Are Section 44AD and Section 44ADA Safe heaven from Income Tax Scrutiny?:

Are Section 44AD and Section 44ADA Safe heaven from Income Tax Scrutiny? The presumptive taxation scheme (PTS) under Section 44AD and Section 44ADA was introduced to offer relief to small businesses and professionals by allowing them to just declare a specified percentage of their turnover or gross receipts as profit, and they will not be required to maintain books of accounts. Under Section 44AD, small businesses with a turnover up to Rs 2 crore are allowed to declare profits at 6% and 8% of their turnover. On the other hand, Section 44ADA is for professionals with gross receipts up to Rs 50 lakhs to declare profit at 50% of their turnover.

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Myth: Sections 44AD and 44ADA Can Avoid Tax Scrutiny

Many individuals believe that they can file ITR under Sections 44AD and 44ADA, declaring Rs 4 to 5 lakh income and can still incur expenses or invest Rs 50 lakh. Not only this, several professionals on social media misrepresent these sections as a shortcut to avoid tax scrutiny. But here is the truth: Sections 44AD and 44ADA may save you from maintaining books of accounts, but they cannot save you from tax scrutiny.

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The income tax department may still question you about your income and spending. They can go through the data they already have with them, such as Annual Information System (AIS), Taxpayer Information Summary (TIS), SFT, PAN-linked spending, etc.

Consequences of Misusing Sections 44AD and 44ADA

Just opting for the presumptive scheme is not enough to get relief; your declared income must match your lifestyle, spending, and banking activity. If your spending is higher than what you have declared as your income, the income tax department will require you to explain the income and expenses. In case you cannot give an explanation about an expense, income, cash or valuables, loans or repayment, the income tax department considers it as unexplained income and expenses under sections 69, 69A, 69B, 69C, and 69D. The unexplained income and expenses are taxable at a rate of 78% under Section 115BBE.

• Section 69: Unexplained Investments
• Section 69A: Unexplained Money, Bullion, Jewellery, etc.
• Section 69B: Amount of investments not fully disclosed
• Section 69C: Unexplained expenses
• Section 69D: borrowed or repaid on Hundi

Unexplained income and expenses are taxed at 60% without providing any exemption limit, irrespective of the slab rates. In addition to this, a surcharge is imposed at 25% and Health and Education Cess at 4%. The final tax rate becomes 78%. For example, assume you have filed an ITR under Section 44ADA with your gross receipts as Rs 15 lakh and declared profit of Rs 7.5 lakh (50% of Rs 15 lakh); you pay zero tax. However, during the same year, you bought a car for Rs 30 lakh, invested Rs 15 lakh and spent Rs 30 lakh travelling. Now, if the income tax department questions you to explain this income, and you cannot give explanations, you might have to face consequences for hiding income and expenses as mentioned above.

What Attracts Section 69?

Sections 69 to 69D can be triggered by the following:

• You have bought high-value assets.
• You have invested in crypto, stocks or mutual funds.
• You have spent huge amounts of money on foreign travel.
• You have deposited a large amount of cash.
• Your amount in credit card bills exceeds the income you have declared.

Conclusion

Presumptive schemes are for genuine small taxpayers. You cannot underreport your income just to take advantage of the presumptive taxation scheme. The income tax department actively monitors your spending. To opt for the scheme, make sure the profit you have declared matches with your expenses. Misusing Section 44AD or Section 44AD, can be a costly mistake for you.