Estimated or Presumptive Method for Computing Profits and Gains of Business or Profession

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1. Computing Profits and Gains of any Business on Estimated Basis [Section 44AD]

Notwithstanding anything to the contrary contained in sections 28 to 43C, there is a special scheme for estimating the profits and gains of assessees engaged in any business excluding the business of transport covered under section 44AE. The broad features of the scheme are as under:

Method for Computing Profits and Gains of Business or Profession
Method for Computing Profits and Gains of Business or Profession

(a) The scheme shall be applicable to an individual, a HUF or partnership firm who is a resident but not to a Limited liability partnership firm. Thus, the scheme is not applicable to LLP, a company assessee or AOP/BOI, etc.

(b) The provision of section 44AD shall not apply to—

(i) a person carrying on specified profession as referred to in section 44AA(1),

(ii) a person earning income in the nature of commission or brokerage, or

(iii) a person carrying on any agency business.

(c) It shall also not be applicable to an assessee who is availing deduction under section 10AA or deduction under any provisions of Chapter VIA under the heading “C.—deductions in respect of certain incomes” (section 80-IA to section 80RRB) in the relevant assessment year.

(d) The scheme is applicable for any other business (excluding a business of plying, hiring or leasing goods carriages referred to u/s 44AE) whose total turnover gross receipts in the previous year does not exceed an amount of Rs. 2 crore.

(e) a sum equal to 8% 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.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, the Act has inserted a proviso to reduce the existing rate of deemed total income of 8%, to 6% in respect of the amount of such total turnover or gross receipts received by an account payee cheque or 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 section 139(1) in respect of that previous year.

However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in any other mode.

Thus, the presumptive rate of 6% shall be applicable only if the amount of such total turnover or gross receipts is received by an account payee cheque or 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 section 139(1) in respect of that previous year.

(f) Any deduction allowable under the provisions of section 30 to 38 shall be deemed to have been already given effect to and no further deduction under these sections shall be allowed. A firm is not entitled to deduction on account of interest and salary paid to the partners if he is covered under section 44AD.

(g) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(h) The eligible assessee shall be required to pay the advance tax, to the extent of the whole amount of such advance tax during each financial year on or before the15th March

(i) An assessee opting for the above scheme shall be exempted from maintenance of books of accounts related to such business as required under section 44AA of the Income-tax Act.

(j) 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 consecutive assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of section 44AD(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 section 44AD(1).

Example :

Suppose an eligible assessee claims to be taxed on presumptive basis under section 44AD for Assessment Year 2018-19 and offers income of Rs.  9.6 lakh on the turnover of Rs.  1.2 crore. For Assessment Year 2019-20 and Assessment Year 2020-21 also he offers income in accordance with the provisions of section 44AD.

However, for Assessment Year 2021-22, he offers income of Rs.  4 lakh on turnover of Rs.  1.4 crore. In this case since he has not offered income in accordance with the provisions of section 44AD for five consecutive assessment years, after Assessment Year 2018-19, he will not be eligible to claim the benefit of section 44AD for next five assessment years i.e. from Assessment Year 2022-23 to 2026-27.

(k) Further, as per section 44AD(5), notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of section 44AD(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 section 44AA(2) and get them audited and furnish a report of such audit as required under section 44AB.

2. Special Provision for Computing Profits and Gains of Profession on Presumptive Basis [Section 44ADA]

(1) Resident assessee engaged in the profession referred to in section 44AA(1) can opt for presumptive income in certain cases [Section 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 section 44AA(1) and whose total gross receipts do not exceed Rs.  50,00,000 in a previous year, a sum equal to 50% 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”.

Profession referred to in section 44AA(1): Legal, medical, engineering or architectural profession, or profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette. Authorised representatives, film artists, company secretaries and profession of Information Technology have been notified for this purpose.

(2) Consequences if the Assessee opts for Presumptive Income Scheme:

(a) Deduction under sections 30 to 38 shall be deemed to have been allowed [Section 44ADA(2)]:

Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of section 44ADA(1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. Further, a firm is not entitled to deduction on account of interest and salary paid to the partners if he is covered under section 44ADA.

(b) Written down value of any asset for the succeeding year shall be computed as if the assessee has claimed deduction [Section 44ADA(3)]:

The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(c) Assessee to maintain accounts and get them audited if he claims profits to be less than 50% of the gross receipts [Section 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 section 44ADA(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 section 44AA(1) and get them audited and furnish a report of such audit as required under section 44AB.

3. Special Provisions for Computing Profits and Gains of Business of Plying, Hiring or Leasing Goods Carriages [Section 44AE]

Notwithstanding anything to the contrary contained in sections 28 to 43C, the scheme u/s 44AE also provides for a system for estimating the income of an assessee engaged in the business of plying, hiring or leasing of goods carriages.

The broad features of the scheme are:

(a) the scheme is applicable to an assessee who owns not more than 10 goods carriages at any time during the previous year and who is engaged in the business of plying, hiring or leasing of such goods carriages;

(b) the profits and gains of each goods carriage owned by the above assessee in the previous year shall be estimated as under:

(i) In the case of heavy goods vehicle (more than 12MT gross vehicle weight)—

An amount equal to  ₹1,000 per ton of gross vehicle weight or unladen weight, as the case may be, for every month or  part of a month during which the heavy goods vehicle is owned by the assessee in the previous year 

or 

an amount claimed to have been actually earned from such vehicle, 

whichever is higher.

 (ii) Vehicles other than heavy goods vehicle —

An amount equal to ₹7,500 per month or part of a  month for each goods carriage 

or 

the amount claimed to be actually earned by the assessee, 

whichever is higher. 

(A) Consequence if Presumptive Income Scheme is opted 

(1) Expenses deemed to have been allowed:

 Any deduction allowable under the provisions of sections 30 to  38 shall, for the purposes of the above income, be deemed to have been already given full effect to and no further  deduction under those Sections shall be allowed. Remuneration and interest paid/payable to partners, shall be allowed as deduction from the income computed under this Section. Such deduction shall, however, be subject to  the conditions and limits specified u/s 40(b). 

(2) Depreciation deemed to have been allowed:

The written down value of any asset used for the purpose of the business shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. 

(3) Turnover of this business not to be included for computing limit of section 44AA and 44AB:

The provisions of sections 44AA and 44AB shall not apply in so far as they relate to this business and in computing the monetary limits under sections 44AA and 44AB for other business, the gross receipts or, as the case may be, the income from the said business shall be excluded. 

(B) Consequences if Presumption Income Scheme is Not opted:

The assessee may choose not to opt for the scheme and may declare an income lower than the specified amount. In this case, the assessee shall have to maintain books of account and get his accounts audited by a Chartered Accountant.

4. Special Provisions for Computing Profits and Gains of Shipping Business in the case of Non-Residents [Section 44B]

Notwithstanding anything  to the contrary contained  in section 28 to 43A in the  case of an assessee, who is  a non-resident and is  engaged in the business of  operation of ships, a sum  equal to 7.5% of— 

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

(b) any amount received or  deemed to be received in  India by or on behalf of  the assessee, on account of  carriage of passengers,  livestock, mail or goods  shipped at any port outside  India, shall be deemed to  be the profits of such  business. The carriage  amount will also include  amount paid or payable or  received or deemed to be  received by way of  demurrage charge or  handling charge or any other amount of similar  nature.

5. Special Provisions for Computing Profits and Gains in connection with the Business of Exploration, etc., of Mineral Oils [Section 44BB]

Notwithstanding anything  to the contrary contained  in section 28 to 43A,  except section 42 the  income of 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 shall be  computed at a flat rate of  10% of— 

(a) the amount paid or  payable whether in or out  of India to the assessee or  someone on his behalf on  account of the provision of  such services and facilities  and 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 

(b) The amount received or  deemed to be received in  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. 

Provisions of section 44BB  not to apply in certain  cases: The provisions of  this section shall not apply  to any income to which the  provisions of sections 42,  115A or 293A apply for  the purpose of computing  profits or gains or any  other income referred to in  these sections. 

The assessee can declare  income under section  44BB to be lower than  10% [Section 44BB(3)]:  Such assessee may claim  lower profits and gains  than the aforesaid amount  of 10% if the following  two conditions are  satisfied:— 

(a) The assessee keeps and  maintains such books of  account as are required u/s  44AA(2), and 

(b) The assessee gets the  accounts audited and  furnishes a report of such  audit as required u/s  44AB. 

However, in this case, the  Assessing Officer shall  proceed to make  assessment of the total  income/loss of the assessee  only under scrutiny assessment as per Section 143(3)

6. Special Provisions for  Computing Profits and  Gains of Business of  Operation of Aircraft in  the case of Non-Residents  [Section 44BBA]

Notwithstanding anything  to the contrary contained  in section 28 to 43A, the  income of a non-resident  engaged in the business of  operation of an aircraft  shall be computed at a flat  rate of 5% of: 

(a) the amount paid or  payable whether in India  or out of India to the  assessee or to any person  on his behalf on account of  carriage of passengers,  live-stock, mail or goods  from any place in India,  and 

(b) the amount received or  deemed to be received in  India, on account of  carriage of such items  from a place outside India.

7. Special Provisions for  Computing Profits and  Gains of Foreign  Companies engaged in the  business of Civil  Construction, etc. in  certain Turnkey Power  Projects [Section 44BBB]

Notwithstanding anything  to the contrary contained  in section 28 to 44AA, 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 10% 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”. 

The assessee can declare  income under section  44BBB to be lower than  10% [Section 44BBB(2)]:  Such assessee may claim lower profits and gains  than the aforesaid amount  of 10% if the following  two conditions are  satisfied:— 

(a)The assessee keeps and  maintains such books of  account as are required u/s  44AA(2), and 

(b)The assessee gets the  accounts audited and  furnishes a report of such  audit as required u/s  44AB.  However, in this case, the  Assessing Officer shall  proceed to make  assessment of the total  income/loss of the assessee  only under scrutiny  assessment as per section  143(3).

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