[Turbanator]

Originally Posted by Guite

However, a CA told me I have to maintain a book of accounts and pay tax on actual profit.

Originally Posted by mtripathi13

my logic holds even if you bring the threshold to say 50l/75Lacs...And you need to offer actual profit. And for the purpose, detailed books has to be maintained, so as to arrive at the said actual profit. It is not voluntary

I think that's not the intent of the said sections. The government does not want you to get into maintaining books/ calculating profits. The intent is very clear, pay Tax on 50% of your gross receipts.

I am a practising CA. I have always opted for 44ADA. And not once have I offered exactly 50% of the receipts. The actual profits have always been offered or tax audit done.

What advantages do you get under 44ADA if you have to maintain the books? How do you calculate the tax amount, say your gross receipts are 50 lac and under this section, you cannot book any expenses as deemed income is 50%. Now if you want to show 80% as income, does this section even allow booking 20% expenses?

But the problem is, both of them are not 'laws'. Law is the Act.

Have you seen any notices to your clients, asking to show/ audit books who have filed under this section?

[mtripathi13]

Originally Posted by Rajesh V

Ah, now I perfectly understand your perspective sir. Thank you for your patience. This has indeed been an eye-opener.

But I still can't understand the existance of 44AD and 44ADA if that were the case.

Pleased to be of any help Rajesh. I will try to put my perspective on the above sections in this reply.

Originally Posted by Turbanator

I think that's not the intent of the said sections. The government does not want you to get into maintaining books/ calculating profits. The intent is very clear, pay Tax on 50% of your gross receipts.

What advantages do you get under 44ADA if you have to maintain the books? How do you calculate the tax amount, say your gross receipts are 50 lac and under this section, you cannot book any expenses as deemed income is 50%. Now if you want to show 80% as income, does this section even allow booking 20% expenses?

Have you seen any notices to your clients, asking to show/ audit books who have filed under this section?

Respectfully I disagree. If the intent was only to tax at a specified percentage, the words 'or claimed to have been earned' would not have been used. You can say that it is poor drafting, but i will try to show a different perspective. Kindly hear me out.

The advantage or disadvantage is not something I can comment on. I am commenting only on the law as it stands. Kindly think what stops/stopped the revenue from inserting proviso in section 44AA and say that books are not required if you opt for 44ADA. They can say all they like outside, but the 'text' of the Act, which matters remain unchanged.

I have not yet received any notice, but this too i am trying to put in perspective.

The following are my views based on my understanding and years of practice. You are free to accept or not accept the views, however if you find anything which is logical, do ponder over in your mind.

1. In the movie called 'PRESUMPTIVE TAXATION', there is a background score and the main soundtrack.

2. The background score consists of memorandum of the finance bill, speech of the hon'ble finance minister, press briefings, FAQs etc. All these background score exhibit clearly that the intent of these sections and the intent of the revenue is to simplify taxation and removal of maintenance of books.

3. However, surprisingly, this 'intent' goes missing in the original motion picture soundtrack called the 'INCOME TAX ACT, 1961', which actually matters.

4. The revenue keep harping about this from all channels, they just do not bother to change the 'text' off the Act. They even go to incorporate the changes in the ITR forms and tax payers are not asked to fill up profit & loss and other details if they opt for presumptive taxation.

5. They keep changing various provisions of the Act, every year, but conveniently do not remove the drafting errors. They could just simplify the section and put the words which everyone wants. Similarly, they could insert a simple proviso in the book keeping section and show that their 'intent' is actually backed by the law itself.

6. What actually happens is they want to have their cake and eat it too. They will keep this leeway on the logic that this scheme is beneficial and should be beneficially interpreted. The revenue can go on doing this as long as it suits their objective. However, the situation can quickly change. If they feel that the provisions are being misused, they will simply use their AI to identify and issue notices.

7. Let me draw your attention to a similar thing done by the revenue in July, this year. Prior to 5th July,2024 the rebate of 87A was being given on special income tax. Post that day the revenue suddenly realized that the 'intent' of the law was not to give the rebate on special income. They tweaked the utility and lo and behold, the rebate goes away. They could do it because, there was nothing in the law to stop them.

8. So, if the revenue one fine morning decides that the presumptive sections have a notwithstanding clause but they do not override 44AA, which relate to keeping books. they can simply issue a notice. You can drag them to any court, but we all know, the law is on their side.

9. So yes, we have not received any notice in respect of same, but just ponder, can it be issued in future based on what I stated. Just think about it.

10. It is my belief that the complex drafting of these sections are intentionally not changed by the revenue. More importantly, not expressly mentioning non-maintenance of books, is a clear give away that they do not want us to do that.

11. Most of the people actually do hear the background score and for no fault of theirs are surprised when the law is shown to them. Sadly this is a situation that we professionals face routinely.

In conclusion, feel free to interpret my views as you like. But, just ponder, have I written something which shows the matter in a different light.

Regards
Manish

[Turbanator]

Originally Posted by mtripathi13

The advantage or disadvantage is not something I can comment on. I am commenting only on the law as it stands.

Ok, so can you tell us how we calculate profits in this section? Say, I am a professional and earning 72 Lac a Year. Per usual understanding, I would have filed a return considering 36 lac as income and rest expense. However, I have zero expenses, I work from home and give consultations to my clients from home. I hire no one and don't spend a pie on anything i.e at the end of Year, I will have 72 lac in my account. Per you out of this 72 lac only 36 Lac is truly mine (white money as we call it) as I paid tax only on 36 Lac and not the other 36 Lac whereas per this act the government itself has asked to do the same.

What should I do? What will be my liability per you in the above case?

[mtripathi13]

Originally Posted by Turbanator

Ok, so can you tell us how we calculate profits in this section? Say, I am a professional and earning 72 Lac a Year. Per usual understanding, I would have filed a return considering 36 lac as income and rest expense. However, I have zero expenses, I work from home and give consultations to my clients from home. I hire no one and don't spend a pie on anything i.e at the end of Year, I will have 72 lac in my account. Per you out of this 72 lac only 36 Lac is truly mine (white money as we call it) as I paid tax only on 36 Lac and not the other 36 Lac whereas per this act the government itself has asked to do the same.

What should I do? What will be my liability per you in the above case?

Sir, whatever I have said is not 'per me' but ' per the law'. I am saying what the law says which is 'taxable income shall be higher of 50% or actual profits'.

In case you feel I am wrong, do not follow my views. That's it. The income/asset correlation is also very important metric used in legal cases. We have all heard the phrase ' income disproportionate to the sources of income', in news and discussions. Now, bear in mind this sources of jncome is actually 'reported sources of income'. Again, you need not concur with my views. I am stating what the legal position is.

If you feel that as per you, the income in your example should only be 36 lacs, then I bow my head and bow out.

Warm Regards
Manish

[Turbanator]

Originally Posted by mtripathi13

I am saying what the law says which is 'taxable income shall be higher of 50% or actual profits'.

Sorry, no matter how many times I read, the act does not come up like this. But you have explained your views multiple times, so we can move on. Here is what's mentioned on the official site. Since I am not supposed to maintain books, there is no burden of proving otherwise. Now if you say this is not what's mentioned in the Act and this means nothing, what can I say?

https://www.incometax.gov.in/iec/fop...form-sugam-faq

Point 15

If you feel that as per you, the income in your example should only be 36 lacs

I am giving you a scenario where my gross income is 72 lac with zero expenses. What will be my taxable income? 99.999999 % of the people who file under the said section consider 50% of the total and pay the taxes on the remainder.

What will be your calculations, I want to understand your view in practice, say as you file in your case. And why will one file the return in this heading if one has to do all the calculations, like in your case?

[mtripathi13]

Originally Posted by Turbanator

What will be your calculations, I want to understand your view in practice, say as you file in your case. And why will one file the return in this heading if one has to do all the calculations, like in your case?

Sorry to disappoint you Sir, but I have mentioned in my earlier reply, FAQ is not 'law'. Law is the text of the section which you will find under the heading. Since you feel that faq's are law what can I say Sir?

Yes, if there is no expense, the entire income has to be offered to tax, There is no question about it.

For your reference I am enclosing the text of the section along with the official link from the incometax site

Source: https://incometaxindia.gov.in/Pages/...-statutes.aspx

I converted the same in PDF. Kindly read 44ADA(1) and observe the words ' or as the case may be, a sum higher than the aforesaid'.

[Turbanator]

Originally Posted by mtripathi13

if there is no expense, the entire income has to be offered to tax, There is no question about it.

Do you agree the law under this section does not allow to claim any expenses? This is not FAQ but the law or my understanding is incorrect in which case can you point me to the relevant portion which tells how to handle expenses in this section?

[mtripathi13]

Originally Posted by Turbanator

Do you agree the law under this section does not allow to claim any expenses? This is not FAQ but the law or my understanding is incorrect in which case can you point me to the relevant portion which tells how to handle expenses in this section?

Sir, we need to understand that this section allows us expenditure, for earning income. It is just we need not report in the ITR and our income is held to be after the expenses.

Say in my case my earning is 12 lacs per annum as fees. The office etc and salary expenses are say 4 lacs. Now, I have kept these records and know my income is 12 minus 4 i.e 8 lacs.

So I have to offer higher of 50% of 12 lacs i.e 6 lacs OR cctual profit which is 8 lacs. So,I have to offer 8 lacs.

Now again envisage a situation. My income is 12 lacs but my expenses are say 7.50 lacs due to unforeseen situation. What happens here.

Since actual profit is 4.50 lacs and 50% is 6 lacs, I need to offer 6 lacs to remain in 44ADA. Otherwise, simply I need to get myself tax audited and offer the actual 4.5 lacs. It will be accepted.

I get your point that we have no place to claim expenses, but understand that the income has to be reported in net of expenses.


What we do in our firm for our clients is that we keep all records. If not in accounting software, then in excel sheet. All expenditures and similarly recorded. After the end of the year, actual profit is found out. If the actual is over the specified percentage, we offer the same to tax. However, if the actual profit is below the threshold, we need to take a call, whether to continue opting in 44ADA or go for tax audit. Many a times we offer just over a little more than specified percentage, to remain in 44ADA, because if you opt out, you cannot opt in for next five years.

[Turbanator]

Originally Posted by mtripathi13

I get your point that we have no place to claim expenses, but understand that the income has to be reported in net of expenses.

Thanks for answering patiently. Can you mention the part of law where it says so in context of this section?

[mtripathi13]

Originally Posted by Turbanator

Thanks for answering patiently. Can you mention the part of law where it says so in context of this section?

Sir, the words claimed to have earned denote the same. Income claimed to have earned is only after incurring necessary expense to earn the same.

[Turbanator]

Originally Posted by mtripathi13

Income claimed to have earned is only after incurring necessary expense to earn the same.

Can we not say, this is your understanding or interpretation? Does this section discuss the expenses anywhere, like depreciation, or other?

So there is no end to this, you are ok with suggesting your clients file under 44AD if their profits are beyond a certain "threshold" - which is 100% your interpretation, and others can simply follow the 50%

[mtripathi13]

Originally Posted by Turbanator

Can we not say, this is your understanding or interpretation? Does this section discuss the expenses anywhere, like depreciation, or other?

So there is no end to this, you are ok with suggesting your clients file under 44AD if their profits are beyond a certain "threshold" - which is 100% your interpretation, and others can simply follow the 50%

Sir, there are commentaries by legal luminaries as well settled case laws from which these interpretations are derived. That is how legal jurisprudence works in litigation. You will be surprised to know that courts have deliberated for pages to arrive at an acceptable definition of a single word. However, you need not accept the same and are free to form your own beliefs.

Regarding, my views I have clearly mentioned that you are free to disagree or treat my views as junk. That is a right the constitution gives you.

My views are based on my knowledge and interpretation of the law. I have also seen people who offer the income exactly in the specified percentage, correct to the decimal and they have not faced any problems till date, so how I can say whatever I know is correct. They must have their own knowledge and belief. Good for them.

As you said, this will not lead to anywhere. I suggest my clients based on my knowledge, just as others do based on theirs. We all are happy in this happy world. You can jolly well offer exactly 50% as that is what you believe is right. I am nobody to contradict.

Warm Regards
Manish

[keroo1099]

As an architect I was told by a couple of auditors that it's a flat 50% on income when filing 44AD. No deductions allowed.

[Guite]

Originally Posted by Turbanator

I think that's not the intent of the said sections. The government does not want you to get into maintaining books/ calculating profits. The intent is very clear, pay Tax on 50% of your gross receipts.

My thoughts too. My own layman take on presumptive taxation: if income has to be computed from book of records, where is the assumption? It is not presumptive* anymore. The law/ government wants you to pay a certain minimum income tax on your gross receipts. So it is saying, “Pay me this much. On the other hand, if you have to pay me less show me why”. This is over simplification and paraphrasing of inputs received from various sources. It is purely my personal opinion, it should not be construed to be legally right (or wrong!).

*From merriam-webster.com
Presume (verb)
to expect or assume especially with confidence, to suppose to be true without proof

Presumptive (adjective) legal definition
based on presumption : presumed to have occurred, giving grounds for reasonable opinion or belief

Additional reading:
https://www.imf.org/external/pubs/nf...w/eng/ch12.pdf
Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on the taxpayer's accounts. The term "presumptive" is used to indicate that there is a legal presumption that the taxpayer's income is no less than the amount resulting from application of the indirect method. Presumptive techniques may be employed for a variety of reasons. One is simplification, particularly in relation to the compliance burden on taxpayers with very low turnover. Second is to combat tax avoidance or evasion.

[aashishnb]

I'm a CA, but don't practice in the taxation field. Nevertheless, here is a practical solution/point of view.

In Taxation (and by extension CA examination), there is no 'one right answer'. There could be two exactly opposite views, and both could be right. There are many such instances where two different high courts have also done this. Please keep this background always in mind.

Now, coming to the part about 44ADA and whether books are required to be maintained and whether to offer 50% or more than 50% as profit margin.
If you go to your family CA, who has been advising you for long and has your best interest in mind - most likely will advice you to maintain books and offer higher profit than 50% if possible.

This is primarily from a long term view of reducing / avoiding notices, potential litigation, etc. in future and to have peace of mind. This is for normal people, mostly like us, who are ok to bear a somewhat higher cost for the peace (off topic, e.g. that's why we pay brokers to do our vehicle registration/transfer work). Some people have a much higher risk threshold and are willing to fight it out and would take a much more aggressive stand.

Now coming to legality, a view can be rightly taken that:
One can declare 50% even if the actual is higher.
One does not need to maintain books.

However,
1. Declaring higher profit helps in a lot ways. You are more likely to be proven right and are on the right side of law - essentially have a much stronger case, if it comes to it. Having said that, declaring only 50% is also perfectly fine.
2. wrt books of accounts, they can only ask you to prove your revenue i.e. the base on which the profit % applies. Everything else is part of the 'presumptive taxation'. Now, therefore, one needs to be able to prove revenues.
3. wrt books of accounts, take the case of potentially having higher profit % and declaring 50% under presumptive scheme. Now, over the years, one would amass a lot more money. Let's hope one is buying a property. They can ask you to prove source of the money.
At this point of time, if you have maintained books for all those earlier years, you can easily prove that you saved higher amounts of money (without getting into each expense, etc.) but paid taxes as per a particular 'section'. Perfectly valid from legal point of view. But can be a subject matter of potential litigation and one may have to fight it out.

Therefore, a practical view, in long term interest, most practicing CAs will advice - keep books, pay a little more taxes, be happy in future (somewhat like buying an Innova!!).
Another practical view, some CAs may advice depending on your risk threshold, save money now, we'll see what happens in the future. Money saved today is worth a lot more. (no car examples here!!)