Budget 2024 brings into focus the complexities and challenges surrounding presumptive taxation in India, particularly under sections 44AD, 44ADA, and 44AE of the Income Tax Act. These sections, aimed at simplifying tax compliance for certain taxpayers, face scrutiny for their applicability, concessions, and implications on business operations.
WHETHER THE PROBLEMS IN THE PRESUMPTIVE TAXATION WILL BE ADDRESSED IN THE BUDGET 2024?
Applicability of sections 44AD, 44ADA & 44AE:
As of now there is no clarity. Each section has got its own definition of the assessees to whom it is applicable. All the sections should be made applicable to all resident assesses excluding the assessees whose accounts are necessarily to be audited under any other provisions of the Act.
Under Section 44AD income is arrived @ 8% of the turnover and the rate is lowered to 6% for receipts other than cash. But such a concession is not made available u.s. 44ADA and 44AE. For section 44ADA the income is calculated @ 50% of the gross receipts, wherein to promote non-cash transactions in this category also for receipts other than cash, 40% may be taken as income.
Likewise u.s 44AE Rs. 1,000/- p.m. per ton for Heavy Goods Vehicle and Rs. 7,500/- for other vehicles are estimated as income. Here also concessions may be given for promoting non-cash transactions by allowing deduction of 5% of the receipts in mode other than cash.
Under section 44AD the turnover is taken into account, which is nothing but net sales (i.e. sales less returns, if any), whereas under section 44ADA the rate of income is arrived from the Gross Receipts, which may include reimbursement of expenses also, wherein calculation of income @ 50% on the receipt of reimbursement of expenses in not correct. Hence such receipts should be allowed to be deducted from the gross receipts for arriving at the calculation of 50%.
Section 44AD (4) reads as under:
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 assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (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 sub-section (1).
From the above clause it is clear that the assessee cannot opt for ‘Presumptive Tax’ for six years (including the year in which he has come out of the scheme), if he has not offered income under this scheme for consecutively for six years including the first year in which he has opted for the scheme. Does it mean that if has opted for the scheme for six years consecutively, afterwards he is free to opt for the scheme, whenever he likes?
If the intention of the statute is to deny the benefit to those who opts out of the scheme, it is sufficient to mention that once if he fails to opt for the benefit of this section in any year (instead five years) subsequent to the year he has availed the benefit he cannot claim the same for next five years, i.e., he cannot return for five years.
Hence the clause 4 is to be replaced as:
Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any year relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (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 sub-section (1).
In the case of Partnership Firms, Partners’ Interest and Salary are specifically not allowed as deduction under section 44AD whereas the section 44ADA is silent about the same. While books of accounts are maintained and audited, before arriving at the taxable income, interest @ 12% p.a. on the amounts invested in the Partnership Firm either in Capital Account or in Current Account of the Partners and salary up to the limits provided u.s 40b are allowed as deduction before arriving at the Taxable Income. It will be fair and just to allow interest and salary to partners so that those Partnership Firms which opt for presumptive tax are also treated on par with others who get their accounts audited. Further in the present situation if a partner gets interest and salary from a Partnership Firm, which has offered income under presumptive taxation scheme, whether such interest and salary are exempt from Income Tax in the hands of the partners is not specified in the Act though they are not allowed as expenditure in Firm’s hands. Since all the expenditure is deemed to have been allowed in Firm’s hands the interest and salary would be subject to tax in partners’ hands also, which will lead to double taxation. In the normal course in the case Firms, which are subject to audit and offer less income than the rates prescribed under this scheme, such interest and salary (which are allowed as deduction) are not taxable in the hands of the partners as Income from Business/Profession, Hence it suggested that the assessees who offer income under this scheme are to be allowed to deduct interest and salary to partners up to the existing limits from the income offered at the prescribed rates so that they are also treated on par with those who offer less income with audited accounts. As of now the salary to partners is allowed to be deducted from the percentage of profit arrived under presumptive basis u.s 44AE only.
Conclusion
Budget 2024’s deliberations on presumptive taxation underscore the need for legislative clarity and equitable tax treatment. Addressing the complexities in sections 44AD, 44ADA, and 44AE is critical to promoting compliance, reducing administrative burdens, and fostering a conducive tax environment for small businesses and partnership firms alike. As stakeholders await Budget 2024 outcomes, balancing taxpayer interests with regulatory imperatives remains paramount for sustainable fiscal policies.
(Republished with amendments)
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