08 May 2021
Dear CA R Seetharaman ji,
Can you please confirm as to what you mean to say is that if 44AD profit is 10 lakhs but actual profit is 30 lakhs, then government cannot add 20 lakhs to my income at any point in time and in any manner. Right sir ? Also, are there any case laws or any defence which you would put in a case like this.
Can we use section 44AD and show 8% even if profit is 20%? Yes, we can use Sec 44AD and show 8% even if profit is 20%.
We need to understand that this provision was introduced to help small businesses to reduce compliance cost, reduce manpower cost of accountant, auditor etc.
Also, the tax department has evolved or is evolving from a enforcer to a friendly assistant so that we as a a 3% tax return filing country move up little higher so that everyone participates in nation building. To achieve this, the majority of small business have to start filing tax returns.
How do you do that? Make laws as simple as possible. The intent of this provision is to bring majority small business into tax net. So, if there are conflicting opinions, then many will be restrained to join the formal economy.
End of the day, no one likes to pay tax. So, if you are going to scare a small business owner that even if you show mandated 8% of your turnover as profit and pay tax, the tax department will still analyse industry average and make additional demand, then there is no incentive for him to file his tax returns. This very much defeats the purpose of this provision.
Also, this section does not cast any obligation on the business owner to show 20% when he actually earned 20%. It gives him only an option to show higher than 8%.
Yes,it may not be morally correct to declare 8% when you actually earned a 20% profit. But, C'mon, when was tax a morality . It is a legal issue. Even Supreme Court has commented that “Cases are to be decided by courts on legal principles and not on one's own moral views. Law is different from morality”. Dr T. A. Quereshi vs Commissioner of Income Tax (2006 287 ITR 547 December 18, 2006
In my opinion, the government has to advertise this provision vigorously and bring in small business owners into the tax net promising them that once they show 6%/8% profits as the case maybe, they are free to run their business and not worry about additional demand of tax. So be it, even if few small business earn 20% and report 8%. Let them make some additional quick bucks.
The tax department will also then be free to focus on qualitative work that can bring in more revenue rather than focusing on the small fishes.
On a plain reading of the section, it is clear that government gives small businesses doing turnover of upto 2crore an option to use this section and skip maintaining books of accounts and other records.
In my opinion, an assessing officer cannot call for any records other than a bank statement and cash receipt book to check if he is eligible to opt for this scheme. So long as the turnover is not higher than 2 crore as per bank statement and his cash receipt book, small businesses can show 8% of turnover as profit and get away even when he has a 20% profit.
18 May 2021
Dear Sir,
Your response was very appropriate tackling all issues.
Q1. Let them make some additional quick bucks
I am not sure if that's true for a person paying tax on Rs. 16 lakhs ( 8% presumptive profit of his turnover 2 crores ) instead of paying tax on Rs. 1 crore ( 50% actual profit of his turnover )
He actually pays Rs. 25 lakhs less each year.
This is real for one of my past client.
Q2. We need to understand that this provision was introduced to help small businesses to reduce compliance cost, reduce manpower cost of accountant, auditor etc.
Are you sure and can also share the explanatory memorandum for insertion of this section or any other document shared by CBDT
Q3 - What if those getting their books maintained/audited, transfer amounts to such 44AD assessees for a big tax saving. It's clear incentive to do such bogus transactions.
Q4 - In the current state of legislation, I know there are loopholes. But can there be a way to plug this.
21 May 2021
1 Declaring higher profits encouraged some of the assessees are doing now. Legally he is saving 25 lacs tax nobody can question it. It's the benefit given small traders. 2 CBDT about presumptive taxation. TAX ON PRESUMPTIVE BASIS IN CASE OF CERTAIN ELIGIBLE BUSINESSES OR PROFESSIONS To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, section 44ADA and section 44AE. In this part you can gain knowledge about various provisions of the presumptive taxation scheme of section 44AD, section 44ADA and section 44AE. Meaning of presumptive taxation scheme As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA and 44AE. A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited. Meaning of presumptive taxation scheme For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below: 1) The presumptive taxation scheme of section 44AD. 2) The presumptive taxation scheme of section 44ADA. 3) The presumptive taxation scheme of section 44AE. Presumptive Taxation Scheme of Section 44AD For whom the presumptive taxation scheme of section 44AD is designed? The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE). The presumptive taxation scheme of section 44AD can be adopted by following persons : 1) Resident Individual 2) Resident Hindu Undivided Family 3) Resident Partnership Firm (not Limited Liability Partnership Firm) In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm). This scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year. 3 Tax audit case he should include such bogus transaction in his audit report. 4 After GST linking with income tax loop hools are tightned.
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