I return income under 44AD. Can the AO treat the balance of my receipts as expenditure actually incurred?
No. Once income is estimated at a percentage of gross receipts, the residual percentage is a notional figure, not a finding that expenditure of that amount was in fact incurred. With the declared turnover undisturbed, an addition built on that assumption has no foundation.
Decided by the ITAT (ITAT Chandigarh Bench — H.L. Karwa (Vice-President) and Ms. Rano Jain (Accountant Member); IT Appeal Nos. 1161 and 1162 (Chd.) of 2013; assessment years 2007-08 and 2009-10) on 2016-06-14, reported as [2016] 71 taxmann.com 246 (Chandigarh - Trib.) / [2016] 160 ITD 413 (Chandigarh - Trib.); IT Appeal Nos. 1161 and 1162 (Chd.) of 2013. It bears on section 44AD, section 69C, section 68, section 48 of the Income Tax Act 1961, in Presumptive Taxation & Audit matters.
This is the answer to the assessment where the officer accepts your 44AD turnover but then works backwards from the deemed profit rate and adds the balance as unexplained expenditure. It also disposes of the demand that a presumptive assessee produce books: s.44AD does not oblige him to maintain any. The reasoning still holds, but the turnover ceiling discussed in a 2016 order has since moved, so cite it for the principle and not for the limit.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee was a civil contractor. Two appeals were heard together, for assessment years 2007-08 and 2009-10, against orders of the Commissioner (Appeals) (Central), Gurgaon, both dated 25 November 2013. For 2007-08 he declared profits of Rs. 3,02,050 under section 44AD against gross receipts of Rs. 37,75,444. From those figures the Assessing Officer inferred expenditure of Rs. 34,73,394, compared it with the Rs. 18,49,264 shown in the assessee's cash flow statement, and — because payments of Rs. 16,24,130 made from the bank were not reflected there and were not shown by documents to relate to contract work — added Rs. 32,24,130 under section 69C. The turnover itself was not disturbed. The same issue arose for 2009-10, where the addition was Rs. 17,04,706. Two further issues were in the appeals: an addition of Rs. 1,00,000 under section 68 for two credits of Rs. 50,000 said to be a loan repaid by a relative, supported only by an undated confirmation; and, for 2009-10, the taxation of the whole Rs. 40 lakh sale price of a house at New Shimla as capital gain, the Assessing Officer having taken both the cost of acquisition and the cost of construction at nil.
The two appeals were partly allowed. On the main issue the section 69C additions were deleted for both years: where the Assessing Officer accepts the turnover and taxes 8 per cent of it as deemed income under section 44AD, the remaining 92 per cent is equally a deemed figure, so it cannot be said that the assessee 'incurred' expenditure of that amount, which is the condition section 69C requires; and section 44AD imposes no obligation to maintain books, the obligation in sub-section (5) falling only on an assessee who claims income below the presumptive rate. Two limbs went the other way or were left open. The addition of Rs. 1,00,000 under section 68 was upheld, the confirmation being undated and uncorroborated. On the capital gain the Tribunal directed the Assessing Officer to allow cost of construction of Rs. 24 lakh, which he had himself accepted in three assessment orders, but on the Rs. 10 lakh cost of acquisition it restored the matter, directing the officer to give the assessee an opportunity to produce evidence and to allow the resulting benefit as the law requires. That limb is therefore not decided.
The Bench worked from the word 'deemed' in section 44AD(1). If 8 per cent of gross receipts is deemed to be income, there is to that extent no actual income; converting the same reasoning, the remaining 92 per cent is deemed expenditure, and actual expenditure may be more or less than that figure. Reading sub-sections (1) and (5) together, the duty to keep books and have them audited falls only on an assessee who claims profits lower than the presumptive rate, so an assessee taxed under the section cannot be penalised for not keeping books; a cash flow statement is not books of account. The Bench accepted the Revenue's point that section 44AD does not in terms bar an addition under section 69C — the only fetter in the section is on sections 30 to 38 — but held that section 69C turns on the words 'has incurred any expenditure', and on the analysis above the assessee had not incurred expenditure of 92 per cent of receipts. Requiring him to prove that expenditure would defeat the purpose of presumptive taxation. The Assessing Officer could have made an addition under section 69C once he had first taken the case out of section 44AD, and he had done no such exercise. The Ahmedabad decision in Shivani Builders, relied on by the Revenue, was distinguished as resting on a finding that the assessee there had failed to record its turnover correctly.
the Assessing Officer, for making the impugned addition has started with the presumption that an amount to the extent of 92% of the gross receipts is the expenditure incurred by the assessee, which is a totally wrong premise. If the income component is estimated, how the expenditure component on the basis of said income can be considered to have been 'actually' incurred.
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Handle my notice → Ask a CA on WhatsAppNo. Once income is estimated at a percentage of gross receipts, the residual percentage is a notional figure, not a finding that expenditure of that amount was in fact incurred. With the declared turnover undisturbed, an addition built on that assumption has no foundation. This was decided by the ITAT (ITAT Chandigarh Bench — H.L. Karwa (Vice-President) and Ms. Rano Jain (Accountant Member); IT Appeal Nos. 1161 and 1162 (Chd.) of 2013; assessment years 2007-08 and 2009-10) and bears on section 44AD, section 69C, section 68, section 48 of the Income Tax Act 1961. It is reported as [2016] 71 taxmann.com 246 (Chandigarh - Trib.) / [2016] 160 ITD 413 (Chandigarh - Trib.); IT Appeal Nos. 1161 and 1162 (Chd.) of 2013. This is the answer to the assessment where the officer accepts your 44AD turnover but then works backwards from the deemed profit rate and adds the balance as unexplained expenditure. It also disposes of the demand that a presumptive assessee produce books: s.44AD does not oblige him to maintain any. The reasoning still holds, but the turnover ceiling discussed in a 2016 order has since moved, so cite it for the principle and not for the limit. If it applies to you, the first step is this: Get the officer to say in writing whether he is disputing the declared gross receipts at all — if he is not, the addition rests only on the notional residue.
The assessee was a civil contractor. Two appeals were heard together, for assessment years 2007-08 and 2009-10, against orders of the Commissioner (Appeals) (Central), Gurgaon, both dated 25 November 2013. For 2007-08 he declared profits of Rs. 3,02,050 under section 44AD against gross receipts of Rs. 37,75,444. From those figures the Assessing Officer inferred expenditure of Rs. 34,73,394, compared it with the Rs. 18,49,264 shown in the assessee's cash flow statement, and — because payments of Rs. 16,24,130 made from the bank were not reflected there and were not shown by documents to relate to contract work — added Rs. 32,24,130 under section 69C. The turnover itself was not disturbed. The same issue arose for 2009-10, where the addition was Rs. 17,04,706. Two further issues were in the appeals: an addition of Rs. 1,00,000 under section 68 for two credits of Rs. 50,000 said to be a loan repaid by a relative, supported only by an undated confirmation; and, for 2009-10, the taxation of the whole Rs. 40 lakh sale price of a house at New Shimla as capital gain, the Assessing Officer having taken both the cost of acquisition and the cost of construction at nil. The matter was decided on 2016-06-14 by the ITAT (ITAT Chandigarh Bench — H.L. Karwa (Vice-President) and Ms. Rano Jain (Accountant Member); IT Appeal Nos. 1161 and 1162 (Chd.) of 2013; assessment years 2007-08 and 2009-10). On those facts the ITAT held as follows. The two appeals were partly allowed. On the main issue the section 69C additions were deleted for both years: where the Assessing Officer accepts the turnover and taxes 8 per cent of it as deemed income under section 44AD, the remaining 92 per cent is equally a deemed figure, so it cannot be said that the assessee 'incurred' expenditure of that amount, which is the condition section 69C requires; and section 44AD imposes no obligation to maintain books, the obligation in sub-section (5) falling only on an assessee who claims income below the presumptive rate. Two limbs went the other way or were left open. The addition of Rs. 1,00,000 under section 68 was upheld, the confirmation being undated and uncorroborated. On the capital gain the Tribunal directed the Assessing Officer to allow cost of construction of Rs. 24 lakh, which he had himself accepted in three assessment orders, but on the Rs. 10 lakh cost of acquisition it restored the matter, directing the officer to give the assessee an opportunity to produce evidence and to allow the resulting benefit as the law requires. That limb is therefore not decided.
The Bench worked from the word 'deemed' in section 44AD(1). If 8 per cent of gross receipts is deemed to be income, there is to that extent no actual income; converting the same reasoning, the remaining 92 per cent is deemed expenditure, and actual expenditure may be more or less than that figure. Reading sub-sections (1) and (5) together, the duty to keep books and have them audited falls only on an assessee who claims profits lower than the presumptive rate, so an assessee taxed under the section cannot be penalised for not keeping books; a cash flow statement is not books of account. The Bench accepted the Revenue's point that section 44AD does not in terms bar an addition under section 69C — the only fetter in the section is on sections 30 to 38 — but held that section 69C turns on the words 'has incurred any expenditure', and on the analysis above the assessee had not incurred expenditure of 92 per cent of receipts. Requiring him to prove that expenditure would defeat the purpose of presumptive taxation. The Assessing Officer could have made an addition under section 69C once he had first taken the case out of section 44AD, and he had done no such exercise. The Ahmedabad decision in Shivani Builders, relied on by the Revenue, was distinguished as resting on a finding that the assessee there had failed to record its turnover correctly. In the words reproduced by the source cited on this page: "the Assessing Officer, for making the impugned addition has started with the presumption that an amount to the extent of 92% of the gross receipts is the expenditure incurred by the assessee, which is a totally wrong premise. If the income component is estimated, how the expenditure component on the basis of said income can be considered to have been 'actually' incurred." The decision followed or applied Shivani Builders v. ITO [2007] 108 ITD 520 (Ahmedabad - Trib.) — distinguished.
It was decided by the ITAT on 2016-06-14 and is reported as [2016] 71 taxmann.com 246 (Chandigarh - Trib.) / [2016] 160 ITD 413 (Chandigarh - Trib.); IT Appeal Nos. 1161 and 1162 (Chd.) of 2013. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 44AD, section 69C, section 68, section 48, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The two appeals were partly allowed. On the main issue the section 69C additions were deleted for both years: where the Assessing Officer accepts the turnover and taxes 8 per cent of it as deemed income under section 44AD, the remaining 92 per cent is equally a deemed figure, so it cannot be said that the assessee 'incurred' expenditure of that amount, which is the condition section 69C requires; and section 44AD imposes no obligation to maintain books, the obligation in sub-section (5) falling only on an assessee who claims income below the presumptive rate. Two limbs went the other way or were left open. The addition of Rs. 1,00,000 under section 68 was upheld, the confirmation being undated and uncorroborated. On the capital gain the Tribunal directed the Assessing Officer to allow cost of construction of Rs. 24 lakh, which he had himself accepted in three assessment orders, but on the Rs. 10 lakh cost of acquisition it restored the matter, directing the officer to give the assessee an opportunity to produce evidence and to allow the resulting benefit as the law requires. That limb is therefore not decided. It arises in Presumptive Taxation & Audit matters, on section 44AD, section 69C, section 68, section 48 of the Income Tax Act 1961, and was decided by ITAT Chandigarh Bench — H.L. Karwa (Vice-President) and Ms. Rano Jain (Accountant Member); IT Appeal Nos. 1161 and 1162 (Chd.) of 2013; assessment years 2007-08 and 2009-10. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Put on record that the scheme dispenses with books of account, so no adverse inference can be drawn from their absence. Do not attempt to reconstruct vouchers for expenditure you were never required to record; that concedes the officer's premise. Check whether the addition is framed under s.69C or s.68 purely as the arithmetical difference between receipts and deemed income, and say so in the reply.
Still good law. Followed by name in Thomas Eapen v. ITO [2020] 113 taxmann.com 268 / [2020] 180 ITD 741 (Cochin - Trib.), decided 19 November 2019, where the Cochin Bench reproduced the reasoning of this order, applied it to an addition under section 69A on bank deposits of a small trader taxed under section 44AD, and deleted the addition, holding that the officer could have made the addition once he had first taken the case out of section 44AD and had done no such exercise. The monetary scope of the presumptive scheme has moved since 2016 and must be read from the section in force for the year in question: under section 58 of the Income-tax Act, 2025, the business presumptive scheme applies where turnover does not exceed two crore rupees, or three crore rupees where cash receipts do not exceed 5 per cent of turnover, and the rate is 6 per cent on receipts taken through banking or online modes and 8 per cent on the rest. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Cite this for what it decided: that where the Assessing Officer accepts the turnover and taxes the presumptive percentage, he cannot then treat the balance of the receipts as expenditure actually incurred and tax it as unexplained under section 69C without first taking the case out of section 44AD. Two limits are on the face of the order. The appeals were only partly allowed - a separate addition of Rs. 1,00,000 under section 68 was upheld, and on the cost of acquisition of the house the matter went back to the Assessing Officer for the assessee to produce evidence, so that limb was not decided. And the Bench agreed with the Revenue that section 44AD does not itself bar an addition under section 69C; the answer turned on the word 'incurred' in section 69C, not on any immunity. On quantum, the presumptive thresholds have moved since 2016: quote the eligibility limit and the rate from the section in force for your year - under section 58 of the Income-tax Act, 2025 the limits are two crore rupees, or three crore where cash receipts do not exceed 5 per cent, with 6 per cent on banking or online receipts and 8 per cent on the rest. The Ahmedabad decision in Shivani Builders is the contrary Tribunal authority; this Bench distinguished it as a case where the turnover itself had been wrongly recorded, and that is the distinction to meet. None outstanding on the particulars: the appeal numbers, the members, both assessment years and the figures are on the face of the order. The order does not record whether the Revenue appealed, and the outcome of the restored cost-of-acquisition enquiry is not known. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The two appeals were partly allowed. On the main issue the section 69C additions were deleted for both years: where the Assessing Officer accepts the turnover and taxes 8 per cent of it as deemed income under section 44AD, the remaining 92 per cent is equally a deemed figure, so it cannot be said that the assessee 'incurred' expenditure of that amount, which is the condition section 69C requires; and section 44AD imposes no obligation to maintain books, the obligation in sub-section (5) falling only on an assessee who claims income below the presumptive rate. Two limbs went the other way or were left open. The addition of Rs. 1,00,000 under section 68 was upheld, the confirmation being undated and uncorroborated. On the capital gain the Tribunal directed the Assessing Officer to allow cost of construction of Rs. 24 lakh, which he had himself accepted in three assessment orders, but on the Rs. 10 lakh cost of acquisition it restored the matter, directing the officer to give the assessee an opportunity to produce evidence and to allow the resulting benefit as the law requires. That limb is therefore not decided.
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