Presumptive Taxation Scheme Not To Apply When Turnover Exceeds The Limit, Estimated Profit To Be Determined if ITR Not Filed

The Income Tax Appellate Tribunal (ITAT) Chennai recently delivered a judgement in the case of DCIT, Trichy. v. Srinivasan Devendran. The case pertained to a civil contractor who had a turnover of Rs. 74 crores from PWD contracts, which was reflected in Form 26AS and had been subjected to Tax Deducted at Source (TDS). However, the assessee had not maintained books of account or got them audited, and had offered to pay tax of Rs. 2,30,21,400/- at a rate of 3% on the estimated basis of business income.

The Assessing Officer (AO) had determined the income on an estimate at 8% under section 44AD of the Act, and assessed the business income at Rs. 6,02,90,646, which was significantly higher than the returned income of Rs. 2,30,21,400/-. The AO had made this determination despite the fact that the contracts were secured in a competitive environment, the turnover was huge, and the Department had accepted 3%/3.5%/4% of turnover on an estimated basis as income under section 143(3) in the past four assessment years.

The ITAT Chennai held that the AO was not justified in making additions by determining income on an estimate at 8%, and that the CIT(A) was justified in limiting additions by applying 4% of turnover without depreciation. The judgement states that the turnover of the assessee was enormous, and it was secured in a very competitive environment. Moreover, the entire turnover was reflected in Form 26AS and had been subjected to TDS. The fact that the assessee had not maintained books of account or got them audited was not sufficient reason to determine the income at a higher rate than what was accepted in the past.

The judgement highlights the importance of maintaining books of account and getting them audited, as it provides a basis for determining the actual income of an assessee. However, it also recognizes that in cases where an assessee has not maintained books of account or got them audited, the income can be determined on an estimated basis. This estimated basis should be reasonable, taking into account the circumstances of the case, such as the turnover, competitive environment, and past assessments.

The judgement also refers to several important terms that are relevant to the Income Tax Act. Section 44AD of the Act pertains to the presumptive taxation scheme for small businesses with a turnover of up to Rs. 2 crores. The Turnover limit is increased to Rs. 3 Crores with effect from financial year 2023-2024 (assessment year 2024-25) subject to condition that 95% receipts are in non cash/ online mode. Under this presumptive taxation scheme, the income is determined at a 8% on cash based transactions and 6% on non cash transactions, m Section 143(3) pertains to the assessment of income tax, and it empowers the AO to assess the income on the basis of returns filed by the assessee, after making necessary inquiries.

In summary, the ITAT Chennai’s judgement in DCIT, Trichy. v. Srinivasan Devendran provides an important precedent for determining the income of civil contractors who have not maintained books of account or got them audited. It emphasizes the importance of determining the income on a reasonable and consistent basis, taking into account the circumstances of the case. The judgement also highlights the relevance of important terms such as section 44AD and section 143(3) of the Income Tax Act.

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