“Law never sleeps; it only trusts—until that trust is broken.”
A belief has quietly spread through business circles:
“Once I file under Section 44AD, nobody will question my deposits or expenses.”
This is one of the most persistent misconceptions in small business taxation. Presumptive taxation under Section 44AD is a relief from maintenance of books, not a waiver from accountability.
A recent tribunal case involving a small trader in plastic goods has once again underlined the principle—no books, no Section 68, but that doesn’t mean no questions at all.
The Case That Sparked the Reminder
The assessee declared turnover of ₹27.14 lakh under Section 44AD and offered profit @8%.
However, his bank deposits totaled ₹54.05 lakh. The Assessing Officer treated the difference as unexplained cash credits under Section 68.
On appeal, the Tribunal held that:
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Section 68 requires “books of account.” Without books, the section simply doesn’t operate.
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Deposits in the bank cannot be taxed under Section 68 when income is declared on presumptive basis.
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However, the assessee must still correlate deposits with business receipts.
The Tribunal directed that the entire deposits be treated as business turnover, and income be computed at the presumptive rate of 8%.
What Section 44AD Shields—and What It Doesn’t
| Aspect | Section 44AD (Presumptive) | Section 68 (Unexplained Credits) |
|---|---|---|
| Books Required | No | Yes |
| Scope | Relief from maintenance of accounts | Applies only if “sum credited” in books |
| Deposits in Bank | Treated as turnover, if linked to business | Cannot be invoked without books |
| AO’s Power | Can still verify nature of deposits | Cannot add u/s 68 but may use 69-series |
| Burden of Proof | Moderate — must show nexus with business | Strict — must prove identity, source, genuineness |
The Misconception: “Under 44AD, Nobody Will Ask”
This is not true.
Section 44AD offers presumptive relief, not presumptive innocence.
The tax department can and does ask:
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Are the deposits truly from business turnover?
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Are withdrawals and household expenses consistent with income declared?
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How are new investments or capital introductions funded?
If patterns are inconsistent, the AO may proceed under:
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Section 69 / 69B / 69C (unexplained investments or expenses), or
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Section 147 (income escaping assessment).
Withdrawals, Investments & Lifestyle — The Ignored Indicators
Professionals must caution clients that presumptive does not mean invisible.
Even without books, every number in the bank speaks.
| Area | Risk if Ignored | Precaution |
|---|---|---|
| Bank Deposits | Treated as unexplained if disproportionate | Reconcile deposits with turnover |
| Personal Withdrawals | Low drawings questioned vs lifestyle | Keep reasonable living expense trail |
| Investments / Assets | Can trigger 69-series addition | Maintain funding trail—old savings, loans, etc. |
| Capital Introductions | Treated as unexplained if unsupported | Use banking channels, document source |
| Cash Transactions | Invites suspicion | Avoid or limit within permissible limits |
| Mixed Accounts | Confuses business & personal receipts | Maintain separate business account |
What the Tribunal Clarified
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No books → No Section 68, but other sections may still apply.
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Deposits = Turnover only if consistent with business pattern.
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Profit @8% to be computed on such turnover, not entire deposit taxed.
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Nexus with business activity must be clear and logical.
Professional Learnings
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Section 44AD reduces paperwork, not scrutiny.
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Turnover and deposits are not the same.
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Maintain at least a basic cash and bank flow summary.
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Lifestyle, drawings, and asset patterns must align with declared income.
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Do not misuse presumptive filing for mixed-income or complex cash flows.
The Real Spirit of 44AD
Section 44AD was introduced to encourage honesty through simplicity, not to create a cover for unverified deposits.
It is a scheme of trust, and every trust comes with responsibility.
“Presumptive taxation is not a hiding place. It is a simplified doorway—walk straight, not sideways.”
Quick Compass for Professionals
| Check | Action |
|---|---|
| Section 68 invoked without books | Invalid |
| Bank deposits exceed turnover | Explain nexus or treat as turnover |
| Withdrawals too low | Prepare household expense note |
| Large investments / capital | Keep source trail |
| Multiple accounts | Consolidate and clarify business link |
| Digital receipts | Clarify if business or personal |
| Pattern mismatch | Be ready with explanation before filing |
Conclusion
Section 44AD is a powerful compliance tool, but its misuse often leads to more trouble than benefit.
The key is balance — simplicity with discipline, presumption with prudence.
No books doesn’t mean no questions. It only means the questions will be different.
By CA Surekha S Ahuja
