Section 44ad

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This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

19 March 2015 Suppose a assessee having trading business in textiles maintains books of accounts. His turnover is say Rs. 75 lacs and his net profit is Rs. 13.50 lacs (i.e., 18% of gross turnover). Now he also has the option to avail the benefit of section 44AD. So he files his return by declaring his total income at Rs. 6 lacs.

My query is that can he do so? If yes, then it means he can legitimately escape from tax on Rs. 7.5 lacs thereby causing loss to the exchequer. Also in that case this section can be misused to convert black money into white!

Amol S Joglekar

Amol S Joglekar (Expert)

19 March 2015 01. 44AD does NOT restrict the assessee to show the profit at 8%.If Profit is 18%, the assessee is expected to show 18% and not 8 %
If the assessee shows a profit which is lower than the actual, s/he is carrying the RISK.

02.I could not understand your point of converting BLACK into WHITE in such situation... Can you please elaborate?

Querist : Anonymous

Querist : Anonymous (Querist)

19 March 2015 By showing 8% as per 44AD the assessee is not under an obligation to maintain books of accounts. If the AO asks for details then he can very well tell that he has not maintained the books. But the actual fact is that he maintains the books for his own ease. So as per his books his capital account will be credited by 13.50 lacs whereas he pays tax only on Rs. 6 lacs.

Now the modus operandi can be:-
1. Turnover to be kept below 1 crore
2. Show profit in books at higher % (say 20%)
3. Pay tax only on 8%
4. Differential 12% is in a way exempted from tax.

This way the color of the money can be changed!!

Amol S Joglekar

Amol S Joglekar (Expert)

19 March 2015 You are right, colour of money can be changed. True...but your "direction of changing colour" was bit ambiguous, so i asked. The differential 12% would be UNACCOUNTED. In the example you cited, WHITE is getting converted into BLACK.

Anyway, the point is GOOD governance.

Let me tell you one beautiful real life case... The person was following the practice as enumerated by you. After few years, he bought one house costing 72 lakh.

As per 44AD, he was not duty bound to explain his books of accounts... but for investment in the house property, Assessing Officer has equal rights to demand the SOURCE of investment.

As per Maslow's need hierarchy chart, once the subsitence level needs are satisfied, the assessee will go for recognition, acclamation needs. At this stage, he is likely to be caught red handed.

Your views please.

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