Important Judicial Pronouncements on Presumptive Taxation

CA.R.S.KALRA | Last updated: 18 December 2020

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This article explores key judicial pronouncements concerning presumptive taxation, particularly under Section 44AD of the Income Tax Act. It highlights ITAT rulings that favour assessees, stating that authorities cannot arbitrarily disregard presumptive taxation provisions or make additions to income without proper justification. The rulings emphasise that if income is estimated, expenditure based on that estimate should also be presumed, and that the purpose of presumptive taxation is to simplify compliance for small taxpayers.

1. [TS-8499-ITAT-2019(Cochin)-O]- Section 44AD exempts the assessee from the maintenance of books of accounts, and asking assessee to prove to the AO's satisfaction expenditure to the extent of 92% of gross receipts/ deposit would defeat the purpose of presumptive taxation u/s 44AD or other such provision; ITAT rules in assessee's favour, notes the contradiction: if the income is estimated, how could the expenditure component on the basis of said income be considered to have been actually incurred"? It is the only presumption that 92% of gross receipts was incurred as expenditure; ITAT holds that section 69A of the Act cannot be applied as neither AO nor CIT(A) have given any reason as to why Section 44AD is not applicable;

2. [TS-6983-ITAT-2019(Kolkata)-O]- Presumptive taxation u/s 44AD - can addition be made u/s 68 when income/ profit is estimated – neither AO nor CIT(A) has given any reason as to why s. 44AD is not applicable; ITAT holds that AO cannot examine the statement of accounts in such cases, or make additions towards undisclosed purchases, undisclosed expenditure, undervaluation of closing stock, etc. The turnover declared by the assessee is accepted by the Revenue, and such additions go against the spirit of the Act

Presumptive Taxation: Key Judicial Rulings Explained

3. [TS-6380-ITAT-2019(DELHI)-O]- Cash deposit during demonetization period - ITAT: Insufficient evidence to consider sales as bogus or to make addition of cash in hand – ITAT notes that Assessee, a small trader, declared return of income under presumptive provisions u/s 44AD and case was selected under limited scrutiny for cash deposit during demonetization period from 09.11.2016 to 30.12.2016; The fact that during assessment, the assessee submitted a copy of his balance-sheet does not prove that the assessee maintained books of account; AO made addition u/s 68 on account of unexplained cash credits due to bogus sales; On appeal, CIT(A) restricted addition to the extent of cash in hand, which was considered as unaccounted; ITAT ruled in Assessee`s favour and delete the entire addition, notes that "If there is no creditor in the books of account and no books of account have been maintained, there is no question of considering it to be cash credit"; Assessee had filed details of sales & purchase before AO giving names, telephone number and address of parties; held that if the AO had any doubt, he could have made direct inquiry; ITAT held that there was no justification to consider the assesee's sales to be bogus or to make addition of cash in hand as per details submitted; AO did not bring any sufficient evidence on record to justify the addition;

4. [TS-8316-ITAT-2019(Hyderabad)-O]- Merely because of cash deposits in bank account during demonetization period (Nov-Dec 2015), cash in hand as on 31-03-2016 cannot be doubted – ITAT notes that assessee is engaged in money lending business and therefore cannot be expected to be without any cash in hand at the end of the relevant assessment years (AYs); The assessee has been showing closing balance of cash in hand even for the earlier AYs and sundry debtors were shown in the Balance Sheet ended 31st March, 2015, hence cash flow statement demonstrates the sources of the funds with the assessee; ITAT further notes that the return of income filed by Assessee has been accepted by the Department and was not picked up for scrutiny; ITAT deletes the addition, holds that cash in hand of as on 31-03-2016 cannot be doubted;

5. [TS-8936-ITAT-2017(Mumbai)-O]- ITAT upholds CIT(A)'s order, sets aside addition u/s 69 for cash deposits in bank account; AO treated the deposits as unexplained investment, as return of income was filed in ITR–2 wherein there is no option for offering income u/s 44AD, and had also offered income under the head income from other sources; the CIT(A) deleted the addition by observing that merely because option to offer income u/s 44AD is not present in Form ITR-2 was no reason for rejecting the appellant's return; the CIT(A) applied presumptive rate of tax of 8% on cash deposited; ITAT notes that AO, in the preceding AY 2010–11, has accepted the assessee's aforesaid claim and the CIT(A)'s finding that cash deposits are from his cosmetics and merchandise business, set aside addition u/s 69; ITAT cautions assessee that "he should not take advantage of his ignorance by repeatedly committing same mistake. If he intends to avail the benefit of presumptive tax u/s 44AD, he has to comply with requirement of the relevant statutoryprovisions"

FAQ :

Presumptive taxation under Section 44AD exempts assessees from maintaining detailed books of accounts, simplifying tax compliance for small businesses and traders.

No, ITAT rulings suggest that if income is estimated under presumptive taxation, expenditure based on that estimated income should also be presumed. Authorities cannot arbitrarily question expenditure to the extent of 92% of gross receipts, as this defeats the purpose of the provision.

ITAT rulings indicate that additions under Section 68 are not permissible if the assessee opts for presumptive taxation and the authorities haven't provided reasons for not applying Section 44AD. The turnover declared is generally accepted, and such additions go against the spirit of the Act.

If an assessee declares income under presumptive provisions and does not maintain books of accounts, the submission of a balance sheet does not automatically prove the maintenance of books. Additions based on unexplained cash credits or bogus sales may be deleted if sufficient evidence is not provided by the AO.

No, ITAT has ruled that cash deposits during demonetisation cannot be doubted solely based on the amount. If the assessee is in a business like money lending and has historically shown cash in hand, and their return is accepted, such additions can be deleted.

If an assessee files an incorrect tax return form that doesn't offer income under Section 44AD, but the income is from a business eligible for presumptive taxation, the CIT(A) may apply the presumptive rate. However, the ITAT cautions assessees to comply with statutory provisions to avail the benefit of presumptive tax in the future.