Practical issues in Presumptive Taxation – 44AD, 44ADA & 44AE

Under section 44AD from if the Turnover of an assessee being resident individual, HUF, Partnership Firm (not being a LLP) and who is not claiming deduction under section 10A, 10AA, 10B &10BA or deduction under Chapter VI A under the heading ‘C -Deductions in respect of certain Incomes’ and derives income from any business except business in respect of plying, hiring or leasing goods carriages referred to in section 44AE is less than Rs. 2 Crores, then 8% of the turnover shall be deemed to be the income from Business, unless he declares more than that and any deduction allowable under sections from 30 to 38 shall deemed to have been allowed. Up to AY 2016-17 in the case of Firms interest and salary were specifically allowed as deduction subject to limits specified under section 40(b). After AY 2016-17, the amendment made by Finance Act, 2016 to disallow deduction of expenditure in the nature of salary, remuneration, interest paid to the partner as per section 40(b) out of presumptive income will be applicable.

Once the Assessee has offered income under this scheme and if in any subsequent year if lower income is offered he shall not be eligible to claim the benefit of this section for next five years. The rationale behind this provision is not understood. The provisions of this section are not applicable to Professionals, and persons earning income from Agency Business/Commission & Brokerage.

Now in the Budget it has been proposed that business income will be calculated @6% in respect of Turnover of gross receipt which is received by an account payee cheque/draft/use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed on or before the due date of filing the return of income. In respect of Sundry Debtors the amounts received in modes other than cash may be out of sales made in previous years and identifying the amounts received in such form for sales made in the current year and that too for such receipts received till the due date of filing the return of income is a herculean task unless separate records are kept. Though they need not keep ‘Books of Account’ some record should be maintained to confirm that the turnover is less than Rs. 2 Crore and to show out of the said Rs. 2 Crores how much is received in cash and how much is received in other modes. To avoid disputes the Income Tax Act/Rules may prescribe records and supporting documents to be maintained so that at the time of scrutiny or otherwise it will be easy for verification.

Likewise under section 44ADA for assessees engaged in profession referred to in subsection (1) of section 44AA such as legal, Medical, Accountancy, Technical Consultancy. Interior Decoration etc., if their gross receipts are less than Rs. 50 Lakhs,  then 50% of the turnover shall be deemed to be the income from Business, unless they declare more than that and any deduction allowable under sections from 30 to 38 shall deemed to have been allowed. It has been specifically stated that no further deductions under those sections shall be allowed.  Right from the inception in the case of Firms no deduction was specifically allowed as it was allowed u.s. 44AD.

Similarly under section 44AE for Assessees engaged in business of plying, leasing or hiring of trucks owning not more than 10 trucks at any time during the previous year,  income will be estimated @ Rs. 7,500/- p.m. per truck unless they declare more than that and any deduction allowable under sections from 30 to 38 shall deemed to have been allowed. In the case of Firms, interest and salary were specifically allowed as deduction subject to limits specified under section 40(b). Further the concession extended u.s 44AD with regard to receipts in modes other than cash is not proposed.

Though under all these sections if lower income is offered they have to maintain the prescribed books of account and get them audited under section 44AB, under section 44AD alone the return can be filed even without audit report also and such returns will be subjected to scrutiny under section 143(3).

Fortunately the restriction stipulated under section 44AD relating to denial of benefit of presumptive taxation for five years once the assessees offer less income after offering income under this scheme is not found in sections 44ADA & 44AE.

While, in the case of Firms, the salary and interest, which were specifically allowed for assesses offering income under section 44AE, the specific proviso is missing in sections 44AD and 44ADA. In my opinion since it has been provided in section 44AD and 44ADA that only ‘deduction allowable under sections from 30 to 38 shall deemed to have been allowed and no further deduction under those sections shall be allowed, the Assessees, which are Firms, offering income under sections 44AD and 44ADA can claim the salary and interest paid to Partners also about which there is no mention in sections 30 to 38 and the allowable limits are specified in section 40(b) only. Moreover it is also reasonable to allow the deduction of interest and salary to Partners since the same will be subjected to tax in their hands along with other incomes earned by them.

Likewise the concession in the rate of calculation of income offered for digital transactions under section 44AD may be extended to the Assessees who are offering income under section 44ADA and 44AE also.

The rate of 50% of gross receipts to be offered as income is very high for professionals. Few Professionals who give opinion/advise/consultation only may be able to retain 50% of their gross receipts as profit. But other regular professionals, who are in majority, have to maintain regular office supported by trained staff with computer, vehicle etc., wherein they will not be able to retain 50% of their earnings as profit. This may be brought to at least 25%.

(Republished with Amendments)

Read Other Articles of CA M. Lakshmanan