Presumptive Income under Income Tax Act, 1961

Atul Khurana

Presumptive Income is the concept introduced by the Income Tax Department under the Presumptive Taxation Scheme so as to allow the assessee to disclose his income on presumptive basis under the relevant sections and their provisions thereof. Let us understand them in detail.

Meaning of Presumptive Taxation Scheme:

As per the Income-tax Act, a person engaged in business is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD and 44AE and overall except these sections, the following sections are also notified by the Income tax department under presumptive taxation scheme:

• Section 44 AF
• Section 44B
• Section 44BB
• Section 44BBA
• Section 44BBB

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 from getting the accounts audited.

For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below:

1) The presumptive taxation scheme of section 44AD.

2) The presumptive taxation scheme of section 44AE.

Now, for understand the same in detail, let us first analyse the following sections:

♥ Presumptive Taxation Scheme under Section 44AD:

In the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.                                                

In brief, As per this section, an eligible assessee who is engaged in eligible business can pay tax on minimum 8% of his total turnover without maintaining regular books of accounts.

For the purpose of this section,

Eligible Assessee means:

• An individual.
• Hindu undivided family.
• A partnership firm, but not a limited liability partnership firm, who is a resident.

Eligible business means:

• Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE.
• whose total turnover or gross receipts in the previous year does not exceed an amount of one crore rupees.

Persons who cannot adopt this scheme under 44AD:

• A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD.

• A person who is engaged in any profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD.
• The presumptive taxation scheme of section 44AD can be opted by the eligible persons, if the total turnover or gross receipts from the business do not exceed the limit of audit prescribed under section 44AB (i.e., Rs. 1,00,00,000). In other words, if the total turnover or gross receipt of the business exceeds Rs. 1,00,00,000 then the scheme of section 44AD cannot be adopted.  Please note the limit is been increased to Rs. 2 Crore from A.Y. 2017-18.

Finance Act 2016, Notified section 44ADA which is as follows and will be applicable from 01.04.2017:

In the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.

♥ Presumptive Taxation Scheme under Section 44AE:

Eligibility:

• The presumptive taxation scheme of sections 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing goods carriages and who does not own more than 10 goods vehicles at any time during the year.
  

As per the Guidance note issued by the ICAI on Tax Audit,

Even where the assessee opts for presumptive taxation, the tax auditor should impress upon the assessee that it would be advisable to maintain some basic records to support the turnover/gross receipts declared for presumptive taxation.

Manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AE:

In case of a person who is opting for the presumptive taxation scheme of section 44AE, the provisions of allowance/disallowances as provided for under the Income-tax Act, will not apply and income computed at the presumptive rate of Rs. 7,500 per goods vehicle per month will be the final income. In other words, the income computed at the rate of Rs. 7,500 per goods vehicle per month will be the final taxable income of the business and no further expenses will be allowed or disallowed.

♥ Section 44B:

This section deals with the Special provision for computing profits and gains of shipping business in the case of non-residents.

in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts as specified shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

Specified amount for the purpose of this section:

• The amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and

• The amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.

♥ Section 44BB:

This section deals with Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.

• In the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified below shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

Specified amount for the purpose of this section:

• The amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and
• The amount received or deemed to be receivedin India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.

♥ Section 44BBA:

This section deals with the Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents.

In the case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to five per cent of the aggregate of the amounts as specified below shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

Specified amount for the purpose of this section:

• The amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods from any place in India; and
• The amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods from any place outside India.

♥ Section 44BBB:

This section deals with the Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects.

In the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf, a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

♥ Section 44D:

This section deals with the Special provisions for computing income by way of royalties, etc., in the case of foreign companies:

As per this section,

In the case of an assessee, being a foreign company,—

• The deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property;

• The deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property;
  

♥ Section 44DA:

This section deals with the Special provision for computing income by way of royalties, etc., in case of non-residents.

As per this section, The income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31st day of March, 2003, where such non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession, as the case may be, shall be computed under the head “Profits and gains of business or profession” in accordance with the provisions of this Act :

Effect of Section 44AB in the above mentioned sections:

Notwithstanding anything contained in the foregoing provisions of the above sectios, an assessee may claim lower profits and gains than the profits and gains specified in the sections, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.