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Per George George K, Vice President:
This appeal at the instance of the assessee is directed against the order of CIT(A) dated 27.02.2024, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2016-17.
The grounds raised read as follows:
The impugned order passed by the learned CIT(A) [the Commissioner Of Income Tax, Appeal ADDL/JCIT (A)-2 Mumbai and AO [the Income Tax Officer Ward 2(2), Mysore], to the extent prejudicial to the appellant, is not justified in law and on the facts and circumstances of the case.
2. The learned CIT(A) and AO have erred in law and on facts in passing the order against the principles of natural justice.
3. The Learned AO/CIT(A) have erred in computing the income from the warehousing business by applying the provisions of section 44A1) of the Act. 4. The addition of Rs. 24,08,331/- (which includes disallowance of losses) is based on wrong interpretation of the provisions of the Act and therefore bad in law. 5. The Learned AO/CIT(A) have erred in perversely stating that the Appellate is required to get books of accounts audited as per the requirements of pre-amended section 44AD(5) of the Act; 6. The addition to the returned income is not in accordance with the provisions of the act and therefore liable to be deleted; 7. The Learned CIT(A) has erred in law and on facts in not appreciating that the order is AO is bad in law and on facts as it is without jurisdiction. 8. The Learned AO has erred in law and on facts in not allowing the benefit of losses as claimed by the Assessee in the return of income. 9. Based on the above, the Learned AO has erred in law and on facts in raising demand by issue of notice u/s 156 of the Act. 10. The Learned AO, based on the above additions, has erred in levying interest under section 2341) of the Act. (Total tax effect: Rs. 7,22,4 99/ -)
Brief facts of the case are as follows:
Assessee is a civil contractor and earns income by executing the civil works and labour works. He also earns business income by letting out ware house to M/s. Karnataka State Warehousing Corporation (KSWC). For Assessment Year 2016-17, the return of income was filed on 30.03.2017 declaring a loss of Rs.17,19,305/-. Assessee had shown gross receipt of Rs.26,11,019/- from civil construction business and declared 8% net profit amounting to Rs.2,08,882/- under the provisions of section 44AD(1) of the Act. As regards letting out of warehouse to KSWC, assessee had gross receipts of Rs.52,00,660/- and declared loss of Rs.20,05,426/- after considering the expenditure in respect of warehouse activity (viz., depreciation and interest on loan). After setting off the net profit from civil construction business, assessee declared net loss of Rs.17,19,305/-. The assessment was completed under section 143(3) of the Act vide order dated 11.12.2018 determining the total income of Rs.6,89,030/- as against the returned loss of Rs.17,19,305/-. The AO disallowed the business loss of Rs.20,05,426/- and estimated profit from warehousing and weighbridge business at 8% of the gross receipts.
Aggrieved by the Assessment Order completed under section 143(3) of the Act, assessee preferred appeal before the CIT(A). The CIT(A) confirmed the Assessment Order and dismissed the appeal of the assessee. The relevant finding of the CIT(A) stating that assessee’s income from business by letting out warehouse to KSWC also needs to be taxed on a presumptive basis under section 44AD reads as follows:
“6.5 The appellant having opted for 44AD and is also not maintaining books, the income is chargeable at the rate of 8%. The appellant stand that his income is below taxable limit is also not acceptable as his income form both his business @ 8% and also income from other sources is above taxable limit.”
Aggrieved by the Order of the CIT(A), assessee has filed the present appeal before the Tribunal. Assessee has filed a Paper Book enclosing therein the written submissions filed before the AO and CIT(A), the relevant provisions of the Act, ITR-V and the forms, etc. The learned AR submitted that the interpretation of the AO and the CIT(A) as regards the provisions of section 44AD(5) of the Act is misplaced. In this context, the learned AR had taken me through the relevant provisions of the Act and contended that the requirement of maintenance of books of accounts and getting the audit report was mandatory in all cases prior to 2009 but the above requirement has been done away with the amendment made by Finance Act No.2 (2009). It was submitted that subsequent to the amendment, assessees are required to maintain the books of accounts and get it audited only if the total income exceeded the basic exemption limit during the relevant previous year.
The learned Standing Counsel supported the Orders of the AO and CIT(A).
I have heard the rival submissions and perused the material on record. The AO has denied the benefit of losses and went on to estimate the income as per the provisions of section 44AD of the Act by stating that the assessee has not maintained books of accounts and got it audited under section 44AB, as per the requirements of section 44AD(5) of the Act. The interpretation of the AO of provisions of section 44AD(5) is misplaced. As per the said subsection, the Assessee who claims that his total income is less than the basic exemption limit and less than the limit prescribed under subsection one is not required to comply with the provisions dealing with tax audit by maintaining books of accounts. Reference may be made to the budget memorandum dealing with Finance Act, 2009, wherein the section has a substantial change. The relevant extract of the same is as under.
Special provision for computing profits and gains of business on presumptive basis The existing provisions of the Income-tax Act, provide for taxation of income on presumptive basis in the case of construction business, income from goods carriages and business of retail trade. Section 44AD prescribes a method of presumptive taxation for assessees engaged in the business of civil construction or supply of labour for civil construction in which a sum equal to eight per cent of the gross receipts is deemed to be the profits and gains from business. Section 44AE provides presumptive provisions for the assessees engaged in the business of plying, hiring or leasing upto ten goods carriages in which a prescribed sum per vehicle is deemed to be the presumptive income of the assessee. Section 44AF prescribes a method of presumptive taxation for retail trade, under which the presumptive income is computed at the rate of a sum equal to five per cent of the total turnover.
There has been a substantial increase in small businesses with the growth of transport and communication and general growth of the economy. A large number of businesses and service providers in rural and urban areas who earn substantial income are outside the tax-net. Introduction of presumptive tax provisions in respect of small businesses would help a number of small businesses to comply with the taxation provisions without consuming their time and resources. A presumptive income scheme for small taxpayers lowers the compliance cost for such taxpayers and also reduces the administrative burden on the tax machinery. In view of the above, it is proposed to expand the scope of presumptive taxation to all businesses by substituting a new section 44AD. The salient features of the proposed presumptive taxation scheme are as under :— (a) The scheme shall be applicable to individuals, HUFs and partnership firms excluding limited liability partnership firms. It shall also not be applicable to an assessee who is availing deductions under sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading "C.—Deductions in respect of certain incomes" in the relevant assessment year. (b) The scheme is applicable for any business (excluding a business already covered under section 44AE) which has a maximum gross turnover/gross receipts of 40 lakhs. (c) The presumptive rate of income is prescribed at 8 per cent of gross turnover/gross receipts. (d) An assessee opting for the above scheme shall be exempted from payment of advance tax related to such business under the current provisions of the Income-tax Act. (e) An assessee opting for the above scheme shall be exempted from maintenance of books of account related to such business as required under section 44AA of the Income-tax Act. (g) An assessee with turnover below Rs. 40 lakhs, who shows an income below the presumptive rate prescribed under these provisions, will, in case his total income exceeds the taxable limit, be required to maintain books of account and also get them audited.
(h) The existing section 44AF is proposed to be made inoperative for the assessment year beginning on or after 1st day of April, 2011. The proposed amendment will take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. [ Clauses 18, 19, 20, 21, 22]
It is relevant to note from the above that the requirement to maintain books of accounts and get them audited is applicable only if the total income exceeds the basic exemption limit. The AO has erred in law and on facts in concluding that the total income has to be computed as per the provisions of section 44AD(1) of the Act, by adopting the prescribed percentage of 8% on the total turnover. In contradiction with the amendment made by the Finance Act (No.2), 2009, the provisions prior to the amendment stood as under:
(5) Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are lower than the profits and gains specified in sub-section (1), and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under sub-section (3) of section 143.] [(6) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub-section (1), if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.]
It is relevant to note from the above extract of erstwhile provisions, that the requirement of maintaining books of accounts and getting audit reports was mandatory in all cases where there was a claim made that the profits are lower than what is prescribed under subsection one. The above requirement has been done away with the amendment made by the Finance Act (No2), 2009. Subsequent to the amendment, the assesses are required to maintain books of accounts and get it audited only if the income exceeds the basic exemption limit. The CIT(A) has erred in upholding the above interpretation of the AO and concluding that the Appellant was required to get a tax audit done as per the provisions of section 44AB of the Act. Therefore, the AO and the CIT(A) have erred in computing the total income for the purpose of section 44AD(5) of the Act by considering 8% of the gross receipts as total income. This is not correct since assessee had specifically claimed that his total income is lower than 8% by adopting the option available under sub-section 5 thereunder.
The learned AR had submitted that assessee had furnished details of losses from the warehouse business which is in its second year of operation during the course of assessment and appellate proceedings. However, since the AO and CIT(A) have not considered the same, it is necessary that in the interest of justice to direct them to consider the submission with respect to the losses incurred and allow the benefit of the same even if the books of accounts are not audited. It is ordered accordingly.
In the result, appeal filed by the assessee is allowed for statistical purposes.