Presumptive taxation – An analysis under different scenario

[Siva Rama]

This article discusses about the different situations under which an assessee has to maintain books of accounts and conduct tax audit under Income Tax Act with specific emphasis on section 44AD and 44ADA (based on provision existing for Assessment Year 2018-19)

Introduction

According to section 44AA of the Income Tax Act, 1961, all assesses engaged in specified profession has to compulsorily maintain books of accounts and documents, and for those assessee engaged in other than specified profession, monetary limits based on total sales/turnover/gross receipt/income from business or profession earned during specified previous years has been fixed beyond which the assessee have to compulsorily maintain books of accounts and documents.

As per section 44AB, in the case of a business assessee whose sales/turnover/gross receipt exceeds ₹ 1 Crore, or in the case of profession whose gross receipts exceeds ₹ 50 lakhs in previous year has to gets his accounts audited by a Chartered Accountant.

However in the case of resident assessee covered under section 44AD and 44ADA, a sum equal to prescribed percentage of total turnover/gross receipts or a higher sum claimed to have been earned by the eligible assessee from eligible business/profession, shall be deemed to be profits and gains of such business/profession chargeable to tax and such assessee has been absolved from the requirement of maintaining books of accounts under section 44AA and get it audited under section 44AB. A similar benefit is also available for assesses covered under section 44AE, 44BB and 44BBB. Since the subject matter of this article is covered around 44AD and 44ADA, more explanation is not given regarding section 44AE, 44BB and 44BBB.

Eligible business or profession

For section 44AD, eligible business inter alia means whose turnover or gross receipts does not exceed ₹ 2 Crore in the previous year. For section 44ADA, eligible profession means profession referred to in sub-section (1) of section 44AA, whose gross receipt does not exceed ₹ 50 lakhs in the previous year. Insertion of section 44AD and 44ADA is a huge relief for small and medium assessee from the tedious requirement of maintaining books and undergoing tax audit.

Deemed profits and gains [44AD(1) and 44ADA(1)]

Section	Deemed profit
44AD	A sum equal to 8% of total TO/GR in the PY or a higher sum (6% in respect of TO/GR received by account payee cheque or account payee bank draft or electronic clearing system)
44ADA	A sum equal to 50% of total GR in the PY or a higher sum

For the purpose of this article, sum equal to 8%/6%/50% of total TO/GR is called as “Basic deemed profit”

Relevant extract of the above section is given below 44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, 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" [Provided that this sub-section shall have effect as if for the words "eight per cent", the words "six per cent" had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.] ------------------------------------------------------------------------------------------------------------------- 44ADA. (1) Notwithstanding anything contained in sections 28 to 43C, 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".

Section 44AD and 44ADA further says that, the assessee will be deemed to have been allowed the deductions under section 30 to 38 and WDV of any asset shall be deemed to have been calculated as if the assessee had claimed and actually allowed the deduction in respect of the depreciation for each of the relevant AYs. [44AD(3) and (4), 44ADA(3) and (4)]

Breaching the conditions of section 44AD and 44ADA

According to section 44AD(5), notwithstanding anything contained in section 44AD(1) to (4), assessee who declares profit not in accordance with section 44AD(1)[i.e. declared profit is below basic deemed profit of 8% or 6%] and whose total income exceeds the maximum amount which is not chargeable to income tax, shall be required to maintain books as required under section 44AA and get them audited under section 44AB.

Similarly, according to section 44ADA(4), notwithstanding anything contained in 44ADA(1) to (3), where the assessee claims that his profits from profession are lower than the profits specified under section 44ADA(1) and whose total income exceeds the maximum amount which is not chargeable to income tax, he shall be required to maintain books as required under section 44AA and get them audited under section 44AB.

Relevant extract of the above section is given below 44AD(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1). 44AD(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.] ---------------------------------------------------------------------------------------------------------------- 44ADA(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.]

Analysis

Section 44AD(5) and 44ADA(4) starts with phrase “Notwithstanding anything contained in the forgoing provisions”. It means, section 44AD(5) and 44ADA(4) have to be read and interpreted without any regards to what is said in their respective foregoing sub-sections. So only when both the two aspects mentioned in 44AD(5) and 44ADA(4) is breached, the assessee is liable to maintain books and go for tax audit.

One – the assessee claims that profit are lower than profits specified in section 44AD(1)/ 44ADA(1) [i.e. lower than basic deemed profit being 8%/6%/50% of turnover or gross receipt]

Two - Total income exceeds maximum amount which is not chargeable to income tax.

Total income means total income computed in accordance with the provisions of Income Tax Act. In computation of total income, business profit will not be the deemed profit as mentioned in section 44AD(1) and 44ADA(1), because section 44AD(5) and 44AD(4) starts with a non obstante clause and disregards what is said in 44AD(1) to (4) and 44ADA(1) to (3) respectively.

Hence even if the business profit declared by an individual or HUF is lower than deemed profit, applicability of section 44AA and section 44AB, will not arise if the total income is less than or equal to the maximum amount which is not chargeable to tax.

In the case of firm, the maximum amount which is not chargeable to income tax is Zero. Hence even if business profit declared by a firm is lower than basic deemed profit, applicability of section 44AA and section 44AB will not arise if the total income is Zero or less than zero (i.e. Loss return).

The maximum amount which is not chargeable to tax for individual or HUF is as follows

For younger citizen	₹ 2.50 lakhs
For senior citizen	₹ 3.00 lakhs
For super senior citizen	₹ 5.00 lakhs

Different scenarios

Illustration 1

Assumptions

1. Assessee is an individual or HUF
2. Assessee is an eligible assessee carrying on eligible business under section 44AD.
3. All turnovers are in cash. So Basic deemed profit is 8%.
4. There is no income other than business income
5. Assessee is a younger citizen. So exemption limit is ₹ 2,50,000/-.

Scenario	Turnover	Deemed profit	Business profit declared by the assessee	Deduction under chapter VIA	Declared Net total income (NTI)	Whether 44AA and 44AB applicable	Reason	Whether IT return to be filed?
1	30 lakhs	2,40,000	2,35,000	0	2,35,000	No	NTI below limit	No
2	40 lakhs	3,20,000	2,40,000	0	2,40,000	No	NTI below limit	No
3	40 lakhs	3,20,000	2,60,000	20,000	2,40,000	No	NTI below limit	Yes, GTI exceeded limit
4	40 lakhs	3,20,000	2,90,000	20,000	2,70,000	Yes	NTI exceeded the limit	Yes, GTI exceeded limit

Note - NTI means Net Total Income and GTI means Gross Total Income

Under scenario 4, even if the assessee is not liable to pay tax considering rebate under section 87A, as their net total income (NTI) is above basic exemption limit, provision of section 44AA and 44AB applies and needs to be complied with.

Illustration 2

Assumptions

1. Assessee is a Firm
2. Assessee is an eligible assessee carrying on eligible business under section 44AD.
3. All turnovers are in cash. So basic deemed profit is 8%.

Scenario	Turnover	Deemed profit	Business profit declared by the assessee	Loss under HP or other sources	Declared Net total income (NTI)	Whether 44AA and 44AB applicable	Remark
1	2 lakhs	16,000	20,000	0	20,000	No	Declared profit is more than basic deemed profit
2	2 lakhs	16,000	16,000	0	16,000	No	Declared profit is equal to basic deemed profit
3	2 lakhs	16,000	15,000	0	15,000	Yes	Declared profit is lower than basic deemed profit and income exceeded the basic exemption limit being  Zero
4	2 lakhs	16,000	(5,000)	0	(5,000)	No	Though declared profit is lower than basic deemed profit, total income has not exceeded basic exemption limit
5	2 lakhs	16,000	15,000	20,000	(5,000)	No	Though declared profit is lower than basic deemed profit, total income has not exceeded basic exemption limit

Conclusion

It appears that there was deliberate intention on the part of legislator to insert a non-obstante clause to give relief to those individual and HUF whose actual total income is equal to or lower than the basic exemption limit and in the case of firms who has earned no profit or suffered loss, from the requirement of hectic book maintenance and tax audit, though at times it seems the above relief is slightly running through the other direction of theme of presumptive taxation. Had non-obstante clause not inserted in section 44AD(5) and 44ADA(4), “the total income” in the respective sections would have to be computed with basic deemed profit as business profit and scenario 2 and 3 in illustration 1 above and scenario 4 in illustration 2 above would have attracted tax audit, i.e. though declared net total income does not exceed basic exemption limit, the total income taking its color from deemed profit gets exceeded basic exemption limit. However, it can be seen that this exemption limit relief is not extended to owners of goods carriage earning income from plying, hire or leasing of such goods carriage, falling under section 44AE. Hence professional judgment needs to be taken before deciding the applicability of section 44AA and section 44AB considering the penalty imposed for its non-compliance. The content of this article is only a knowledge sharing initiative for discussion purpose and not professional advice and author assumes no responsibility for use of this information.

The author can be reached at [email protected]

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