Presumptive taxation for small enterprises - Present and Future Deepak Kalani, FCA, DISA Provisions of Section 44AD,

44AE and 44AF of the Income Tax Act deals with computing presumptive profit of certain trade or business for small entities. Such provision are provided to make them declare profit at the rate specified under these section without maintaining any records and without allowing any other deduction except deduction allowable u/s 80C to 80U of the Income Tax Act. In my view these are the good provisions for small entities which provides more relief to assessee in compare to department official. Now a day we are watching that changes in provisions of Income Tax Act are revenue favour. Every thing which is decided by High Court/ Supreme Courts in favour of assessee is being amended in the budget to favoring revenue. Hence there are only few provisions under Income Tax Law which provides assessees side favour. In this article I am discussing the provision of section 44AD, 44AE and 44F applicable as on today and proposed for future under Direct Tax Code 1. Profit and gains of business of civil construction (Section 44AD )

Present Provision(Applicable up to 31/03/2010)

Applicable : - Persons who are engaged in the business of civil construction or supply of labour Condition : - Gross receipt paid or payable from aforesaid business does not exceed Rs. forty lacs . Presumptive Rate of profit : - 8% of gross Receipt from aforesaid business Audit / Maintenance of Books :- Provision of section 44AA maintenance of books of accounts and audit of account under section 44AB shall not apply in so for if income

declares by the assessee is on the basis of above provisions . If assessee declares lower profits and gains than the profit specified under aforesaid provisions then he has to maintain books of accounts and get it audited. Deduction :-All the deduction allowable under the provision of section 30 To 38 of the Income Tax Act shall for the purposes of these profits be deemed to have been already given full effect to and no further deduction is allowable except in case of a firm , the salary and interest paid to its partners shall be deducted from the profit computed as per presumptive taxation. Amendment made by Finance (No.2) Act, 2009 , w.e.f. 01-042011 i.e. w.e.f. Financial Year 2010-2011 All the provisions are same as applicable presently except the enlarging the scope of section and applicability for only certain assessee.Brief of the changes made by the finance bill are as under: Applicable: - Any eligible business by eligible assessee except the business of plying, hiring or leasing goods carriages referred to in section 44AE . Eligible assessee means : 1. An individual , HUF or a partnership firm not LLP and who is a resident and 2. Who has not claimed deduction under any of the section 10A to 10BA or deduction under any provision of chapter VIA under the heading C deduction in respect of certain income i.e. 80H to 80RRB. Eligible Business Means : 1. Any business except the business of plying , hiring or leasing goods carriages and 2. Whose total turnover or gross receipt in the previous year does not exceed an amount of Rs.forty lakhs. Other provision

1.

2. 3. 4.

Deduction allowable under section 30 to 38 shall deemed to have been already allowed. No further deduction is allowable Salary and interest to partners shall be deductible per clause (b) of section 40 in case of partnership firm Advance tax payment is not required. No books of accounts or audit is required if profit declared according to aforesaid provisions. If assessee declares lower profit than he has to maintain books of accounts and get it audited.

Amendment made by Finance Act (2), 2009 under section 44AD are welcome provision as changes made by the finance Act will enlarge the scope of business as stated earlier now any type of business except business of plying , hiring or leasing goods carriages referred to in section 44AE will come under the purview of this section . However section will be limited for Individual , HUF & Firm presently it is available for any assessee . Further section will be applicable only for the assessee who are resident presently same is available to all assessee . It may be noted that section is not applicable for profession as separate definition have been provided under Income Tax Act for business and profession . Here the word business has been mentioned. As per definition given under section 2(13) of the Income Tax Act business included any trade , commerce or manufacturing or any adventure or concern in the nature of trade , commerce or manufacture . Further section 2(36) of the Income Tax Act defined profession including vocation , Hence income in the nature of business is eligible under eligible business for the purpose of this section . The amendment will create number of controversies in defining business whether the provisions will apply in particular business or not .There are certain business under which there is no relation of rates of profits .Like a person doing share business .He will have to declare 8% of turnover if his turnover is less than 40 lacs even if he has incurred losses otherwise he has to

get his account audited. On other side a person who has earned more profit in compare to presumptive rate .He will declare profit as per presumptive rates without maintaining any records. There are some businesses under which such problem will arise: Share business Property/Real Estate business Commission Agent Liaison Income Job workers Service providers

To avoid any litigation suitable amendment should be made so that genuine assessee should not be suffered and nobody can escape from tax by hiding himself under this provision. Proposed under Direct Tax Code Schedule fourteenth of the proposed Direct Tax code provides determination of income on a presumptive basis S.No. 3 of the schedule provides that any business other than business of plying hiring or leasing of heavy/light goods vehicle or profession where gross receipts of the assessee in financial year is less than or equal to one crore is eligible for presumptive taxation and income from that business will be taken at the rate of 8% of total turnover . No further allowance or deduction or loss is allowable under this code ( Including Interest & Salary to Partners ) provision of this section shall not apply if :1. If the assessee keeps and maintain all the books of account and other document referred in section 83 of the DTC . 2. He gets his account audited and obtain a report of such audit U/s 86 of the DTC 3. Accounts are correct and complete to the satisfaction of A.O . 4. Income can be property deduced from the accounts. 5. The assessee produces the books of accounts and other documents before A.O. as and when called for.

From perusal of the conditions mentioned in DTC it can be concluded that the assessee has no option except declaring presumptive profit. As if any assessee wants to declare lower profit then he has to face scrutiny by the department (for satisfaction of A.O.)which is too costly/harassment for assessee in compare to declaring income at the rate of 8% . Under presumptive taxation he is not required to keep books of account which can not be maintained by the small assessee under DTC. As per section 83 of the DTC following books of accounts are compulsory to be maintained for the purpose of code : (a) Cash Book (b) Journal (c) Ledger (d) Register of daily Inventory (e) Carbon copies of bills (f) Carbon copies of receipts (g) Original bills or receipts of expenditure exceeding Rs . 50/- . (h) Payment voucher of expenditure not exceeding fifty rupees . A Small businessman cannot maintained the above mentioned books and he can not get his accounts audited without such maintenance hence he has no option except to declare profit as per presumptive rates .The key issue is that partnership firm can not claim deduction of interest and salary from profit as per presumptive provisions under newly proposed Direct Tax Code which will cause undue hardship for the partnership firm. However amendment made by Finance Act (2),2009 regarding condition of applicability of the provision for certain assessee or status of resident is no more proposed under Direct Tax Code .Further limit has been increase from Rs. forty lacs to one crore which is reliefable provision for the assessee. However non allowing of deduction for investment under section 80C and interest and salary to partners in case of partnership firm are

requires some changes.Further the line that accounts are correct and complete to the satisfaction of A.O. also requires some changes. 2.Profit of business of plying , hiring or leasing

goods carriages (Section 44AE) Present Provision(Applicable up to 31/03/2010)

Applicable : - Assessee who ownes not more than ten goods carriages vehicle and engaged in the business of plying , hiring or leasing such goods carriages . Conditions : No of goods carriage vehicle must be less than or equal to ten . Presumptive Rate : For heavy goods vehicle : - 3500/- per month or part of month for other than a heavy goods vehicle : - 3150/- per month or part of month . Audit / Maintenance of Books :-Provision of section 44AA maintenance of books of accounts and audit of account under section 44AB shall not apply in so for if income declares by the assessee is on the basis of above provisions . If assessee declares lower profits and gains than the profit specified under aforesaid provisions then he has to maintain books of account and get it audited. Deduction :-All the deduction allowable under the provision of section 30 To 38 of the Income Tax Act shall for the purposes of these profits be deemed to have been already given full effect to and no further deduction is allowable except in case of a firm , the salary and interest paid to its partners shall be deducted from the profit computed as per presumptive taxation. Only difference from 44AD & 44AF is that if assessees gross receipt is more than 40 lacs from the owing of goods carriage vehicle however no.of vehicle is less than or equal to 10 vehicle and he declares profit as per rate specified under this section no audit or maintenance of books of accounts required .

Amendment made by Finance (No.2) Act, 2009 , w.e.f. 01-042011 i.e. w.e.f. Financial Year 2010-2011 The only amendment made by the Finance Act (2),2009 is in respect of rates of presumptive taxation which are as under:For heavy goods vehicle : - 5000/- per month or part of month for other than a heavy goods vehicle : - 4500/- per month or part of month . Proposed Under Direct Tax Code Under direct tax code no other changes has been proposed except the change of 2nd category of vehicle as light goods vehicle which is presently other than heavy goods vehicle however in definition of light goods vehicle same has been defined as vehicle other than heavy goods vehicle . Hence there is no changes in Direct Tax Code except Non allowing of deduction for investment under section 80C and interest and salary to partners in case of partnership firm .Further as proposed under section 44AD under Direct Tax Code all other provisions for the persons who declares lower profits would be the same hence person engaged in such type of business will have no option except declaring presumptive profits.

3.Provision for computing profits and gains of retail business (Section 44AF) Present Provision(Applicable up to 31/03/2010)
Applicable :- Assessee who is engaged in retail trade of goods or merchandise Condition :- Turnover does not exceeds Rs . Forty Lakh . Presumptive Rate :- Profit from such business should be presumed to be 5% of total turnover . Audit / Maintenance of Books :-Provision of section 44AA maintenance of books of accounts and audit of account under section 44AB shall not apply in so for if income declares by the assessee is on the basis of above

provisions . If assessee declares lower profits and gains than the profit specified under aforesaid provisions then he has to maintain books of account and get it audited. Deduction :-All the deduction allowable under the provision of section 30 To 38 of the Income Tax Act shall for the purposes of these profits be deemed to have been already given full effect to and no further deduction is allowable except in case of a firm , the salary and interest paid to its partners shall be deducted from the profit computed as per presumptive taxation. Amendment made by Finance (No.2) Act, 2009 , w.e.f. 01-042011 i.e. w.e.f. Financial Year 2010-2011 Section will not be available w.e.f. Assessment year 2011-2012 . As same has been merged with section 44AD . Propesed under Direct Tax Code Not available as same has been merged with any type of business as per section 44AD I have discussed the provisions in detailed so that every person can plan his business in keeping provision in his mind available in coming years. At present we have the provision applicable up to 31/03/2010 and provision applicable from 01/04/2010 and provision proposed under Direct Tax Code from 01/04/2011 so that tax planning can be made in better manner. Summaries chart of provision are given below for ready reference.

PRESUMPTIVE TAXATION
PARTICULARS Section 44AD Applicable Residential status Status Presumptive rate Turnover limit

PRESENT PROVISION(U

Civil construction or supply o

Any statu Any assess 8% 40 lacs

Salary and interest in case of firm Deduction under section 80C to 80U Audit requirement Books of Accounts Scrutiny

Allowabl Allowabl If profit declared is less than turnover exceeds R If profit declared is less than turnover exceeds R Not compul

Section 44AE Applicable Residential status Status Presumptive rate

Business of plying ,hiring or l

Any statu Any assess Heavy goods vehicle Other than heavy goods ve

No. of vehicle limit Salary and interest in case of firm Deduction under section 80C to 80U Audit requirement Books of Accounts Section 44AF Applicable Residential status Status Presumptive rate Turnover limit Salary and interest in case of firm Deduction under section 80C to 80U Audit requirement Books of Accounts

10 Allowabl Allowabl If profit declared is less tha

If profit declared is less tha

Business of Retail Trade Any statu Any assess 5% 40 lacs Allowabl Allowabl If profit declared is less than turnover exceeds R If profit declared is less than turnover exceeds R