The Fabricator with Two Flats and a 44AD History
Mr. Sanjay Behera runs a fabrication unit at Rourkela as a sole proprietor. His turnover for FY 2024-25 is ₹1,85,00,000, of which ₹30,00,000 was received in cash and the balance through bank and digital modes. His books show a net profit of ₹8,50,000 after all business expenses, which is 4.6% of turnover. He also owns two properties: a flat let out at ₹36,000 per month, on which he paid municipal tax of ₹20,000 and housing loan interest of ₹3,10,000; and a house he occupies, on which housing loan interest is ₹2,40,000. He filed his FY 2023-24 return under section 44AD declaring 8% of turnover as profit. This year he wants to switch to regular books because his actual profit is lower, and he asks whether that is allowed and what it will cost him. He has no other income and no brought-forward losses.
1. Compute his income from house property, showing the treatment of the two properties and the interest.
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Let-out flat
- Gross annual value (rent received): ₹4,32,000
- Less municipal tax actually paid by the owner: ₹20,000
- Net annual value: ₹4,12,000
- Less 30% standard deduction: ₹1,23,600
- Less interest on borrowed capital: ₹3,10,000 (no cap for a let-out property)
- Income: ₹2,88,400 − ₹3,10,000 = loss ₹21,600
Self-occupied house
- Annual value nil
- Interest deductible up to ₹2,00,000 for acquisition or construction, so the ₹2,40,000 interest gives loss ₹2,00,000
Aggregate: loss of ₹2,21,600. Under section 71(3A), loss from house property can be set off against other heads only up to ₹2,00,000 in a year. So ₹2,00,000 is set off against business income and ₹21,600 is carried forward, to be set off only against house property income in the next eight years, never against business income. Note that the ₹40,000 interest disallowed on the self-occupied house is not carried forward at all.
2. Should he stay in section 44AD or move to regular books? Show the numbers and the legal consequence of opting out.
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Eligibility: Turnover of ₹1,85,00,000 is within the ₹2 crore limit for section 44AD (the ₹3 crore limit is available only where cash receipts are 5% or less, and here cash is ₹30,00,000, about 16%).
Deemed profit under 44AD: 6% of digital receipts ₹1,55,00,000 = ₹9,30,000, plus 8% of cash receipts ₹30,00,000 = ₹2,40,000, total ₹11,70,000.
Regular books: ₹8,50,000, which is ₹3,20,000 lower.
Consequence of opting out: Because he opted in for FY 2023-24, section 44AD(4) applies. If he now declares income below the deemed limit, he must maintain books under section 44AA and get them audited under section 44AB, and the audit obligation continues for this year and the next four years. Section 44AD(5) also bars him from re-entering 44AD for five years.
Judgement: The extra ₹3,20,000 is taxed at his marginal rate; at 30% plus cess that is roughly ₹1,00,000, against a one-time audit fee and a five-year lock-out. Staying in 44AD is the safer default, especially because a 4.6% margin invites scrutiny. Opting out is defensible only if the low profit can be fully explained and the audit cost is clearly less than the tax saved.
3. If he stays in 44AD, compute his gross total income and explain how the carried-forward house property loss is treated.
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Computation under 44AD
- Business income: ₹11,70,000
- Less house property loss set off, restricted to ₹2,00,000: ₹2,00,000
- Gross total income: ₹9,70,000
- Loss carried forward: ₹21,600
Comments
- The ₹9,70,000 is taxed at slab rates applicable to a non-salary individual, with the rebate under section 87A unavailable because income exceeds ₹7,00,000 in the new regime.
- The carried-forward ₹21,600 can be set off only against house property income of later years, for a maximum of eight assessment years. It cannot reduce business income, salary or interest income.
- If he later sells the let-out flat, the carry-forward survives and can be used against the income of any other house property.
- He cannot avoid the cap by allocating interest differently: the ₹2,00,000 ceiling operates on the aggregate house property loss, not on each property.
- Advise him to keep the 44AD working, the turnover split between cash and digital receipts, and loan interest certificates, because the 6% and 8% classification and the interest claim are both verification points.