Presumptive Taxation: ITAT Applies Section 44AD, Rejects Higher Rate

The assessee, an individual, filed his income return for AY 2020-21, declaring an income of Rs 4.92 lakh under the presumptive taxation scheme. He was engaged as a Business Correspondent (BC) with Fino Payments Bank Limited and also operated a proprietary concern. The bank account in question was stated to be a BC Merchant Account used for facilitating customer transactions, where deposits represented third-party funds and only commission income accrued to the assessee.

Based on information suggesting large unexplained credits, reassessment proceedings were initiated. The Assessing Officer noted total bank credits exceeding Rs 4.63 crore but ultimately accepted the turnover at Rs 14.85 lakh. However, instead of applying Section 44AD, the AO computed income at 50% of turnover, drawing an analogy from Section 44ADA, and made an addition of Rs. 2.15 lakh. The CIT(A) upheld the addition, citing a lack of detailed supporting evidence and non-compliance during assessment proceedings.

Main Issue: Whether the Assessing Officer was justified in applying a 50% presumptive income rate (akin to Section 44ADA) instead of Section 44AD to a Business Correspondent engaged in business activity.

Tribunal’s Decision: The Tribunal allowed the appeal and deleted the addition, holding that the action of the Assessing Officer was legally unsustainable. It was observed that the assessee was engaged in a business activity and not a specified profession; hence, Section 44ADA had no applicability. The AO’s adoption of a 50% rate, derived from provisions meant for professionals, was held to be fundamentally flawed.

The Tribunal emphasised that Sections 44AD and 44ADA operate in distinct fields and cannot be interchanged. Once the assessee had declared income significantly higher than the prescribed presumptive rate under Section 44AD, the same could not be arbitrarily enhanced without any material indicating suppression of receipts or ineligibility. It was further noted that the AO had accepted the turnover declared by the assessee and did not establish any defect in the same. In such circumstances, substituting the statutory rate with a higher rate had no legal basis. Accordingly, the income declared by the assessee was accepted, and the addition was deleted.

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