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Is this misuse of sectioon 44ad?

Sohil (Learner) (631 Points)

15 April 2016

Person has 30 Lalk purchase and 50 Lakh gross sale including vat and all.ALso shows 10 Lakh stock in hand.In short profit is easily more than 10 lakh rupees.

On 50 Lakh he pays tax @ 8% 4lakh profit.

He invest in 80c 1.5l and says basic profit goes to 2.5 lakh hence no tax liable.

Is this practice valid?

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7 Replies

CA Raj Doshi (Practising CA) (8733 Points)
Replied 15 April 2016

Yes. It is completely valid. It is a benevolent provision for small tax payers. And according to your above example , a person is charged to tax on net profits and not gross profits. It is beneficial provision very well valid.

S S Dahale ( Agri and business) (439 Points)
Replied 16 April 2016

He should have a legitimate business to prove that it comes u/s 44AD , then in that case making a statement of 8% as NET profit is OK, (as far my knowledge -understanding of those businesses < 8% is on max .side , as No one can earn more than 5% as net profit), in that scenario, it is proper and Just Ok.

CA Raj Doshi (Practising CA) (8733 Points)
Replied 16 April 2016

If a business cannot earn 8% return then why do business. You can invest that much capital in a fixed deposit and earn 9% interest. Generally , business will ensure that return is atleast higher that risk free return. He should be rewarded higher return for taking additional risk.

Sohil (Learner) (631 Points)
Replied 16 April 2016

But he can again twist it.

Like say 40Lakh purchase and just around year end sales in 60 lakh.But he cuts extra bill and say sales goes to 1 Crore .On that extra 40L profit he pays the vat @ 12.5% or whatever vat applicable and at 1crore sales pays at say 8% or say 10%.

This way on money where a person needs to pay tax at 30% plus he can simply evade tax by paying i guess not more than 15-20%.

S S Dahale ( Agri and business) (439 Points)
Replied 16 April 2016

In sec.44 AD , there are certain businesses enlisted, so benfit of that can ONLY be availed by those , who really do it ... .. a tax practioner / doctor cannot claim benfit ofa transporter or a contractor as per 44AD ( though many people from these 2 fraternity earn reasonable butter from transporst and construction buisness on bread of there educated field )

S S Dahale ( Agri and business) (439 Points)
Replied 16 April 2016

For all those businesses enlisted, as governed under sec.44 AD , after deducting for depreications of machinery, vehicles used , one cannot get more than 5% to 7% .; as far as legitimacy of keeping amount in bank to get interest @ 9% ( doubtful) with TDS and It appalicable on it , makes it effective 5 % or 6% at most .

so govt is / was wise to make sec 44 AD appalicable with self decalration of profit of 8% ...simply to amke them comfortable ..of not keeping books of accounts and its records for 8 years, and faciltate them , to simply concentarte them on labor oreined there business,

as far as ilegitimate use of that sec.44AD ..In India , there are several people , who operate byaaj-batta ..money lending ( even there are educated professionals in it) and hardly pay anything to govt.as taxes or scuffle with 44 AD to avoid it

(Guest)

Nothing stops a person to declare more that 8%. He should declare a higher profit margin if he actually earned it.

In my view presumptive sections always create problems and confusion as the person as mentioned by Sohil cannot prepare a proper balance sheet and show all the assets and liabilities (Banks are reluctant to give loans against such returns).

If the assessee in question purchases a property of RS 10L in that year because he actually made a profit of 10L (but showed on;y 4L) how can he discose the property? As the turnover increases, the risk of non disclosure of assets increases. In the event of sale of that undisclosed asset we don't know whether the cost will be allowed by the AO for capital gain calculation.

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