The Curious Case of Casus Omissus and section 44AD of the Income Tax Act
**Hrishikesh
Nani Palkhivala, regarded as one of the most prominent lawyers India has produced famously said that the Income Tax Act (IT Act hereinafter) was a national disgrace due its highly unstable nature caused by the plethora of amendments made each year. This act has suffered over 4000 amendments till the introduction of the new act in 2025. Despite these amendments, there are gaps in the act that do a great deal of disservice to the small-time assesses. This article aims to explore one such gap that creates ambiguities in compliance and places enormous burden on the assessee.
Section 44AD and the outliers
Under the IT Act, any income received by a person will be taxed under different heads based on the nature of such income. One such head is Profits and Gains of Business or Profession (PGBP hereinafter). Under this head, certain persons are required to maintain books of accounts, or in simpler terms, maintain all inflows and outflows of money with respect to business or profession. Section 44AA mandates the maintenance of such books if the income crosses a certain threshold. In addition to this, there is a mandate for such persons whose income crosses a threshold to have their accounts audited by an accountant under s. 44AB. At the time of filing return under s. 139, both the books and the audit report are required to be submitted mandatorily.
The provisions from s. 44AD and onwards under the head of PGBP are special provisions intended to guide the assessees carrying out certain businesses or professions on computing profits and gains. Section 44AD lays down the rule for calculation of profits on a presumptive basis at 8% of the gross receipts. Section 44AD(6) specifically rules out persons who earn income through commission or are brokers or are agents. The subsequent sections guide specific businesses such as goods carrier operators, non -resident shipping businesses etc. However, none of them cover the case of these specifically excluded individuals. The implication is that the taxable income of the assessee will be calculated based on sections 30 to 43D of the act as per s. 29. This means that the gross receipts will only be allowed the standard deductions even though the taxable amount calculated in this way will be greater than the actual profit. This absurdity therefore arises only due to the exclusion of such persons from availing presumptive basis calculation of tax.
The issue therefore that is central to this article is the question of what a small-time person engaged in commission or broker business can do if he fails to maintain books of accounts and cannot avail the sections governing calculation of profits on a presumptive basis. Considering the entire gross receipts as profit would violate the principles of equity in taxation since the costs incurred to receive the income are ignored. At the same time, there is no statutory remedy available either. This is a visible gap under the act which will be analyzed hereinafter.
The Gap
It is pertinent to first understand the object behind s. 44AD. The presumptive calculation of profit is for the benefit of small taxpayers so that compliance costs are low. Originally, s. 44AD was applicable only to civil construction business and was subsequently amended to be applicable to other businesses. It did not demand maintenance of books of accounts either till the amendment as per the Finance Act, 1999. This shows that the intention behind the section was to ensure that the small taxpayers do not face huge burden in terms of tax liability and in terms of compliance. In fact, for an agent who earns commission, a presumptive taxation at 8% of the gross receipt would most likely still be higher than his actual profit, given that intermediaries’ profit represent a slim percentage of the larger chunk of the underlying transaction, thereby levying a inflated burden.
In Shri Selvaperumal Govindraj v ITO, the assessee was engaged in commission agency business of agricultural produce and earning income as commission agent. The Assessing officer had calculated the profits by presumptive method at 8% under 44AD despite the section explicitly barring commission agents. The tribunal, on appeal by the assessee modified the percentage by reducing it to 4%. It also held that a reasonable estimation of profits is necessary despite the section barring persons who carry on business or commission or brokerage.
This judgement therefore bridged the gap in s. 44AD by ensuring that profits are estimated at a reasonable rate and entire gross receipts would not be taxed. The tribunal was right in doing so since the intent of the legislature as examined above was to minimize burden on small taxpayers. Therefore, a legislative oversight manifest in the exclusion of commission and brokerage business was to some extent remedied by the tribunal. Interestingly, the same assessee once again in a different assessment year faced the same issue and the tribunal cited its own ruling as shown above to rule once again in favour of the assessee by lowering the percentage of presumptive calculation.
This ruling is significant because the gap in the legislation has been partially acknowledged by the tribunal. However, a tribunal in any other state will not be bound by this decision. The judgement certainly carries value, but only in terms of persuasion and not in terms of precedent. There is yet to be any ruling of a constitutional court on this issue. Therefore, it is pertinent not for the courts to examine this issue, but for the legislators to acknowledge this issue and fix the gap.
Why courts cannot fix this issue through casus omissus?
Casus omissus simply means a case that ought to have been covered by the legislators have not been covered. In other words, it refers to a gap left in a statute. The English courts early on cited this principle and refused to read into the statute or fill in the gaps left. However, Lord Denning in his characteristic style vehemently opposed the silence of judges and famously remarked that a judge must “iron out the creases”. The judgements of the House of Lords that followed the judgement of Lord Denning in Seaford Court Estates v Asher strongly disapproved of his judgement and remarks. However, in Inco Europe v First Choice Distribution, his views received affirmation and was recognised. This was of course with certain exceptions to ensure that the judges don’t exercise this power arbitrarily without necessity. Moreover, the doctrine of separation of powers clearly demarcates the role of the judiciary and legislature so that they do not act ultra vires.
In India, the rule of construction of a statute as suggested by Lord Denning to cure the defects left in a statute was accepted. In Commissioner of Sales Tax MP v Popular Trading Company, the Supreme Court held that reading into a statute was allowed only if there is a clear necessity and the legislature’s intent could be ascertained. It was around the same time Lord Denning’s judgement received full affirmation in the Inco judgement in England. There haven’t been objective principles or tests laid down to test casus omissus. However, it is understood from the judgements discussed hereinbefore that there must be absolute necessity of reading words into a statute and the words so read in must have been the language the legislature intended which must be ascertained by the courts.
A 5-judge bench of the Hon’ble Supreme Court in Dadi Jagannadham vs Jammulu Ramulu & Ors observed that in cases where casus omissus is applicable, court must harmonise the conflicting provisions. This view finds its origin in a 2-judge bench decision of the same court (Basavantappa vs Gangadhar Narayan Dharwadkar & Anr). The issue in this case related to a certain time period granted under Order 21 Rule 89 of the Civil Procedure Code, 1908 (hereinafter “the code”) read with The Limitation Act, 1963. Subsequently, The Limitation Act was amended, and the time period therein was enlarged. The corresponding change was not made in the Code. The aforementioned 5-judge bench affirmed that in cases such as these, where such difficulties arise, the court can indeed step in and harmonise the provisions. Additionally, the court also held that it was under the trial court’s discretion to grant the extended timeline. What can be reasonably inferred is that the courts are not averse to the idea of intervening when there are interstices, subject to necessity and absurdity created due to such interstice.
Several judgements of the Supreme Court have ruled that provisions of taxation must be interpreted literally and reading words into it or modifying it is strictly impermissible. There have been times where a particular definition has been given a wider sweep beyond what the statute says. However, this has little applicability to the issue at hand since s. 44AD specifically rules out business of commission or brokerage. The interim solution from a practical standpoint would be to follow the judgement of the tribunal by computing the profits reasonably instead of considering the gross receipts entirely. The absence of a section guiding the presumptive computation should not be the stepping stone for the Assessing Officer to consider gross receipts as a whole and tax the entire amount. Application of mind is necessary since commission or brokerage will be a small percent of an amount that would be the real profit. Doing otherwise would be a gross violation of principle of equity that is inherent in every tax system.
The essence of the judgement of Dadi Jagannadham vs Jammulu Ramulu & Ors is to harmonise conflicting provisions. However, in the current case, there is no conflicting provision with s. 44AD. There is a stricter scrutiny in applying such interpretation principles due to the nature of taxation statutes that are not easily subject to interpretation by the courts. Therefore, despite the fact that the tribunal above that held in favour of the assessee was right in its approach, it will be difficult for a court to apply it the same way given the lack of authority conferred on it.
The Income Tax Act of 2025, a missed opportunity
To put an end to the thousands of amendments suffered by the act of 1961, the government introduced the IT act of 2025 with a revamp of the earlier act. Under the new act, s. 44AD, 44ADA and 44AE have been subsumed under s. 58. It once again expressly excludes persons earning income by way of commission or brokerage. The glaring gap, therefore as pointed out hereinbefore has not been addressed. This was a good opportunity to address all the problems of the amendment ridden IT act of 1961. The new act has done well in some spheres but is beyond the scope of this article. In essence, as far the persons who carry on business of commission or brokerage are concerned, there is no statutory remedy yet.
The legislative intent behind the latest s. 58 is clear and is the same as the one behind s. 44AD. There is, however, no rationale behind exclusion of just one class of persons without a safety net under the act. The problem does not lie in exclusion of such persons, but it lies in the fact casus omissus exists and hasn’t been cured yet. The defence that the legislators inadvertently missed out on providing a remedy for persons excluded under s. 44AD cannot be used anymore. The opportunity arose for fresh consideration of the entire act but this issue ultimately remained and was overlooked yet again. Additionally, the whole purpose of the special provision for presumptive computation is beaten. The courts cannot be relied upon to fill in these gaps when in fact they are visible prima facie. The legislators must correct these gaps at the earliest to protect the interests of small businesses.
A possible way out would be to cull out a new section for such persons given that the percentages of the gross amounts such persons charge is usually lower than 8%. Allowing them to still be charged under presumptive basis of 8% under s. 44AD would still cause them grievance. Therefore, a separate section governing such persons should be added to the new tax regime.
Conclusion
Section 44AD was conceived with a clear purpose to protect the interests of small-time taxpayers. However, it specifically excludes persons carrying out business of agricultural commission, insurance agents and brokers from availing the benefits. In doing so, it does not live up to the intention of its very inception. This gap causes a great deal of inconvenience to hundreds of thousands of people. Courts are bound by interpreting tax statutes strictly and cannot therefore fill in this gap. This has also spilled over into the Income Tax Act, 2025 without any solace which once again beats the purpose of the new act which was to cure the ills of the previous one. While the tribunal’s judgement is a good step forward, it doesn’t carry the same weight and effect as a clear statute or a Supreme Court judgement. Another tribunal in a different state may not follow the same suit ultimately leaving the assessee’s fate at the hands of uncertainty in judicial discretion instead of a clear statute. The IT act being one of the most amended acts not incorporating a necessary amendment thereby causing prejudice is the irony.
**Hrishikesh is a final year student at OP Jindal Global Law School
**Disclaimer: The views expressed in this blog do not necessarily align with the views of the Vidhi Centre for Legal Policy.