision of sec 68 and 69B when income has been assessed u/s 44AD.
The link https://indiankanoon.org/doc/134099742/ has a judgment that says invocation of provisions of 69/69C is unreasonable when taxpayer has declared income u/s 44AF and bank deposits can be related to the gross turnover/receipts.
15 August 2016
I agree with the above views of Mr Anil Kumar. He has rightly pointed out the court Judgments.
15 August 2016
Thank you Seetharaman Sir! I am new to this forum and not sure but seems that others are not able to respond to the queries if the status is marked as resolved. Please leave the status as 'open' so that other experts like you may respond. Please ignore if my observation is incorrect.
15 August 2016
Yes you are right..........
16 August 2016
01. Even though the status of the query goes to RESOLVED, a notificatory e mail is sent to each participant in that query. so when no answer is received, implies that the person is NO more interested in interacting OR BUSY in some more important work.
02. There is a small point in all those case laws and the one which I narrated. I am sure you have considered the same. Let us mock, if you dont mind..... What reply would you give for the notice u/s 133 etc requiring the partners as well as firm to explain the SOURCE of 2 flats + 2 cars....which are reflected in the books of accounts w.e.f. financial year 2008-09. (Please be informed that the AO is not asking for any explanation of the transaction in all those earlier 5-6, 44AD years.)
02. There is a small point in all those case laws and the one which I narrated. I am sure you have considered the same. Let us mock, if you dont mind..... What reply would you give for the notice u/s 133 etc requiring the partners as well as firm to explain the SOURCE of 2 flats + 2 cars....which are reflected in the books of accounts w.e.f. financial year 2008-09. (Please be informed that the AO is not asking for any explanation of the transaction in all those earlier 5-6, 44AD years.)
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16 August 2016
Joglekar Sir, I don't know what response would be appropriate to the notice in the case you mentioned. But, if I am able to convince myself in my case that declaring 8% profit is my legal entitlement u/s 44AD, then I would act in the following manner. Please bear in mind it is not my slightest intention to make a false declaration or conceal the income, but to avail the benefits of 44AD provisions that courts have upheld.
I am into options trading (primarily a seller). Let us assume, my capital with broker is 50 lac and my trading turnover (as per the ICAI guidelines) for FY 16-17 is 1 crore and I make an actual profit of 20% amounting to 20 lac (unlikely but possible). I declare a profit of 10% (10 lac) while filing my ITR u/s 44AD. I withdraw the actual profit of 20 lac from my brokerage account to my bank account and invest in say a mutual fund that gets reflected in AIR (annual information report). I have created a trail for FY 2016-17 hiding nothing. As per the courts judgment about interpretation of 44AD I am entitled to declare 8%, my bank account establishes that 20 lac came as a payout from my brokerage account and not from any unrelated source, I invest that 20 lac legitimately using my PAN and coming under the purview of AIR. At the first instance of any question or notice, I don't make even a feeble attempt to misrepresent the factual situation and take a stand that I have used the provisions of 44AD while declaring profit. Perhaps, I would use the optional Asset/Liability schedule as well to keep on declaring my net-worth in a transparent manner. If I get to know of any other way to express the fact that my actual profit is more than that reported in ITR u/s 44AD, I would adopt that as well.
I respect your views and you seem to be right that serious problems might arise if one is accumulating large sums (though legitimately) over a longer period and then invests it all together. And, that is the reason that despite being able to see many court judgments upholding the views I subscribe to about interpretation of 44AD, I have not been able to make up my mind about using the provisions. Perhaps, most of us value peace of mind more than the money.
I am into options trading (primarily a seller). Let us assume, my capital with broker is 50 lac and my trading turnover (as per the ICAI guidelines) for FY 16-17 is 1 crore and I make an actual profit of 20% amounting to 20 lac (unlikely but possible). I declare a profit of 10% (10 lac) while filing my ITR u/s 44AD. I withdraw the actual profit of 20 lac from my brokerage account to my bank account and invest in say a mutual fund that gets reflected in AIR (annual information report). I have created a trail for FY 2016-17 hiding nothing. As per the courts judgment about interpretation of 44AD I am entitled to declare 8%, my bank account establishes that 20 lac came as a payout from my brokerage account and not from any unrelated source, I invest that 20 lac legitimately using my PAN and coming under the purview of AIR. At the first instance of any question or notice, I don't make even a feeble attempt to misrepresent the factual situation and take a stand that I have used the provisions of 44AD while declaring profit. Perhaps, I would use the optional Asset/Liability schedule as well to keep on declaring my net-worth in a transparent manner. If I get to know of any other way to express the fact that my actual profit is more than that reported in ITR u/s 44AD, I would adopt that as well.
I respect your views and you seem to be right that serious problems might arise if one is accumulating large sums (though legitimately) over a longer period and then invests it all together. And, that is the reason that despite being able to see many court judgments upholding the views I subscribe to about interpretation of 44AD, I have not been able to make up my mind about using the provisions. Perhaps, most of us value peace of mind more than the money.
16 August 2016
No response per se except to admit the reality.
The AO was smart enough to ask for "source proving". He did NOT ask for any transaction during those 44AD years....At every stage of submission, he used to tell me..."I am NOT touching any of the transaction of 44AD years..because as per court decisions, I dont have any authority to probe into those...... But I do have the right to ask you to prove the source of 2 flats and 2 plots as shown by you in your balance sheet for financial year 2009-10.
I think if the difference between the actual profit % and real one is small, one can go ahead with declaring lower %, subject to however 44AD.
(A 90% level of confidence with 3 sigma standard deviation may be looked upon as a CALCULATED risk in declaring a lower profit......but more than that would be a RISKY proposition)
The AO was smart enough to ask for "source proving". He did NOT ask for any transaction during those 44AD years....At every stage of submission, he used to tell me..."I am NOT touching any of the transaction of 44AD years..because as per court decisions, I dont have any authority to probe into those...... But I do have the right to ask you to prove the source of 2 flats and 2 plots as shown by you in your balance sheet for financial year 2009-10.
I think if the difference between the actual profit % and real one is small, one can go ahead with declaring lower %, subject to however 44AD.
(A 90% level of confidence with 3 sigma standard deviation may be looked upon as a CALCULATED risk in declaring a lower profit......but more than that would be a RISKY proposition)
16 August 2016
A hypothetical question - Would the partners / firms in the case referred have been in better position to respond to the notice, had they invested the actual profit (or at least the excess of actual and reported) every year creating a trail every year they availed 44AD? Let's assume they accumulated & invested 20 lac (the difference between actual and reported) every year for 5 years, and used the maturity sum of say 1.2 crore in the 6th year to buy 2 flats + 2 cars, would it have been easier for them to explain the source of funding?
This is the last follow-up question. I know this cannot be an endless debate.
This is the last follow-up question. I know this cannot be an endless debate.
16 August 2016
If Funds Flow Statement is prepared for all these years....
year 1
Source : Profit from operation 10 lakh (10% of 1 crore ....as per 44AD)So? Not to be touched/questioned...ok?
Application : Bank account 20 lakh, (Or the investment you made in MF)
Mismatch in Funds Flow.....
Year 2
Source : Profit from operations 10 lakh
Applications : ........ again a mismatch of difference between actual % of profit and the 44AD % of profit...
Thank god, in any of the cases cited by you, the question of Funds Flow Statement was NOT raised at all in any of the stages before courts.
year 1
Source : Profit from operation 10 lakh (10% of 1 crore ....as per 44AD)So? Not to be touched/questioned...ok?
Application : Bank account 20 lakh, (Or the investment you made in MF)
Mismatch in Funds Flow.....
Year 2
Source : Profit from operations 10 lakh
Applications : ........ again a mismatch of difference between actual % of profit and the 44AD % of profit...
Thank god, in any of the cases cited by you, the question of Funds Flow Statement was NOT raised at all in any of the stages before courts.
17 August 2016
Fund flow has to be prepared based on actual profit not based on profit declared u/s 44AD.
17 August 2016
Is there any BAR in preparing Funds Flow from INCOMPLETE records?
Any particular section OR case law restricting Assessing Officer from asking for the same?
Finding the balancing figure from incomplete records is quite common in many fields of accountancy.
Any particular section OR case law restricting Assessing Officer from asking for the same?
Finding the balancing figure from incomplete records is quite common in many fields of accountancy.
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