Presumptive Tax Scheme in India – A Deep Dive

The provisions relating to Presumptive Tax Scheme (PTS) under the Income Tax Act, 1961 (ITA) are inter alia, covered under Sections 44AD, 44ADA, 44AE, 44B, 44BB, 44BBA and 44BBB. In this article, we have limited our discussion to Sections 44AD & 44ADA.

While Section 44AD covers within its ambit small taxpayers engaged in eligible business, Section 44ADA covers eligible professionals. Taxpayers opting for PTS are allowed to declare income as a prescribed percentage of turnover / gross receipts of the business/profession (as the case may be) and are exempted from maintaining books of account and getting them audited annually. As the taxable income is deemed/presumed to be a percentage of turnover / gross receipts, this scheme is popularly known as ‘presumptive taxation scheme’.

Decoding Section 44AD

 

 

Legislative History

The PTS was first introduced by the Finance Act of 1994 to estimate taxable income from the civil construction business or the supply of labour for civil construction work. The income from such businesses is estimated to be 8% of gross receipts, provided that such gross receipts do not exceed INR 40 lakhs. The taxpayer, if he chose, was allowed to voluntarily declare a higher income in his tax return.

The Finance Act, 1999, amended the PTS with retrospective effect from financial year (FY) 1997-98 and mandated the requirement of furnishing an audit report in cases where the assessee offered an income lower than 8% of gross receipts.

A significant change in the entire structure of PTS was made vide The Finance (No. 2) Act, 2009, w.e.f FY 2010-11. The scope of PTS was expanded to all ‘eligible assessees’ engaged in ‘eligible business’.

 

Coverage

 

Category of taxpayers covered:

The following categories of taxpayers having total turnover / gross receipts from business not exceeding INR 2 crores in a financial year can opt for PTS under section 44AD of the ITA:

  • Resident Individual;
  • Resident Hindu Undivided Family (HUF);
  • Resident Partnership Firm (not being a Limited Liability Partnership (LLP))
 
Category of businesses covered:

PTS under Section 44AD covers all businesses except the below, where the taxpayer is:

  • Earning income in the nature of commission or brokerage.
  • Engaged in the agency business.
  • Engaged in the business of plying, hiring or leasing goods carriages.

(This business is covered under PTS under Section 44AE of ITA)

  • Carrying on a specified profession.

(These professionals are covered under PTS under Section 44ADA of ITA, which is discussed in the latter part of this article).

  • Intending to claim deductions under sections 10A, 10AA, 10B, 10BA, 80HH, to 80RRB of the ITA.

 

 

Percentage of deemed income

Under Section 44AD, the taxable income of eligible assessees engaged in eligible business (as discussed above) is presumed to be 8% of the turnover/gross receipts.

To promote non-cash transactions, a lower rate of 6% has been provided in respect of the amount of turnover/gross receipts, that is received by the assessee on or before the due date of filing the Income Tax Return, by way of:

  • Account payee cheque or account payee bank draft;
  • Electronic Clearing System, Net banking, RTGS, NEFT;
  • Credit Card or Debit Card;
  • IMPS, UPI or BHIM Aadhar Pay.

Though the PTS provides for taxable income to be 8%/6% of turnover or gross receipts, taxpayers can voluntarily declare a higher income on their tax return.

 

 

Meaning of Turnover or Gross Receipts

The terms “turnover” and “gross receipts” are not defined in the ITA.

Reference can be made to the Guidance Note on Tax Audit under Section 44AB of the ITA (Guidance Note). Para 5.10 of the Guidance Note is reproduced below:

5.10 Considering that the words “Sales”, “Turnover” and “Gross receipts” are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion.”

 

 

Other Important Points to Remember

 
 
  • Advance Tax: The due date for payment of advance tax shall be the 15th March of such FY;
  • Additional deductions: All the deductions u/s 30 to 38 for all taxpayers and in the case of partnership firms, interest and salary/remuneration to partners, would be deemed to have been allowed to the taxpayer.
  • Additional disallowances: Any disallowance relating to cash payments above INR 10,000 for expenses, non-deduction of tax at source, etc. will not be required to be added back, as Section 44AD overrides Sections 28 to 43C of the ITA.
  • Mandatory Tax Audit: In the case where the taxpayer has declared income as per PTS under Section 44AD in any FY and does not declare income in accordance with Section 44AD in any of the next five FYs, the taxpayer shall not be eligible to declare income under PTS for next five FYs, subsequent to the year in which income is not declared as per PTS under Section 44AD. Further, the taxpayer would also be required to maintain books of account and get them audited, irrespective of the turnover in the next 5 years, if his total income exceeds the maximum amount that is not chargeable to tax, i.e. the applicable basic exemption limit.

Illustration: Mr. A claims to be taxed under PTS under Section 44AD for Assessment Year (AY) 2019-20 and offers income in accordance with PTS. However, for AY 2020-21, he declares his income at a rate lower than the rate prescribed under PTS. In this case, Mr. A will not be eligible to claim the benefit of PTS for the next 5 AYs and will mandatorily be required to keep and maintain books of account and get them audited annually for those years as well i.e. AY 2021-22 to 2025-26 if his total income exceeds the maximum amount not chargeable to tax (basic exemption limit).

This is explained with the help of the following table in the case of Mr. X:

 

AYTurnover (in Cr)Profit (%)Income more than basic exemption limitSections applicableNote no.
44AA44AB44AD
2018-1937%YesYesYesNo1
2019-201.29%YesNoNoYes2
2020-210.855%YesYesYesNo3
2021-220.7510%YesYesYesNo4
2022-231.22%NoYesYesNo5
2023-241.59%YesYesYesNo

 

 

6

2024-250.926%YesYesYesNo
2025-260.959%YesYesYesNo
2026-272.56%YesYesYesNo

 

Note 1: Turnover exceeds Rs.1 Crore and hence, liable to maintain books of account and get them audited.

Note 2: Since Mr X declared income in accordance with the provisions of PTS under Section 44AD, he is not required to maintain books of account and get them audited.

Note 3: Since Mr. X declares profit @ 5%, which is lower than the prescribed rate of 8% under PTS, he shall be required to maintain books of account and get them audited for AYs 2020-21 to AY 2025-26.

Note 4: Mr. A is required to maintain books of account and get them audited.

Note 5: Mr. A is required to maintain books of account. He is not required to get them audited as his total income is less than the basic exemption limit.

Note 6: Mr. A is required to maintain books of account and get them audited.

 

 

Decoding Section 44ADA

 

 

Legislative History

The PTS under section 44ADA, also popularly known as ‘’presumptive taxation regime for professionals’’, was first introduced by the Finance Act 2016. The intention was to provide a PTS for people who make a living from their profession. 

 

 

Coverage

 

Categories of taxpayers covered:

The taxpayers listed below, whose total gross receipts from their profession do not exceed INR 50 lakhs in a fiscal year, are eligible for PTS under Section 44ADA:

  • Resident Individual;
  • Resident Partnership Firm (not being an LLP)
 
Categories of professions covered:

Only professions referred to in Section 44AA(1) of the ITA can opt for PTS under Section 44ADA. This includes a person carrying on:

  • Legal, Medical, Engineering or Architectural profession;
  • Profession of Accountancy, Technical consultancy or Interior decoration;
    • Other Profession like Film artist: Film artists include an actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, and dress designer.

 

 

Percentage of deemed income

Under Section 44ADA, the taxable income of an eligible taxpayer is presumed to be 50% of the gross receipts from the eligible profession.

The taxpayer can voluntarily declare higher income in the tax return.

 

 

Other important points to be kept in mind

  • Advance Tax: The due date for payment of advance tax shall be the 15th day of March of such FY;
  • Mandatory Tax Audit: In the case where the taxpayer claims his income to be lower than the deemed income of 50% as specified in PTS under Section 44ADA, he shall be required to maintain books of account and get them audited, if his total income exceeds the maximum amount that is not chargeable to tax, i.e. the applicable basic exemption limit.
  • Additional deductions: All the deductions u/s 30 to 38 and, in the case of partnership firms, interest and salary/remuneration to partners would be deemed to have been allowed.
  • Additional disallowances: Any disallowance relating to cash payments above INR 10,000 for expenses, non-deduction of tax at source, etc. will not be required to be added back, as Section 44ADA overrides Sections 28 to 43C of the ITA.

 

 

Issues Under the Presumptive Tax Scheme

  • Section 44AD vis-à-vis section 68/69
  • When a taxpayer declares income under Section 44AD, whether he is under an obligation to prove that he has incurred the balance of gross receipts by way of business expenditure became an issue in Nand Lal Popli v. Dy. CIT [2016] 71 taxmann.com 246 (Chandigarh).

The assessee proposed 8% of the gross contract receipt of Rs. 37.75 lakhs as income.The Assessing Officer (AO) requested information on the 92% expenditure of Rs. 32.73 lakhs. The assessee presented a cash flow statement with a cash outflow of Rs.18.49 lakhs, besides payment from the bank to the extent of Rs.16.25 lakhs. In the absence of documentary evidence of the cash flow, the AO ultimately made an addition of Rs.32.24 lakhs as an unexplained expenditure.

The issue before the Tribunal was whether the AO can make an addition under Section 69C of the ITA for the expenditure incurred by the assessee based on the cash flow statement when the assessee has declared income under Section 44AD. The Tribunal held that Section 44AD does not place any obligation on the assessee to maintain books of account when he has declared income as per the presumptive provision. It held that the cash flow statement cannot be considered as keeping books of account. It also held that the assessee cannot be asked to prove to the satisfaction of the AO the expenditure of 92% of the gross receipts, as that would defeat the very purpose of presumptive taxation.

It observed that if the AO had independent evidence of the expenditure incurred/not incurred or had carved out the case out of the glitches of Section 44AD, then such an addition could have been possible. Thus, the Tribunal held that an addition towards unexplained expenditure cannot be made under section 69C when the income has been offered under Section 44AD.

  • Whether a taxpayer declaring income under Section 44AD could be subjected to tax under Sections 68/69 for the amounts credited in his bank account became an issue in CIT v. Surinder Paul Anand [2010[ 48 DTR (P. & H.) 135.

In the assessment, the assessee was asked to explain the cash deposit in his bank account and finally the addition of Rs.14,95,300/- was made to the returned income. The Court held that the assessee has opted for presumptive provisions and is exempted from maintaining books of account. It held that the assessee is under an obligation to explain the individual entry of a cash deposit only when such entry has no nexus with the gross receipts of the business. The assessee claimed before both the CIT (A) and the Tribunal that the said amount was part of business receipts and in the absence of any other contrary material or evidence, the cash deposits could not be taxed as unexplained or undisclosed income of the assessee. The Court held that there was no substantial question of law in the appeal and hence upheld the order of the Tribunal.

  • Section 44AD and disallowance under section 40(a)(ia)
  • In ITO v. Mark Construction [2012] 23 taxmann.com 398 (Kolkata), the assessee engaged in civil construction and disclosed profits exceeding 8% by opting for Section 44AD provisions. In the assessment, the AO called for books of account of the assessee and the assessee took a plea that the income was offered under Section 44AD and hence maintenance/production of books of account was not compulsory. The AO made an addition of Rs. 32,62,140/- by invoking Section 40(a)(ia). The Tribunal held that since the assessee has disclosed profits of more than 8% of the gross receipts, no disallowance under Section 40(a)(ia) could be made.

As may be seen from the above analysis, the provisions of Sections 44AD and 44ADA can be extremely relevant for assessees from the perspective of tax planning and tax compliance. It is important that assessees consider the extant provisions of PTS along with their applicability to the business situation at hand. Also, appropriate professional advice should be sought, wherever necessary, to ensure that the optimum benefit of the PTS provisions is availed while finalising the tax returns.

Image Credits: Photo by Olya Kobruseva 

The provisions of sections 44AD and 44ADA can be extremely relevant for assessees from the perspective of tax planning and tax compliance. It is important that assessees consider the extant provisions of PTS along with their applicability to the business situation at hand. Also, appropriate professional advice should be sought, wherever necessary, to ensure that the optimum benefit of the PTS provisions is availed while finalising the tax returns.

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Have You Claimed Your Medical Expenses This Year?

Broadly, the medical expenses that can be claimed under the Income Tax Act 1961 (‘the Act”) in the income tax return[1] of an individual/HUF, comprise of the following:

  • Health Insurance/ Preventive Medical Check-up for Self and Family;
  • Maintenance or Medical Treatments for Disabled Dependents;
  • Medical Treatment for Dependents with Specified Diseases; and
  • Deduction for Person with Disability.

 

Health Insurance/Preventive Medical Check-up for Self and Family

As per section 80D of the Act, the taxpayer, being an individual or an HUF, can claim a deduction on premium paid towards medical insurance with the General Insurance Corporation of India or any other insurer approved by the Insurance Regulatory and Development Authority (IRDA) and medical expenditure incurred for

  • Self;
  • Spouse;
  • Parents;
  • Dependent children; and
  • Members of the HUF.

The deduction can be claimed from the following payments made by the taxpayer:

  1. A medical insurance premium paid for any of the foregoing;
  2. Actual expenditure incurred during the year on account of preventive/diagnostic health check-up for the health of any of the above;
  3. Medical expenditure incurred on the health of senior citizens (aged 60 years or above), whether taxpayer or any his/her family member, who are not covered under any health insurance scheme;
  4. The contribution is made to the Central Government Health Scheme, or any scheme as notified by the Government.

The above referred payments (barring the expenditure incurred on preventive health check-up) need to be mandatorily made through non-cash modes to avail the benefit.

The deduction in a year, would be subjected to the aggregate limits, as follows:

Particulars Premium Paid (Rs)   Maximum Tax Exemption u/s 80D (Rs)
  For
Self, Spouse and Dependent children
For Parents  
Individual, Spouse, dependent children, and parents < 60 years 25,000 25,000 50,000

Individual, Spouse, Dependent Children < 60 years

but parents > 60 years

25,000 50,000 75,000
Individual/Spouse, and parents > 60 years 50,000 50,000 100,000
Members of HUF 25,000 25,000 25,000

Note:

  • The above amount is inclusive of the preventive health check-up limit of Rs. 5,000 (Rupees Five Thousand only). The taxpayer can avail this tax benefit on the payment made towards the preventive health check-up undertaken for the taxpayer, spouse, children and parents.
  • If medical expenses are incurred for senior citizens (either self, spouse, dependent children or parents) not covered under any medical insurance, then the taxpayer can claim deduction for the said expenses incurred under the above limit of Rs 50,000.
  • If both the taxpayer and the parents are aged more than 60 years, for whom the medical covers has been taken, the maximum deduction that can be availed under this section is Rs 100,000. If the medical expenditure done on senior citizens (taxpayer/family and parents) are not covered under any health insurance, the taxpayer can claim a deduction for the said expenses within the said limit.

Based on the above reading, the maximum claim u/s 80D could be up to Rs 100,000 in a year.

Maintenance or Medical Treatments for Disabled Dependents

An individual or an HUF resident in India can claim for deduction under section 80DD of the Act in respect of the following:

  • expenditure for the medical treatment (including nursing), training and rehabilitation of a dependent, being a person with disability[1]; or
  • the amount paid to Life Insurance Corporation (LIC) or any other insurer or administrator or specified company in respect of a scheme for the maintenance of a dependent, being a person with disability.

Subject to a fixed deduction of Rs 75,000 if the disability is 40% or higher but less than 80% and Rs 125,000 if the disability is severe (80% or higher).

However, the deduction is subjected to the following conditions:

  • To claim the same, one must produce a certificate of disability from a prescribed medical authority to be filed on Form No. 10-IA[2] with the return of income.
  • The disabled individual should not have taken deduction under Section 80U.
  • It is essential that they should be wholly or mostly dependent on the taxpayer for their support as well as maintenance.

 

Medical Treatment for Dependents with Specified Diseases or Ailment

As per section 80DDB of the Act, an individual or an HUF resident in India can claim for the deduction of medical treatment of the specified diseases or ailments (Ref: Rule 11DD of the Rules), subject to:

  • Rs 40,000 per annum or the actual amount paid (whichever is less)
  • For senior citizens, Rs 100,000 per annum or the actual amount paid (whichever is less)

 

Deduction for Person with Disability

Section 80U of the Act provides deduction to people suffering from a disability[3]. As per this section, individuals suffering from a disability of at least 40% can claim tax benefit of Rs 75,000 per financial year (Rs 125,000 in case of severe disability of 80% and more). The taxpayer has to file Form No. 10-IA[4] producing certificate of disability from a prescribed medical authority with the return of income to claim the deduction.

The above deductions available to taxpayers should be carefully studied and optimised while finalising the income tax return.

For further advice and detailed assistance kindly contact any of the following individuals Fox Mandal and Associates:

Sandip Mukherjee – sandip.mukherjee@foxmandal.in

Salusalini Jha – salusalini.jha@foxmandal.in

Nikhil Bhise – nikhil.bhise@foxmandal.in

Akshita Bhandari – akshita.bhandari@foxmandal.in

References:

[1] Due date for filing FY 2021-22 tax return for individuals is 31st July, 2022.

[1] As defined in Sec2(i) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995

[2] Ref: Rule 11A of the Income Tax Rules

[3] As defined in Sec2(i) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995

[4]  Ref: Rule 11A of the Income Tax Rules

Here is a detailed list of medical expenses that an individual/HUF can claim while filing the annual income tax return under the Income Tax Act, 1961. 

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Key Pointers for Filing Income Tax Returns in India: 2022

The tax laws in India are perceived to be complicated by all. Having said that, the government of India, along with the Central Board of Direct Taxes (CBDT), has over the years tried to make tax compliance simpler for the taxpayers. It is important to note that paying the taxes due and filing tax returns is everyone’s duty as well as responsibility towards building the nation of our dreams.

With the due date for filing your income tax return for the Financial Year 2021-22, i.e., Assessment Year 2022-23, just round the corner, we bring to you a few pointers while filing your tax return, which can ensure that your tax filing process is smooth and hassle-free:

 

1. Assessees for whom the due date of 31st July is applicable:

All assesees, except the following, are required to file their returns on or before 31st July:

  1. Assessees who are subject to a tax audit and/or transfer pricing.
  2. Partners of Partnership Firms/LLP to whom tax audit and/or transfer pricing is applicable.
  3. A company.
  4. Any person whose accounts are required to be audited under any other law.

 

2. Income Tax Website and Account:

  • To file your income tax returns, you need to visit the Income Tax website at https://www.incometax.gov.in
  • If you are a first-time filer, you will have to register yourself by clicking on the “Register” tab at the top right corner of the ‘’Home’’
  • If you are a registered user, you can click on the “Login” tab at the top right corner of the home page.
  • Your Permanent Account Number [PAN] is the default user ID to login to the income tax portal.

 

3. Sources of Income:

As per the tax laws in India, there are primarily, 5 sources of income, which are explained as under:

  1. Income from Salaries: If you are a salaried employee, your income will be chargeable under this category. Furthermore, pensions earned by retired people will be taxed under this head. Also, taxable portion of the gratuity earned on retirement and leave encashments received from employers, is also taxed under this head. Please ensure you have your Form 16 received from your employer handy while you proceed to file your tax returns.
  2. Income from House Property: The rentals earned from your house property rented out is taxable under this head. Further, if you own multiple house properties which are not let out, each of such house properties, other than one[1] self-occupied house property, shall be deemed to be let out and a notional rental shall be considered as income. You would be allowed to reduce from the aforesaid rentals, the municipal taxes paid during the year towards the said let-out properties. Further, there would be a statutory deduction of a flat 30% from the net income of each house property. The interest component of your housing loan EMI paid on your housing loan will be reduced up to a maximum of Rs. 2 Lakhs from the said income.
  3. Income from Business and Profession: If you own a business or are a professional, your net profits will be taxed under this head. It is advisable to reconcile the turnover as per books of accounts and as per the Goods and Services Tax [GST] returns filed during the year.
  4. Income from Capital Gains: If you have sold any shares, mutual funds, bonds, land, commercial or residential property, or any other capital asset during the year, the net gains, i.e., sale price less cost/indexed cost of acquisition of the same, shall be taxable under this head, unless you have made an eligible reinvestment, which gives you exemption from the capital gain tax. It is to be noted that a ‘’switch out’’ from a mutual fund scheme and a ‘’switch into’’ another mutual fund scheme is also a taxable transfer on which capital gains tax is required to be paid. It is advisable to obtain a capital gain statement from your broker or download it from the application/software used to transact in shares and mutual funds, to help you calculate the long-term and short-term capital gains amounts.

Long-term capital losses can only be set off against long-term capital gains in the event of a loss; however, short-term capital losses can be set off against both long-term and short-term capital gains. Unexhausted losses can be carried forward for the next eight assessment years.

5. Income from other sources: This head of income is a residual head where incomes such as dividends, bank interest, etc. are taxed.

It is critical to scrutinise all your bank statements thoroughly and verify the income received during the year and also obtain relevant interest certificates from the bank to enable you to compute the due taxes appropriately.

 

4. New Regime vs. Old Regime:

It is necessary to estimate your tax liability, both as per the old regime and the new regime, at the beginning of the financial year itself, to enable you to plan your taxes accordingly. Having said that, the Income Tax Department has clarified that you may, while filing your tax returns, select an option different from the option selected while filing your declarations and providing investment details to your employer.

 

5. Treatment of losses:

In the event the return is not filed by the due date, you will not be allowed to carry forward losses from business, capital gains, and activity of owning and maintaining racehorses. However, losses from house property and unabsorbed depreciation can be carried forward even if the return is filed belatedly.

 

6. Return Form vis-a-vis Sources of Income:

Following are the ITR forms to be filed for the corresponding incomes:

  • ITR 1 – For residents with a total income of up to Rs.50 lakh from salaries, one house property, or other sources.
  • ITR 2 – For individuals and HUFs not having income from profits and gains of business or profession.
  • ITR 3 – For individuals and HUFs having income from profits and gains in business or profession.
  • ITR 4 – For Individuals, HUFs and Firms (other than LLPs) being a resident having total income up to Rs.50 lakh and income from business and profession computed under sections 44AD, 44ADA or 44AE (Presumptive Income).
  • ITR 5 – For persons other than- (i) individual, (ii) HUF, (iii) company and (iv) charitable trust, NGOs and similar organisations.

You can file the online utility of the aforesaid forms by logging into your income tax portal and clicking on E-File > Income Tax Returns > File Income Tax Return > Assessment Year – 2022-23 > Mode of filing: Online. You can also download the common Java utility for ITR 1 to 4 or ITR 5 from the Download tab on the income tax website, fill it in and submit it. The Income Tax Department also gives you the option to pre-fill your return using the data filed in the previous year by clicking on E-File > Income Tax Returns > Download Prefilled Data. Before submitting your return for the year, you must reconcile the information being submitted with the pre-filled data that is available on the portal against each assessee’s name, to ensure its correctness and also make necessary changes, wherever necessary.

 

7. Form No. 26AS and Annual Information Statement (AIS):

Before starting with the process of filling in details of income in the return of income, you should download Form No. 26AS from E-File > Income Tax Returns > View Form 26AS > click ‘view tax credit (form 26AS) < Assessment Year 2022-23 – View as HTML < Export as PDF, so as to ensure that all the incomes on which Tax Deducted at Source [TDS] has been deducted and the corresponding TDS amounts, are taken into consideration while calculating your taxes. In case Tax Collected at Source [TCS] has been collected from you, the credit  for that will be taken into account when calculating your tax payable.

Further, you need to download the AIS on the tab Services > Annual Information Statement (AIS), which has the information of various transactions reported to the Income Tax Department during the year. The same shall be taken into consideration, to the extent applicable, while computing the taxability during the year. (The password to open the AIS is your PAN in small case followed by your date of birth; eg: aaapa1111f15121960).

 

8. Deductions under Chapter VI A (80C, 80G, 80D, etc):

All the eligible deductions under Chapter VIA of the Income Tax Act 1961 [Act] can be claimed while filing the return of income, even if the same were inadvertently left out while making declarations, or while submitting actual proof of the same to the employer, for consideration on Form 16. The excess TDS deducted by the employers, consequently, can be claimed back as a refund.

 

9. Payment of Self-Assessment tax and Credit of Taxes Paid:

The taxes paid in the form of Advance Tax and TDS/TCS shall be available as a credit against the tax, cess, surcharge and interest as computed on the total income and the balance amount payable along with interest thereon shall be paid as self-assessment tax using challan 280 on https://www.tin-nsdl.com.

 

10. Consequence of late filing or non-filing of Income Tax Returns:

In case a taxpayer fails to file the return within the normal due date applicable to him, a penalty of Rs. 5,000 would be levied if the return is filed past the due date but before December 31st. In other cases, the fine could be up to Rs. 10,000. However, in the case of willful defaulters, failing to file the return can lead to a fine and even imprisonment.

 

11. Verification of the tax returns:

The return filed online needs to be verified by the taxpayer within 120 days from the date of filing. The tax return can be e-verified using the Aadhar OTP, Electronic Verification Code (EVC), or by using your net banking account with selected banks. If none of these options work, you may send a signed copy of the acknowledgment to CPC Bangalore. A tax return filed but not verified is treated as an invalid return by the I.T. department. It would mean that you have not filed the return at all.

 

12. Donations made to charitable institutions are eligible for deduction u/s 80G:

If you have made donations to charitable institutions and wish to claim a deduction for the same u/s 80G of the Act, kindly ensure such institutions have reported your donations to the Income Tax Department and obtained a certificate of donation on Form No. 10BE.

 

 
Note:
  • If your total income does not exceed Rs. 2,50,000 no tax is due. Further, if your total income does not exceed Rs. 5,00,000, you are eligible to claim a rebate u/s 87A to the extent of Rs. 12,500/-, which effectively would result in nil tax payable.
  • For non-resident taxpayers, only their Indian income is chargeable to tax in India.
  • In cases where Indian tax residents own foreign assets, including shares of foreign companies, foreign bank accounts, etc., the same needs to be disclosed in their income tax returns.
  • Every individual having a total income of over Rs 50 Lakh is required to give a list of his/her assets and liabilities at cost while filing his/her tax returns.
  • Though clarity on taxing crypto currencies came vide Finance Act 2022, the sale of crypto currencies prior to Finance Act 2022 would also be chargeable to tax as per the prevailing law. You may need to seek a detailed opinion if you have traded in crypto currencies and made a profit thereon.
  • If you are a legal heir to a taxpayer who has died during the year and has earned taxable income or is required to file his/her tax returns as per the law, you are required to register yourself as a ‘legal heir’ to such a deceased taxpayer through your Income Tax portal and file his/her tax return through your income tax portal using his/her PAN.
 

For further advice and detailed assistance in filing your Income tax returns kindly contact our following Fox Mandal and Associates representatives:

Sandip Mukherjeesandip.mukherjee@foxmandal.in

Salusalini Jhasalusalini.jha@foxmandal.in

Nikhil Bhise – nikhil.bhise@foxmandal.in

Akshita Bhandari – akshita.bhandari@foxmandal.in

References:

[1] Increased to two in last Finance Act, subject to conditions being met.

With the due date for filing your income tax return for the Financial Year 2021-22, i.e., Assessment Year 2022-23, just round the corner, we bring to you a few pointers while filing your tax return, which can ensure that your tax filing process is smooth and hassle-free.

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Faceless Appeal Scheme 2021: A Forward-Looking Initiative

The Central Board of Direct taxes (“CBDT”), with an objective of bringing in more transparency in the appeal proceedings and “honoring the honest”, had introduced the “Faceless Appeal Scheme 2020”[1] (“Old Scheme”), on September 25, 2020. The Old Scheme was introduced with an aim to eliminate human interference between the taxpayer and the First appellate authority (Commissioner Appeals), thereby ensuring that the appeals are disposed in a fair manner and are not influenced by any relation and human biasness.

The Old Scheme was introduced with the noble intention of curbing malpractices, easing compliance and make appeal process seamless and faceless. However, there were some post implementation hiccups experienced and accordingly taxpayers requested certain modifications in the Old Scheme.

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

In this alert, we have made an effort to apprise the readers with the changes introduced in the New faceless appeal Scheme vis-à-vis the Old Scheme.

Key Changes in the New Faceless Appeal Scheme, 2021

The key changes brought in by the New Appeal Scheme are as follows:

  1. Mandatory personal hearing, if requested

In the Old Scheme, the appellant or his authorized representative had to make a request for personal hearing and the Chief Commissioner or Director General in charge of the Regional Faceless Appeal Centre (RFAC) had the discretion to approve such request, if he was of the opinion that the request is covered by the circumstances laid down by the CBDT.

In the New Scheme, there is no requirement for prescribed circumstances and the discretion for grant of personal hearing has been completely removed. CIT(A) shall allow personal hearing if requested by the appellant anytime during the course of the proceedings.

  1. Restructuring of the appeal center

In the Old Scheme, CBDT had set up a three-layer structure with National Faceless Appeal Centre (NFAC) at the top to conduct appeals in a centralized manner (nodal agency), followed by RFAC to support NFAC and Appeal Unit (AU) at the bottom, to facilitate the conduct of e-appeal proceedings and dispose them. In the composition structure, each AU unit had one or more Commissioner Appeals [CIT(A)].

In comparison, the New Scheme has done away with the RFAC and has set up a two-layered structure headed by NFAC and AU will directly coordinate with NFAC and conduct the appeal and dispose them. Further, in the New Scheme, each AU will have only one CIT(A).

  1. Elimination of review by multiple AUs

In the Old Scheme, the NFAC on receipt of draft order from AU, would  review the order and if the payable amount in respect of disputed issue was more than a specified amount, then send the draft order to another AU, other than the AU which had prepared it. In any other case, the NFAC would  examine the order based on the specified risk management strategy and then finalise the appeal or send the draft order to another AU.

The other AU who was assigned such case, would  either concur with the order or suggest variations as it would  deem fit. In case of variation, the NFAC would  assign the said appeal to another AU other than the one who had prepared or reviewed the draft order. The NFAC would then pass the final order, based on the order received from the last AU.

In the New Scheme, the CIT(A), after examining the submissions, shall now pass the order by digitally signing the same and send it to NFAC, along with details of penalty proceedings, if any, to be initiated therein.

Such order shall be final and will not be reviewed at multiple AUs as provided in the erstwhile scheme. NFAC shall communicate such order to the appellant and such other officers as may be prescribed.

  1. Penalty Proceedings

In the Old Scheme, AU in the event of any non-compliance during the appeal proceedings, had to send a recommendation to NFAC to initiate penalty proceedings. However, in the New Scheme, there is no need to send such recommendation and the CIT(A) can directly send the penalty notice through NFAC.

FM Comments:

The modifications provided in the New Scheme are certainly a move in the right direction by easing the process and building a robust appeal scheme. The CDBT, by removing the discretionary power of the authorities for grant of personal hearing, has also made an effort to meet the constitutional validity criteria, which has also been one of the matters, challenged before the Courts.

References: 

[1] Notification No 76/2020 dated 25 September 2020

[2] Notification No 139/2021 dated 28 December 2021

Image Credits: Photo by Arina Krasnikova from Pexels

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

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Additional Guidelines Issued on TDS/TCS Under Sections 194-O, 194Q & 206C(1H)

The Central Board of Direct Taxes (CBDT) has issued Circular No 20/2021 dated November 25, 2021, providing more clarification on deduction and collection of tax at source on certain transactions under sections 194-O, 194Q & 206C(1H) of the Income Tax Act.

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

In this regard, CBDT vide Circular no. 17/2020, dated 29.09.2020 and Circular no. 13/2021, dated 30.06.2021, issued guidelines to clarify the scope and applicability of the above sections and thereby removing the difficulties faced by the assessee.

In continuation to the above, to further remove the difficulties, CBDT with the approval of the Central Government (CG), has issued the following guidelines to clarify on the scope of the above TDS provisions:

 

Guidelines:

 

I. E-auction services carried out through electronic portal

It has been represented by various stakeholders involved in the business of e-auction services that provisions of section 194-O shall not be applicable to them based on the following arguments:

  • E-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported the client.
  • The price negotiations may happen directly between the parties and may not necessarily happen at the price discovered through e-auction process.
  • The transaction of purchase / sale takes place directly between the buyer and the seller party outside the electronic portal maintained by the auctioneer.
  • The e-auctioneer is not responsible for purchase / sale of goods except for limited purpose of price discovery.
  • Negotiation and payments terms happens only between the purchaser and seller offline and e-auctioneer does not have any further information or role to play to in this.
  • On the service charges payable to e-auctioneer, the client deducts TDS under the relevant provisions other than section 194-O of the Income tax Act (Act).

In this regard, it has been clarified by the CBDT that provisions of section 194-O shall not be applicable in cases where all the above features are cumulatively satisfied. Further, the buyer and seller would still be liable to deduct/ collect tax u/s. 194Q / 206C(1H) of the Act, as the case may be.

II. Adjustment of various State levies and taxes other than GST

It has been represented that while the clarification with respect to treatment of TDS on GST component is provided in the earlier Circular no. 13/2021, the same is silent on other non-GST levies such as VAT, Excise duty, Sales tax, etc.

In this regard, it has been clarified by CBDT that in case of purchase of goods exigible to other levies, if the component of VAT/Sales tax/Excise duty/CST, as the case may be, has been indicated separately in the invoice, then the tax is to deducted u/s. 194Q of the Act, without considering levies such as VAT/Sales tax/Excise duty/CST. However, in case of advance payment, the tax is to be deducted on the whole amount, as it will not be possible to identify the VAT/Sales tax/Excise duty/CST component to be invoiced in the future.

 

III. Applicability of Section 194Q of the Act in case where exemption has been provided under section 206C (1A) of the Act

Section 206C(1A) of the Act provides that, if the buyer furnishes to the seller a declaration in respect of  goods viz liquor, forest produce, scrap etc (specified in section 206C(1)) are to be utilized for the purpose of manufacturing, processing or producing article or thing or for the purposes of generation of power and not for trading purposes, than tax is not required to be collected. It has been requested to clarify whether the provisions of section 194Q of the Act will be applicable in such a case.  

Section 194Q of the Act does not apply in respect of those transaction where tax is collectible u/s. 206C [except sub-section (1H)]. Accordingly, it is noted that since section 206C(1A) exempts tax collection in respect of goods specified in section 206C(1),  it is hereby clarified that in such cases, the provisions of section 194Q of the Act will apply and the buyer shall be liable to deduct tax under the said section, if the conditions specified therein are fulfilled.

 

IV. Applicability of the provision of section 194Q in case of department of Government not being a public sector undertaking or corporation

It has been represented by both Central and State Government (department), to enquire if such department is required to deduct tax under the provision of section 194Q of the Act.

The provision of section 194Q requires tax to be deducted by a person, whose total sales, gross receipt or turnover from business carried on by that person, exceeds specified limit. Accordingly, it is clarified that in case department is not carrying any business or profession, the primary requirement of being considered as “buyer” will not be fulfilled. Hence, provision of section 194Q will not be applicable. However, if such department is carrying business or profession, then the provisions of section 194Q will be applicable.

In case where department is a seller, it is clarified that for the purpose of deduction of tax under section 194Q, department shall not be considered as “seller” and no tax should be deducted by the buyer.

In continuation to the above, it is further clarified that any other person, such as a public sector undertaking or corporation established under central or state Act, shall be liable to comply with provisions of section 194Q.

 

FM Comments:

The above are  welcome clarifications issued by the CBDT to bring more clarity and remove the hardship faced by the stake holders. However, there is still no clarity with respect to transactions where TDS / TCS is already deducted / collected and if by virtue of this clarification, the above provisions were not applicable, then whether in such cases refund can be claimed or not.

 

Image Credits: Photo by Nataliya Vaitkevich from Pexels

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

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Heightened Onus on Assessee to Prove Genuineness of Share Subscription Money Routed Through Web of Entities

The Hon’ble Mumbai Tribunal in the case of Leena Power Tech Engineers Pvt Ltd[1] has held that the onus (i.e. burden) is on the assessee to prove the ‘bonafides’ or ‘genuineness’ of the share application money credited in the books of accounts. The Tribunal further remarked that it would be superficial approach to examine assessee’s claim only on the basis of documents filed and overlook the unusual pattern in the documents filed by the assessee and pretend to be oblivious of the ground realities.  

Considering the fact that the monies were routed through complex web of entities, which failed to inspire any confidence about the genuineness of the investing company and made it looks like a shell company, the Tribunal upheld the additions made by the Assessing Officer (AO) in the hands of the assessee with respect to the receipt of share application money.

 

Facts – Leena Power Tech Engineer’s Pvt. Ltd.:

In the instant case, the assessee had received share application monies from Rohan Vyapar Private Limited (RVPL) and Manbhawan Commercial Pvt Ltd (MCPL). The equity shares were issued at 900% premium on the face value of Rs 10 each i.e. Rs 90 per share. The assessee had issued 3,78,290 equity shares to RVPL and accordingly received an amount aggregating to Rs 3,78,29,600. Similarly, the assessee had received an amount aggregating to Rs 4,35,00,000 from MCPL.

The case of the assessee was reopened by the Assessing Officer (‘AO’) on the basis of certain information received from the investigation wing which mentioned that the assessee has received share application money from RVPL which was subjected to routing through several layers and ultimately has its source in of huge cash deposits in one of the branches of ICICI Bank.

The transaction flow has been elaborated below for ease of reference.



Assessee’s Contentions: Relevant documentary evidence produced

The Assessee’s contentions have been summarized below:

The assessee contended that it had submitted all the relevant documentary evidence such as details of the subscribers to the share capital, share premium, bank statement, justification of share premium (computed on a scientific basis), share valuation by cash flow method, and ledger confirmation from the subscribers. The assessee further submitted that the Revenue had also issued a notice under section 133(6) of the Income-tax Act, 1961 (Act) which was duly replied along with the details of the transaction with the assessee, ledger account, return of income, audited balance sheet, etc. and accordingly it was contended that the assessee had discharged its initial onus cast upon it and now it is for the revenue authorities to prove otherwise.

It was further contended that the proviso to section 68[2] of the Act inserted with effect from 1 April 2013 cannot have retrospective operation. In this regard, reliance was placed on the ruling of Hon’ble jurisdictional High Court in the case of Gagandeep Infrastructure Pvt Ltd[3].

The Assessee further contended that the companies from which the assessee had received the share subscriptions were companies with proper net-worth and these companies were properly assessed to tax and have not been declared as shell companies by the Government or any official body and just because five levels below these companies, there are cash deposits in some bank accounts, the receipts cannot be rejected as lacking bonafide.

Accordingly, it was contended that the entries in the books of accounts of the companies subscribing to the shares cannot be brought to tax in the hands of the assessee.

Revenue’s Contentions: Assessee has failed to prove ‘Bonafides’

The primary contention of the Revenue was that the assessee has failed to prove the ‘bonafides’ of the share application money. Further, the Revenue further contended that the surrounding circumstance of the transaction clearly demonstrates that the transaction is not bonafide and the assessee is a beneficiary of a sophisticated money-laundering racket wherein the money is routed through multiple layering of accounts to the accounts of entities subscribing to the share capital of the assessee.

The Revenue further contended that it was the responsibility of the assessee to show the genuineness of the share application money received and merely producing PAN, income-tax returns, and financial statements of the subscriber do not prove that the transaction is bonafide. It was pointed out that there were hardly any overnight balances in the bank accounts of the companies subscribing to the shares of the assessee company, and all this indicates that these companies are merely conduit companies.

Issue Before the Tribunal:

The question which arose before the Tribunal was whether the learned Commissioner of Income-tax (Appeals) was justified in deleting the addition of Rs 8,13,29,600 as unexplained credit under section 68 of the Act in the hands of the assessee.

Mumbai Tribunal’s Ruling:

The Mumbai Tribunal observed and held as under:

At the outset, the Tribunal observed that there cannot be any dispute on the fundamental legal position that the onus is on the assessee to prove ‘bonafides’ or ‘genuineness’ of the share application money credited in the books of accounts and to prove the nature and source on the money to the satisfaction of the assessing officer.

The Tribunal placed reliance on the cases of Youth Construction Pvt Ltd[4], United Commercial and Industrial Co (P.) Ltd[5] & Precision Finance (P.) Ltd[6] and noted the kind of explanations which assessee is expected to provide:

  1. proof regarding the identity of the share applicants;
  2. their creditworthiness to purchase the shares; and
  3. genuineness of the transaction as a whole.

The Tribunal remarked that the onus of the assessee of explaining nature and source of credit does not get discharged merely by filing confirmatory letters, or demonstrating that the transactions are done through the banking channels, or even by filing the income tax assessment particulars.

The Tribunal further went on to add that, being a final fact-finding authority, it cannot be superficial in its assessment of the genuineness of a transaction and this call has to be taken not only in the light of the face value of the documents presented before the Tribunal but also in the light of all the surrounding circumstances, the preponderance of human probabilities and ground realities. The Tribunal placed reliance on the case of Durga Prasad More[7] wherein it was held that “If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not real. There may be a difference in subjective perception on such issues, on the same set of facts, but that cannot be a reason enough for the fact-finding authorities to avoid taking subjective calls on these aspects and remain confined to the findings on the basis of irrefutable evidence.”

The Tribunal further analyzed the financial statements of RVPL and observed that RVPL has earned only an interest income of Rs 1.13 lakhs and has not carried out any substantial activity during the relevant period. Further, the Tribunal found it difficult to believe that company handling investments in excess of Rs 10 crores and making such aggressive investments as buying shares for Rs 3.78 crores, at a huge premium of nine times the face value of shares, in the private limited and wholly unconnected companies, without any management control, will operate in such a modest manner. This defies logic and such transactions do not take place in the real-life world. The Tribunal also examined the bank account of RVPL and noted that there are series of transactions that do not inspire any confidence about the genuineness of the investing company but make it looks like a shell company acting as a conduit.

The Tribunal also observed that the entities involved in the transaction only provide different layers to the transaction and de facto hide the true investor. The assessee was also unaware of the actual beneficial investor in his company.

Additionally, the Tribunal examined, in detail, the valuation carried out by the assessee on the basis of Discounted Cash Flow (DCF) method and rejected the same thereby holding that the share premium at which the shares are issued is wholly unrealistic.   

A similar analysis was also carried out by the Tribunal with respect to another investor ‘MCPL’.

In light of the above facts and circumstances, the Tribunal rejected the assessee’s contention and held that the transactions under consideration are not ‘bonafide’ and accordingly restored the additions made by the AO.

Our Observation:

The order of the Mumbai Tribunal has, indeed, widened the scope of ‘onus’ placed on the assessee to prove the genuineness of a particular transaction. Such ‘onus’ will not be deemed to be discharged by merely filing the documents before the tax authorities, but the assessee would have to go one step further to justify the rationale of such transactions in order to prove that the transaction has not been entered as a colorable device to defraud the Revenue. The judgment further emphasizes taking a holistic view of the matter based on the surrounding circumstances rather than just relying upon the documentary evidence. Having said this, one has to keep in mind that documentary evidence will always be the primary source of substantiation of a particular transaction.

Going forward, it would be interesting to see the repercussions of this judgment and whether the other Tribunal and lower tax authorities would adopt a similar path and undertake a holistic view of the matter in order to differentiate between the apparent and the real.’

References

[1] [TS-883-ITAT-2021(Mum)]

[2] It provides that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.

 

[3] (2017) 80 taxmann.com 172 (Bom)

[4] [(2013) 357 ITR 197 (Del)]

[5] [1991] 187 ITR 596 (Cal)]

[6] [1994] 208 ITR 465 (Cal)]

[7] 1971) 82 ITR 540 (SC)

 

 

Image Credits: Photo by Nataliya Vaitkevich from Pexels

The order of the Mumbai Tribunal has, indeed, widened the scope of ‘onus’ placed on the assessee to prove the genuineness of a particular transaction. Such ‘onus’ will not be deemed to be discharged by merely filing the documents before the tax authorities, but the assessee would have to go one step further to justify the rationale of such transactions in order to prove that the transaction has not been entered as a colorable device to defraud the Revenue.

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45th GST Council Meeting: Sectoral Highlights