Income Tax--Current Issues

Practice Update

V.K. Subramani

ISSUES IN COMPUTATION OF PRESUMPTIVE INCOME UNDER SECTION 44AD AND TURNOVER LIMIT FOR THE PURPOSE OF SECTION 44AB

Section 44AD is intended to ease the compliance cost for the taxpayers by providing relief from maintenance of books of account and obtaining audit report. However, there are many associated issues in opting the presumptive income provisions contained in section 44AD such as (i) if opted out of the section the tax payer cannot revert for subsequent 5 assessment years; (ii) what would happen if the taxpayer discontinued business and reverts after the said 5 years?; (iii) the term 'eligible business' alone is eligible for section 44AD and thus whether ineligible business like commission agency of the same taxpayer is taxable otherwise with/without tax audit by ignoring section 44AD?; and (iv) whether turnover for applying the presumptive provision is inclusive of GST or not ?

The first 3 issues could be resolved but the last and final one, requires perusal of section 145A, which says that the value of purchase and sale of goods shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred to bring the goods or services to the place of its location. Thus, it is widely believed that the turnover for the purpose of presumptive income determination would include all duties and taxes. However, this could be very harsh on the taxpayers as no profit element is embedded in the duties and taxes collected on turnover by the taxpayers. This warrants clarification from CBDT so that the presumptive income determination is really simple and hassle free. Further, the discrepancy in turnover (with GST) for the purpose of section 44AD and taxable turnover under GST would throw mismatch and create discomfort to the taxpayers.

For the purpose of audit under section 44AB, one has to determine the turnover for which reference has to be made to section 145A. To determine the turnover/sales, the accounting policy needs to be appreciated. If the duties and taxes are accounted separately and sale is accounted 'net' of duties and taxes, the monetary limit for audit under section 44AB would be reckoned accordingly. In case, the purchase/sale are accounted in inclusive manner with duties and taxes, then that 'gross' figure would be reckoned for the purpose of audit under section 44AB. Considering section 145A, this author favours inclusive method of accounting of purchases and sales with duties and taxes so that the closing inventory also represents value inclusive of duties and taxes which would satisfy both section 145A and ICDS 2 (meant for valuation of inventories).