Section 44AE Chaos of Heavy Goods Vehicle Owners

Summary: Section 44AE of the Income-tax Act provides a presumptive taxation scheme for small transport operators engaged in plying, hiring, or leasing goods carriages. Following amendments by the Finance Act, 2018, effective 1 April 2019, the Central Board of Direct Taxes (CBDT), vide Circular F. No. 225/233/2019/ITA-II dated 14 August 2019, issued urgent clarifications to the All India Motor Transport Congress on how to compute deemed profits, particularly in the case of heavy goods vehicles. The law defines a “heavy goods vehicle” under Section 44AE as one where the gross vehicle weight (GVW) exceeds 12,000 kilograms, which differs slightly from the definition under the Motor Vehicles Act, 1988. For goods carriages, deemed profits are calculated at ₹1,000 per ton of GVW per month, while for tractors and road rollers, where GVW is not relevant, the unladen weight exceeding 12,000 kg is applied. The circular highlighted that GVW includes both unladen and laden weight, as registered by the authority, and illustrated calculations showing higher deemed income where full GVW is considered. Tax professionals are cautioned to apply the CBDT clarification from FY 2019-20 onwards while advising clients, to ensure compliance and avoid errors in presumptive income computation under Section 44AE.

Section 44AE : Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages.

GoI, MoF, DoR, CBDT F. No. 225/233/2019/ITA-II dated 14th August, 2019.

Urgent clarification to All India Motor Transport Congress, in the context of amendment made in sub-section (2) of section 44AE of the Act vide Finance Act, 2018 w.e.f. 01.04.2019. (i) Gross Vehicle Weight ( which include un-laden weight of the vehicle and the payload laden weight).

(ii) Un-Laden Weight i.e., Weight of the Empty Vehicle

OR

(iii) Laden Weight ( Payload)

As per clause (aa) under Explanation.- at the end of Section 44AE , ‘Heavy Goods Vehicle’ means any goods carriage, the gross vehicle weight of which exceeds 12000 Kilograms.

As per clause (a) of the same the definition of ‘Gross Vehicle Weight’ or ‘Unladen weight’ or

‘Goods carriage’ will be as per the definition in the Motor Vehicle Act,1988.

The Motor Vehicles Act,1988 defines the said terms as below:

Section 2(14) , “goods carriage” means any motor vehicle constructed or adapted for use solely for the carriage of goods or any motor vehicle not so constructed or adapted when used for the carriage of goods.

Section 2 (13) “ gross vehicle weight” means in respect of any vehicle the total weight of the vehicle and load registered by the registering authority as permissible for that vehicle.

Section 2(48) “unladen weight” means the weigjht of a vehicle or trailor including all equipments ordinarily used with the vehicle or trailor when working but excluding the weight of a driver or attendant and where alternative parts or bodies are used the unladen weight of the vehicle means the weight of the vehicle with the heaviest such alternative part or body.

In this regard , it is relevant to note the definition ( emphasis added by me )“ Heavy Goods Vehicle” in the Income Tax Act is different ( emphasis added by me ) from the definition of said term in the Motor Vehicles Act,1988. The definition of the said term as per the Motor Vehicles Act,1988 is as below:

Section 2(16) “heavy goods vehicle” means any goods vehicle carriage the gross vehicle weight of which or a tractor or a road-roller the unladen weight of which exceeds 12,000 kilograms.

Conclusive para 6 : The above definitions make it clear that the assesses will have to compute the profits and gains of business under section 44AE of the Act on the basis of above definitions . It means that in respect of a “ heavy goods vehicle” i.e., all goods carriage vehilcles whose gross vehicle weight exceeds 12,000 kilograms , the profits and gains from each goods carriage for the purposes of section 44AE Act shall be at rate of Rs 1,000/- per ton of gross vehicle weight for every month or part of the month. However, in respect of a tractor or a road-roller, where the gross vehicle weight is not applicable , and unladen weight exceeds 12,000 Kilograms , the profits and gains from each goods carriage for the purposes of section 44 AE of the Act shall be at the rate of Rs 1,000/- per ton of unladen weight for every month or part of the month.

All of the above can be explained to an asesseee , by way of an illustration, as follows:

A heavy goods vehicle whose Gross Vehicle Weight ( which include un-laden weight of the vehicle and the payload laden weight). The un-laden weight is 13000 kilograms , the payload laden weight is 15000 kolograms (Total 25000 kilograms) and owned for All 12 months.

1.As per (i) referred supra owned, the profits and gains would be 25X12X 1,000 = Rs 3,00,000/- only.

2. As per a commercial law publisher’s 15^th edition of 2023 , it was 13X12X1000 = Rs 1,56,000/-

3. As per the handbook on Direct Taxes 24^th edition of 2025 , it is 25X12X1000 = Rs 3,00,000/-

4. As per the Direct Taxes Ready Reckoner ,49 the edition A.Y’s 2025026 & 2026-27 , it is

5. 25X12X1000= Rs 3,00,000/-

I request the Tax Professionalss , to be awre and to consider GoI , MoF , DoR , CBDT F. No. 225/233/2019/ITA-II dated 14^th August, 2019 before computation of profits and gains of business of plying, hiring or leasing goods carriages w.e.f 01.04.2019 and accordingly advise the clients to comply with the latest law and pay due taxes as responsible citizens of India.

SECTIONS 44AD AND 44AE l CIVIL CONSTRUCTION
BUSINESS/TRANSPORT BUSINESS

413. Whether deduction(s) on account of salary/interest to partners of firm shall be admissible from income estimated in accordance with sections 44AD and 44AE

1.Sections 44AD and 44AE were inserted in the Income-tax Act, 1961, by the Finance Act, 1994, w.e.f. 1st April, 1994. Section 44AD provides for a method of estimating income from the business of civil construction or supply of labour for civil construction work, where the gross receipts from the business do not exceed Rs. 40 lakhs. Section 44AE provides for a method of estimating income from the business of plying, hiring or leasing trucks owned by a taxpayer owning not more than 10 trucks. Both the schemes are optional.

2. Sub-section (1) of sections 44AD and 44AE clearly provide that the income shall be estimated at the prescribed percentage/basis without regard to the provisions contained in sections 28 to 43C of the Act. In other words, the income estimated in accordance with sections 44AD and 44AE takes care of various deductions, etc., admissible under the aforesaid sections.

3. A doubt has been raised as to whether deduction(s) on account of salary/interest to the partners of a firm shall be admissible from the income estimated in accordance with sections 44AD and 44AE of the Act. The law is clear on this issue and no separate deduction is to be allowed under section 40(b) in such cases. The doubt has primarily arisen because of the erroneous clarification given in paras 31.3 and 32.2 of Explanatory Notes on provisions of the Finance Act, 1994 (Circular No. 684, dated 10-6-1994) (see Volume 4). The relevant portion of the Explanatory Note reads as under :

“In the case of firms, the normal deductions to the extent allowed under clause (b) of section 40 will be allowed.”

4. Clause (b ) of section 40 lays down restriction on the deduction allowable on account of salary and interest to the partners and is not an enabling section for claiming deduction. The admissible deductions are specifically mentioned under sections 30 to 38 of the Income-tax Act. Hence, sections 44AD(2) and 44AE(3) only state this obvious position by way of clarification. However, in view of the non obstante clause in sub-section (1) of sections 44AD and 44AE, there is no ambiguity about the intention of the legislation in this matter and the provisions of the Act are quite clear. As already said above, the doubt has primarily arisen because of the error in the Explanatory Notes to Finance Act, 1994. Therefore, for the sake of clarity and removal of doubts in this regard, the following lines are deleted from paras 31.3 and 32.2 of Circular No. 684 dated 10th June, 1994 :

‘In the case of firms, the normal deductions to the extent allowed under clause (b) of section 40 will be allowed.’

Circular : No. 737, dated 23-2-1996.

JUDICIAL ANALYSIS

EXPLAINED IN – Ranjan Constructions v. CBDT [1998] 232 ITR 76 (Ori.) with the observation that a combined reading of the newly added provisos to sections 44AD(2) and 44AE(3) makes it clear that the effect of Circular No. 737 is lost and consequently assessments made on the basis of the circular cannot stand and they are liable to be vacated.

EXPLAINED IN – In Narinder Jain v. CBDT [1998] 96 Taxman 566 (Punj. & Har.) the assessee-firm was engaged in the business of civil construction supply of labour for construction, whose income was to be computed as per section 44AD. It claimed under section 40(b) deduction of salary and interest paid to partners in the computation of its total inocme by relying on the Board’s Circular No. 684, dated 10-6-1994. The Assessing Officer however, relying on the Board’s Circular No. 737, dated 23-2-1996, disallowed the assessee’s claim. the assessee had filed an appeal against the assessment order.

On writ challenging legality of the Board’s Circular No. 737, dated 23-2-1996, it was held that the assessee brought to the notice of the court that by the Finance Act, 1997 a proviso to section 44AD had been added with retrospective effect from 1-4-1994 clarifying that salary and interest paid by a firm to its partners shall be deducted from income computed under section 44AD(1) subject to conditions and limits specified in section 40(b), thereby restoring the position of law stated by Circular No. 684, dated 10-6-1994 and rendering Circular No. 737, dated 23-2-1996 as infructuous. Prima facie, the Court found force in the assessee’s submission but refrained to express any opinion on that and relegated the assessee to raise this point before the concerned authority (whether appellate or Assessing Officer) who would take that into consideration while deciding the case.

Again in Goswami & Bros. v. Union of India [1998] 96 Taxman 219 (Raj.), the facts of the care were fact in Circular No. 684 dated 10-6-1994, the Board had clarified, inter alia, that in computing profits and gains of business of civil constrution, etc., under section 44AD “in the case of firms, the normal deduction to the extent allowed under clause (b ) of section 40 will be allowed”. Subsequently, by Circular No. 737 dated 23-2-1996, the aforesaid words were deleted from the aforesaid Circular. In pursuance of Circular dated 23-2-1996, the income-tax authorities reopened the assessments of the petitioner and in some of the matters issued fresh assessment orders.

On writ praying for quashing Circular No. 737 dated 23-2-1996 :

The Court held that by the Finance Act, 1997, a proviso to sub-section (2) of section 44AD had been added giving it retrospective operating with effect from 1-4-1994, that is, with effect from assessment year 1994-95, providing that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in section 40(b). In view of this, the said circular was clearly erroneous and could not be permitted to stand.

Accordingly, the petition was allowed of said circular was quashed.

EXPLAINED IN – Venugopala Constructions v. ITO [1997] 227 ITR 164 (AP) with the following observation :

“The later circular of the Central Board of Direct Taxes in not extending the benefit of the earlier circular, had neither tried to deprive the assessee of any right nor had created any liability which was not already existing. If a wrong circular had been issued giving the impression that the assessee was entitled to the benefit of section 40(b ) as well as section 44AD, it is the inherent right of the authorities to cure their own error. The later circular of the Central Board of Direct Taxes had only attempted to do that and hence no exception could be taken to it. Circular No. 737, dated February 23, 1996, was valid.”

EXPLAINED IN – In Ambika Construction v. ITO [1998] 99 Taxman 561 (Pat.) the assessee’s case was selected for scrutiny under section 44AD. The assessee, therefore, submitted the return as per Circular No. 684 issued by the CBDT but the Assessing Officer while making final assessment on 18-11-1996 applied the procedures provided in the Board’s Circular No. 737 which came into effect from 23-2-1996. According to the assessee, applicability of any circular has to be made effective with reference to the year of assessment and not at the time of final assessment.

The Court held that there was a doubt that effect of any circular could not be applied retrospectively so as to deprive the assessee of the benefit of the earlier circular which was applicable at the time of assessment. But in the instant case at the time of the assessment by the Assessing Officer, the Circular No. 737 had already occupied the field, as the final order of the assessment was passed on 18-11-1996 whereas Circular No. 737 was brought into effect on 23-2-1996. Hence, no grievance could be made that such a circular had been applied retrospectively.