Presumptive Income u/s 44AD Accepted: ITAT Deletes Demonetization Cash Addition

Presumptive Income u/s 44AD Accepted: ITAT Deletes Demonetization Cash Addition

1. The Core Dispute

The primary issue was the taxability of ₹12.34 Lacs in cash deposited by the assessee in old currency during the 2016 demonetization period.

• AO’s Action: The AO framed a “Best Judgment Assessment” u/s 144, rejecting the assessee’s claim of running a business. The AO treated the entire deposit plus the returned income (totaling approx. ₹15.32 Lacs) as undisclosed income, taxing it at the punitive rate of 60% u/s 115BBE.

• Assessee’s Defense: The assessee claimed he was a small trader opting for the Presumptive Taxation Scheme u/s 44AD. He argued the cash represented business sale proceeds, savings, and a ₹2.50 Lacs gift from his father-in-law.

2. Legal Ruling: Relief for Small Traders u/s 44AD

The ITAT Chandigarh Bench (Accountant Member Manoj Kumar Aggarwal) partly allowed the appeal, providing significant relief based on the following findings:

I. Validity of Section 44AD Claim

The Tribunal observed that since the assessee offered income on a presumptive basis (reporting 8% or 6% of turnover as profit), the law specifically exempts him from the requirement of maintaining elaborate books of accounts or regular records.

• Finding: The assessee produced sales bill books and had shown similar income in past years. Therefore, the AO was wrong to reject the business claim as “abnormal.”

II. The “Gift” and Lack of Evidence

While the business claim was accepted, the assessee could not produce sufficient documentary evidence to prove the ₹2.50 Lacs gift from his father-in-law.

• Decision: The Tribunal confirmed a lump-sum addition of ₹2.50 Lacs to the income to cover this unsubstantiated portion, while the rest of the cash deposit was accepted as explained business turnover.

III. Rejection of Punitive Tax Rate (Section 115BBE)

The AO had applied a 60% tax rate. The Tribunal overruled this, citing a precedent from the Madras High Court (S.M.I.L.E. Microfinance Ltd.).

• Decision: The confirmed addition of ₹2.50 Lacs will be taxed at normal slab rates, not the 60% rate, because the higher rate was not applicable in the manner interpreted by the AO for this specific year.

3. Summary of the Final Order

• Original Addition: ₹15.32 Lacs (approx.) at 60% tax.

• ITAT Order: Only ₹2.50 Lacs added (over the returned income) at normal tax rates.

• Outcome: Appeal of the Assessee is Partly Allowed. The AO is directed to re-compute the tax liability accordingly.

Key Takeaways for Taxpayers

• Presumptive Taxation is a Shield: If you are under Section 44AD, the Department cannot easily reject your turnover based on a lack of “regular books,” provided you have basic evidence like bill books or bank statements.

• Demonetization Deposits: For small businesses, cash deposits made during demonetization are generally considered “explained” if they align with the declared turnover and past history of the business.

• Substantiate Gifts: Even in a presumptive setup, specific claims like “gifts from relatives” must be backed by a gift deed or the donor’s bank statement to avoid additions.