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Facts
The assessee, an insurance agent, filed a revised return declaring income under Section 44AD, but later claimed to have maintained books of account and sought to deduct actual expenses. The Assessing Officer and CIT(A) rejected this, disallowing expenses and adding the entire commission income, also imposing a penalty under Section 271A.
Held
The Tribunal found that the assessee had maintained books of account and that genuine business expenditures should not be rejected merely because the assessee wrongly claimed benefit under Section 44AD. It directed the Assessing Officer to allow the claimed business expenditures and consequently deleted the penalty under Section 271A.
Key Issues
The key legal issues were whether an assessee, who initially declared income under Section 44AD, could subsequently claim to have maintained books of account and deduct actual business expenses, and the validity of a penalty under Section 271A for not maintaining books of account when such books were indeed maintained.
Sections Cited
Section 44AD, Section 271A, Section 143(2), Section 132(1), Section 142(1)
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Income Tax Appellate Tribunal, AGRA (SMC
Before: SHRI S. RIFAUR RAHMAN
assessment order, both these appeals are being disposed of by this consolidated order for the sake of convenience and brevity. is taken as a lead case.
Brief facts of the case are, the assessee, an insurance agent, filed return of income for the assessment year 2018-19 on 28.06.2018 and admitted a total income of Rs.27,87,770/-. Subsequently, assessee filed revised return of income on 05.12.2018 and admitted a total income of Rs.15,14,600/-. Case of the assessee was selected for complete scrutiny on the basis of reduction of income in the revised return of income and claimed refund. Accordingly, notices u/s. 143(2) and 132(1) of the Act were issued and served on the assessee. During the assessment proceedings, the Assessing Officer verified the return of income (ITR-3), in which the assessee has declared commission income of Rs. 22,91,309/- from National Insurance Company Ltd. Assessing Officer observed that as per the Board’s Circular No. 594, 648 and 677, the agents, who have earned gross aggregate commission of less than Rs.60,000/-, they are not required to maintain books of account. The other agents, who earned more than Rs.60,000/-, they should maintain books of account. He observed that in this case, the assessee has admitted gross profit from commission income of Rs.17,84,354/- on estimated basis u/s. 44AD of the Act and the commission earned is more than Rs.60,000/-. Further, he observed that the commission income is not covered u/s. 44AD of the Act. Since the assessee has not maintained 2 | P a g e any books of account and not claimed any expenditure, the entire commission income of Rs.22,91,309/- is treated as actual commission income in the impugned assessment order. Accordingly, a show cause notice was issued to the assessee to explain the same. In response, assessee submitted as under :
“……the assessee wrongly shown the commission income of Rs. 22,91,321/- u/s.44AD in the return filed and has claimed Rs.5,06,967/- as expenses. The expenses of Rs.5,06,967/- shown and claimed by the assessee are not on adhoc basis but on actual basis as per books of accounts, maintained by the assessee..." "...the regular books of accounts are being maintained by the assessee and the income and expenditure a/c is worked out and accordingly claimed in ITR, filed by the assessee. The copies of Balance Sheet, P & L A/c and copies of accounts of expenses enclosed for kind consideration and perusal..." "...the mistake of showing commission income u/s.44AD is due to oversight. The commission income be kindly accepted as regular income from business/profession on the basis of books of accounts, Income & Expenditure A/c etc as per details furnished /enclosed..." "...the assessee has maintained regular books of accounts and claimed the expenditure, incurred to earn commission income only not on adhoc basis. The expenses are genuine and were incurred for business expediency only which may kindly be accepted...”
After considering the above submissions, the assessing officer rejected the same and observed that the assessee has not maintained books of account. Therefore, gross profit was arrived from gross receipts on estimate basis. Since the assessee has declared income u/s. 44AD in ITR Form, he observed that it is known that the assessee did not 3 | P a g e maintain books of account for her commission activities in the year under consideration. Now, assessee confirmed that she is maintaining books of account for her commission activities during the financial year. Therefore, he rejected the claim of assessee and proceeded to make addition of the entire commission of Rs. 22,91,309/- and rejected the expenses claimed by the assessee.
Aggrieved, the assessee preferred an appeal before NFAC, Delhi.
Assessee filed detailed submissions before the learned CIT(A) and claimed that the assessee has filed the return of income u/s. 44AD of the Act. Further, the assessee has maintained the books of account simultaneously and submitted that in case the plea of the assessee is rejected u/s. 44AD of the Act, the assessee should be allowed the actual expenditure incurred by her. After considering the same, learned CIT(A) rejected the detailed submissions of the assessee and observed that the assessee has not maintained the books of account and the expenses claimed by the assessee are un-substantiated and held that the Assessing Officer rightly disallowed the same. Accordingly, he dismissed the appeal preferred by assessee.
Aggrieved, assessee is in appeal before us. At the time of hearing, learned AR brought to our notice the income and expenditure maintained in tally and also relevant profit and loss account and balance sheet. From 4 | P a g e the above information, he submitted that the lower authorities have rejected the plea of the assessee for filing the return of income u/s. 44AD of the Act. He agreed that the filing of return u/s. 44AD is bad in law.
However, he brought to our notice that the assessee has declared income u/s. 44AD @ 50% of the receipts not @ 8%. Even otherwise, income of the assessee should be determined on the basis of actual income earned by the assessee. He submitted that the assessee has maintained books of account. Therefore, expenditure claimed by the assessee are genuine and connected to the commission agency run by her.
On the other hand, learned DR relied on the findings of the lower authorities.
Considered the rival submissions and the material placed on record.
We observe that the assessee has earned gross commission of Rs.22,91,309/- as agent of the National Insurance Co. Ltd. The assessee has wrongly filed her return of income and claimed benefit of section 44AD. During the assessment proceedings, the assessee has submitted the relevant books of account, which the assessee has maintained in tally. However, the Assessing Officer has rejected the same by observing that the assessee has not maintained any books of account. As per the 5 | P a g e Board’s Circular, the assessee has to maintain the books of account once the commission income earned is more than Rs.60,000/-. However, it is brought to our notice that the assessee has maintained books of account. In support of the same, the assessee has filed copy of ledger account and expenditure account in the form of paper book. Assessee also filed written submissions before the learned CIT(A) and Assessing Officer in compliance to notices issued u/s. 143(2) and 142(1) of the Act.
We observe that the assessee is running a commission agency and merely because the assessee has wrongly claimed benefit u/s. 44AD of the Act, the genuine business expenditure cannot be rejected. Since the assessee has brought on record, the relevant books of account, we observe that the assessee has earned substantial amount as gross commission and the relevant expenditure, which are relating to vehicle maintenance, car loan interest, salary income and telephone expenses, in our view are regular business expenditure, which should be allowed.
Therefore, we direct the Assessing Officer to allow the business expenditure incurred by the assessee against gross income earned by the assessee. In the result, the appeal preferred by the assessee is liable to be allowed.
With regard to penalty proceedings, initiated u/s. 271A of the Act, since we have allowed the quantum appeal preferred by the assessee on 6 | P a g e the basis that the assessee has maintained books of account, therefore, the penalty levied u/s. 271A is hereby deleted.
In the result, both the appeals, preferred by the assessee are allowed.
Order pronounced in the open court on 05.01.2026.