In an unforeseen development, the Income Tax Department has admitted to its mistake in issuing erroneous Income Tax Return (ITR) notices to taxpayers who had accurately completed their returns. This acknowledgment has provided some solace to numerous taxpayers, yet it also provokes doubts regarding the dependability of these notices. Some individuals, in their rush to comply, submitted revised ITRs, potentially complicating their circumstances.
ISSUES WITH THE NOTICES
On November 29, 2024, the tax authority released notices regarding defective ITRs under Section 44AD, citing inconsistencies in turnover thresholds and absent financial documentation.
Nevertheless, on December 5, 2024, the department rectified the error, stating, “A defective return notice was incorrectly issued on November 29, 2024, indicating that income was declared under Section 44AD, even though the gross receipts surpass Rs 2 crore and the balance sheet and profit and loss account have not been submitted, and the books of accounts are unaudited. Please disregard this communication. We apologize for this error, which pertained to the return filed for the Assessment Year 2024-25. This return is currently being processed. Kindly await the receipt of intimation regarding the processing results.”
This unusual admission was praised by experts. Chartered Accountant Ashish Niraj remarked to The Economic Times that Section 44AD permits small businesses with a turnover of up to Rs 2 crore to submit simplified returns without the need for balance sheets or audits. “This proves that taxpayers were correct in their submissions,” he affirmed.
EXPLORING SECTION 44AD GUIDELINES
Section 44AD is a presumptive taxation framework designed for small businesses, contingent on their cash transactions remaining below 5% and turnover being capped at Rs 3 crore. Taxpayers may declare 6% or 8% of their gross receipts as profits without necessitating an audit. However, those whose turnover exceeds Rs 2 crore must follow more stringent compliance measures, including tax audits.
Although this retraction was a relief for many, it has placed taxpayers who filed revised ITRs due to the defective notices in a precarious situation. that revised ITRs take precedence over original submissions, even when the initial notices were flawed. “Those who did not challenge the notice may now encounter processing difficulties with their revised returns.