The provisions relating to Presumptive Tax Scheme (PTS) under the Income Tax Act, 1961 (ITA) are inter alia, covered under Sections 44AD, 44ADA, 44AE, 44B, 44BB, 44BBA and 44BBB. In this article, we have limited our discussion to Sections 44AD, 44ADA and 44AE.

Purpose of presumptive taxation scheme

As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further get his books of accounts audited in certain situations. A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also getting the same audited. For small taxpayers the Income-tax Act has framed special provisions under presumptive taxation schemes as given below:

1. Section 44AD: Computing profits and gains of Business on presumptive basis
2. Section 44ADA: Computing profits and gains of Profession on presumptive basis
3. Section 44AE: Computing profits and gains of Business of plying, hiring or leasing goods carriages

Let’s discuss them separately as under:

Section 44AD: Computing profits and gains of Business on presumptive basis

As per The Central Board of Direct Taxes (CBDT) Circular No. 684 dated 10 June 1994, Reforms Committee had recommended gradual introduction of the Estimated Income Method in certain areas to facilitate better tax compliance. Accordingly, Section 44AD was initially inserted by the Finance Act, 1994 to provide method of estimating income from the business of civil construction or supply of labour for civil construction work. Later on, from Assessment Year 2011-12 Section 44AD was amended, which now provided applicability to “eligible assessee” and for “eligible business”.

Eligible Assessee:

Following persons are eligible assessee for section 44AD:

1. Resident Individual
2. Resident Hindu Undivided Family
3. Resident Partnership Firm (not Limited Liability Partnership Firm)

The scheme cannot be adopted by a non- resident and by any person other than an individual, a HUF or a partnership firm. Thus a Limited Liability Partnership Firm cannot opt for S.44AD.

Further, this scheme cannot be adopted by person who has claimed deduction under section 10A, 10AA, 10B and 10BA or deduction under sections 80HH to 80RRB in the relevant assessment year.

Eligible Business:

Eligible business means any business except the business of plying, hiring or leasing of goods carriages referred to in section 44AE, whose total turnover or gross receipt in relevant year does not exceed Rs. 2 Crores.

Provisions of section 44AD cannot be opted by following persons:

• A person carrying on profession as referred to in section 44AA(1).
• A person who is earning income in the nature of commission or brokerage
• A person who is carrying on any agency business.
• An insurance agent
• Whose total turnover or gross receipts for the year exceed Rs. 2 Crores

Amendment with effect from Assessment Year 2024-25:

If the aggregate amount of cash received during the previous year does not exceed 5% of the total turnover or gross receipt of such year then the threshold limit for total turnover or gross receipt shall be taken as Rs. 3 Crores instead of Rs. 2 Crores. The receipts through the mode of cheque or a bank draft which is not an account payee shall be considered a receipt in cash for this purpose. Thus, limit of Rs. 2 Crores is enhanced to Rs. 3 Crores, but with an additional condition that amount or aggregate amount received in cash during the relevant year does not exceed 5% of total turnover or gross receipts of the relevant year.

Income Computation manner:

Under section 44AD, income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.

After demonetization, from AY 2017-18, in order to promote digital transactions it is provided that income shall be computed @ 6% instead of 8%, if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, during the previous year or before the due date of filing of return under section 139(1).

Thus digital transaction would include payments made by Account payee cheque or account payee bank draft, Electronic Clearing System, Net banking, RTGS, NEFT; Credit Card or Debit Card; IMPS, UPI or BHIM Aadhaar Pay.

One precaution an assessee needs to take to avail 6% lower rate, that payment of specified turnover or gross receipt of the relevant year is received is prescribed digital mode on or before due date of filing return of income, say 31st July. Thus if payment is not received before due date specified for filing return of income u/s. 139(1) say 31st July, the assessee cannot opt for 6% but has to compute taxable income @8%.

Hence, under section 44AD income is computed @6% where payment is received in specified digital mode or @8% in respect of payment received in cash or other than prescribed digital mode. The same is known as presumptive income.

However, a person may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.

Applicable Conditions:

The income computed as per the prescribed rate is the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed. It will be presumed that deductions allowable under the provisions of section 30 to 38 have already been given full effect to and no further deduction shall be allowed.

While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

Depreciation : It was clarified that all deductions under Sections 30 to 38 including depreciation, would be deemed to have been already allowed and no further deduction would be allowed under section 44AD. The written down value would be calculated, where necessary, as if depreciation as applicable had been allowed.

Earlier, in case of a partnership firm deduction u/s. 40(b) for Salary and interest paid to partners was allowed subject to the limits and conditions of section 40(b). However, by Finance Act 2016, w.e.f. AY 2017-18 proviso of allowing deduction to partnership firms’ u/s. 40(b) for Salary and interest paid to partners is omitted. Hence, now from AY 2017-18 a partnership firm cannot claim deduction as per the provisions of section 40(b) for Salary and interest paid to partners, from income computed u/s. 44AD.

However, on one hand it would be open for an assessee to argue that as per section 44AD (2) only deductions under Sections 30 to 38 have been specifically deemed to have been allowed but not under other sections and hence, the deduction of partners’ salary and interest under section 40(b) is to be allowed. Further, on other hand department may argue that provision of section 44AD begins with “notwithstanding anything contrary contained in section 28 to 43C”, thus provision of section 40(b) is excluded.

Consequence of non-fulfillment of conditions:

A person can declare his income at a rate lower than those prescribed under section 44AD. However, then he is required to maintain the books of account and to get his accounts audited as prescribed under section 44AB.

Advantage of opting Presumptive taxation scheme:

No need to maintain books of accounts and vouchers etc.

In case of a person engaged in a business and opting for section 44AD, the provisions of section 44AA relating to maintenance of books of account will not apply in respect of business covered under section 44AD. He need not maintain books of accounts or vouchers of expenses etc. However, he needs to maintain records of his gross turnover or receipts as the case may be to determine the total amount of gross receipts or turnover.

Tax audit under section 44AB not applicable if a person opts the scheme of section 44AD

Section 44AB of the Income Tax Act mandates tax audits for assessees carrying on business with an annual turnover of more than Rs. 100 lakh (Rs. 10 crores where cash receipts and payments are less than 5%). If an assessee is opting for the presumptive tax scheme of Section 44AD, the tax audit under section 44AB shall not be required in the case of such assessee.

Advance tax payable only before 15th March, no need to pay in June, September and December

Normally advance tax is payable in 4 installments 15% by 15th June, 45% by 15th September, 75% by 15th December and 100% by 15th March. Any person opting for section 44AD is liable to pay whole amount of advance tax only on or before 15th March of the previous year. In other words, he need not pay advance tax in June, September and December. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.

No further allowance or disallowance u/s. 28 to 43C

While arriving at such presumed income u/s. 44AD it would be deemed that effect have been given for all allowances, deductions or disallowance u/s. 28 to 43C is made. Thus there would be no further disallowances u/s. 40(a), 40A, 40A(3), 40A(3A),41 etc.

Any disallowance relating to cash payments above INR 10,000 for expenses, non-deduction of tax at source, etc. will not be required to be added back, as Section 44AD overrides Sections 28 to 43C of the Income Tax Act.

Deductions under chapter VIA can be claimed

A person opting for section 44AD can claim various deductions under Chapter VIA. As such various deductions u/s. 80C of LIC, PPF etc., u/s. 80D of medical insurance, mediclaim etc. so on can be claimed.

Current year losses and/or brought forward losses can be setoff

Sec 44AD overrides sec 28 to 43 C but does not override chapter VI. Therefore, current year losses and brought forward losses can be set off against deemed income u/s. 44AD. The same was held by ITAT, Pune in the case of DCIT v. Sunil M. Kankariya [2008].

Ease of doing business

Opting for Section 44AD, reduces compliance burden and facilitates ease of doing business. Income tax returns can be filed in simpler and shorter form ITR-4 (Sugam). The return of income has to be filed on or before 31st July of the Assessment Year.

Consequences if a person opts out from the presumptive taxation scheme of section 44AD

If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he fails to opt section 44AD in next 5 years, then presumptive taxation scheme will not be available for him for next 5 years.

In the case where the taxpayer has declared income as per presumptive tax scheme under Section 44AD in any FY and does not declare income in accordance with Section 44AD in any of the next five FYs, the taxpayer shall not be eligible to declare income under PTS for next five Financial Years, subsequent to the year in which income is not declared as per Section 44AD. Further, the taxpayer would also be required to maintain books of account and get them audited, irrespective of the turnover in the next 5 years, if his total income exceeds the maximum amount that is not chargeable to tax, i.e. the applicable basic exemption limit.

For example: An assessee claims to be taxed on presumptive basis under Section 44AD for 2021-22. However, if for AY 2022-23 he did not opt for presumptive taxation scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next 5 AYs, i.e. from AY 23-24 to AY 27-28.

Certain issues and controversies:

• Method of accounting:

  Considering that the words “Sales”, “Turnover” and “Gross receipts” are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion.

• Turnover Defined:

  Some legal experts are of the view that in view of provisions of section 145A(ii) turnover includes any tax, duty, cess or fees. Thus amount of GST will be added to calculate Turnover. It is also said it depends on method of accounting followed by assessee if it is inclusive method, GST has to be added.

  The purpose of section 145A is for determining the income chargeable under the head Profits and gains of business or profession. Hence, this makes the provision of section 145A inapplicable on Section 44AD. GST is collected by a taxpayer on account of the Government. The same is required to be paid to the Government. And therefore it cannot form part of the turnover. If we include GST in turnover then it’s 8% will going to be part of total income U/S 44AD, which is not justified. Thus, stronger view is GST will not be added in calculating turnover.

  Turnover will also depend on method of billing followed by the assessee whether to include service charges for delivery etc., sales of unusable empties, packages etc. But it will not include advance received, security deposits, sales of assets, interest etc.

  As per Guidance Note on Tax Audit issued by the ICAI, the turnover in case of futures and options is computed in following manner if assessee opts for offering income u/s 44AD: (a) The total of favourable and unfavourable differences shall be taken as turnover (absolute values ignoring positive or negative signs). (b) Premium received on sale of options is also included in turnover.  (c) In respect of any reverse trades entered, the difference thereon should also form part of the turnover.

  Whether remuneration to a partner from partnership firm can be called as turnover u/s. 44AD?

  Madras High Court in the case of Anandkumar Vs ACIT Madras High Court 388 of 2019 held that conspicuously section 28(v) has not been included in sub-section (2) of Section 44AD which deals with any interest, salary, bonus, commission or remuneration by whatever name called, due to or received by, a partner of a firm from such firm. As such remuneration to partner from firm is not covered u/s. 44AD.

• Section 44AD vis-à-vis section 68/69
  • When a taxpayer declares income under Section 44AD, whether he is under an obligation to prove that he has incurred the balance of gross receipts by way of business expenditure became an issue in Nand Lal Popli v. Dy. CIT [2016] 71 taxmann.com 246 (Chandigarh).

  The assessee proposed 8% of the gross contract receipt of Rs. 37.75 lakhs as income. The Assessing Officer (AO) requested information on the 92% expenditure of Rs. 32.73 lakhs. The assessee presented a cash flow statement with a cash outflow of Rs.18.49 lakhs, besides payment from the bank to the extent of Rs.16.25 lakhs. In the absence of documentary evidence of the cash flow, the AO ultimately made an addition of Rs.32.24 lakhs as an unexplained expenditure.

  The issue before the Tribunal was whether the AO can make an addition under Section 69C of the ITA for the expenditure incurred by the assessee based on the cash flow statement when the assessee has declared income under Section 44AD. The Tribunal held that Section 44AD does not place any obligation on the assessee to maintain books of account when he has declared income as per the presumptive provision. It held that the cash flow statement cannot be considered as keeping books of account. It also held that the assessee cannot be asked to prove to the satisfaction of the AO the expenditure of 92% of the gross receipts, as that would defeat the very purpose of presumptive taxation.

  It observed that if the AO had independent evidence of the expenditure incurred/not incurred or had carved out the case out of the glitches of Section 44AD, then such an addition could have been possible. Thus, the Tribunal held that an addition towards unexplained expenditure cannot be made under section 69C when the income has been offered under Section 44AD.

  • Whether a taxpayer declaring income under Section 44AD could be subjected to tax under Sections 68/69 for the amounts credited in his bank account became an issue

  The Hon’ble Supreme Court in the case of Lakhmichand Baijanath v. CIT [1959] 35 ITR 416 (SC) held that when an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business.

  A view has been taken by the Income-tax Appellate Tribunal in the case of in the case of Thomas Eapen v. ITO [2020] 113 taxmann. com 268 (Cochin – Trib.) where it was held that where assessee, a small trader in medicine falling under section 44AD of the Act, offered income on presumptive taxation basis, provision of section 69A of the Act could not be applied to make addition in respect of undisclosed cash credits found in assessee’s bank account.

• Income declared u/s. 44AD vis a vis addition u/s. 69A

  Hon. Nagpur Tribunal in the case of ITA No.154/NAG/2021 Ankit Shankarlal Tanwani vs ACIT, Central Circle 2(1), Nagpur decided on 8th June 2022 held that It cannot be argued that statute has provided a rate which is not reasonable. Further, having regard to provisions of s. 44AD, which is overriding, it is not possible for the Revenue to argue that profit computed as per the section is not profit computed “in accordance with provisions of this Act” or that the legislature was unaware of provision of ss. 68, 69, 269SS, 269T, 140(3) etc., in the enactment of s. 44AD. Thus, reading entire scheme of the Act one has to hold that profit computed as per s. 44AD of the Act by application of flat rate in one recognized method of computation of total income or part of total income.

  In the above case Hon. Nagpur Tribunal held that the assessee filed the sales register which has not been discarded by any of the authorities below. Considering the total turnover sale of the assessee, net income determined under section 44AD of the Act shown by the assessee has to be accepted, as there is no provision in the Income Tax Act, 1961, to reduce the income of the assessee. It is also admitted fact that in the earlier years the department has accepted income U/s. 44AD of the Income Tax Act. The judicial precedence relied upon by the learned Counsel for the assessee also support the case of the assessee and none of the case laws relied by the learned departmental representative were applicable in the case of the assessee and the income determined under section 69A of the Act is directed to be treated as regular return of income of the assessee and returned income shown by the assessee is hereby directed to be accepted.

• No Disallowance u/s. 40(a)(ia)

  Section 40 starts with a non obstante clause “Notwithstanding anything to the contrary in section 30 to 38.” As against this section 44AD has non obstante clause “Notwithstanding anything to the contrary in section 28 to 43C”. Thus, section 40 does not have overriding effect over section 44AD, 44ADA & 44AE, while all these sections have overriding effect over section 40. In ITO v. Mark Construction [2012] 23 taxmann.com 398 (Kolkata), the Tribunal held that disallowance under section 40(a)(ia) could not be made in case of assessee opting for presumptive taxation scheme. This is also confirmed in the case of has been upheld by the Surat Bench of ITAT in the case of Bipinchandra Hiralal Thakkar v. ITO [2021] 124 taxmann.com 236 (Surat-Trib.)

• No Disallowance u/s.40A

  Section 40A(1) reads “The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this act relating to the computation of income under the head “Profits & gains of business or profession”. Wordings of section 40A(1) does not make it clear whether it overrides presumptive tax schemes of section 44AD etc.. Section 44AD etc. has overriding effect over section 28 to section 43C, which includes section 40A also. Thus provisions of section 40A should not override section 44AD. In ITO Jaipur v. Rajesh Kumar Gupta, Jaipur Bench (SMC) of ITAT held that disallowance u/s 40A(3) cannot be made while considering presumptive income u/s 44AF. It held that “The presumptive system of tax u/s 44AF starts with non-obstante clause and overrides other provisions. In view thereof, there is no justification in making the addition which is deleted.

• Disallowance u/s.43B a controversial issue Section 43B reads “Notwithstanding anything contained in any other provision of this act…”. On other hand section 44AD reads “Notwithstanding anything to the contrary in section 28 to 43C”. This means that section 43B has overriding effect over all other provision of the Act including section 44AD.On other hand the overriding effect of section 44AD is limited over section 28 to 43C, thus section 43B has a large overriding effect in as much as it overrides all other provisions of the Act.

  The Panaji Tribunal in case of Good Luck Kinetic v. ITO [2015] 58 taxmann.com 267 while dealing with disallowance u/s 43B against income computed u/s 44AF held that the non-obstante clause in Sec. 43B has a far wider amplitude because it uses the words “notwithstanding anything contained in any other provisions of this Act”. Therefore, even assuming that the deduction is permissible or the deduction is deemed to have been allowed under any other provisions of this Act, still the control placed by the provisions of Sec. 43B in respect of the statutory liabilities still holds precedence over such allowance. This is because the dues to the crown has no limitation and has precedence over all other allowances and claims. In these circumstances, we are of the view that the disallowance made by the AO by invoking the provisions of Sec. 43B of the Act in respect of the statutory liabilities are in order even though the Assessee’s income has been offered and assessed under the provisions of Sec. 44AF of the Act. Thus, Panaji Tribunal held that disallowance u/s. 43B can be made even in the case of presumptive scheme of taxes.

  On other hand, one may argue that section 44AD comes after section 43B and there is no mention in the section 44AD about disallowance under section 43B. Disallowance u/s. 43B in a year, will require claiming allowance u/s. 43B in later year, and one not maintain proper books, may not have proper records for disallowance and later claiming allowance u/s. 43B. This defeats the very basic purpose of presumptive taxation scheme. Moreover, Income tax portal of Income Tax Department, India, Ministry of Finance, Government of India in its “Advance Learning on Section 44AD (Theory)” it has been mentioned that “Further, from income computed at the aforesaid rate, no disallowance can be made under sections 40, 40A and 43B. Thus, in case of an assessee adopting the presumptive taxation scheme of section 44AD, no disallowance under sections 40, 40A and 43B will apply.”

• In case the income of assessee is higher than prescribed 6% or 8% whether assessee is bound to show higher income

  The Punjab and Haryana High court in Naresh Kumar v. CIT 393 ITR 389 has held cash deposited in bank is chargeable under section 69A as the assessee failed to link purchases and sales and the deposit of money in bank by the assessee returning income based on 44AF. So, it is incorrect to say that AO cannot take  any action and apply section 69, 69A, 69C etc.It all will depend on facts of each case.

  Some legal luminaries are of the view that it is not necessary to show higher income, if the assessee chooses to declare prescribed income it will suffice. According to them wordings in Section 44AD “a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profit and gains of such business”. According to them it is at the option of the assessee to declare higher income. Further the assessee is bound to show proof of deposit, which he can always show matching amount of turnover or gross receipt, expense 92% of deduction need not be matched.

  The provisions of presumptive taxation are enacted to facilitate computation of total income and filing of return of income. Itdoes not give a license to the assessee todeclare lower income despite the assesseehaving a higher income. The assessee is legally bound to return higher income if the same is higher than the benchmark given. The other stronger view is that the assessee needs to disclose higher income in case income exceeds prescribed percentages.

Section 44ADA: Computing profits and gains of Profession on presumptive basis

The presumptive taxation scheme of section 44ADA is designed to give relief to the small taxpayers engaged in the specified profession. The Finance Act, 2016 introduced a new Section 44ADA incorporating a similar scheme for presumptive taxation of professionals from Assessment Year 2017-18. Section 44ADA is applicable to a person who is a resident of India and having income from profession referred in section 44AA(1) viz., legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration and any other profession as notified by the, CBDT; and the gross receipts on account of such profession do not exceed INR 50 lakhs. Once the above said conditions are satisfied, the assessee has an option to declare either 50% or more of the gross receipts as income from such profession. While arriving at such presumed income it would be deemed that all deductions under the provisions of Sections 30 to 38 have been given effect to and the written down value of the assets used for the purposes of such profession would be deemed to be calculated as if the person would have claimed depreciation.

Eligible Assessee:

The Finance Act, 2021 has amended provisions of section 44ADA, accordingly with effect from Assessment Year 2021-22, the benefit of section 44ADA is eligible only in case of assessee who is an:

• Resident Individual; and
• Resident Partnership firm other than a Limited Liability Partnership (LLP) covered in section 2(1)(n) of Limited Liability Partnership Act, 2008.

Thus HUF, LLP, AOP, Companies etc. are not eligible to take advantage of the presumptive taxation scheme of section 44ADA.

Eligible person:

A person resident in India engaged in following professions can take advantage of section 44ADA:-

1. Legal
2. Medical
3. Engineering or architectural
4. Accountancy
5. Technical consultancy
6. Interior decoration
7. Any other profession as notified by CBDT

Professions which are notified by the CBDT are Authorised Representative, profession of Film Artist, Company Secretaries and profession of Information Technology.

“Authorised Representative” means a person who represents any other person, on payment of any fee or remuneration, before any tribunal or any authority constituted under any law, but does not include an employee of the person so represented or a person who is carrying on the profession of Legal Profession or a person carrying on the Profession of Accountancy.

“Film artist” means any person engaged in his professional capacity in the production of a cinematograph film whether produced by him or by any other person, as- An actor, cameraman, director, including an assistant director, music director, including an assistant music director, art director, including an assistant art director, dance director, including an assistant dance director; editor, singer, lyricist, story writer, screen – play writer, dialogue writer, and dress designer.

“Company Secretaries” means a person who is a member of the Institute of Company Secretaries of India in practice as per section 2(2) of the Company Secretaries Act, 1980.

Accordingly, all the professionals, other than those listed above, are the ones who cannot opt for a presumptive taxation scheme u/s. 44ADA.It may be noted that Share brokers, insurance agents, clearing and forwarding agents, estate agents are not considered as professional.

Income computation manner:

The presumptive taxation scheme of section 44ADA can be adopted by the eligible persons, if the total gross receipts from the profession do not exceed Rs. 50 Lakhs. In other words, if the total gross receipt of the profession exceeds Rs. 50 Lakhs then the scheme of section 44ADA cannot be adopted.

Amendment with effect from Assessment Year 2024-25:

However, if the amount or aggregate amount of cash received during the previous year does not exceed 5% of the total gross receipt of such year then the threshold limit for total gross receipt shall be taken as Rs. 75 Lakhs instead of Rs. 50 Lakhs. The receipts through the mode of cheque or a bank draft which is not an account payee, shall be considered a receipt in cash for this purpose.

Under section 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person can declare income higher than 50%.

Applicable Conditions:

A person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%. It will be presumed that deductions allowable under the provisions of section 30 to 38 have already been given full effect to and no further deduction shall be allowed.

While computing income as per the provisions of section 44ADA, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such profession shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

A partnership firm cannot claim deduction as per the provisions of section 40(b) for Salary and interest paid to partners, from income computed u/s. 44AD, since there is no specific provision to allow so. Further, provision of section 44ADA begins with “notwithstanding anything contrary contained in section 28 to 43C”, thus provision of section 40(b) is excluded.

Consequence of non-fulfillment of conditions:

A person carrying profession can declare his income at a rate lower than those prescribed under section 44ADA. However, then he is required to maintain the books of accounts as prescribed under rule 6F of Income tax rules’ 1962, and to get his accounts audited as prescribed under section 44AB.

Advantage of opting Presumptive taxation scheme:

As explained herein above Advantages of opting presumptive tax u/s. 44AD, in a similar way following advantages will be available to a person adopting for presumptive tax scheme u/s. 44ADA

• Tax audit under section 44AB not applicable if a person opts the scheme of section 44AD
• Advance tax payable only before 15th March, no need to pay in June, September and December
• No further allowance or disallowance u/s. 28 to 43C
• Deductions under chapter VIA can be claimed
• Current year losses and/or brought forward losses can be setoff
• Ease of carrying profession. However return of income to be filed on or before 31st July.

As regards non maintenance of books of accounts as required u/s. 44AD

Under presumptive scheme there is a understanding that the books of account are not required to be maintained by assessees u/s. 44AA. However, Section 44AA this is provided only with reference to those assessees who are covered by Sections 44AD and 44AE. Since, Section 44AA is silent in relation to the assessees who are covered by Section 44ADA. Further, Section 44ADA overrides only Sections 28 to 43C and not Section 44AA and therefore, revenue may take a stand that it is mandatory for the professional who is covered under Section 44ADA to maintain books of accounts though he has opted for the presumptive taxation scheme. In this regard we have to state that the Memorandum to the Finance Bill, 2016 provides that an assessee opting for Section 44ADA would not be required to maintain books of account under Section 44AA(1), the same has not been brought out clearly in the Section 44AA. One may rely upon the legislative intent put forth by the Memorandum to the Finance Bill and also the fact that without the exception to maintain books of account the very purpose of the presumptive taxation scheme would be defeated. Even Section 44ADA (4) provides that if income is declared lower than specified percentages, one has to maintain books of accounts and other documents. Therefore, it should be presumed that those declaring prescribed or more profits need not maintain books of accounts.

As provided in section 44AD, there are no consequences if a person opts out from the presumptive taxation scheme of section 44ADA in any particular year. It can switch back to 44ADA in next year.

Certain issues and controversies:

As explained herein above issues and controversies u/s. 44AD will have similar views even for section 44ADA since more or less wordings of both sections are similar:

• Method of accounting: The method of accounting followed by the assessee is also relevant for the determination of gross receipts
• Turnover Defined: Whether to include GST to decide amount of gross receipt from profession
• Section 44ADA vis-à-vis section 68/69
• Income declared u/s. 44ADA vis a vis addition u/s. 69A
• No Disallowance u/s. 40(a)(ia) if income declared u/s. 44ADA
• No Disallowance u/s.40A if income declared u/s. 44ADA
• Disallowance u/s.43B a controversial issue
• In case the income of assessee is higher than prescribed 50% whether assessee is bound to show higher income

Section 44AE: Computing profits and gains of Business of plying, hiring or leasing goods carriages

The scheme of section 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing of goods carriages. Initially, section 44AE provided for a method of estimating income from the business of plying, hiring or leasing goods carriage owned by a tax payer owning not more than 10 goods carriages. As per CBDT circular no. 684 dated 10.06.1994 this scheme does not apply to those who operates goods carriages on hire without owning them.

The important criterion of the scheme is the restriction on owning of not more than 10 goods vehicles at any time during the year. Thus, if a person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of this scheme. With effect from 1st April 2019 a person who is in possession of goods carriage, whether taken on hire purchase or on installments and for which whole or part of the amount is still due, shall be deemed to be the owner, as such even those vehicles will be considered for counting of ten vehicles.

Eligible Assessee:

An assessee engaged in the business of plying, hiring or leasing goods carriages and owns not more than 10 goods carriages at any time during the previous year.

Thus all assessees are entitled to claim the benefit of section 44AE. It could be Individual, HUF, Company, partnership Firm, LLP, AOP, BOI, etc. Assessee could be Resident or Non- resident. In other words, even non-resident assessee could adopt provisions of section 44AE.

Eligible Business: 

The presumptive taxation scheme of section 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages.

The person should not own more than 10 goods vehicles at any time during the year. a person who is in possession of goods carriage, whether taken on hire purchase or on installments and for which whole or part of the amount is still due, shall be deemed to be the owner, as such even those vehicles will be considered for counting of ten vehicles.

Income Computation Manner:

For Heavy Goods Vehicle, income will be computed at the rate of Rs. 1,000 per ton of gross vehicle weight for every month or part of a month during which the heavy goods vehicle is owned by taxpayer. In case of vehicles other than heavy goods vehicle, income will be computed at the rate of 7,500 per vehicle for every month or part of a month during which the goods carriage is owned by taxpayer. Part of the month would be considered as full month.

“Heavy Goods Vehicle” means any goods carriage having gross vehicle weight exceeding 12,000 kilograms.

If the actual income is higher than the presumptive rate, i.e., higher than Rs. 1,000/ Rs. 7,500, then such higher income can be declared.

Applicable Conditions:

The presumptive income computed at the rate of Rs. 1,000 per ton or Rs. 7,500 per goods vehicle per month is the final income and no further expenses will be allowed or disallowed. It will be presumed that deductions allowable under the provisions of section 30 to 38 have already been given full effect to and no further deduction shall be allowed.

Interest and Remuneration to partner is allowed to a firm: However, in case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the presumptive rate of Rs. 7,500 per goods vehicle per month, further deduction can be claimed on account of remuneration and interest paid to partners. Deduction will be allowed subject to conditions and limits specified u/s. 40(b). This has been specifically mentioned by way of proviso to Section 44AE(3) with retrospective effect from 1.4.1994. It is important to note that no such deduction u/s. 40(b) is allowed to a firm in Section 44AD and 44ADA.

While computing income as per the provisions of section 44AE, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such profession shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

Depreciation : It was clarified that all deductions under Sections 30 to 38 including depreciation, would be deemed to have been already allowed and no further deduction would be allowed under all presumptive income scheme sections of 44AD, 44ADA and 44AE. The written down value would be calculated, where necessary, as if depreciation as applicable had been allowed.

Consequence of non-fulfillment of conditions:

A person can declare his income at a rate lower than those prescribed under section 44AE. However, then he is required to maintain the books of account and to get his accounts audited as prescribed under section 44AB.

Advantage of opting Presumptive taxation scheme:

As explained herein above Advantages of opting presumptive tax u/s. 44AD, in a similar way following advantages will be available to a person adopting section 44AE

• No need to maintain books of accounts and vouchers etc. as required u/s. 44AA
• Tax audit under section 44AB not applicable if a person opts the scheme of section 44AD
• No further allowance or disallowance u/s. 28 to 43C
• Deductions under chapter VIA can be claimed
• Current year losses and/or brought forward losses can be setoff
• Ease of carrying profession. However return of income to be filed on or before 31st July.

Advance tax payable for all four installments viz June, September, December and March

There is no concession in payment of Advance tax, as such it is payable in 4 installments 15% by 15th June, 45% by 15th September, 75% by 15th December and 100% by 15th March. If assessee fails to pay the advance tax at the various instalment of previous year, he shall be liable to pay interest as per section 234C. It is important to note that advance tax in Section 44AD and 44ADA is payable only on or before 15th March only as per the provisions of section 211.

As provided in section 44AD, there are no consequences if a person opts out from the presumptive taxation scheme of section 44AE in any particular year. It can switch back to 44AE in next year.

Certain issues and controversies:

As explained herein above issues and controversies u/s. 44AD will have similar views even for section 44AE since more or less wordings of both sections are similar:

• Section 44AE vis-à-vis section 68/69
• Income declared u/s. 44AE vis a vis addition u/s. 69A
• No Disallowance u/s. 40(a)(ia) if income declared u/s. 44AE
• No Disallowance u/s.40A if income declared u/s. 44AE
• Disallowance u/s.43B a controversial issue

In case the income of assessee is higher than prescribed amount, whether assessee is bound to show higher income.

Hon. Allahabad High Court in the case of CIT v. Nitin Soni (2012) 21 Taxmann.com 447 (Allahabad) has held that the words “shall be deemed” are the keys words and they are indicative of the legislative intent. It has further held that the tax shall be chargeable on presumptive income, computed as per sub-section (2) of the Section 44AE. The presumptive income, which may be less or more, is taxable. Such an assessee is not required to maintain any account books. This being so, even if, its actual income in a given case is more than income calculated as per sub-section (2) of Section 44AE, cannot be taxed.

In spite of above judgement, as explained herein above issues and controversies u/s. 44AD, it is still felt that assessee needs to disclose higher income in case income exceeds prescribed amount.

Goods Carriage means:

“Goods Carriage” means any motor vehicle constructed or adapted for use solely for  carriage of goods, or any other motor vehicle not so constructed of adopted when used for the carriage of goods.

JCB used in process of construction, an earth moving machinery used for excavation of earth, lifting of heavy materials, etc. cannot be termed as “Goods Carriage” and income from hiring of JCB cannot be offered for tax under section 44AE. – Gaylord Constructions v. ITO (2008)175 Taxmann 99 (Coch)

Adopting section 44AE for part of Lorries

An assessee cannot apply provision of section 44AE in case of some Lorries and to go for regular assessment in respect of other Lorries on the basis of books of account. – CIT v. C.P. Kunhimohammed (2005) 94 ITD 278 (Coch)

Sale proceeds of scrap part of hiring business income

If the Assessee has adopted provisions of section 44AE, separate addition on account of proceeds of scrap cannot be made since the receipt from scrap is not a separate source of income. – Mohammad Aslam v. ITO (2005) 94 TTJ (Jodh) 282

Conclusion

Presumptive scheme of taxation is a good initiative of Income Tax Department for ease of doing business and making it hassle free for small business or professional persons. However, it is urged that to make it more useful (i) it be made even broader based considering inflation and economic growth by increasing threshold limits in 44ADA and number of vehicles in 44AE (ii) anomalies and unwarranted stipulations be removed such as granting remuneration and interest to partners in a firm, removing conditions that once an assessee opts out of 44AD he cannot adopt the same for 5 years.