Presumptive Tax Scheme in India – A Deep Dive

The provisions relating to Presumptive Tax Scheme (PTS) under the Income Tax Act, 1961 (ITA) are inter alia, covered under Sections 44AD, 44ADA, 44AE, 44B, 44BB, 44BBA and 44BBB. In this article, we have limited our discussion to Sections 44AD & 44ADA.

While Section 44AD covers within its ambit small taxpayers engaged in eligible business, Section 44ADA covers eligible professionals. Taxpayers opting for PTS are allowed to declare income as a prescribed percentage of turnover / gross receipts of the business/profession (as the case may be) and are exempted from maintaining books of account and getting them audited annually. As the taxable income is deemed/presumed to be a percentage of turnover / gross receipts, this scheme is popularly known as ‘presumptive taxation scheme’.

Decoding Section 44AD

 

 

Legislative History

The PTS was first introduced by the Finance Act of 1994 to estimate taxable income from the civil construction business or the supply of labour for civil construction work. The income from such businesses is estimated to be 8% of gross receipts, provided that such gross receipts do not exceed INR 40 lakhs. The taxpayer, if he chose, was allowed to voluntarily declare a higher income in his tax return.

The Finance Act, 1999, amended the PTS with retrospective effect from financial year (FY) 1997-98 and mandated the requirement of furnishing an audit report in cases where the assessee offered an income lower than 8% of gross receipts.

A significant change in the entire structure of PTS was made vide The Finance (No. 2) Act, 2009, w.e.f FY 2010-11. The scope of PTS was expanded to all ‘eligible assessees’ engaged in ‘eligible business’.

 

Coverage

 

Category of taxpayers covered:

The following categories of taxpayers having total turnover / gross receipts from business not exceeding INR 2 crores in a financial year can opt for PTS under section 44AD of the ITA:

  • Resident Individual;
  • Resident Hindu Undivided Family (HUF);
  • Resident Partnership Firm (not being a Limited Liability Partnership (LLP))
 
Category of businesses covered:

PTS under Section 44AD covers all businesses except the below, where the taxpayer is:

  • Earning income in the nature of commission or brokerage.
  • Engaged in the agency business.
  • Engaged in the business of plying, hiring or leasing goods carriages.

(This business is covered under PTS under Section 44AE of ITA)

  • Carrying on a specified profession.

(These professionals are covered under PTS under Section 44ADA of ITA, which is discussed in the latter part of this article).

  • Intending to claim deductions under sections 10A, 10AA, 10B, 10BA, 80HH, to 80RRB of the ITA.

 

 

Percentage of deemed income

Under Section 44AD, the taxable income of eligible assessees engaged in eligible business (as discussed above) is presumed to be 8% of the turnover/gross receipts.

To promote non-cash transactions, a lower rate of 6% has been provided in respect of the amount of turnover/gross receipts, that is received by the assessee on or before the due date of filing the Income Tax Return, by way of:

  • Account payee cheque or account payee bank draft;
  • Electronic Clearing System, Net banking, RTGS, NEFT;
  • Credit Card or Debit Card;
  • IMPS, UPI or BHIM Aadhar Pay.

Though the PTS provides for taxable income to be 8%/6% of turnover or gross receipts, taxpayers can voluntarily declare a higher income on their tax return.

 

 

Meaning of Turnover or Gross Receipts

The terms “turnover” and “gross receipts” are not defined in the ITA.

Reference can be made to the Guidance Note on Tax Audit under Section 44AB of the ITA (Guidance Note). Para 5.10 of the Guidance Note is reproduced below:

5.10 Considering that the words “Sales”, “Turnover” and “Gross receipts” are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion.”

 

 

Other Important Points to Remember

 
 
  • Advance Tax: The due date for payment of advance tax shall be the 15th March of such FY;
  • Additional deductions: All the deductions u/s 30 to 38 for all taxpayers and in the case of partnership firms, interest and salary/remuneration to partners, would be deemed to have been allowed to the taxpayer.
  • Additional disallowances: Any disallowance relating to cash payments above INR 10,000 for expenses, non-deduction of tax at source, etc. will not be required to be added back, as Section 44AD overrides Sections 28 to 43C of the ITA.
  • Mandatory Tax Audit: In the case where the taxpayer has declared income as per PTS under Section 44AD in any FY and does not declare income in accordance with Section 44AD in any of the next five FYs, the taxpayer shall not be eligible to declare income under PTS for next five FYs, subsequent to the year in which income is not declared as per PTS under Section 44AD. Further, the taxpayer would also be required to maintain books of account and get them audited, irrespective of the turnover in the next 5 years, if his total income exceeds the maximum amount that is not chargeable to tax, i.e. the applicable basic exemption limit.

Illustration: Mr. A claims to be taxed under PTS under Section 44AD for Assessment Year (AY) 2019-20 and offers income in accordance with PTS. However, for AY 2020-21, he declares his income at a rate lower than the rate prescribed under PTS. In this case, Mr. A will not be eligible to claim the benefit of PTS for the next 5 AYs and will mandatorily be required to keep and maintain books of account and get them audited annually for those years as well i.e. AY 2021-22 to 2025-26 if his total income exceeds the maximum amount not chargeable to tax (basic exemption limit).

This is explained with the help of the following table in the case of Mr. X:

 

AYTurnover (in Cr)Profit (%)Income more than basic exemption limitSections applicableNote no.
44AA44AB44AD
2018-1937%YesYesYesNo1
2019-201.29%YesNoNoYes2
2020-210.855%YesYesYesNo3
2021-220.7510%YesYesYesNo4
2022-231.22%NoYesYesNo5
2023-241.59%YesYesYesNo

 

 

6

2024-250.926%YesYesYesNo
2025-260.959%YesYesYesNo
2026-272.56%YesYesYesNo

 

Note 1: Turnover exceeds Rs.1 Crore and hence, liable to maintain books of account and get them audited.

Note 2: Since Mr X declared income in accordance with the provisions of PTS under Section 44AD, he is not required to maintain books of account and get them audited.

Note 3: Since Mr. X declares profit @ 5%, which is lower than the prescribed rate of 8% under PTS, he shall be required to maintain books of account and get them audited for AYs 2020-21 to AY 2025-26.

Note 4: Mr. A is required to maintain books of account and get them audited.

Note 5: Mr. A is required to maintain books of account. He is not required to get them audited as his total income is less than the basic exemption limit.

Note 6: Mr. A is required to maintain books of account and get them audited.

 

 

Decoding Section 44ADA

 

 

Legislative History

The PTS under section 44ADA, also popularly known as ‘’presumptive taxation regime for professionals’’, was first introduced by the Finance Act 2016. The intention was to provide a PTS for people who make a living from their profession. 

 

 

Coverage

 

Categories of taxpayers covered:

The taxpayers listed below, whose total gross receipts from their profession do not exceed INR 50 lakhs in a fiscal year, are eligible for PTS under Section 44ADA:

  • Resident Individual;
  • Resident Partnership Firm (not being an LLP)
 
Categories of professions covered:

Only professions referred to in Section 44AA(1) of the ITA can opt for PTS under Section 44ADA. This includes a person carrying on:

  • Legal, Medical, Engineering or Architectural profession;
  • Profession of Accountancy, Technical consultancy or Interior decoration;
    • Other Profession like Film artist: Film artists include an actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, and dress designer.

 

 

Percentage of deemed income

Under Section 44ADA, the taxable income of an eligible taxpayer is presumed to be 50% of the gross receipts from the eligible profession.

The taxpayer can voluntarily declare higher income in the tax return.

 

 

Other important points to be kept in mind

  • Advance Tax: The due date for payment of advance tax shall be the 15th day of March of such FY;
  • Mandatory Tax Audit: In the case where the taxpayer claims his income to be lower than the deemed income of 50% as specified in PTS under Section 44ADA, he shall be required to maintain books of account and get them audited, if his total income exceeds the maximum amount that is not chargeable to tax, i.e. the applicable basic exemption limit.
  • Additional deductions: All the deductions u/s 30 to 38 and, in the case of partnership firms, interest and salary/remuneration to partners would be deemed to have been allowed.
  • Additional disallowances: Any disallowance relating to cash payments above INR 10,000 for expenses, non-deduction of tax at source, etc. will not be required to be added back, as Section 44ADA overrides Sections 28 to 43C of the ITA.

 

 

Issues Under the Presumptive Tax Scheme

  • Section 44AD vis-à-vis section 68/69
  • When a taxpayer declares income under Section 44AD, whether he is under an obligation to prove that he has incurred the balance of gross receipts by way of business expenditure became an issue in Nand Lal Popli v. Dy. CIT [2016] 71 taxmann.com 246 (Chandigarh).

The assessee proposed 8% of the gross contract receipt of Rs. 37.75 lakhs as income.The Assessing Officer (AO) requested information on the 92% expenditure of Rs. 32.73 lakhs. The assessee presented a cash flow statement with a cash outflow of Rs.18.49 lakhs, besides payment from the bank to the extent of Rs.16.25 lakhs. In the absence of documentary evidence of the cash flow, the AO ultimately made an addition of Rs.32.24 lakhs as an unexplained expenditure.

The issue before the Tribunal was whether the AO can make an addition under Section 69C of the ITA for the expenditure incurred by the assessee based on the cash flow statement when the assessee has declared income under Section 44AD. The Tribunal held that Section 44AD does not place any obligation on the assessee to maintain books of account when he has declared income as per the presumptive provision. It held that the cash flow statement cannot be considered as keeping books of account. It also held that the assessee cannot be asked to prove to the satisfaction of the AO the expenditure of 92% of the gross receipts, as that would defeat the very purpose of presumptive taxation.

It observed that if the AO had independent evidence of the expenditure incurred/not incurred or had carved out the case out of the glitches of Section 44AD, then such an addition could have been possible. Thus, the Tribunal held that an addition towards unexplained expenditure cannot be made under section 69C when the income has been offered under Section 44AD.

  • Whether a taxpayer declaring income under Section 44AD could be subjected to tax under Sections 68/69 for the amounts credited in his bank account became an issue in CIT v. Surinder Paul Anand [2010[ 48 DTR (P. & H.) 135.

In the assessment, the assessee was asked to explain the cash deposit in his bank account and finally the addition of Rs.14,95,300/- was made to the returned income. The Court held that the assessee has opted for presumptive provisions and is exempted from maintaining books of account. It held that the assessee is under an obligation to explain the individual entry of a cash deposit only when such entry has no nexus with the gross receipts of the business. The assessee claimed before both the CIT (A) and the Tribunal that the said amount was part of business receipts and in the absence of any other contrary material or evidence, the cash deposits could not be taxed as unexplained or undisclosed income of the assessee. The Court held that there was no substantial question of law in the appeal and hence upheld the order of the Tribunal.

  • Section 44AD and disallowance under section 40(a)(ia)
  • In ITO v. Mark Construction [2012] 23 taxmann.com 398 (Kolkata), the assessee engaged in civil construction and disclosed profits exceeding 8% by opting for Section 44AD provisions. In the assessment, the AO called for books of account of the assessee and the assessee took a plea that the income was offered under Section 44AD and hence maintenance/production of books of account was not compulsory. The AO made an addition of Rs. 32,62,140/- by invoking Section 40(a)(ia). The Tribunal held that since the assessee has disclosed profits of more than 8% of the gross receipts, no disallowance under Section 40(a)(ia) could be made.

As may be seen from the above analysis, the provisions of Sections 44AD and 44ADA can be extremely relevant for assessees from the perspective of tax planning and tax compliance. It is important that assessees consider the extant provisions of PTS along with their applicability to the business situation at hand. Also, appropriate professional advice should be sought, wherever necessary, to ensure that the optimum benefit of the PTS provisions is availed while finalising the tax returns.

Image Credits: Photo by Olya Kobruseva 

The provisions of sections 44AD and 44ADA can be extremely relevant for assessees from the perspective of tax planning and tax compliance. It is important that assessees consider the extant provisions of PTS along with their applicability to the business situation at hand. Also, appropriate professional advice should be sought, wherever necessary, to ensure that the optimum benefit of the PTS provisions is availed while finalising the tax returns.

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