2025 (6) TMI 1904 - AT - Income Tax

Intimation issued u/s.143(1) - entire contract receipts as per Form 26AS was treated as income of the assessee and a huge demand - Rejection of declaration of income on presumptive taxation u/s.44AD - as held by the JCIT(A) total turnover / gross receipts of the assessee during the relevant assessment year exceeded Rs. 2 crore hence the presumptive provision u/s.44AD of the Act does not have application and JCIT(A) held that no details of the expenditure incurred by the assessee in undertaking the contract work has been furnished. HELD THAT - We find there is no justification to assess the gross receipts of the assessee as income under the head profits and gains from business or profession. If the provisions of sec.44AD of the Act is not applicable the Revenue cannot bring to tax the entire gross receipts but only the net income. In the interests of justice and equity we restore the case to the files of the AO. The assessee shall produce necessary material to prove that he had incurred the expenses for which he has earned the total receipts of Rs. 2, 97, 85, 593. In the event the assessee has not been able to provide necessary evidences to that effect the AO shall estimate the income of the assessee by taking into account comparable cases. AO shall afford a reasonable opportunity of being heard to the assessee before a decision is taken on the matter. Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

- Whether the Assessing Officer (AO) and the first appellate authority were justified in treating the entire contract receipts of the assessee as income under the head "Profits and Gains from Business or Profession" for the assessment year 2017-18, instead of applying presumptive taxation under section 44AD of the Income-tax Act, 1961.

- Whether the provisions of section 44AD of the Act are applicable to the assessee, given that the turnover exceeds Rs. 2 crore.

- Whether the AO can treat gross receipts as income in the absence of details of expenses incurred by the assessee.

- The correctness and legality of the order passed under section 143(1) of the Act, which raised a demand by treating the entire contract receipts as taxable income.

- The appropriate course of action where the assessee has filed return under presumptive taxation scheme incorrectly and the turnover exceeds the prescribed limit.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Section 44AD and Treatment of Income

Relevant legal framework and precedents: Section 44AD of the Income-tax Act provides a presumptive taxation scheme for small businesses, allowing them to declare income at a prescribed percentage (8% in this case) of turnover or gross receipts, subject to a turnover ceiling of Rs. 2 crore. If turnover exceeds Rs. 2 crore, the presumptive scheme under section 44AD does not apply, and the assessee is required to declare income as per actual profits and gains from business or profession.

Court's interpretation and reasoning: The Tribunal noted that the assessee had filed return using ITR-4, which is designed for presumptive taxation under section 44AD. However, the turnover of the assessee was Rs. 2.97 crore, exceeding the Rs. 2 crore limit prescribed under section 44AD. Therefore, the presumptive taxation scheme was not applicable to the assessee's case.

Key evidence and findings: The turnover figure of Rs. 2,97,83,593 was undisputed and confirmed by Form 26AS. The assessee declared income at 8% of this turnover, i.e., Rs. 23,82,692, under presumptive taxation. The AO, however, treated the entire turnover as income, raising a demand of Rs. 1,41,82,974.

Application of law to facts: The Tribunal held that since section 44AD does not apply due to turnover exceeding Rs. 2 crore, the entire turnover cannot be treated as income. The law requires that income be computed on actual profits and gains, which necessitates considering expenses incurred to earn the turnover.

Treatment of competing arguments: The Revenue argued that since section 44AD was not applicable, the entire gross receipts should be treated as income. The assessee contended that the entire gross receipts cannot be taxed as income and that the matter should be remanded to the AO to determine net income after considering expenses.

Conclusions: The Tribunal agreed with the assessee that the entire turnover cannot be treated as income and remanded the matter to the AO for proper determination of net income after allowing expenses.

Issue 2: Legality of the Order Passed Under Section 143(1)

Relevant legal framework and precedents: Section 143(1) of the Income-tax Act allows the AO to issue an intimation based on the return filed, with limited scope for adjustments. However, if there is a mistake apparent from the record or the return is defective, further proceedings under section 143(3) or other provisions are required for detailed scrutiny.

Court's interpretation and reasoning: The Tribunal observed that the intimation under section 143(1) treated the entire contract receipts as income, which was not justified. The AO had not conducted detailed scrutiny or considered expenses, which is necessary when presumptive taxation is not applicable.

Key evidence and findings: The intimation dated 24.08.2018 raised a demand without affording the assessee an opportunity to prove expenses or actual income. The first appellate authority confirmed this intimation.

Application of law to facts: The Tribunal found that treating gross receipts as income without considering expenses or conducting detailed assessment was not in accordance with law. The AO must follow the procedure under section 143(3) or other relevant provisions to assess net income.

Treatment of competing arguments: The Revenue supported the intimation and appellate order. The assessee argued for restoration to AO for proper assessment.

Conclusions: The Tribunal held that the intimation under section 143(1) was not sustainable and remanded the matter for fresh assessment.

Issue 3: Appropriate Procedure for Assessment Where Presumptive Taxation Does Not Apply

Relevant legal framework and precedents: When presumptive taxation under section 44AD does not apply, the assessee must declare income as per actual profits and gains, substantiated by books of account and evidence of expenses. The AO is empowered to assess income based on evidence and, if necessary, estimate income by reference to comparable cases.

Court's interpretation and reasoning: The Tribunal emphasized that the AO must provide the assessee an opportunity to produce evidence of expenses incurred in earning the contract receipts. If the assessee fails to do so, the AO may estimate income based on comparable cases.

Key evidence and findings: The assessee had not furnished details of expenses to the JCIT(A). The Tribunal recognized the need for the assessee to produce such evidence before final assessment.

Application of law to facts: The Tribunal directed restoration of the case to the AO with instructions to allow the assessee to produce evidence and to assess income accordingly, ensuring compliance with principles of natural justice.

Treatment of competing arguments: The Revenue's position that gross receipts should be taxed was rejected in favor of a fair assessment process.

Conclusions: The Tribunal ordered restoration to AO for proper determination of net income after considering expenses and providing reasonable opportunity to the assessee.

3. SIGNIFICANT HOLDINGS

- "We find, there is no justification to assess the gross receipts of the assessee as income under the head profits and gains from business or profession. If the provisions of sec.44AD of the Act is not applicable, the Revenue cannot bring to tax the entire gross receipts, but only the net income."

- The Tribunal established the principle that the applicability of presumptive taxation under section 44AD is contingent on turnover limits, and exceeding such limits mandates computation of income on actual profits and gains, not on gross receipts.

- The Tribunal held that an intimation under section 143(1) cannot be used to raise a demand by treating gross receipts as income without proper assessment and opportunity to the assessee.

- The final determination was that the appeal is allowed for statistical purposes and the matter is restored to the AO to conduct a detailed assessment of net income after considering expenses, with due opportunity to the assessee.