The Hindu : Business : Presumptive income v real income

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Monday, May 02, 2005

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Business

Presumptive income v real income

The obligation to declare the correct income is not spared

You have stated in The Hindu dated January 31, 2005 that a person is bound to declare an income higher than the presumptive income if his real income is higher than such income. Respectfully but firmly, I disagree with this opinion of yours and would like to point out that Sec. 44AD as is presently worded, does not permit such an interpretation. In the first place, the section begins with the words `Notwithstanding anything to the contrary contained in Sec. 28 to 43C. Secondly, the word used is `shall' thereby closing all options to the assessing officer to go in for an enhanced computation. I would go a step further and say that even if my books disclose a profit margin higher than the one laid down by the Section, and the assessee chooses to ignore the book results and go by the lower percentage stated in the section, this would be in accordance with the section. Of course the section permits the assessee to return a higher figure, but that is an option available with the assessee and him alone, and surely the Assessing Officer cannot make use of this section as a ruse to go in for higher computation. I would add that the difference between real income and the presumptive income cannot also be assessed under other sources, since it is established law that what is assessable under one head cannot be assessed under any other head merely because it does not get assessed.

Presumptive incomes under Sec. 44AD, 44AE and 44F are meant to spare small businesses from the necessity of keeping accounts. In such cases, they `shall' be assessed on the presumptive income. Whether the assessee keeps accounts or not, duty to file correct return under Sec. 139 at the risk of penalty for non-declaration is not spared, since these sections infer as income, the presumptive income "or as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income". The obligation to declare the correct income is not excused by these provisions.

Where the books or other criteria like investments, household expenses etc. indicate a higher income, the assessing officer is not precluded from bringing into tax such higher income and taking penal action, where the reported income, even on the basis of presumptive income, is lower. Presumptive income under Sec. 44AD, 44AE and 44AF are different from presumptive income under Sec. 44B, 44BB, 44BBA and 44BBB relating to the estimate of Indian income for non-residents, where such presumptive income is prescribed, because of difficulty in ascertaining the Indian income out of global income.

In this sense, the income estimated under Sec. 44AB, 44AE and 44AF is different. Even a lesser income than the presumptive income can be reported, if it is real income, as long as books are maintained and there is a tax audit report in support.

Any advice as suggested by the reader to the effect that, an assessee with a demonstrable real income higher than the presumptive income under Sec. 44AD, 44AE and 44AF can file return and pay tax on presumptive income is incorrect. It would involve a risk to the taxpayer, if he follows such a view.

S. RAJARATNAM

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