Let us first of all see what section 69C of the Income Tax Act, 1961 reads. Section 69C reads as under:
69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year :
Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.
If assessee opts for presumptive taxation it cannot claim any deduction of any expenditure including Depreciation. Since no deduction is allowed the AO is not permitted to add back the income as unexplained expenditure. It is to be noted that the provisions of section 69C of the Act are very clear that wherever the assessee fails to explain about the source of certain expenditure incurred during the year, the same may be deemed to be the income of the assessee.
To understand this concept we must see the provisions of section 44AD (1):
“44AD (1) 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) 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 :”
The provisions of the above section are quite unambiguous to the effect that in case of an eligible business based on the gross receipts/total turnover, the income under the head ‘profits & gains of business’ shall be deemed to be @ 8% or any higher amount. The first important term here is ‘deemed to be’, which proves that in such cases there is no income to the extent of such percentage, however, to that extent, income is deemed. It is undisputed that ‘deemed’ means presuming the existence of something which actually is not. Therefore, it is quite clear that though for the purpose of levy of income tax 8% or more may be considered as income, but actually this is not the actual income of the assessee. This is also the purport of all provisions relating to presumptive taxation.
This issue has been explained very well in the following cases.
The assessee was a civil contractor. He had declared its profits under section 44AD at the rate of 8 per cent against the gross receipts. During assessment proceedings, the assessee explained that he had made payments from the bank account on various dates which were not reflected in the cash flow statement. Since no documentary evidence was filed to prove that those payments were towards contract work, the Assessing Officer made addition of said amount to assessee's income under section 69C.The Commissioner (Appeals) confirmed said addition. On second appeal:
The provisions of section 44AD are quite unambiguous to the effect that in case of an eligible business based on the gross receipts/total turnover, the income under the head 'profits & gains of business' shall be deemed to be at the rate of 8 per cent or any higher amount. The first important term here is 'deemed to be', which proves that in such cases there is no income to the extent of such percentage, however, to that extent, income is deemed. It is undisputed that 'deemed' means presuming the existence of something which actually is not. Therefore, it is quite clear that though for the purpose of levy of tax at rate of 8 per cent or more may be considered as income, but actually this is not the actual income of the assessee. This is also the purport of all provisions relating to presumptive taxation.
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 per cent of gross receipts are 'deemed' income of the assessee, the remaining 92 per cent are also 'deemed' expenditure of the assessee. Meaning thereby that actual expenditure may not be 92 per cent 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 per cent or it may also be more than 92 per cent of gross receipts.
From the combined reading of sub-section (1) and sub-section (5), it is apparent that the obligation to maintain the books of account and get them audited is only on the assessee who opts to claim the income being less than 8 per cent of the gross receipts.
Applying the above to the facts of the present case, it is observed that the Assessing Officer, for making the impugned addition has started with the presumption that an amount to the extent of 92 per cent 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. This is not a case, where the Assessing Officer has doubted the gross receipts or gross turnover of the assessee. In fact, accepting the same, estimating income at the rate of 8 per cent on the same at presumptive rate, he preferred to make further addition under section 69C of the Act. The argument of the revenue that the turnover of the assessee has been doubted by the Assessing Officer is totally ill-found, in view of the same.
Further, it is a fact on record that the assessee had not maintained books of account that is why he opted for 8 per cent income as per section 44AD of the Act. The section also does not put obligation on the assessee to maintain books of account, more so, in view of the fact that his income has been assessed as per section 44AD of the Act, he cannot be punished for not maintaining the same. The argument of the revenue that the assessee was in fact, maintaining books of account is untenable. Keeping or preparing a cash flow statement cannot be considered as keeping the books of account.
Coming to the argument of the revenue that the addition has been made under section 69C, on which there is no bar under section 44AD, one is quite in agreement with the same. The only fetter provided under section 44AD are the applicability of provisions of sections 30 to 38 of the Act.
The crucial words in section 69C for the purposes of present appeal are 'any financial year an assessee has incurred any expenditure'. But can one say on the facts and circumstances of the present case that the assessee has 'incurred' any expenses. From an analysis of section 44AD it has already been held that the assessee had not incurred the expenses to the extent of 92 per cent of the gross receipts. Therefore, in the present case, the provisions of section 69C cannot be applied. Asking the assessee to prove to the satisfaction of the Assessing Officer, the expenditure to the extent of 92 per cent of gross receipts, would also defeat the purpose of presumptive taxation as provided under section 44AD or other such provision.
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, once he had carved out the case out of the glitches of the provisions of section 44AD. No such exercise has been done by the Assessing Officer in this case.
As already held in the preceding paragraph, the Assessing Officer himself while computing the income of the assessee has made the business income to be taxable at the rate of 8 per cent of the gross receipts as provided under section 44AD of the Act. In such circumstances, this ground of appeal is allowed.
Thomas Eapen Vs. ITO (2020) 180 ITD 741 (Cochin Trib) / 113 Taxmann.com 268 (Cochin – Trib)
Section 44AD, read with section 69A, of the Income-tax Act, 1961 - Presumptive taxation (Scope of provision) - Assessment year 2015-16 - Assessee, a small trader in medicine, declared return of income under section 44AD at 8 per cent of his turnover - Assessing Officer made addition under section 68 in respect of unexplained cash credit found in assessee's bank - On appeal, Commissioner (Appeals) held that since assessee did not maintain books of account, said unexplained deposits could not be taxed under section 68 but under section 69A - Whether since scheme of presumptive taxation had been formed in order to avoid long drawn process of assessment in case of small traders or in case of businesses where incomes were almost of static quantum of all businesses, Assessing Officer could have made addition under section 69A, once he carved out case out of glitches of provisions of section 44AD, and in instant case no such exercise being done by Assessing Officer, addition made under section 69A was to be deleted - Held, yes [In favour of assessee].
It is to be noted that the assessee having been taxed under the presumptive taxation under section 44ADof the Act, the Assessing Officer is not right in asking him to substantiate the expenditure incurred by him. Reliance was placed on the judgment of Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Surinder Pal Anand (2010) 192 Taxman 264 (P&H )
The assessee filed his return of income showing certain business income under section 44AD. The Assessing Officer did not accept the return and made an addition in respect of the cash deposited in the bank account during the year. On appeal, the Commissioner (Appeals) held that the assessee was not required to maintain regular books of account as the return had been filed under section 44AD and the turnover was below Rs.40 lakhs. It was also recorded that since the cash deposits in the bank statement were lower than the business receipts shown by the assessee and in the bank statement there were withdrawals as well as deposits, the addition was unjustified. The Tribunal upheld the order of the Commissioner (Appeals).
On the revenue's appeal to the High Court: HELD
Sub-section (1) of section 44AD clearly provides that where an assessee is engaged in the business of civil construction or supply of labour for civil construction, income shall be estimated at 8 per cent of the gross amount paid or payable to the assessee in the previous year on account of such business or a sum higher than the aforesaid sum as may be declared by the assessee in his return of income notwithstanding anything to the contrary contained in sections 28 to 43C. This income is to be deemed to be the profits and gains of said business chargeable of tax under the head 'Profits and gains of business or profession'. However, the said provisions are applicable where the gross amount paid or payable does not exceed Rs.40 lakhs.
Once under the special provision, exemption from maintenance of books of account has been provided and presumptive tax at the rate of 8 per cent of the gross receipt itself is the basis for determining the taxable income, the assessee is not under any obligation to explain individual entry of cash deposit in the bank, unless such entry has no nexus with the gross receipts. In the instant case, the stand of the assessee before the Commissioner (Appeals) and the Tribunal that the amount in question was on account of business receipts had been accepted. The revenue could not show with reference to any material on record that the cash deposits were unexplained or undisclosed income of the assessee.
Therefore, no question of law arose from the Tribunal's order and the revenue's appeal was to be dismissed.
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