ITAT Mumbai Rules Out 50% Presumptive Profit on Business Income Returned Under Section 44AD

Background of the Dispute

In Manoj Rajaram Sharma Vs ITO (ITAT Mumbai), the core controversy revolved around whether the Assessing Officer (AO) could arbitrarily apply a 50% presumptive profit rate—akin to Section 44ADA—on income declared under Section 44AD by an assessee engaged as a Business Correspondent (BC) of Fino Payments Bank Ltd.

The assessee, an individual resident in India, had filed a return of income for Assessment Year 2020–21 on 17.10.2020 under Section 139(1) declaring total income of Rs. 4,92,220/-. The income was offered on a presumptive basis under Section 44AD on commission earnings from business correspondent activities.

Subsequently, the Department received information suggesting that income of Rs. 2,16,59,470/- had allegedly escaped assessment. On this basis, the AO initiated reassessment proceedings under Section 147 and issued notice under Section 148 dated 29.03.2024, followed by notices under Section 142(1) and show-cause notice under Section 144.

Nature of Business and Bank Account in Question

Assessee’s Explanation

During the reassessment proceedings, in response to the final show-cause, the assessee clarified:

  • He was functioning as a Business Correspondent (BC) for Fino Payments Bank Ltd.
  • He was also proprietor of M/s Saraswati Associates.
  • The bank account under scrutiny (Current Account 37303254619 with State Bank of India) was a “BC Merchant Account”.
  • The large deposits reflected in that account were customer-related transactions, routed through the BC channel, and not his personal income.
  • His income was confined to commission earnings derived from facilitating these transactions.
  • To corroborate this, the assessee submitted:
    • Authorization letters from Fino Payments Bank Ltd.
    • Relevant certificates and confirmations from associated entities.
    • Bank statements showing the nature and pattern of activity.

The assessee consistently maintained that only the commission component represented his business turnover and that he had correctly applied Section 44AD to such commission income.

Assessment Proceedings and AO’s Approach

AO’s Initial Stand

From information obtained under Section 133(6) from State Bank of India, the AO noticed total credits of Rs. 4,63,79,981/- in the relevant current account for the previous year. As per Form 26AS, brokerage income of Rs. 2,67,153/- was also reflected.

At the show-cause stage, in the absence of what the AO considered as satisfactory compliance, he initially proposed to estimate income at 8% of total credits in the bank account, working out to Rs. 37,10,398/-. This approach essentially treated the total credits as business receipts and proposed to apply a presumptive margin thereon.

Change in Computation Method in Final Order

However, while finalising the assessment under Section 147 read with Sections 144 and 144B on 20.02.2025, the AO departed from the 8% proposal. Instead, he:

  1. Accepted the gross receipts declared by the assessee at Rs. 14,85,694/- as business turnover.
  2. Noted that the assessee had declared income at around 35% of such receipts under Section 44AD.
  3. Held that income “should have” been declared at 50% of gross receipts, on a footing similar to the presumptive rate prescribed for certain professions under Section 44ADA.
  4. Computed income at Rs. 7,07,609/- by taking 50% of Rs. 14,85,694/-.
  5. Made an addition of Rs. 2,15,389/- over and above the returned income.
  6. Also initiated penalty proceedings under Section 270A and under Section 272A(1)(d).

Thus, the addition arose not from rejection of turnover or characterisation of receipts, but solely from substituting the presumptive rate declared by the assessee with a higher 50% rate.

First Appeal Before CIT(A)

The assessee challenged the reassessment before the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (CIT(A)).

Arguments of the Assessee Before CIT(A)

The assessee reiterated: