Presumptive Taxation & Audit

Presumptive Taxation & Audit — the law in short

Every authority in this library on presumptive taxation & audit, with what each one decided.

• DIT (International Taxation) v Star Cruises (India) P Ltd Supreme CourtHelps taxpayer
  My client is the Indian agent of a foreign cruise ship that sails round trips out of Mumbai. The Assessing Officer says a cruise is entertainment and hospitality, not carriage of passengers, so s.44B does not apply and he wants the s.195 withholding worked out on 25% of the fare instead of 7.5%. Can he do that?
  It depends on the findings of fact, and on these facts he could not. The Supreme Court refused to confine 'carriage' in s.44B to movement from one port to a different port, and held that ancillary services provided on a voyage do not take the activity outside the section. The concurrent findings of the CIT(A), the Tribunal and the Bombay High Court that the non-resident ship owner was carrying passengers were left undisturbed, so the deduction under s.195 stood on the statutory presumptive rate of 7.5% of gross cruise fare receipts and not on the 25% the Assessing Officer had estimated. The Revenue's appeals were dismissed.
• Sedco Forex International Inc v CIT Supreme CourtHelps department
  We are a non-resident drilling contractor taxed under section 44BB. Is the mobilisation fee for bringing the rig to India part of the taxable receipts?
  Yes, on these contracts. The Supreme Court held that a fixed mobilisation fee paid for moving a drilling unit to the Indian location falls within clause (a) of section 44BB(2), as an amount paid on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used in, the extraction of mineral oils in India. Clause (a) applies whether the amount is paid in or outside India. By the fiction in section 44BB the amount becomes income under section 5 and is treated as arising in India for section 9. The assessees' appeals were dismissed.
• CIT v Hyundai Heavy Industries Co Ltd Supreme CourtCuts both ways
  I am a foreign company on a turnkey contract. I fabricated the platform abroad and only installed it in India. Can the Department tax the offshore fabrication profit because the contract was one indivisible whole?
  No, on these facts. The Supreme Court held that an installation permanent establishment comes into existence only at the installation stage, which is after the equipment has been sold and delivered abroad, so profits on the offshore supply are not attributable to it. Under Article 7 what is taxed is not the real profit but the hypothetical profit the permanent establishment would have made as a wholly independent enterprise, so nothing can be attributed on the supply unless the Department shows the price was not at arm's length or included an element for the establishment's services. On quantum, ten per cent of the Indian gross receipts was upheld.
• Union of India v A. Sanyasi Rao Supreme CourtCuts both waysValidity unconfirmed
  Tax has been collected from me at source on my purchase price as though a fixed percentage of it were my profit. Am I stuck with that figure, or can I still be assessed on my real income?
  You can still be assessed on your real income. The Supreme Court upheld the validity of section 206C and held section 44AC a valid piece of legislation, but read it down: it is an adjunct to and explanatory of section 206C and does not dispense with a regular assessment. To the extent its non obstante clause shut out sections 28 to 43C for the specified trades, the provision was unreasonable, no basis having been shown for denying those traders the reliefs every other assessee gets. So tax is collected at the section 206C rates and a regular assessment follows, with profits computed under sections 28 to 43C.
• Chavakkad Service Co-operative Bank v ITO High CourtHelps taxpayerValidity unconfirmed
  Our audit report was late because the statutory auditor was late. Can the officer still levy the s.271B penalty?
  No, where the delay is genuinely the auditor's and the report reaches the officer before the assessment is completed. The Kerala High Court set aside penalties of Rs 1.5 lakh, holding that s.273B is peremptory: no penalty can be imposed under s.271B if the assessee proves reasonable cause, and a co-operative society has no control over the timetable of the statutory auditor appointed under the State co-operative law.
• Mr. Anandkumar v ACIT High CourtHelps department
  I am a partner. Can I take the salary and interest my firm pays me, call it my turnover, and offer 8 per cent of it under s.44AD?
  No. The High Court held that a partner receiving remuneration and interest from his firm is not himself carrying on a business, so those receipts cannot be termed a turnover, and they do not qualify as gross receipts either. Section 44AD applies only to an eligible assessee engaged in an eligible business having a total turnover or gross receipts, and the assessee here had neither effected sales nor rendered services; the sums had already been debited in the firms' own profit and loss accounts. The appeal was dismissed and both questions of law were answered against the assessee and in favour of the Revenue. This is the answer to a scheme that is still marketed to partners, and it is a High Court answer, not a Tribunal one.
• CIT v Y. Ramachandra Reddy High CourtHelps taxpayer
  The officer made a best judgment assessment and fixed my profit at a percentage of receipts. Does that wipe out my claim to depreciation and to interest?
  No. The High Court held that depreciation and interest, which are otherwise deductible in the ordinary course of assessment, keep the same legal character even where the profit is determined on a percentage basis. There was no reason to withhold from the assessee, merely because his profit had been estimated, a facility he would have had on a regular computation. The Revenue's appeal was dismissed. Note the boundary of this: the assessee's receipts were far above the s.44AD threshold, so s.44AD did not apply to him at all. Where income is actually returned under s.44AD, s.44AD(2) provides that deductions under ss.30 to 38 are deemed to have been given full effect, and depreciation under s.32 falls inside that range.
• DIT v OHM Ltd High CourtHelps taxpayer
  I am a foreign company providing survey and data services to an offshore oil exploration block in India. Am I taxed at 10% of gross under section 44BB, or must I go under section 44DA?
  Section 44BB applies. The Delhi High Court upheld the Authority for Advance Rulings and held that where a non-resident provides services in connection with prospecting for or extraction or production of mineral oils, section 44BB governs the computation, not section 44DA. Section 44BB is the special provision and section 44DA the general one, so generalia specialibus non derogant applies. Reading section 44DA as covering everything would reduce section 44BB to a dead letter. The provisos inserted by the Finance Act 2010 in both sections are clarificatory on computation and do not change either section's sphere of operation.
• CIT v Nitin Soni High CourtHelps taxpayer
  I returned income for my trucks under s.44AE. The officer says my real income was higher and has taxed the difference. Can he?
  No, not on the facts of this case. The High Court held that the words 'shall be deemed' in s.44AE indicate a legislative intent that tax is chargeable on the presumptive income computed under sub-section (2). The presumptive income, which may be less or more than the truth, is what is taxable; such an assessee is not required to maintain books at all; and so even where the actual income in a given case is more than the figure computed under sub-section (2), it cannot be taxed. The addition of Rs 29,21,738 made under the head income from other sources was deleted, and the Revenue's appeal was dismissed summarily. Two limits matter. The officer had identified no other source in the assessment order, and it was not disputed that s.44AE applied. A genuinely separate source of income remains taxable in the ordinary way.
• CIT v Surinder Pal Anand High CourtHelps taxpayerSuperseded by amendment
  I declared income under 44AD. Must I explain every individual cash deposit in my bank account?
  No. An assessee returning income under s.44AD is not obliged to explain each entry of cash deposit, unless the particular deposit has no nexus with the gross receipts already declared. The scheme substitutes a presumption for proof, and requiring transaction-by-transaction sourcing would defeat it.
• CIT v Gian Chand Labour Contractors High CourtHelps department
  The officer rejected my books and applied a flat net profit rate. Can I still claim my freight and other expenses separately?
  No. Once the books are rejected and income is estimated by applying a net profit rate, that rate is taken to have already absorbed every deduction that would otherwise be computed under sections 30 to 43A. You cannot have the estimate and the expenses too.
• Indwell Constructions v CIT High CourtHelps taxpayer
  The officer rejected my firm's books and estimated the profit. Can he then also add back the interest and remuneration the firm paid its partners?
  No. Once the books are rejected and the profit is estimated, the estimate stands in substitution for a computation under s.29, and every deduction that s.29 brings in is deemed to have been taken into account in arriving at it. The Court added that the embargo in s.40 is taken into account in the same way. To add back one specific item out of the profit and loss account is to rely on the very books that have been rejected, which the officer cannot do. The separate addition of Rs 63,859 for interest and remuneration paid to partners was held not permissible, and the reference was answered in the negative and in favour of the assessee. Read the reasoning carefully before relying on it, because it cuts both ways: the same sentence that stops the Revenue adding an item back is the sentence the Revenue uses to resist a further deduction claimed on top of an estimate.
• Neeraj Dewangan v ITO ITATHelps departmentValidity unconfirmed
  I offered 8% under 44AD for consultancy work. Can the AO push me into 44ADA at 50%?
  Yes, where the work is professional in character. Liaison services, coordination of statutory no-objection certificates and related facilitation were held to require specialised technical knowledge and so to amount to 'technical consultancy', a specified profession under s.44AA(1) read with s.44ADA — which made s.44AD unavailable and the 50% rate applicable.
• Mohamed Asmi v ITO ITATHelps departmentValidity unconfirmed
  I filed under s.44AD and the officer has still added my whole bank credit under s.69A. Doesn't the presumptive return protect me?
  Not by itself. The Tribunal held that s.44AD and s.69A operate in distinct fields, and that a presumptive return cannot regularise deposits whose source and genuineness the assessee cannot establish; the entire addition of Rs 7,10,37,643 was sustained.
• DCIT v Smt. Ashu Ashok ITATHelps taxpayerValidity unconfirmed
  I declared more than 8 per cent under s.44AD. The officer has disallowed my expenditure for want of vouchers and allowed only 30 per cent on estimate. Can he do that?
  No. Where the case falls under s.44AD and the assessee has declared income above the prescribed rate of 8 per cent of gross receipts, she is not required to maintain books or documents to justify the expenditure, and estimating expenses and recomputing income is not within the Assessing Officer's domain. The Revenue's appeal against deletion of the addition was dismissed.
• Dipyaman Dutt v ITO ITATHelps taxpayerValidity unconfirmed
  I declared income under 44AD. Can the AO still add my cash deposits as unexplained income?
  No. Where income has been offered on a presumptive basis under s.44AD on declared turnover, cash deposits representing that turnover cannot be added again as unexplained income — that taxes the same receipts twice, once as deemed profit and once as unexplained credits.
• Hemant Kumar Agrawal v ITO ITATHelps department
  I am a partner in a professional LLP. Can I offer my partner's remuneration under section 44ADA at 50 per cent?
  No, on this Tribunal's view. Remuneration from the firm is not the partner's own turnover or gross receipts, so section 44ADA does not apply to it. But it is still business income in the partner's hands, and expenses with a direct nexus to earning it are deductible in the ordinary way.
• Calories Count v DCIT ITATCuts both waysValidity unconfirmed
  The officer has rejected my books and worked out a much higher turnover from material impounded in a survey. If he does that, does he still have to apply the presumptive rate?
  On these facts, yes. The Tribunal upheld the Assessing Officer's determination of gross sales at Rs 1.87 crore against the Rs 87.34 lakh disclosed, but directed that the business profit be computed at 8 per cent of the redetermined turnover instead of the Rs 1.45 crore the officer had assessed.
• Santosh Kumar v ITO ITATHelps taxpayerValidity unconfirmed
  The AO has taxed my entire cash deposit as undisclosed income. Can he be made to tax only the presumptive percentage of it instead?
  Yes, where the deposits are the takings of an eligible business. The Tribunal deleted an addition of the whole Rs 25,56,700 deposited and substituted income of Rs 2,05,000, computed at 8% of those deposits under s.44AD, on the footing that the real income and not the entire receipt is what is taxable.
• Haresh Ghanshyamdas Makhija v ITO ITATHelps taxpayer
  They already penalised me under 271A for keeping no books. Can they levy 271B on top?
  No. Once penalty has been levied under s.271A for non-maintenance of books, a further penalty under s.271B for failure to audit those books cannot stand — the department cannot assert a failure to audit books it has itself found not to exist. The same consolidated order deletes a separate concealment penalty under s.271(1)(c) on the footing that the officer accepted the return and assessed the identical income, so there was nothing concealed.
• Gunita Pradeep Kapur v ITO ITATHelps taxpayerValidity unconfirmed
  I trade in futures and options. The officer has disallowed my loss because I did not get a tax audit and has brought s.44AD into it. Does s.44AD apply to derivative trading at all?
  The Tribunal held that s.44AD cannot be a reference point where the profit or loss arises from derivatives, futures and options in shares or commodities, because the section deals with regular business in the retail of goods, and that reliance on it by the authorities below was misplaced. The loss of Rs 35,81,745 was allowed, the absence of a tax audit not being a ground to disallow the claim.
• Lokesh Kumar Sharma v ITO ITATHelps taxpayerValidity unconfirmed
  I never maintained books at all. Can they penalise me under 271B for not getting them audited?
  No. Section 44AB requires a person to get 'his accounts' audited, which presupposes that accounts exist. Where the default is at the earlier stage of not maintaining books under s.44AA, the audit obligation never arises, and the penalty for that default is s.271A — not s.271B.
• Yuvraj Singh v ITO ITATHelps taxpayerValidity unconfirmed
  The officer treated my cash deposits as turnover, said I crossed the s.44AB limit and levied s.271B. The quantum was settled under Vivad se Vishwas. Does the penalty still stand?
  No. Where the assessee's declared turnover was below the s.44AB threshold and the officer crossed the threshold only by adding cash deposits to it, and the quantum dispute ended under the Vivad se Vishwas Scheme 2020 without any final judicial finding on the correctness of the turnover, the benefit of the doubt goes to the assessee and the s.271B penalty is reversed.
• Kokkarne Prabhakar v ITO ITATHelps taxpayer
  My return was under s.44AD. The officer has added the whole gap between my Form 26AS turnover and my declared turnover, and has also added my bank deposits under s.68. Can he do either?
  Not in that form, but read the second half of this order narrowly. On the turnover gap the Tribunal held, in its own words at para 7, that the difference between the declared turnover and the Form 26AS turnover 'is to be part of the business turnover of the assessee', that it 'should be included in the total turnover of the assessee and income of 8% is to be estimated on it', and that 'the entire undisclosed turnover of Rs.5,05,050/- cannot be considered as income of the assessee'; the Assessing Officer was directed to consider 8 per cent of that sum. On the deposits the Tribunal deleted the addition of Rs 3,00,000, saying that once the assessment of the assessee was completed under s.44AD there cannot be any application of s.68 or s.69A. The appeal was partly allowed. What the order decides on that second ground is narrower than the sentence in which it is expressed: a deposit addition of Rs 3,00,000 could not stand alongside a completed s.44AD assessment on a declared turnover of Rs 41,41,302. The sentence itself is wider than the High Court authority under it, because CIT v. Surinder Pal Anand relieves the assessee of explaining individual cash deposits only where the deposit has a nexus with the gross receipts already declared, and it is the order of a single Accountant Member. Do not take it as a general immunity from s.68 and s.69A on a presumptive return.
• Arthur Bernard Sebastine Pais v DCIT (CPC) ITATHelps taxpayer
  CPC has processed my return, decided that my receipts belong under s.44ADA at 50 per cent instead of s.44AD at 8 per cent, and raised a demand. Can that be done in a s.143(1) intimation?
  No. The Tribunal held that the whole of the gross receipts had in fact been included in the return, under s.44AD, so the condition for an adjustment under s.143(1)(a)(vi) — that income appearing in Form 26AS has not been included in computing the total income — was simply absent, and the addition fell on that ground alone. It went further and said that whether the income has to be taxed under s.44AD or under s.44ADA cannot be the subject matter of a decision in processing under s.143(1)(a). Be careful what you take from this. The Tribunal expressly declined to decide whether the assessee's management consultancy receipts were assessable under s.44ADA or s.44AD, and nothing in the order holds that they were not professional receipts.
• Somnath Ghosh v ITO ITATHelps taxpayerValidity unconfirmed
  I kept no books at all. Can they penalise me under 271B for not getting the accounts audited?
  No. Where no books of account exist there is nothing capable of being audited, so s.271B is not attracted. The default, if any, is non-maintenance of books, which is dealt with by s.271A.
• Nand Lal Popli v DCIT ITATCuts both ways
  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.
• Banwari Sitaram Pasari HUF v ACIT ITATHelps taxpayerSuperseded by amendment
  The officer has added up my whole commodity contract value as turnover and penalised me under s.271B. Is contract value turnover?
  No. Where the assessee buys and sells commodities on a commodity exchange without delivery being taken or given, the total value of the transactions booked with the exchange cannot be treated as turnover for deciding whether accounts had to be audited under s.44AB. The transactions were speculative, no delivery took place, and the s.271B penalty was deleted.
• C. Eswara Reddy & Co v ACIT ITATCuts both waysSuperseded by amendment
  The officer rejected my firm's books and estimated the profit at a percentage of receipts. Can the firm still deduct salary and interest paid to its partners from that estimated figure?
  For the years this order governs, yes. The Tribunal held that s.44AD(2) deems only the deductions under ss.30 to 38 to have been given full effect; s.40 is not deemed to have been allowed, and the proviso to s.44AD(2) as it then stood said in terms that salary and interest paid to a partner shall be deducted from the income computed under s.44AD(1), subject to the ceiling in s.40(b). Taking a clue from that scheme, the Tribunal directed the officer to allow partner salary and interest from the estimated income. On depreciation it went the other way: because depreciation is allowable under s.32, which falls inside ss.30 to 38, no separate deduction for depreciation was permitted from the estimate. The order concerns assessment years 2003-04 and 2004-05 and rests squarely on a proviso Parliament has since deleted.
• Ranu Gupta v ACIT ITATHelps taxpayerValidity unconfirmed
  I am a partner in a CA firm. Can I offer my remuneration from the firm under 44ADA?
  Yes. Remuneration received by a professional working partner from his firm is professional income eligible for s.44ADA. The section carries no condition that corresponding expenditure be proved, and none that the profession be carried on independently rather than through a firm.
• CBDT Clarification 14.08.2019 on s.44AE CBDT Circulars & InstructionsHelps departmentValidity unconfirmed
  For 44AE, do I compute on gross vehicle weight or on unladen weight for a heavy goods vehicle?
  Gross vehicle weight. For a heavy goods vehicle — gross vehicle weight exceeding 12,000 kg — presumptive income is Rs. 1,000 per ton of gross vehicle weight as defined in the Motor Vehicles Act, 1988, for every month or part of a month. Unladen weight is the measure only for a tractor or a road-roller; other goods carriages remain at Rs. 7,500 per month or part of a month.
• Statutory position — s.44AA(2): who must keep books of account, and the thresholds CBDT Circulars & InstructionsCuts both waysValidity unconfirmed
  My client runs a small business, not a notified profession. At what point is he obliged to keep books at all, and what are the current figures?
  For a business or a non-specified profession, books must be kept if income from the business or profession exceeds Rs 1,20,000 OR total sales, turnover or gross receipts exceed Rs 10,00,000 in any one of the three years immediately preceding the previous year. For an individual or a Hindu undivided family two provisos raise those figures to Rs 2,50,000 and Rs 25,00,000 respectively.
• Income Tax Dept presumptive taxation tutorial CBDT Circulars & InstructionsCuts both ways
  What are the current 44AD, 44ADA and 44AB limits, and what does the 5% cash test mean?
  For AY 2024-25 onwards: s.44AD applies up to Rs. 2 crore turnover, or Rs. 3 crore where cash receipts are within 5%, at 8% (6% for receipts by account payee cheque or draft or electronic mode); s.44ADA up to Rs. 50 lakh, or Rs. 75 lakh on the same condition, at 50%. Audit under s.44AB is triggered at Rs. 1 crore turnover for business, Rs. 10 crore where cash receipts and cash payments are each within 5%, and Rs. 50 lakh gross receipts for a profession. The 5% cash cap is the same thing as routing more than 95% of transactions through banking channels.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.