Analysis of amendments proposed in respect of presumptive taxation

Section 44AD widely affects the businesses in small sector. It was brought in its present shape by Finance Act 2009 wef AY 2011-12. It implies that legislature at that time thought it fit to take a year extra to have impact study of the section. However section 44AD has been amended by Finance Bill 2016, wef Financial year commencing from 01-04-2016, without providing enough time and space to thinks about its implications. This article is a humble attempt to look into and look through amendments proposed in section 44AD as amended by Finance Bill 2016

Comparative Positions of older and proposed provisions of 44AD(1) to 44AD(5) is reproduced below:
44AD(1)
(1) Notwithstanding anything to the contrary contained in sections 28to 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”.
No Change
44AD(2)
(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed
No Change
44AD(2) Proviso
Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.
Omitted
44AD(3)
The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
No Change
44AD(4)
The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.
Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1)
44AD(5)
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 44AAand get them audited and furnish a report of such audit as required under section 44AB.
Notwithstanding anything contained in the foregoing provisions of this section,
an eligible assessee to whom the provisions of sub-section (4) are applicable 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.
Section 44AD(4) as proposed to be amended by Finance Bill 2016
•Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and
•he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1),
•he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1)
Now let us analyse the benefits available u/s 44AD
Benefits u/s 44AD(1)
8% of total turnover or higher sum is deemed to be income of eligible business, overriding the provisions of section 28 to 43C [but not 44AA and 44AB].
Benefit u/s 44AD(2)
Deduction u/s 33 to 38 is deemed to have been allowed. Hence there is no actual benefit but rather benefit if any, is taken away in lieu of 8% or higher sum deemed to be income of the assessee
Benefit u/s 44AD(3)
WDV of business is calculated as if depreciation has been allowed
Hence benefit, if any is there in section 44AD(1) and not in any other provision. However section 44AD(1) does not talk about books or audit, which are separately dealt in 44AA and 44AB
Section 44AD(5) as proposed to be amended by Finance Bill 2016
•Notwithstanding anything contained in the foregoing provisions of this section,
•an eligible assessee to whom the provisions of sub-section (4) are applicable 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.
Section 44AA(2)(iv)
Every assessee carrying on business shall
…………………………
Where the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year
Keep and maintain such books of accounts and other documents as may enable the assessing officer to compute his total income in accordance with the provisions of this Act
Section 44AB(e)
Every person
carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year
get his accounts of such previous audited……..
Hence S.44AA(2)(iv) and 44AB(e) are just corollary to what is said in 44AD(5)
Now the issue is when is section 44AD(4) applicable
Section 44AD(4) has two parts one is the applicability (or operative part )and other is substantive part. Section 44AD(5) is also speaks of consequences of applicability of 44AD(4)
Applicability (Or operative) part
•Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and
•he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1),
Consequence Part in 44AD(4)
•he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1)
Implications
The assessee shall forego the benefit once the profit of six consecutive years is not shown at 8%, hence actual profit shall be computed for next five years.
This consequence shall also apply even if income is computed at lower than exemption limit and assessee can not reflect higher income to convert his undisclosed income into disclosed income
Consequence part in 44AD(5)
Eligible assessee to whom 44AD(4) applies and income is more than exemption limit
•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.
1. Situation where 44AD(4) is applicable and income is more than exemption limit
E.g. Year 1 profit is 8% or higher
Year 2 profit is less than 8%
Then section 44AD(5) states that for Year 3 to Year 7, if income is more than exemption limit, the assessee shall have to get the accounts prepared and get the audit done.
Now there can be following propositions:
i) If in year 3 to years 7 income is lesser than 8% but higher than exemption limit, assessee shall prepare books and get the accounts audited. This was also the situation which existed before amendment of section 44AD(5) as reproduced above.
ii) If in the year 3 to year 7 income more than 8% but lesser than exemption limit, then maintenance of prescribed books and audit not required. This was also the essence of section 44AD(5) before amendment as reproduced above
iii) If in year 3 to year 7, income is more than 8% and also higher than exemption limit, whether still maintenance of prescribed books and audit required where turnover is lesser than two crores?
If the answer is yes, because it is as per amended provision, it defies the logic of presumptive income scheme itself.
If answer is no, then it is obliteration of express provisions of the law
2. Situation where 44AD(4) is not applicable and income is more than exemption limit
a) Reflecting 8% or higher income for six consecutive years. In such a situation if in Year 7 income is reflected lesser than 8% , still in year 8 benefit of 44AD can be availed.
b) Never earlier reflected 8% or higher Income or it is first year of the assessee business , then in Year 1 after such years or in the Year 1 itself benefit of 44AD can be availed.
In the both the above situations, since 44AD(4) is not applicable and as per 44AD(5) as well as 44AA(2)(iv) and 44AB(e), maintenance of books and audit is required only when 44AD(4) is applicable, books/ audit not required for Year 8 or Year 1 respectively in above propositions.
Although in such situation one might argue that books may be required to be maintained because of 44AA(2)(i)/(ii) but Memorandum explaining provisions of Finance Bill 2009 mentioned that “An assessee opting for the above scheme shall be exempted from maintenance of books of accounts related to such business as required under section 44AA of the Income-tax Act”
c) The year in which income is reflected lesser than 8%, 44AD(4) is again not applicable because 44AD(4) applies only to an an eligible assessee who declares profit for any previous year in accordance with the provisions of this section , hence normal provisions of law shall apply. Hence assessee shall be entitled to have benefit of deduction under section 30 to 38. Audit provisions shall apply if turnover is higher than one crore.
Another Interesting proposition of drafting 44AD(4) and 44AD(5) is that requirement of carrying out eligible business has also been dispensed with, while it is there in 44AD(5) in present form. Whether it is intentional or unintentional, only draftsmen know.
Retroactive application of Section 44AD(4) and 44AD(5)
The provisions have been amended wef AY 2017-18. However it is not clear that if, if assessee once covered by 44AD(1) has shown lesser than 8% income for period earlier that AY 2017-18, whether 44AD(4) and 44AD(5) shall become applicable wef AY 2017-18. It means that if operative part of 44AD(4) becomes applicable to the assessee for AY 2017-18, it might get covered by proposed provisions. Hence the amendment may have retroactive if not retrospective application.
Since section 44AD in present for came into existence wef AY 2011-12, let us take an example. Suppose for AY 2011-12, income was declared at 8% or higher sum but in any of five subsequent assessment year i.e. AY 2012-13 to AY 2016-17, income is declared lesser than 8%, then section 44AD benefit shall not apply for AY 2017-18 as per proposed amendment in 44AD(4).
Impact of not enhancing audit limit for business u/s 44AD
By not amending section 44AB(a) in the Finance Bill , the situation has been made more perplexing. This implies that if assessee’s turnover is between one crore and two crore he needs to get his accounts audited u/s 44AB(a) inspite of being covered by presumptive taxation u/s 44AD up to two crores.
Special Allowance of partners’ salary and interest to firm abolished ; Implications
Following proviso to 44AD(2) is proposed to be omitted wef AY 2017-18:
“Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.”
Implications
As per Supreme Court in Munjal Sales Corporation 298 ITR 298, interest to partner is covered by 36(1)(iii) and section 40(b) only places a restriction. Similarly salary to partner is covered by Section 37 and Section 40(b) only places restriction upon the same.
By Omissions of proviso to section 44AD(2) the provisions of 44AD(2) shall come into play which says that deductions u/s 30 to section 38 shall be deemed to have been given full effect . Therefore full effect shall be deemed to have been given effect to partners salary and interest covered respectively by 36(1)(iii) and section 37.
Hence if partnership deed provides for salary and interest to partners, while no deduction shall be allowable for presumptive taxation u/s 44AD, it might become taxable in the hands of partner u/s 28(v)
One school of thought is that fiction is not to be extended beyond the purpose for which it is created (Supreme Court in Bengal Immunity). Hence deeming fiction that full effect is deemed to have been given to deductions u/s 30 to 38 for presumptive taxation of firm can not be extended to tax interest and salary, deemed to have been allowed as deduction for firm, in the hands of the partner.
Another school of thought is that full effect must be given to the statutory fiction and it should be carried to its logical conclusion and to that end it would be proper and even necessary to assume all those facts on which alone the fiction can operate. By following this proposition, interest and salary shall become taxable in the hands of partner merely by virtue of provisions of partnership deed even though no separate deduction is allowed to the firm.
Conclusion: The law on presumptive taxation in present form shall give rise to more confusions and shall also result in harassment of assessee. The issues arising here in above require immediate clarification and redressal.