1. 44AD(1) is reporoduced as under: Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible 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”. 2. 44AD(5) is reporoduced as under: Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB. 3. On perusing the provisions of section 44AD one thing is crystal clear that the moment an eligible assessee is engaged in eligible business,Section 44AD is automatically applicable to such business, unless the case is covered by section 44AD(5). In all other cases, the assessee is governed by the provisions of section 44AD only, whether the assessee declares income at the 8% or higher income or lower income in cases covered by 44AD(5) where the Total Income does not exceed the maximum amount not chargeable to tax. 4. Eligible Assessee means: i. A Resident Individual, A Resident HUF, A Resident Partnership Firm (But does not include a LLP) AND ii. Who, out of the above categories of assessees, has not claimed Deduction during the relevant year; u/s 10A, 10AA, 10B and 10BA ORDeduction under any provision of Chapter VI-A under the Heading “Deduction in respect of certain incomes”. 5. Eligible Business means: (i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; AND (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of Rs. 1 Crore. If more than 10 goods carriages are owned by assessee, then he will be outside the purview of Section 44AE and hence he will get covered under 44AD if the Turnover from such business does not exceed Rs. 1 Crore. 6. Here the only thing that has to be borne in mind is the distinction between business and profession, because Section 44AD is applicable to Business and not Profession and Business is different from Profession. Some activities have been held to be business:- (i) Advertising agent (ii) Clearing, forwarding and shipping agents – CIT v/s. Jeevanlal Lallubhai & Co. (Bom). (iii) Couriers (iv) Insurance agent (v) Nursing home (vi) Stock and share broking and dealing in shares and securities – CIT v/s. Lallubhai Nagardas & Sons (Bom). (vii) Travel agent. 7. Consider the following: - - Net Profit as per Books of Accounts – Rs. 10 Lakhs - Income @ 8% of Turnover – Rs. 8 Lakhs. (i.e. Turnover is Rs. 1 Crore.) - Income as per Normal Provisions of Act – Rs. 7.5 Lakhs. For the purpose of comparison of Actual Income with income @ 8% of Turnover, which amount should be considered, Net Profit as per Books or Income from Business and Profession as per Normal Provisions of Act? In this situation, it has to be borne in mind that the provisions section 44AD override sections 28 to 43 C of the IT Act. Hence, the question of computation of income as per normal provisions does not arise. Thus, income as per the records maintained by the assessee needs to be compared with presumptive income at the rate of 8% to find out whether the same is higher or lower than 8% of Turnover. If it is lower 44AD(5) comes into picture and if the same is higher, the assessee is at the option to disclose the same in the return of income. 8. Consider the following: - - The assessee filed return of income u/s 44AD of the Income Tax Act, and the assessing officer wants to disallow the following:- i. Rs. 1 Lakh u/s 40(a)(ia) ii. Rs. 1 Lakh u/s 43B iii.Rs. 1 Lakh u/s 40A(2) As per section 44AD (1), this section overrides section 28 to 43C of the Act, and hence all those section could not be applied once the assessee is assessable u/s 44AD of the Act. [Ahmedabad Tribunal in case of Gopal Raj Purohit]. 9. Can assessee file Return u/s 44AD declaring Income @ 8% of Turnover (assuming Turnover is not exceeding Rs. 1 Crore) even though he has earned more than 8%? 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. 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.
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