Interplay of Section 43CA vs. Section 44AD - Part II

 It is a very special case which also tries to disturb the scope of sec 44AD of the Act. To understand this concept, we must see the sec 43CA of the Act, which reads as under:

43CA. (1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer:

Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed one hundred and [ten] per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration:

[Provided further that in case of transfer of an asset, being a residential unit, the provisions of this proviso shall have the effect as if for the words "one hundred and ten per cent", the words "one hundred and twenty per cent" had been substituted, if the following conditions are satisfied, namely:-

(i) the transfer of such residential unit takes place during the period beginning from the 12th day of November, 2020 and ending on the 30th day of June, 2021;

(ii) such transfer is by way of first time allotment of the residential unit to any person; and

(iii) the consideration received or accruing as a result of such transfer does not exceed two crore rupees.]

(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far as may be, apply in relation to determination of the value adopted or assessed or assessable under sub-section (1).

(3) Where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same, the value referred to in sub-section (1) may be taken as the value assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer on the date of the agreement.

(4) The provisions of sub-section (3) shall apply only in a case where the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account ⁹³[or through such other electronic mode as may be prescribed⁹⁴] on or before the date of agreement for transfer of the asset.

[Explanation.- For the purposes of this section, "residential unit" means an independent housing unit with separate facilities for living, cooking and sanitary requirement, distinctly separated from other residential units within the building, which is directly accessible from an outer door or through an interior door in a shared hallway and not by walking through the living space of another household.]

It is to be noted that section 44AD starts with "Notwithstanding anything to the contrary contained in sections 28 to 43C…." meaning thereby, indirectly, section 44AD is subject to section 43CA. This is not correct position of law. It is to be noted that the open ended coverage of section 44AD(1) is puzzling since sale of immovable property held as stock in trade governed by section 43CA is not brought within the provisions of section 44AD. Section 44AD starts with non-obstante clause by saying that the provisions would prevail over sections 28 to 43C of the Act. The applicability of the section is however optional. Only when the taxpayer opts for the provisions of section 44AD, it would prevail over the provisions of sections 28 to 43C. Now a question arises, whether the provisions of sec 43CA of the Act are applicable in case of presumptive tax. In this connection it is to be noted that both these sections i.e.44AD and 43CA of the Act are deeming sections. A legal fiction is created only for a definite purpose and is limited to that purpose and should not be extended beyond it. It should be within the framework of the purpose for which it is created. Deemed to be is not an admission that it is in reality, rather it is an admission that it is not in reality what it is deemed to be.

'The meaning of total turnover/ gross receipts has not been defined u/s 44AD of the Act. But if we carefully read the provisions of sec 44AD(1), the words used are total turnover of such business. This means the assessee has to take actual turnover or gross receipts' and not the deemed turnover or receipts. Further, the terms 'total sales, turnover or gross receipts' are fiscal facts and cannot include deeming fiction created by section 43CA which categorically apply only 'for the purpose of computing profits and gains from transfer of asset' and is meant for taxing sale of immovable assets held as stock in trade where value adopted for stamp duty purposes by State Government authorities is more than 110% of the consideration. Similarly, new provision of section 43CA should not apply in cases governed by section 44AD for assessment of presumptive profits on sale of land/building.

Example: Mr. X is engaged in business of sale and purchase of property. He sells a property for Rs.10,00,000. The stamp duty value of the same is Rs.15,00,000. His total turnover other than is property is Rs.60,00,000. What will be his total turnover?

The stamp duty value of the property is more than 110% of consideration i.e. Rs.11,00,000 (110% of 10,00,000). If Mr. X opts for sec 44AD Rs.10,00,000 will be added in turnover as sec 43CA is not applicable in case income is declared u/s 44AD. The total turnover will be Rs.70,00,000.

If Mr. X not opts for sec 44AD, Rs.15,00,000 will be added in turnover. His total turnover will be considered as Rs.75,00,000.

In the case of an eligible assessee engaged in an eligible business

1) To claim the benefits of Section 44AD twin requirements must be satisfied. First, the assessee must be an Eligible Assessee who runs the eligible business. If Assessee is eligible one but who runs the business which is ineligible the benefits of Section 44AD couldn’t opt for such ineligible business.

2) The definition of the eligible business is given in explanation (ii) to Section 44AD. Which includes all business whose total turnover/ gross receipts during the previous year doesn’t exceed Rs.2 Crores as an eligible business except the business of Plying/hiring/ leasing goods carriages as referred to in Section 44AE

3) It means even if the turnover of Business of Plying/Hiring/Leasing of Goods carriage etc. is below Rs.2 Crores it will not cover U/s 44AD at any cost.

Meaning of Eligible assessee

1. Resident Individual
2. Resident Hindu Undivided Family
3. Resident Partnership Firm (Except an Limited Liability Partnership Firm as defined under LLP Act, 2008)

Note: While explaining the meaning of eligible assessee, a rider also provided in Explanation (a) to Sec. 44AD for eligibility i.e.

Non Eligible Assessee under Sec.44AD of the Act

Explanation (a) to sec. 44AD provides the following arenot covered under these provisions:

• An Individual / HUF / Partnership Firm who is a resident and claiming deduction under chapter III of the Act section10A,10AA,10B,10BA relating to units located in FREE Trade Zone, Hardware & Software Technology Park etc. OR
• Claiming deduction under Chapter VI-A Part-C (deductions in respect of certain Incomes) i.e. Sections80HH to 80RRB.

The following are not covered u/s 44AD

• Individual /HUF who is not Resident
• Association of Person
• Firm having non-resident Status.
• A local Authority
• A co-operative Society
• LLP both Indian as well as Foreign
• Companies both Domestic and Foreign company
• Every Artificial Juridical Person

Example: A Partnership Firm X & CO. is involving in manufacturing of leather and it is offering income u/s 44AD each year. Now, it converts its business to LLP. Whether it can continue to offer income u/s 44AD?

The Presumptive Taxation scheme of Section 44AD provides that it can be adopted only by Individual, HUF and Partnership Firm and not LLP. So, it cannot offer presumptive income u/s 44AD since it has converted into LLP.

Example: Mr. X an Individual, who is offering income u/s 44AD each year, became a non-resident in the previous year 2018-19 relevant to assessment year 2019-20. Whether he can continue to offer presumptive income u/s 44AD?

The Presumptive Income u/s 44AD will be applicable only to the resident individual. Non-Resident cannot avail the benefit u/s.44AD.

Can income be offered under 44AD when one Partner is Non Resident?

As per Provision of Section 44AD, only a Resident Partnership Firm is an eligible assessee u/s 44AD partnership firm is a resident in India if then control and management of its affairs wholly or partly situated within India during the relevant previous year. Thus, the firm can opt for taxation u/s 44AD provided control and management of its affairs wholly or partly situated within India during the relevant previous year.

It is noteworthy that an assessee except resident individual/HUF/ Partnership Firm eligible u/s 44AD, such as company or a LLP shall not be required to get its accounts audited u/s 44AB of the act, even if :

1. his gross receipts during the year do not exceed Rs.1 Crore.
2. he reports income lower than the deemed profit under the presumptive rate of tax at 6 per cent or 8 per cent as the case may be, and
3. his taxable income exceeds maximum amount of taxable income not chargeable to tax.

Meaning of Eligible Business

The term has been defined under Explanation to subsection 6 of Section 44AD as under; "eligible business" means,-

• Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
• Whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.’

The presumptive taxation scheme under section 44AD covers all small businesses with total turnover/ gross receipts of up to 2crores (except the business of plying,hiring and leasing goods carriages covered under section 44AE).

Restrictions to opt the provisions of presumptive taxation u/s 44AD (6) of the Act

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.

As per the provisions of sub-section 6 of section 44AD, if an assessee has earned any income from specified activities such as commission, then provisions of section 44AD shall have no bearing on such assessee.

It is to be noted that meaning of words "Commission or brokerage" is same as given for the purpose of section 194H of the Act. Commission or brokerage includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person:

1. for services rendered (not being professional services), or
2. for any services in the course of buying or selling of goods, or
3. in relation to any transaction relating to any asset, valuable article or thing, not being securities.

Thus an assessee can’t opt the provisions of sec 44AD.

So Eligible Business includes:

• Manufacturing
• Trading
• Wholesale
• Retail
• Job Work
• Service business
• Speculative/ Non speculative.

Assessee and Several Businesses

The provisions of Sec. 44AD of the Act apply to an ‘Assessee’. Hence when a person carries on several businesses, viz. wholesale and/or retail and or manufacture, the turnover or gross receipts of all the businesses are to be considered for the purposes of this section. Whether separate books or combined books are maintained by the assessee is not material. Combined turnover or gross receipts of all the businesses would form the basis for calculation of presumptive income.

Example: Mr. XA Resident individual, is carrying on three eligible businesses, the turnover of which is as under –

• Business A (Rs.145 Lac)
• Business B (Rs.35 Lac)
• Business C (Rs.25 Lac)

Whether he can opt for sec 44AD?

The Answer is NO because turnover of eligible business exceeds Rs.2 Crores. It is to be noted that when we take when we take combined turnover of three businesses, it exceeds Rs.2 crore. Hence, the assessee is not eligible for sec 44AD of the Act.

Example: A Person doing brokerage business who have received brokerage for Rs.90,00,000 and declaring income @ 5% of Rs.4,50,000. Should his books of Accounts be audit u/s 44AB since he is offering income less than 8%?

Ans. Audit u/s 44AB is applicable if he is declaring income lower than thereafter specified u/s 44AD. But, section 44AD is not applicable to Agency, Commission and Brokerage. Hence, he can declare income less than 8%.

Example: An Eligible Assessee is engaged in trading business of goods both in his own name and also as a consignee for another person. The Total Sales amount to Rs.1.30 Crores, Turnover Details are as follows:

• Own Business Turnover = Rs.90 Lacs
• Consignment Sales Turnover = Rs.40 Lacs

Whether Assessee can opt for Presumptive income computation or not?

For computing Turnover for 44AD, the turnover of sale of goods on his own name should alone to be considered i.e. Rs.90 Lacs. Here, the commission received on Consignment sales is liable for Tax Audit only when such commission exceeds the limit of Rs.1 Crore. Consignment Commission can be offered at any rate (Even below 8%), provisions of Sec.44AD will not govern the commission income.

 Click here to read Part 1 - Presumptive Taxation Scheme u/s Section 44AD