Estimated or Presumptive Income method for Computing Business Income [Section 44AD, 44ADA, 44AE]

To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, section 44ADA and section 44AE. In this part you can gain knowledge about various provisions of the presumptive taxation scheme of section 44AD, section 44ADA and section 44AE.

1. Presumptive Taxation Scheme Under Section 44AD for computing Profit and Gains of any Business

Section 44AD is a presumptive taxation scheme that was introduced by Income Tax Law in order to ease the tax burden on small taxpayers or assesses (excluding the business of Transport covered under Section 4AE). Individuals who come under the provisions of this scheme need not maintain or show books of account, nor are they required to get an audit performed on the same.

The broad features of the Scheme are as under :

(a)           The scheme shall be applicable to an individual, a HUF or partnership firm who is a resident but not to a Limited liability partnership firm. Thus, the scheme is not applicable to LLP, a company assessee or AOP/BOI, etc.

(b)          The provision of section 44AD shall not apply to—

(i)            a person carrying on specified profession as referred to in section 44AA(l),

(ii)           a person earning income in the nature of commission or brokerage, or

(iii)          a person carrying on any agency business.

(c)           It shall also not be applicable to an assessee who is availing deduction under section 1OAA or deduction under any provisions of Chapter VIA under the heading "C.—deductions in respect of certain incomes" (section 80-IA to section 8ORRB) in the relevant assessment year.

(d)          The scheme is applicable for any other business (excluding a business of plying, hiring or leasing goods carriages referred to u/s 44AE) whose total turnover gross receipts in the previous year does not exceed an amount of 2 crore.

(e)           a sum equal to 8% of the total turnover or gross receipts of the assessee in the previous year on account of such business or as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee shall be deemed to be the profits and gains of such business.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, the Act has inserted a proviso to reduce the existing rate of deemed total income of 8%, to 6% in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in section 139(1) in respect of that previous year.

However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in any other mode.

Thus, the Presumptive Rate of 6% shall be applicable only if the amount of such total turnover or gross receipts is received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account such other electronic mode as may be prescribed —

— during the previous year or

— before the due date specified in section 139(1) in respect of that previous year.

(f)           Any deduction allowable under the provisions of section 30 to 38 shall be deemed to have been already given effect to and no further deduction under these sections shall be allowed.

A firm is not entitled to deduction on account of interest and salary paid to the partners if he is covered under section 44AD.

(g)           The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(h)          The eligible assessee shall be required to pay the advance tax, to the extent of the whole amount of such advance tax during each financial year on or before the 15th March

(i)            An assessee opting for the above scheme shall be exempted from maintenance of books of accounts related to such business as required under section 44AA of the Income-tax Act

(j)            Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five consecutive assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of section 44AD(1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of section 44AD( 1).

For Example, an eligible assessee claims to be taxed on presumptive basis under section 44AD for Assessment Year 2020-21 and offers income of 9.6 lakh on the turnover of 1.2 crore. For Assessment Year 2021-22 and Assessment Year 2022-23 also he offers income in accordance with the provisions of section 44AD. However, for Assessment Year 2023-24, he offers income of 4 lakh on turnover of 1.4 crore. In this case since he has not offered income in accordance with the provisions of section 44AD for five consecutive assessment years, after Assessment Year 2020-21. he will not be eligible to claim the benefit of section 44AD for next five assessment years i.e. from Assessment Year 2024-25 to 2028-29.

(k)          Further, as per section 44AD(5), notwithstanding anything contained in the foregoing provisions of this section. an eligible assessee to whom the provisions of section 44AD(4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under section 44AA(2) and get them audited and furnish a report of such audit as required under section 44AB.

2. Special Provision for computing Profits and Gains of Small Profession on Presumptive Basis [Section 44ADA]

Section 44ADA is a special provision for calculating the profits and gains of small professionals in certain circumstances. Section 44ADA was introduced to extend the scheme of simplified presumptive taxation to specified professionals. Earlier, the presumptive scheme of tax was applicable only for small business.

Conclusion is that, in case of persons opting for section 44AD, maintenance of books of accounts is not compulsory but in case of professionals opting for section 44ADA, maintenance of books of accounts is compulsory as per sub- section 1 of section 44AA

Eligible Professionals under Section 44ADA

>     Engineering.

>     Legal.

>     Architectural profession.

>     Accountant.

>     Medical.

>     Technical consultant.

>     Interior business.

>     Other notified professionals such as authorized representatives, film artists, certain sports-related persons, company secretaries and information technology.

1.     Resident assessee engaged in the profession referred to in section 44AA(1) can opt for Presumptive Income in certain cases [Section 44ADA(1)]

Notwithstanding anything contained in sections 28 to 43C. in the case of an assessee, being a resident in India, who is engaged in a profession referred to in section 44AA( 1) and whose total gross receipts do not exceed Rs. 50,00,000 in a previous year. a sum equal to 50% of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head Profits and gains of business or profession".

2.     Consequences if the assessee opts for Presumptive Income Scheme:

(a)    Deduction under sections 30 to 38 shall be deemed to have been allowed ISection 44ADA(2)J:

Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of section 44ADA(l), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

Further, a firm is not entitled to deduction on account of interest and salary paid to the partners if he is covered under section 44ADA.

(b)    Written down value of any asset for the succeeding year shall be computed as if the assessee has claimed deduction [Section 44ADA(3)]:

The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(c)     Assessee to maintain accounts and get them audited if he claims profits to be less than 50% of the gross receipts [Section 44ADA (4)]:

Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in section 44ADA(1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under section 44AA( 1) and get them audited and furnish a report of such audit as required under section 44AB.

3. Special provisions for Computing Profits and Gains of Business of Plying, Hiring or Leasing Goods Carriages [Section 44AE]

Notwithstanding anything to the contrary contained in sections 28 to 43C, the scheme u/s 44AE also provides for a system for estimating the income of an assessee engaged in the business of plying, hiring or leasing of goods carriages. The broad features of the scheme are:

(a)          the scheme is applicable to an assessee who owns not more than 10 goods carriages at any time during the previous rear and who is engaged in the business of plying, hiring or leasing of such goods carriages;

(b)          the profits and gains of each goods carriage owned by the above assessee in the previous year shall be estimated as under:

(i)            In the case of heavy goods vehicle (more than 12MT gross vehicle weight)—An amount equal to 1,000 per ton of gross vehicle weight or unladen weight, as the case may be, for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year

or

an amount claimed to have been actually earned from such vehicle,

whichever is higher.

(ii)           Vehicles other than heavy goods vehicle — An amount equal to 7,500 per month or part of a month for each goods carriage

or

the amount claimed to be actually earned by the assessee,

whichever is higher.

(A) Consequence if presumptive income scheme is opted

(1)   Expenses deemed to hate been allowed:

Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of the above income, be deemed to have been already given full effect to and no further deduction under those Sections shall be allowed. Remuneration and interest paid/payable to partners, shall be allowed as deduction from the income computed under this Section. Such deduction shall, however, be subject to the conditions and limits specified u/s 40(b).

(2) Depreciation deemed lo have been allowed:

The written down value of any asset used for the purpose of the business shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(3) Turnover of this business not to be included for computing limit of section 44AA and 44AB:

The provisions of sections 44AA and 44AB shall not apply in so far as they relate to this business and in computing the monetary limits under sections 44AA and 44AB for other business, the gross receipts or, as the case may be, the income from the said business shall be excluded.

(B) Consequences if presumption income scheme is not opted:

The assessee may choose not to opt for the scheme and may declare an income lower than the specified amount. In this case, the assessee shall have to maintain books of account and get his accounts audited by a Chartered Accountant.