The ITAT Kolkata has clarified a critical limitation on the application of presumptive taxation under Section 44AD of the Income Tax Act, holding that it ceases to apply once turnover exceeds ₹2 crore. This decision resolves conflicting interpretations and provides much-needed clarity for small traders operating near the statutory threshold.
Background & Facts
The Dispute
The appellant, Jitanshu Goswami, an individual engaged in the trading of agricultural products, filed his return of income for Assessment Year 2017-18 declaring a gross turnover of ₹3,50,68,790 and a net profit of ₹4,55,190, representing a profit margin of 1.297%. The Assessing Officer (AO) found this profit rate unusually low and noted that the assessee had deposited ₹6,34,000 in Specified Bank Notes (SBNs) during the demonetization period (10.11.2016 to 30.12.2016). The assessee failed to produce books of account or cash books despite notices under Section 133(6) of the Act.
Key Facts
- Gross turnover declared: ₹3,50,68,790 for AY 2017-18
- Net profit declared: ₹4,55,190 (1.297% of turnover)
- SBN deposits during demonetization: ₹6,34,000 between 10.11.2016 and 30.12.2016
- No books of account or cash books produced before the AO
- Previous years’ profit margins: approximately 2%
- Turnover exceeded ₹2 crore, the statutory limit for Section 44AD applicability from 01.04.2017
Procedural History
- 31.03.2018: Due date for filing return of income for AY 2017-18
- 2018: Assessment proceedings initiated by the AO
- 23.09.2025: Order passed by the Addl/JCIT(A)-Panchkula under Section 250 of the Act
- 07.01.2020: Appeal filed by the assessee before the Addl/JCIT(A)
- 23.09.2025: Addl/JCIT(A) confirmed addition of ₹23,50,313 under presumed profit rate of 8% and deleted ₹6,34,000 under Section 69A
- 27.11.2025: Notice issued by ITAT Kolkata for hearing
- 23.03.2026: Final hearing concluded
- 05.05.2026: Judgment pronounced by ITAT Kolkata
Relief Sought
The assessee sought deletion of the addition of ₹23,50,313 made by the AO and confirmed by the Addl/JCIT(A), arguing that the 8% rate was arbitrary and that Section 44AD was inapplicable due to turnover exceeding ₹2 crore. The assessee also sought reduction of the addition to a reasonable rate based on past profit history.
The Legal Issue
The central question was whether Section 44AD of the Income Tax Act can be applied to a business with a turnover exceeding ₹2 crore in Assessment Year 2017-18, and whether the Assessing Officer or the Commissioner (Appeals) may impose a presumptive profit rate of 8% in the absence of statutory authorization.
Arguments Presented
For the Appellant
The Ld. AR contended that Section 44AD, as amended with effect from 01.04.2017, applies only to businesses with turnover up to ₹2 crore. Since the assessee’s turnover was ₹3,50,68,790, the provision was inapplicable. The 8% rate applied by the Addl/JCIT(A) was arbitrary, unsupported by any statutory provision, and ignored the assessee’s historical profit margin of around 2%. The AR admitted non-production of books but argued that the AO’s estimation must be reasonable and grounded in evidence.
For the Respondent
The Ld. DR argued that the assessee had failed to maintain or produce books of account, justifying the AO’s estimation under Section 145(3). The Addl/JCIT(A)’s reliance on Section 44AD was submitted as a reasonable interpretation to prevent tax evasion, especially given the SBN deposits during demonetization. The DR contended that the 8% rate was a standard benchmark for trading businesses.
The Court's Analysis
The Tribunal conducted a meticulous review of the statutory framework. It noted that while the AO did not invoke Section 44AD in the original order, the Addl/JCIT(A) explicitly relied on it to sustain the addition. The Bench observed:
"A perusal of the provisions of section 44AD of the Act as applicable for AY 2017-18 shows that section 44AD of the Act is applicable only if the turnover of the business is ₹1 Crore which was increased to ₹2 Crore with effect from 01.04.2017. Since the assessee's turnover had exceeded ₹2 Crore during the year, therefore, the provisions of section 44AD of the Act are not applicable."
The Tribunal further held that the Addl/JCIT(A) erred in applying a presumptive rate of 8% without any statutory basis. The rate was not prescribed under any provision of the Act for businesses exceeding the turnover limit. The Bench rejected the notion that 8% could be applied as a default benchmark, noting that such estimation must be reasonable and fact-specific.
However, the Tribunal also found that the assessee’s declared profit of 1.297% was implausible given the nature of the business and its historical profit margin of approximately 2%. The non-production of books justified rejection of the book result under Section 145(3). The Bench, after considering the facts, past history, and industry norms, concluded that a profit rate of 4% was reasonable and acceptable.
The Verdict
The appeal was partly allowed. The addition of ₹23,50,313 was reduced to ₹9,47,562, calculated as 4% of ₹3,50,68,790 (₹14,02,752) minus the declared profit of ₹4,55,190. The addition of ₹6,34,000 under Section 69A was already deleted by the Addl/JCIT(A) and was not disturbed. The order of the Addl/JCIT(A) was modified accordingly. No further interest or costs were directed.
What This Means For Similar Cases
Presumptive Taxation Has a Hard Turnover Ceiling
- Practitioners must verify turnover thresholds before invoking Section 44AD - it is inapplicable for any business with turnover exceeding ₹2 crore in AY 2017-18 and beyond
- AO or CIT(A) cannot substitute 8% as a default rate for businesses outside Section 44AD’s scope
- Estimations under Section 145(3) must be based on reasonableness, not arbitrary benchmarks
Historical Profit Margins Matter in Estimation
- Past profit trends (e.g., 2% in prior years) are relevant evidence for determining a reasonable rate
- Non-production of books justifies rejection of book profits but does not permit unlimited estimation
- A 4% rate, supported by historical data and business nature, was upheld as a balanced compromise
Demonetization Deposits Require Separate Scrutiny
- SBN deposits alone cannot justify addition unless linked to unexplained income
- Section 69A requires proof of unexplained investment - mere deposit does not equate to undisclosed income
- The deletion of ₹6,34,000 under Section 69A was correct and should be followed in similar cases
