Recent Developments in Presumptive Taxation
(WiderScope of Section44ADw.e.f. A.Y. 2011-12)
- CA. Ashish Goyal, Advocate
PART A : Introduction
Q.1 Why there is a presumptive taxation?
Richard Musgrave championed the device of presumptive taxation, in his well-known work on public finance. He explained in detail the merits of the system. In his view, the additional revenue which accrues as a result of presumptive taxation will be a welcome advantage for the State, looking for chunks of money to carry out the very many welfare schemes. Presumptive taxation was much more than an effective check against evasion; it was the ideal form of taxation from the point of view
of efficiency.
Assessees’ are also benefited by presumptive taxation, as the requirement of compliance like accounts, audit, advance-tax etc is reduced. Their assessments are completed without much inquiry and therefore tax management is easy.
Q.2 Briefly explain the history of presumptive taxation in India?
The provisions of presumptive taxation were introduced by Finance Act, 1988 for the first time in the
Income-tax Act, 1961 in the form of section 44AC which applied to presumptive taxation on trading
of certain goods. Section 44AD was introduced for the first time by Finance Act, 1994.
This article concentrates on the provisions of section 44AD after the amendments by Finance (No. 2) Act, 2009. The amended provisions apply w.e.f. A.Y. 2011-12. The provisions of presumptive taxation override sections 28 to section 43C. Therefore the provisions shall apply unless assessee opts to offer lower profit.
PART B: New Section 44AD briefly explained
Q3. Whether the scope of new section 44AD is wider then earlier section 44AD.
The new section 44AD consolidates the earlier section 44AD and also section 44AF. Earlier section
44AD was limited to civil construction business and section 44AF was related to retail business. The new section 44AD covers all business, whether retail, wholesale, commission, manufacture, trading, money lending, publishing, tailoring, contractor-ship, builder, real estate, consultancy business etc.
Q.4 What are the conditions for the applicability of section 44AD?
As per the new provisions, to be covered by presumptive taxation u/s. 44AD, the following conditions shall be satisfied: -
(a) There shall be “eligible assessee”
(b) There shall be “eligible business”
“Eligible assessee” has been defined to mean: -
- An individual, HUF, Partnership Firm (except Limited Liability Partnership); and
- Who has not claimed any income based deduction or exemption (section 10A to 10BA or chapter VIA Part C)
“Eligible business” will cover: -
- Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
- Whose total turnover or gross receipts in the P.Y. does not exceed Rs. 60 lakhs.
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Q.5 How the income is to be computed, once section 44AD applies?
Once the assessee is covered by section 44AD, the income under the business or profession from such business is taken at
- 8% of the total turnover or gross receipts, or
- as the case may be, a sum higher than the aforesaid sum in the previous year on account of such business.
Q.6 What are the benefits of getting the assessment u/s. 44AD?
One may note the benefits of being covered by section 44AD: -
1. Assessee will be exempted from the requirement of maintaining any books of account as prescribed u/s. 44AA.
2. Assessee will not be required to get the accounts audited u/s. 44AB. Further, the turnover of such business will not be considered for calculating the turnover u/s. 44AB.
3. In the new provisions, the assessee is made further exempt from the requirement of payment of advance-tax. Thus, assessee will not be liable for interest u/s. 234B and 234C.
4. No separate deduction will be allowable u/s. 30 to 38 and no disallowance will be made u/s.
40 to 43D. This means that even if assessee does not deduct TDS, or makes cash payment exceeding prescribed limit u/s. 40A(3), or does not discharge statutory dues u/s. 43B, or makes illegal expenses under Expln. to section 37; no disallowance will be made for same.
5. One may further note, although assessee will not be getting any deduction/ no separate disallowance will be made; yet, in case of firm, a separate deduction u/s. 40(b) for payment
to partners will be allowed.
6. Another benefit of offering income u/s. 44AD is that generally scrutiny norms do not cover section 44AD cases. In case assessee offers income lower than section 44AD, scrutiny assessment is mandatorily done.
7. It may also be noted that the depreciation will be deemed to have been allowed. Therefore, the Written Down Value of the assets will be deemed to have been recomputed and reduced.
Q.7 Can assessee opt out of the provisions of section 44AD?
Once the conditions of section 44AD are applicable, prima-facie section 44AD will apply, and the income will be taken at 8% or such higher rate as the case may be.
However, if the assessee wants to offer lower profits, then section 44AD(5) becomes applicable. In case assessee wants to offer lower profits, the provisions of income under the head Business or Profession shall apply normally. Therefore all the expenses will be allowable as per section 30 to section 38 and disallowances will also be made u/s. 40 to 43D.
Further, section 44AD(5) states that, if the assessee’s total income exceeds the basic exemption limit, the assessee will be required to : -
(a) Maintain the books of account as required u/s. 44AA(2).
(b) Get the books of account audited u/s. 44AB [irrespective of the fact that the turnover is less than Rs. 60 lacs].
PART C: FAQs on new provision
Q.8 I am (My firm is) a Professional. Am I eligible under section 44AD.
Section 44AD uses the words “Business”. The word “business” is different from “profession”. Section
2(13) defines “business” to include any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture. Whereas, section 2(36) defines “profession” to include vocation.
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