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44 ada doubt

ADITYA MEHROTRA (CA CS DipIFR (ACCA-UK)) (62 Points)

24 May 2019

As per section 44ADA, professionals (falling under definition) are allowed to declare 50% of gross receipts as income.

Situation - if a person lets say earns Rs. 20 Lacs and declare Rs.10 Lacs as income and pays tax on Rs. 10 Lacs.

Question-

1) The person may have actually incurred just 2 Lacs as expense and so bank balance is showing 18 Lacs (lets ignore personal expenses and Income tax payment at moment), hence there is a mismatch between declared income of 10 Lacs and actual assets (bank balance ) of Rs. 18 Lacs. Can IT department question this mismatch? yes/no and why ? If yes any way to handle this?

2) Can IT department challenge that profit margin of 50%. I mean can department say looking the nature of profession that profit margin is 60% or 70% or any other figure ?

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6 Replies

Manish (Student) (190 Points)
Replied 24 May 2019

yes it department may question about of bank balance.... he wants to know what is source of such income..for the purpose of taxation..
however in your case assessee this declaring only 50% of actual profit...
the following section shall.be applicable---
SEC 270A:- in persuance of this section if a assessee reporting under profit from the actual profit then he shall be leviable @ 200% tax...on under reported profit....
however in other case he shall chargeable 50%of under reported profit...

ankit poddar (26 Points)
Replied 24 May 2019

there will be no problem as taxable amount will be 10 Lakh on which tax will be calculated and paid. presumptive taxation scheme provides you with this benefit and you don't need to prepare any books of accounts for the same. and tax has to be paid by 15 march

rama krishnan (12234 Points)
Replied 25 May 2019

44ADA. [1] Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section [1] of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head "Profits and gains of business or profession".

you need to declare either 50% of gross receipts or sum actually earned, whichever is higher as your total income. this is my opinion

CS Advocate Abhishek Goyal (M Com FCS LLB M-AIMA ) (13531 Points)
Replied 01 July 2019

The benefit of presumptive scheme of taxation u/s 44AD and ADA is that you have to declare minimum prescribed income. As long as you do that the tax officer cannot interfere your estimated and declared income under these section by his own judgment. this is because the law itself provides for a certain percentage of net profit to be declared. Since you are not required to prepare books of accounts under these sections the AO even otherwise also cannot make additions as he cannot reject the books in the absence of the same.

Vimal Goyal (14 Points)
Replied 06 January 2020

Here the question is not about rejecting the books and the question is about relying on the bank statement of the Assessee. Suppose case comes under scrutiny, AO asks for Bank statement which shows that out of total income of Rs. 20 lakhs, there is withdrawal of only 2 lakhs and net 18 Lakhs have been invested.

Can AO made addition to income saying that though there is no need to maintain books but at the same time, it is very much apparent that expenses claimed are higher than actual?

If there is any precedent / decide case on this subject, it will help proper guidance.

CS Advocate Abhishek Goyal (M Com FCS LLB M-AIMA ) (13531 Points)
Replied 07 January 2020

The point needs to be understood. The AO cannot question the 50% criteria as the section itself is providing for the same and certainly he is not the one who can override the Act. The only thing he can do is to question the gross receipts shown u/s 44ADA as per bank statements. It happened in one of our case where return was filed u/s 44AD and gross receipts were questioned by the AO in scrutiny on the basis of cash deposited during demonetization.

So I am of the firm view that as long as provisions of section 44ADA are duly complied with there is no right with the AO to estimate the income on the premise that more expenses have been claimed than actual. In any way, law does not deter you from offering net profit in excess of 50% which is the major criteria.