Applicability/Scope
- It is applicable with
effect from 1st April, 1994. (Assessment Year 1994-95).
- It is applicable to an
assessee engaged in the business of civil construction or supply
of labour for civil construction etc. whose gross receipts, paid
or payable to the assessee, do not exceed Rs. 40 lakhs in
the previous year.
- Once the assessee satisfies
the conditions of being engaged in the eligible business and having
gross receipts paid or payable less than Rs. 40 lakhs 8% of such
gross receipts, or such higher sum as maybe declared by him shall
be deemed to be the profits and gains of business. Such an assessee
is exempted from the provisions of section 44AA; i.e, the provision
regarding maintenance of accounts.
- All deductions/allowances
available u/ss 30 to 38 shall be deemed to be allowed.
- In terms of proviso to
section 44AD(2), the salary and interest paid to partners shall
be deducted from the income computed under this section.
- If an assessee desires
to claim profits lower than that specified under sub- section (1),
he would be required to maintain books and carry out an audit u/s
44AB.
Issues
Before proceeding to discuss various issues arising out of the
provisions of section 44AD it is necessary to consider the applicability
of these provisions. The section uses the word "engaged in the business
of civil construction or supply of labour for civil construction".
The explanation to this section defines civil construction as follows:
For the purposes of this section,
the expression "Civil Construction" includes
-
the construction or repair
of any building, bridge, dam or other structure or of any canal
or road;
-
the execution of any works
contract.
The issue therefore is what
is the real scope of the term business of civil construction. The
business of civil construction is carried out by assessees who can
be broadly classified in three categories. (1) Developer, (2) Builder
and (3) Contractor.
These terms may be used with
different meanings by different individuals in various contexts. But
in my view the terms would normally mean
-
A developer would be an
assessee who purchases land or rights therein and entrusts the
work of actual construction to a contractor and sells the constructed
flats. His profit would normally consist of reward for risk involved
in acquisition of land; the incidental risk of title and the accretion
in the value of land from the time that the land was acquired
till the flats are sold. The reward would also include return
on finance.
-
A builder would be a person
who under takes all the activities of developer but is also actively
involved in the activity of construction. He may appoint contractor
and sub-contractor but he is also involved in the construction
activity and also desires to retain an element of profit that
accrues in actually carrying out the construction.
-
A contractor is engaged
only in the business of construction and is normally not concerned
with actual sale of flats or realisation thereof. His reward is
in connection with the risk involved in actual construction.
In my opinion the provisions
of section 44AD cannot apply to a developer. In his case the profit
is attributable not to civil construction but other elements in real
estate business. As far as builders are concerned if the predominant
activity is that of a developer, section 44AD may not apply. But in
the case of builder the matter is definitely arguable on either side.
To the contractor the provisions will definitely apply. I draw support
for the proposition I discussed from the speech of Finance Minister
made on the floor of the House while introducing the provisions and
the subsequent circular of Central Board of Direct Taxes and the view
expressed in a publication of the Institute of Chartered Accountants
of India The Finance Minister said while introducing the provision
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"In
addition, I am introducing a new estimated income scheme for
contractors with a turnover of up to Rs. 40 Lakhs and
for truck owners who own up to ten trucks. In the case
of contractors, the net profit will be estimated at 8%
of the gross receipts. In the case of truck owners, the income
will be estimated at Rs. 24,000 per truck per year for light
commercial vehicles and medium motor vehicles and Rs. 30,000
per truck per year for heavy transport motor vehicles. In
both these cases, no further deduction on account of depreciation
or interest or other expenses will be allowed. In both cases,
the scheme is optional. This scheme is based on the recommendation
of the Chelliah Committee on Tax Reforms. The scheme will
be simple and free of irritants and I expect an enthusiastic
response." |
Even Circular No. 684 of CBDT
dated 10-6-1994 supports the view. For reference, the extract of relevant
clauses of the said circular are reproduced herewith.
Estimated income method for tax-payers
engaged in the business of civil construction
| "31
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The
estimated income method of assessment for certain categories
of businesses is prevalent in several countries. The Tax Reforms
Committee has also recommended gradual introduction of the
Estimated Income Method in certain areas to facilitate better
tax compliance. Accordingly, a new section 44AD has been inserted
in the Income tax Act with a view to providing for a method
of estimating income from the business of civil construction
or supply of labour for civil construction work. The new section
is applicable to all assessees whose gross receipts from the
abovementioned business do not exceed Rs. 40 Lakhs. Gross
receipts are the amount received from the clients for the
contract and will not include the value of material supplied
by the client. The income from the above mentioned business
will be estimated at 8% of the gross receipts paid or payable
to an assessee. A tax-payer can voluntarily declare a higher
income in his return. |
| 31.2
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The
expression "civil construction" will include the construction
or repair of buildings, dams, bridges or other structures,
or roads or canals. It will also include the execution of
any other works contract. It will, thus, include work related
to electrical fittings, plumbing job, landscaping work, etc." |
Further, the profession of
Chartered Accountants also has taken a view that it is very debatable
whether the provision applies to the promoters, builders, developers
and extract from the publication of Western India Regional Council
of the Institute of Chartered Accountants of India on "Presumptive
Taxation A Study" in para 2.2.5 is reproduced.
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"It is
also controversial as to whether the scheme applies to the
promoters / builders / developers or it is restricted only
to the contractors.
According to one view,
the role of a promoter / builder includes an element of trading
whereas the section contemplates the profit derived from actual
construction activity.
The other view is that
the section does not contemplate any such distinction. Therefore,
if an assessee is engaged in civil construction, he will be
covered even if he also acts as a builder.
The former view appears
to be more correct. In any case, if an assessee is purely
a builder and does not carry out any construction, the section
will not apply to him." |
The reason as to why the provisions
of section 44AD are difficult to apply to a developer can be illustrated
by the following example.
A developer purchases a plot
for Rs. 1 crore. He obtains approval of plan from local authority
and thereafter proceeds to obtain booking from prospective flat purchasers.
During the relevant year he books flat with an aggregate flat price
of Rs. 35 Lakhs and received an advance of Rs. 25 Lakhs. He submits
to tax an income of Rs. 2 Lakhs being 8% of Rs. 25 Lakhs.
In the next year he books flat
worth Rs. 1 crore and receives towards those sales a sum of Rs. 60
Lakhs. He decides to adopt the job completion method. In such situation
number of issues would arise.
What would be the treatment
of profit returned in earlier year? What would be the status of expenditure
incurred in earlier year? If in the next year, the gross receipts
are less than Rs. 40 Lakhs, can assessee revert to section 44AD? All
these lead to a conclusion that the provisions of section 44AD cannot
apply to a developer simpliciter.
This brings me to the next
issue as to whether the term gross receipt paid and payable gives
an option of method of accounting to an assessee. In my opinion even
though the assessee is exempted from the requirement of maintenance
of books of account, he is required to establish the quantum of gross
receipt paid and payable with sufficient evidence. He may adopt the
cash method, in which case the amount received will be treated as
the gross receipts. If he decide to choose the mercantile method ,
the aggregate sum of bills raised by him on the contractee will be
the gross receipts.
The next issue is regarding
allowability of interest and remuneration payable to partners. It
will be necessary for an assessee to establish that such remuneration
and interest is authorised by and in accordance with the deed of partnership.
While for the purpose of remuneration it maybe possible to adopt the
deemed income as starting point for allowability of interest it will
be necessary to establish the quantum of capital, which maybe difficult
in absence of books of accounts.
It is important to note that
in terms of 44AD(2), all the deductions u/s. 30 to 38 are deemed to
have been allowed. Therefore no other disallowance under any other
section will be made. However, the provisions of section 269SS will
still apply to same an assessee.
An issue is often raised as
to whether if an assessee is in the knowledge that his income is higher
than 8%, is he required to disclose the same? In my opinion the presumptive
scheme of taxation was introduced with an objective., to enable a
small contractor to file return of income without having to maintain
cumbersome record.
However, it must be borne in
mind that if an assessee is aware that his income (either reflected
in books of account or on the basis of other record) is higher he
is duty bound to disclose the same. That is the mandate of the verification
he signs in his return.
