Criminal Trident Pack: IPC, CrPC and IEA by Sr. Adv. G.S Shukla and Adv. Raghav Arora
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vinod.m   02 February 2017

Presumptive taxation with profit over 8%

I am running an ITeS business with gross annual revenue below the presumptive taxation limit of 2 crore. The business earns over 50% profit.
I was considering switching to presumptive taxation scheme. If I switch to presumptive taxation, can I pay tax for just 8% of the revenue, or do I have to pay tax for the actual profit as I do now? Is declaration of the actual profit required, when it is easy to calculate the actual profit?
I have come across the following judgement by the Income Tax Appellate Tribunal
The judgement notes
11. Putting the above analysis, in converse, it can be easily inferred that the same is also true for the expenditure of the assessee. If 8% of gross receipts are 'deemed' income of the assessee, the remaining 92% are also 'deemed' expenditure of the assessee. Meaning thereby that actual expenditure may not be 92% of gross receipts, only for the purposes of taxation, it is considered to be so. To take it further, it can be said that the expenditure may be less than 92% or it may also be more than 92% of gross receipts.
17. The crucial words in the said section for the purposes of present appeal are 'any financial year an assessee has incurred any expenditure'. But can we say on the facts & circumstances of the present case that the assessee has 'incurred' any expenses. From an analysis of section 44AD of the Act contained hereinabove, we have already held that the assessee had not incurred the expenses to the extent of 92 % of the gross receipts. Therefore, in the present case, the provisions of section 69C of the Act cannot be applied. Asking the assessee to prove to the satisfaction of the Assessing Officer, the expenditure to the extent of 92% of gross receipts, would also defeat the purpose of presumptive taxation as provided under section 44AD of the Act or other such provision.
Does the above points mean that it is not mandatory to declare and pay tax on the actual profit? If so, what is the state of the remaining profit? Since it is not unaccounted expense, will it be considered as unaccounted/black money?
The above text is immediately followed by
Since the scheme of presumptive taxation has been formed in order to avoid the long drawn process of assessment in cases of small traders or in cases of those businesses where the incomes are almost of static quantum of all the businesses, the Assessing Officer could have made the addition under section 69C of the Act, once he had carved out the case out of the glitches of the provisions of section 44AD of the Act. No such exercise has been done by the Assessing Officer in this case.
What does "carving the case out of the glitches of the provisions of section 44AD of the act" mean? Does it mean that assessing officer can dispute the application of presumptive taxation scheme, if he/she suspect tax avoidance?


 6 Replies

dr g balakrishnan (advocate/counsel supreme court)     02 February 2017

your idea can work if there is something called expenditure tax; but now there is no exenditure tax as such; so you have to file ROI  based upon your net what you have on that you have to pay tax sir, where is 92% and 8% notionals sir ?

dr g balakrishnan (advocate/counsel supreme court)     02 February 2017

You have file on actuals your ROI means; if you do all funny things you might get caught and end up paying penalty tio friend; be honest; after all it is revenue ti the government.

dr g balakrishnan (advocate/counsel supreme court)     02 February 2017

You don't fall under those sections as you are some IT industry entrepreneur pls.

Manish   02 February 2017

Every small business comes under Section 44ad. It is nowhere  written that IT Entrepreneurs are excluded from this section.

Aso, "carving the case out of the glitches of the provisions of section 44AD of the act", means that AO should have figured out the wrong turnover presented by the assessee in that particular case and should have brought the case outside the provision of section 44ad since the turnover was above the prescrbed limit of 40 lakhs. But AO didn't do so. 

AO could have used section 69 once the assessee's case fall outside of section 44ad due to having higher turnover than 40 lakhs, but since the AO didn't question the turnover, he couldn't do so.


vinod.m   02 February 2017

Thank you for your valued responses.

All my receipts are through bank, and all my expenses are through bank, and I have no intention to suppress my total revenue, nor inflate expense incurred. 

For ease of calcuation, let us suppose the gross receipts is say 50 Lakhs and the total expense is 10 Lakhs. In such a scenario, is it illegal to pay tax on just 4 Lakhs (8% of 50 Lakhs) instead of 40 Lakhs?

Does the judgement quoted above confirm that for the purpose of calculation in PTS, the business owner is within his rights to declare the total profit as 8% even if the actual profit is over 8%.

Are there any other judgements made by our honourable courts in similar cases that allow/forbid this?

Originally posted by : Manish
AO could have used section 69 once the assessee's case fall outside of section 44ad due to having higher turnover than 40 lakhs, but since the AO didn't question the turnover, he couldn't do so. 

Isn't that applicable only when there is undeclared expense, which can be presented as unaccounted income?


balas (Chartered)     06 February 2017

Hi Mr. Vinod,

Sec 44AD, sub-section 1 reads : "....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..."

To answer your query, you need to read the fine print of "a sum higher...claimed..." .

In your case, you earn >8% profit per my understanding.

Question is : Whether to take advantage of 8% cap or declare higher actuals.

Answer is : You are eligible (or say rightfully) to take advantage of the Act to declare @8% as profits.

Herein lies the caveat. In your ITR, you declare and verify  as "...information given in the return is correct and complete and that the amount of total income and other particulars shown therein are truly stated and are in accordance with the provisions of the Income- tax Act 1961..."

By the above declaration, you are claiming the info as true and correct within the ' provisions of law'.

In effect you can claim 8% of turnover as profits.

2nd query : Does the excess of profits represent unaccounted money ?

Answer : No. You have declared the total turnover and have paid taxes in accordance with the Act under the eligible section.

Other Aspect : You need to take into account Sub-Sectin 4 & 5 as & when same gets triggered.

Hope this helps.


Bala Srini FCA., LL.B.


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