CRITICAL COMPARISON AND ANALYSIS OF PRESUMPTIVE TAX PROVISIONS UNDER INCOME TAX ACT 1961 – 44AD, 44ADA & 44AE
1. Section 44AD clearly specifies the ‘Eligible Assessee’ as ‘all resident Individuals, HUFs, or Firms (excluding Limited Liability Partnership Firms)’ engaged in ‘Eligible Business’, which is defined by an exclusive clause by specifying the businesses to which the scheme is not applicable ‘business of plying, hiring or leasing goods carriages covered u.s 44AE, any profession referred to u.s 44ADA, any person earning income in the nature of commission or brokerage and any agency business. Besides, this scheme applies to a business if its total turnover or gross receipts do not exceed Rs. 2 Crores whereas the limit for Compulsory Audit is only Rs. 1 Crore (From A.Y. 2021-22 onwards if the total cash receipts do not exceed 5% of the turnover and cash payments do not exceed 5% of the total payments the limit for Compulsory Audit is fixed at Rs. 5 Crores.) Since the limit for Presumptive Tax is Rs. 2 Crores the limit for Compulsory Audit should also be fixed at Rs. 2 Crore, because as per the existing provisions for the businesses wherein the turnover is between Rs. 1 Crore and Rs. 2 Crores both the sections are applicable and hence the assessee has the option to chose 44AD and offer the fixed percentage of the turnover as income or if his income is below he fixed percentage he has to get his accounts audited under section 44AB.
2. Section 44ADA simply say that this section will apply to a resident assessee engaged in profession referred u.s. 44AA(1). The term ASSESSEE is defined u.s. 2(7) and for RESIDENT, we have go with term ‘Residence in India’, which is defined u.s 6. It does not spell out clearly whether the same is applicable to individual, HUF, Partnership Firm, LLP, Limited Company etc., (as given in section 44 AD). We have to assume that this section will not be applicable to those assesses, whose accounts are audited under any other provisions of the Income Tax Act. For professionals there is no clash in the Turnover as in 44AD because if the Turnover is more than Rs. 50 Lakhs, Compulsory Audit is required and if it is Rs. 50 Lakhs or less they can opt for Section 44ADA and offer 50% of gross receipts as income or offer less than that by filing audited accounts. For limited companies & LLPs this section may not of any use because their accounts are to be necessarily audited and the profit as arrived at is to be offered as income irrespective of the fact that the profit arrived at is above or below 50% of the gross receipts. Hence this section will not be applicable to those assessees whose accounts are audited under the Income Tax Act or any other Act.
3. Section 44AE is even more relaxed with regard to applicability in the sense that it applies to all assessees Individuals, HUF, Partnership Firm, LLP, Limited Company etc., and there is no mention about the residential status. Here the restriction is about number of vehicles, which is not more than ten and used in the business of plying, leasing, or hiring trucks. Section 44 AD specifically excludes LLP while making it applicable for partnership firms and it is not applicable to other assessees not specified in the section. As observed in the discussion above under section 44ADA this section will not have any practical application for those assesses, whose accounts are audited under any other section of the Income Tax Act or under any other Act. An assessee who is not a resident can also opt for offering income under this section because the word RESIDENT is missing in this section, whereas 44AD and 44ADA are specific about the residential status.
II. RATE OF ARRIVING AT THE INCOME
1. 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 arrived @ 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 is estimated as income. Here also concession may be given for promoting non-cash transactions by allowing deduction of 5% of the receipts in mode other than cash.
2. 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 and to calculate income @ 50% on the receipt of reimbursement of expenses may not be correct. Hence such receipt must be allowed to be deducted from the gross receipts for arriving at the calculation of 50%.
III. CONTINUATION OF THE SCHEME IN SUBSEQUENT YEARS.
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).
Of course similar restriction is not in the other two sections viz. 44ADA & 44 AE and hence whenever the assessee feels convenient he can opt for presumptive tax.
Interest and Salary to Partners: Another drawback in this Presumptive Taxation under section 44AD, in the case of Partnership Firms, Partners’ Interest and Salary are specifically not allowed as deduction and 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. and salary up to the limits provided u.s 40b are allowed as deduction. It will be fair and just to allow interest and salary to partners so that those Partnership Firms which opt for presumptive tax are 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.
Liability to pay Advance Tax:
The assessees offering income u.s 44AD & 44ADA are required to pay Advance Tax for the Financial Year in one instalment by 15th March and for the assessees offering income u.s 44AE the Advance Tax is to be paid in four instalments like any other assessee. For all the three categories the liability to pay advance tax should be uniform; in one instalment by 15th March.
Lower Income may be declared:
In all the three sections lower income may be declared in any year. In such a case the assessee shall be liable to maintain books of account prescribed u.s 44AA and get the accounts audited u.s 44AB if the total income of the assessee exceeds the basic exemption limit. In my opinion this clause “if the total income of the assessee exceeds the basic exemption limit” will defeat the very purpose of the section because the assessee may resort to offering income below the taxable limits if he wishes to escape from maintaining books of account and get them audited. The law should be clear to the effect that if the turnover/gross receipts are more than the limits specified in the section regardless of the taxable income the books should be audited if lower income is declared. As per the wordings of the present section as exists the assessee will be allowed to carry forward loss, if any, without audit of books of account if lower percentage is offered since ‘his income is below the taxable limits’(loss will also be treated as below the taxable income).
Maintenance of Books of Account:
Maintenance of Books of Account is as given in section 44AE, wherein the assessees who offer income under section 44AD and 44AE are exempt from maintaining books of account and since section 44ADA is not mentioned in the section for exemption, as per the existing law even if the income is offered u.s 44ADA the assessee has to maintain Books of Account.