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Deemed income or real income?

QUESTION: Where income is assessed on presumptive basis in respect of civil construction contracts under Sec. 44AD, transport vehicles under Sec. 44AE and income from retail business under Sec. 44AF, where such income is assessed on presumptive basis year after year the question arises whether explanation has to be offered for investments, since it is not easy to link deemed income with investment. What is the solution?

ANSWER: There should be no difficulty, if the investments could be explained from the income offered on presumptive basis after what is required for household expenses. The fact that income is assessed on presumptive basis does not dispense with the need for explaining the source of investment even during the years in which tax is paid on presumptive basis. For example, if a person purchases five trucks and plies the same on hire, he would be entitled to have the assessment done under Sec. 44AE, because he owns not more than ten trucks, but that does not mean that he owes no explanation as to how he met the cost of five trucks, since any unaccounted income in the investment is income from other sources and not income from plying the trucks themselves.

If any investment is claimed to have been made out of presumptive income, such explanation could be accepted only to the extent of possible savings out of the assessed income on presumptive basis. Where the investment exceeds such available income, the assessment of such excess as income from undisclosed source cannot be avoided. If the inference of the reader is that a higher income can be inferred or claimed for the years for which he has paid taxes on presumptive basis, he is mistaken because all the three Sec. 44AB, 44AE and 44AF clearly lay down that the assessee is obliged to declare a higher income than the presumptive income, if he has so earned. The provisions relating to presumptive incomes are only provisions which spare the need for elaborate accounts. Hence, it is not safe to prefer to pay tax on presumptive basis, when his income is higher, not only because the law expects him to report such higher income at the risk of penalty, but also because he may otherwise find himself unable to explain the source of his household expenses and investments in the same or later years.

S. Rajaratnam

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