Presumptive Taxation u/s 44AD Overrides Unexplained Cash Credit Addition on Turnover

Presumptive Taxation u/s 44AD Overrides Unexplained Cash Credit Addition on Turnover

1. The Core Dispute

The primary issue was whether the Assessing Officer (AO) can treat a portion of the business turnover as an “Unexplained Cash Credit” under Section 68 when the assessee has opted for the Presumptive Taxation Scheme under Section 44AD.

2. The Facts

• The Business: The assessee operated a retail business under the name M/s Jalpa Cloth House.

• The Discrepancy: * In the original return, the turnover was shown as ₹7,65,300.

  • After receiving a notice u/s 148 (reopening of assessment), the assessee filed a fresh return showing an increased turnover of ₹25,90,627.

• The Addition: The AO noticed the difference of ₹18,25,327 in the reported turnover. Instead of accepting this as business receipts under the presumptive scheme, the AO treated ₹15,35,900 as unexplained cash credit and taxed it accordingly.

3. The Legal Ruling

The ITAT Chandigarh Bench (Vice President Rajpal Yadav) set aside the lower authorities’ orders and deleted the addition based on the following principles:

• Exemption from Maintaining Books: Under Section 44AD, an assessee is not required to maintain regular books of account. The scheme allows small taxpayers to declare a fixed percentage of their gross turnover as profit.

• Turnover vs. Cash Credit: The Tribunal held that once the AO accepts the nature of the business (trading in clothes), the deposits in the bank account must be treated as part of the business turnover. The AO cannot “cherry-pick” parts of the turnover and label them as unexplained cash credits.

• Consistency of Scheme: If the income is offered under presumptive taxation, the AO’s role is limited to verifying the gross turnover and applying the statutory profit rate (8% or 6%, as applicable).

4. Final Decision

The Tribunal allowed the appeal with the following directions:

1. Addition Deleted: The addition of ₹15,35,900 made u/s 68 is completely removed.

2. Re-computation: The AO is directed to recalculate the taxable income by applying the Section 44AD profit rate on the total revised turnover of ₹25,90,627.

3. Outcome: The appeal of the Assessee is Allowed.

Key Takeaways for Small Business Owners

• The 44AD Shield: If you opt for presumptive taxation, the Department generally cannot ask for proof of expenses or treat bank deposits (within the turnover limit) as “unexplained” wealth, provided they relate to your declared business.

• Updating Turnover: If you realize your bank deposits are higher than the turnover reported in your original return, disclosing the higher figure in response to a Section 148 notice can be a valid strategy to regularize your income, as seen in this case.

• No Books Required: The legal protection of not maintaining books u/s 44AD is a powerful tool against arbitrary additions, as long as the nature of the business is undisputed.