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Applicability of sec 69 in case of 44ad

Harshad Natu (Student- CA Final) (59 Points)

13 March 2013

If eligible assessee carrying on eligible business declares his income @ 8% where as his actual profit percentage is 20%. Can AO appy provisions of sec 69 and treat 12% of gross receipts as undisclosed income?

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11 Replies

CS,CA F,Numrologi TusharSampat (CS CA F Numerologist Astrologer Graph) (85935 Points)
Replied 13 March 2013

If he is eligible as per sec44AD and fullfill all conditon therein as mentioned by u then AO cant inovke Sec 69 as legaly its permissible for him to use sec 44AD for declaring income @ 8% irrespectiveof what u said.

1 Like

CS,CA F,Numrologi TusharSampat (CS CA F Numerologist Astrologer Graph) (85935 Points)
Replied 13 March 2013

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(Guest)

NO the AO cannot...

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CA Adesh Gupta (Finance Manager) (160 Points)
Replied 13 March 2013

As per Section 44AD, if turnover of assessee is less than 1 crore then as per that section his income will be deemed to be 8% of turnover achieved by him and assessee is freed from maintainance of accounts if he follows section 44AD

However assessee can voluntarily disclose higher income, if he so desires. But A.O can't invoke Section 69 and tax assessee at higher income if he is satisfying all conditions of Section 44AD, if that be the case then SEC 44AD would be of no use to the assessee.

1 Like

Harshad Natu (Student- CA Final) (59 Points)
Replied 14 March 2013

Please help me in following case

Following are the actual figures taken from the books of an eligible assessee engaged in eligible business.

Annual Turnover Rs 60,000,00/-

Expenses Rs 40,000,00/-

Profit Rs 20,000,00/-

Can assessee claim his taxable income is Rs 4,80,000/- ?( ie 8% of 60 Lacs)

Assuming assessee is having income only uder head PGBP and not having anything deductible under chapter VI, His actual profit after tax will be as follows

Profit as per books 20,000,00/-

Less: Tax on Rs 4,80,000 28,000/-

Actual profit after tax 19,72,000/-

ie after paying tax his capital have increased by Rs 19,72,000/-

Please help me. Whether my above calculation is correct?

SAYED MUJEEB (ACCOUNTANT) (101 Points)
Replied 15 March 2013

Harshad,i think the provision is that if assess is having profit less then 8%, than he is required to show income 8% of t.o. or els require to get his accounts audited.

How ever if he is having income more then 8% then he is require to pay tax on actual profit.

better wait for reply from others.

Harshad Natu (Student- CA Final) (59 Points)
Replied 17 March 2013

Experts Please tell me whether my following interpretaion is correct...

Facts of the case are as follows.

Assume Assessee is eligible asseesee engaged in eligible business and he is having income only under head PGBP and no admisible deductions under chapter VI

Turnover Rs 60Lakhs

Expenses Rs 40 Lakhs

Actual Profit Rs 20 Lakhs

Profit as per sec 44 AD Rs 4.80 Lakhs

After Tax Profit Rs 19.72 Lakhs (ie 20 Lakhs Less Tax Rs 28k on declared income Rs 4.80Lakhs)

1. As per sec 44AD Assessee has the option to claim income @ 8% ie Rs 4.80Lakhs and this will be accepted by AO

2. If Assessee invests Rs 19.72 Lakhs anywhere, and Assessing Officer asks for Source of this income assessee cannot plead that it is out of his business profits Because of wording of section

It is as follows

"Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of aneligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”

3. If assessee says that it is out of his business income then it is deemed that Assessee is claiming higher income and wording of section is very clear on claiming higher profits. This will attract provisions of sec 69 and AO can levy Penalty for concealment , Interest etc.

4.Therefore we cannot say that if sec 44AD is applied Assessee can declare income at 8% even if his actual Profit Percentage is more.

5. As per wordings of sec 44AD, He can declare income at 8% but there are high chances that he is caught u/s 69.

6. By opting this scheme Assessee can escape from provisions of sec 28 to 43C ( mainly he will be safeguarded from disallowances of cash payment exceeding Rs 20 Thousand , Payment to relative, Maintenance of books, etc) But the section is silent about the provisions of sec 69, It means that sec 69 can be applied by AO

7. As this section is recent amendment AO must be having the data about the actual profit % of past several years.

8. In short we can say that as per sec 44AD, Income will be 8% of gross receipts OR Actual profit whichever is higher. There is no question of voluntarily declaring more income.

Please let me know whether my this interpretaion is correct?

Thanks!!

1 Like

Pawan Mittal (CA Final) (711 Points)
Replied 19 March 2013

Dear Harshad,

Mr. Sayed Mujeeb is 100% wrong.

But the point that you have raised and the facts given by you are highly appreciable.

Please go through the following:

Can the Assessing Officer add the Difference between actual income and disclosed income in the assessment proceedings?

{Let us assume that the Turnover of the assessee is Rs. 50 Lakhs and all the receipts are by cheque and the same is deposited in the only Bank account maintained by the assessee. There are no outstanding receipts at year end.

All the payments for expenses on revenue account are through cheques debited to the same account and there are no outstanding expenses at year end. The total expenses are Rs. 25 Lakhs.

Thus the balance of Rs. 25 Lakhs as per his bank account is the income as per the records of assessee.

He filed Return u/s 44AD declaring of Rs. 4 Lakhs @ 8% of Turnover.

Can the AO add the difference of Rs. 21 Lakhs to the income of assessee?}

◊First of all the assessee, being covered by section 44AD, is under no obligation to maintain books of accounts u/s 44AA.

Secondly, the turnover being less than Rs. 1 Crore and declared income not being less than 8% of Turnover, Section 44AB is not applicable to the assessee.

◊ Further the assessee is given the option u/s 44AD (1) to declare higher income. The word used is 8% OR higher income.

Thus, the option is with the assessee to disclose higher income OR to file Return disclosing the income @ of 8% of Turnover.

Here the assessee is free to exercise any option at his will. He may morally show actual income and pay tax on it as an Honest citizen of the country, but such Honesty is not digressed even if he files return @ 8% as he is legally correct. (Here the decision of Honourable Supreme Court in case of Dr. Qureshi can be recalled where the apex court, condemning the High Court, held that “cases have to be decided on merits and legality instead of morality”.)

Legally he is given the option by the statute and such an option cannot be equated with obligation cast upon the assessee. There is a definite difference between OPTION and OBLIGATION and an Option granted to the assessee cannot be construed to be his obligation when his actual income is more than 8% of Turnover.

◊ Also, the AO cannot make any addition on this count as there is no provision under the Act permitting to make such addition.

◊ Further, the words used are “higher income claimed to have been earned by the assessee”.

Here if the assessee has not made a claim in the Return of Income regarding any higher income, it implies there is no claim for Higher Income made by assessee. AO cannot claim that the assessee has earned higher income, because under the statue, he is not entitled to do so.

1 Like

CA Deepak Rathore (EXPERT) (281 Points)
Replied 19 March 2013

No , A.o cannot do it

Assesee can declare 8 %PROFIT OF TOTAL GROSS RECIEPT

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CA Ankur Garg (Partner) (22 Points)
Replied 31 July 2018

Dear Pawan

Agreed on above debate, even asseessee comply all the conditions of 44AD and shows 8% profit instead of 25% ACTUAL. Can asseessee use that funds to Loan to Other.

Further Don't you think what would be source of funds of that loan Given ? Don't you think AO shall apply section 69 as unexplained investment of said laon.

If you agreed on that everybody will open a shop and will receive 1 Crore will disclose 8% Profit instaed of actual 50% or more give that loan to again director of companies and AO will given you clean order to entity.

I am not challenging the legality of 44AD. I am challenging the legality of Section 69, AO has to invokke the section becasue above loan has been given out of profits which was not offered to revenue.

I am facing the same issue. he has received the income of Rs. 50 lacs and spect only 15lac. and has given loan of Rs. 2000000 and balance in the bank account. what to do.

Regards

Ankur Garg

Regards

Ankur Garg

Saifullah Khalid (Autodidact/Curious ) (638 Points)
Replied 31 July 2018

Originally posted by : CA Ankur Garg
	Dear Pawan Agreed on above debate, even asseessee comply all the conditions of 44AD and shows 8% profit instead of 25% ACTUAL. Can asseessee use that funds to Loan to Other. Further Don't you think what would be source of funds of that loan Given ? Don't you think AO shall apply section 69 as unexplained investment of said laon. If you agreed on that everybody will open a shop and will receive 1 Crore will disclose 8% Profit instaed of actual 50% or more give that loan to again director of companies and AO will given you clean order to entity. I am not challenging the legality of 44AD. I am challenging the legality of Section 69, AO has to invokke the section becasue above loan has been given out of profits which was not offered to revenue. I am facing the same issue. he has received the income of Rs. 50 lacs and spect only 15lac. and has given loan of Rs. 2000000 and balance in the bank account. what to do. Regards Ankur Garg

YES the AO can invoke sec 69 or sec 68 when the assesse is not able to relate the sum received or sum spent to the gross receipts of the bussiness...its obvious that word " unexplained " will be applicable to his receipts/expenses/investment when he can not relate the amounts to his bussiness receipts ... you can refer to this case law >>> https://indiankanoon.org/doc/131006805/
Above case law will also help understand about the legal interpretation of words "Deemed" in context of sec 44AD ....hope that will help ...

Advise : My advise to all those people who are having good profit percentage of net profit and still want to get benefits of "presumptive taxation"... to avoid any dispute TRY as much as you can to get your bussiness receipts only through Banking / electronics modes as the receipts through banking/electronics mode are easy to relate with sales/bills ..on the other hand cash receipts (though one can maintain a cash book) are always controversial and questionable...