Taxworry.com. Advisory. The Query

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1 Taxworry.com Advisory Mail Voice Mail : The Query Dear Sir, I need some clarifications about filing income tax returns u/s 44AD (presumptive taxation).my questions related to 44AD are as follows 1) Can a self employed professional who is also carrying on eligible business file his returns u/s 44AD using ITR4S? 2)Can an assesse doing eligible business but also having capital gains income in the relevant previous year file his returns u/s 44AD using ITR4S? 3) Suppose the assesse is a small builder of residential apartment who is building an apartment on his self owned ancestral land (and not under any development agreement as he is the landowner himself).since he converted his capital asset(ancestral land) into stock in trade of his construction business deemed long term capital gains has accrued to him u/s 45 so he has to pay deemed LTCGs also along with tax on business profits whenever he sells his flats to prospective seller. Now his business profit as per his books of account is say 25% (He has maintained books of account although perhaps books are not mandatory to be maintained for an eligible assesse filing returns u/s 44AD. My question is if an eligible assessee running an eligible business as a small builder of residential flats having annual turnover below the eligible limit declares business profit of 8% using ITR4S whereas his actual profit is 25% as per his books of account, can the income tax dept insist that he pays tax on the actual profit rather than on the presumptive income of 8% of his turnover? 1. Does the assessing officer have the power or jurisdiction to look into the books of a/c of assesses and charge tax on the book profit? 2. Does the A.O have the authority under income tax laws to ask for books of a/c when the same is not necessary to be maintained u/s 44AD. 3. Does the assesse filing his return u/s 44ad has the absolute choice to either pay tax on 8% presumptive income or higher income as he wishes? KINDLY REFER RELEVANT CASE LAWS. My last question is which accounting method to employ in the case of this assesse if he wants to file u/s 44AD? Because service tax is paid on total sale s receipts which are treated as advances in accounting. Due to employment of different accounting methods there may be mismatch between the turnover shown in service tax returns and income tax returns. Also in a particular year actual sales receipts may cross 1 crore (and service tax paid thereon)but under completed contract method or AS 9 income may be recognized in different accounting years eg when full payments under agreement to sell has been received OR at the time of giving possession of flats to buyers OR at the tome of transfer of flats. Asked by xxxxxxx Prasad Singh Date 10 th March 2014 Disclaimer: taxworry.com has provided the advisory on the basis of exact fact narrated in the form for question. If the facts changes, the tax advise may not be effective. So the answer given to queriest should be read with respect to fact written in the question only.

2 2 Answers Question (1) Can a self employed professional who is also on eligible business file his returns u/s 44AD using ITR4S? carrying Section 44AD got a major change vide Finance Act by which certain persons are not eligible to enjoy section Memorandum to Finance Bill 2012 regarding the which inserted provisions 44AD. First of all read the amendment in section 44AD: It is proposed to amend section 44AD to clarify that this presumptive scheme is not applicable to (i) a person carrying on profession as referred to in sub-section (1) of section 44AA; (ii) persons earning income in the nature of commission or brokerage income; or (iii) a or a person carrying on any agency business. This amendment will take effect retrospectively from 1 st April, 2011 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. The actual amendment is as under : was inserted in sub-section 6 of section 44AD effective from (6) 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. In the opinion of taxworry.com, the legislature has debarred a person carrying on the profession referred in section 44A(1) enjoying the section 44AD itself. Plain reading means that a professional can not enjoy section 44AD at all. Emphasis on shall not apply to a person in the section 44AD(6) is important. If the Legislature wanted to prohibit only the profession and not the person carrying profession, it would have been worded so in the section 44AD. But that is not the case So, in considered opinion, a person who is carrying on any profession as referred in section 44AA(1), can not take benefit if section 44AD, in case of any other business. taxworry.com 2

3 3 However, if you are a professional, but not listed under u/s 44AA(1), you can file ITR-4 because in that case section 44AD(6) does not apply to you. In other words, if you do not carry any of the following profession, you can enjoy 44AD for any other business 1. legal, 2. medical, 3. engineering, 4. architectural, 5. accountancy, 6. technical consultancy, 7. interior decoration, or 8. any other notified profession (i.e., authorised representative, film artist, company secretary and information technology) Question (2) Can an assessee doing eligible business but also having capital gains income in the relevant previous year file his returns u/s 44AD using ITR4S? A person who earns capital gains can claim profit from the eligible business as per section 44AD. However, he can not file a return in Form ITR-4S.Why? Simply because the ITR-4S says so. In the instruction for filling of FORM ITR-4S, it is provided who can not use this Return Form? as under For this reason, you will find there is no fields for Capital Gains in ITR-4S. If you ask for a reason for doing so by the CBDT, only God knows. Because the Income Tax Rule does not prohibit anyone having capital gains from filing ITR-4S, but when there is no filed for filling such income, how will you file. taxworry.com 3

4 4 So, answer to your question is in Negative. You can not file ITR-4S if you have capital gains. You will be required to file ITR-4 and use the Field 51 of Part A P & L to show the income as shown in the picture Further, you are required to fill up the Schedule BP in which you will have to segregate the income u/s 44AD. Please see the image below Question 3.My question is if an eligible assessee running an eligible business as a small builder of residential flats having annual turnover below the eligible limit declares business profit of 8% using ITR4S whereas his actual profit is 25% as per his books of account, can the income tax dept insist that he pays tax on the actual profit rather than on the presumptive income of 8% of his turnover? 1. Does the assessing officer have the power or jurisdiction to look into the books of a/c of assesses and charge tax on the book profit? 2. Does the A.O have the authority under income tax laws to ask for books of a/c when the same is not necessary to be maintained u/s 44AD. 3. Does the assessee filing his return u/s 44ad has the absolute choice to either pay tax on 8% presumptive income or higher income as he wishes? KINDLY REFER RELEVANT CASE LAWS. taxworry.com 4

5 5 If you have opted for section 44AD and all the conditions are fulfilled, while there is nothing in I.T.Act to prevent A.O from asking question and demanding to look into your books of account, law u/s 44AD provides you a RIGHT to say that as per the provision of law, you have not maintained the books of account. The matter ends there, as far as you legal reply is concerned. However, A.O is free to enquire on his own and make an assessment of account. He can only add to your income, he gathers evidence 1. Your turnover is more than the specified limit or 2. For any reason section 44AD is not applicable that without your books But, if the A.O fails to prove that you have addition can sustain. Reliance may be placed on the judgment of Construction vs ACIT, 66 TTJ 718 addition by the A.O u/s 158BD. The wrongly claimed relief u/s 44AD, no ITAT, Pune in the case of Balaji held that when A.O declared income u/s 44AD, the facts of the case was that The assessee-firm was a civil contractor and its total contract receipts were below Rs. 40 lakhs. The premise of the assessee was searched, and certain documents were seized. In the assessment proceedings u/s 158BC, the assessee was asked to explain the nature and source of expenditure found to have been incurred on the basis of seized records. The assessee taken contended that the provisions of section 44AD were applicable for the assessment of income from contracts and, therefore, no cognizance was to be of the expenses incurred by it. The Assessing Officer, however, rejected that claim of the assessee by observing that provisions of Chapter XIV-B were self-contained code for assessing the undisclosed income and that nowhere in the Act it was provided that the option exercised under section 44AD entitled the assessee to the immunity from the provisions of Chapter XIV-B. Since the assessee was unable to explain the nature and source of expenses in question, the Assessing Officer treated them as undisclosed and made additions on that account. The Tribunal gave relief to the assessee. The Tribunal held as under :. In view of the above discussion, we are of the view that addition of Rs. 1,45,930 cannot be sustained. Admittedly, the assessee is engaged in the construction activities and the total contract receipts are below Rs. 40,00,000. In such situation, section 44AD provides that profits chargeable to tax would be 8% of the gross receipts paid or payable to the assessee or the higher sum declared by the assessee in the return. This sections is a taxworry.com 5

6 6 deeming section and it overrides the provisions of sections 28 to 43C provided the total receipts paid or payable does not exceed Rs. 40,00,000. In view of such mandatory provisions, the business income of the assessee carrying on construction activity has to be determined under section 44AD and not in accordance with the provisions of sections 28 to 43C. That means profits computed under section 44AD would take care of expenditures and allowances provided in sections 28 to 43C. From the above discussion, it is implied that legislature has recognised 92% of the contract receipts on account of expenditures and allowances specified in sections 28 to 43C irrespective of any material or evidence. Therefore, assessee cannot be asked to explain the entries of expenditure to the extent of 92% of the contract receipts minus (-) the amount of statutory allowances such as depreciation. Similarly, assessee cannot claim any such statutory allowances or other expenditure against the deemed profits chargeable to tax under section 44AD. The three amounts of Rs. 5,000, Rs. 1,10,000 and Rs. 30,930 are much less of 92% of the contract receipts. Therefore, in our opinion, no addition can be made in respect of such expenses. Income Tax Department can not insist on the higher income declaration, if all the conditions of section 44AD is fulfilled. In this regard, reliance maybe placed on Punjab & Haryana Court decision in CIT-II vssurinderpal Singh Anand[2011] 242 CTR 61 (Punjab & Haryana)wherein the facts of the case was that the assessee filed his return of income showing business income under section 44AD. The Assessing Officer did not accept the return and made an addition in respect of the cash deposited in the bank account during the year. On appeal, the Commissioner (Appeals) held that the assessee was not required to maintain regular books of account as the return had been filed under section 44AD, and the turnover was below Rs. 40 lakhs. It was also recorded that since the cash deposits in the bank statement were lower than the business receipts shown by the assessee and in the bank statement there were withdrawals as well as deposits, the addition was unjustified. The Tribunal upheld the order of the Commissioner (Appeals). The High Court held as under : 7. Section 44AD of the Act was inserted by the Finance Act, 1994 with effect from Sub-section (1) of section 44AD clearly provides that where an assessee is engaged in the business of civil construction or supply of labour for civil construction, income shall be estimated at 8 per cent, of the gross receipts paid or payable to the assessee in the previous year on account of such business or a sum higher than the aforesaid sum as may be declared by the assessee in his return of income notwithstanding anything to the taxworry.com 6

7 7 contrary contained in sections 28 to 43C of the Act. This income is to be deemed to be the profits and gains of said business chargeable of tax under the head "profits and gains" of business. However, the said provisions are applicable where the gross receipts paid or payable does not exceed Rs. 40 lakhs. 8.Once under the special provision, exemption from maintaining of books of account has been provided and presumptive tax at the rate of 8 per cent of the gross receipt itself is the basis for determining the taxable income, the assessee was not under obligation to explain individual entry of cash deposit in the bank unless such entry had no nexus with the gross receipts. Thus the answer to your questions are Can department insist on higher profit, if there is indeed higher profit? No, as long as all the conditions are fulfilled. Does the assessing officer have the books of a/c of assesses and power or jurisdiction to look into the charge tax on the book profit? A.O has power to look into the books of accounts, however, when the law itself provides that assessee who opt for 44AD may not maintain books of accounts, a simple answer to A.O notice is that no books of accounts have been maintained But please note that, are required to prove claim benefit u/s turnover & the law provides relief of maintenance of books of account, yet you your turnover or gross receipt, because on that basis only, you can 44AD. So, you should always maintain basic documents to prove your Gross Receipt. These maybe, cash memos, purchase invoice or bank statement & other documentary proof. Does the A.O have the authority under income tax laws to ask for books of a/c when the same is not necessary to be maintained u/s 44AD. Answer is same as above. Does the assessee filing his return u/s 44AD has the absolute choice to either pay tax on 8% presumptive income or higher income as he wishes? Yes, law has given the option to the assessee to (i) Show income at least 8% or higher with benefit of no books of accounts u/s 44A Or (ii) Show lower profit with burden of books of accounts and audit. taxworry.com 7

8 8 Attention should also be given on the use of the word Claimed in the sentence, a sum higher than the aforesaid sum claimed in section 44AD(1) which signifies option with assessee to show profit as he wants, subject to minimum 8 %. Which Method of accounting is suitable? The discrepancies with service tax shall always be there. Section 145 of the Income tax Act is applicable on also person option for presumptive taxation. So, method of accounting cash or mercantile should be chosen carefully be chosen. Nothing concrete can be suggested on this point, except one point that in case like yours, where the land is converted from investment to stock in trade, the business profit will be lesser, because the part profit will be taxed under Capital Gains. So that point should be taken into account while deciding on the method of accounting. Taxworry.com Disclaimer The tax advice is given by taxworry.com on the basis of facts narrated in the question, by the person asking for advice. Thus the answer to the question should be read with reference to the facts in the question only. In case, the facts of the case change, the answer may or may not apply. Taxworry.com does not take any responsibility for such eventuality in changed facts and circumstances. The advice is given considering all the ratio of the courts and tribunals on the issues related to the query available as on the date of advice. If any new decision, contrary to the advice comes, after the date of giving advice, taxworry.com should not be held responsible for such unfathomable circumstances. taxworry.com 8