Computation of income on basis of estimation
To give relief to small taxpayers from maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme u/s 44AD, 44ADA and 44AE.
Computation of Business Profit on Presumptive Basis [Sec. 44AD]
Applicable to | A resident individual, resident Hindu undivided family or a resident partnership firm Note: The provision is not applicable in the following cases:
| |
Conditions |
| |
Estimated income |
| 6% of such turnover or receipts |
| 8% of such turnover or receipts | |
However, a taxpayer can voluntarily declare a higher income in his return. | ||
Notes
No Deduction in respect of expenses: The estimated income is comprehensive and no further deductions relating to expenses shall be allowed.
Depreciation: Depreciation is deemed to have been already allowed. The written down value of asset will be calculated, as if depreciation has been allowed.
Deductions: The above estimated income is aggregated with other income of the assessee, from any other business or under any other heads of income. Further deduction under chapter VIA (other than those mentioned above) shall be available to the assessee as usual.
Brought forward loss: Brought forward loss (if any) shall be subtracted from such estimated income as per provisions of this Act.
Provision is not applicable [Sec. 44AD(4)]: Where an eligible assessee:
declares profit for any previous year in accordance with the provisions of this section (i.e., specified percentage of the turnover); &
declares lower profit (i.e., less than specified percentage of the turnover) for any of the 5 assessment years relevant to the previous year succeeding aforesaid previous,
then, he shall not be eligible to claim the benefit of the provisions of this section for 5 assessment years subsequent to the assessment year relevant to the previous year in which he has declared lower profit.
E.g. an assessee claims to be taxed on presumptive basis u/s 44AD for A.Y. 2017-18. For A.Y. 2018-19 and 2019-20, he offers income on the basis of presumptive taxation scheme. However, for A.Y. 2020-21, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next 5 A.Y.s, i.e. from A.Y. 2021-22 to 2025-26
Effect on the assessee if sec. 44AD(4) is applicable: An assessee to whom provision of sec. 44AD(4) is applicable and whose total income exceeds the maximum amount which is not chargeable to tax (i.e., basic exemption limit), he shall be required:
To maintain books of account and other documents as required u/s 44AA; and
To get his accounts audited and furnish a report of such audit as prescribed u/s 44AB
Illustration 1
X Co., a firm, is engaged in the business of trading of cloth (turnover of 2016-17 being ₹ 57,80,000, out of which ₹ 25,00,000 has been received in account payee cheque). It wants to claim the following deductions:
Particulars | Amount |
Salary and interest to partners [as permitted by sec. 40(b)] | 60,000 |
Salary to employees | 4,90,000 |
Depreciation | 2,70,000 |
Cost of materials used | 35,90,000 |
Other expenses | 13,45,000 |
Total | 57,55,000 |
Net profit (₹ 57,80,000 – ₹ 57,55,000) | 25,000 |
Determine the net income of X & Co. for the assessment year 2017-18 assuming that (i) taxable interest income is ₹ 90,000; (ii) Long term capital gain is ₹ 1,40,000; and (iii) the firm is eligible for a deduction of ₹ 15,000 under sec. 80G.
Solution
Since turnover from business does not exceed ₹ 2 crore, hence sec. 44AD is applicable. However, income computed as per provision other than provision of sec. 44AD is less than estimated income (being 8% of ₹ 57,80,000), hence, the firm may be assessed for such lesser income provided following conditions are satisfied –
Maintain books of account as prescribed u/s 44AA; and
Get accounts audited u/s 44AB.
Where it maintains accounts and gets it audited
Computation of total income of X & Co. for the A.Y. 2017-18
Particulars | Amount |
Profits and gains of business or profession: Income from cloth business | 25,000 |
Capital gains: Long term capital gain | 1,40,000 |
Income from Other Sources: Interest Income | 90,000 |
Gross Total Income | 2,55,000 |
Less: Deduction u/s 80G | 15,000 |
Total Income | 2,40,000 |
It is assumed that all the expenditures are allowed.
Where it does not maintain account or fails to get accounts audited
Computation of total income of X & Co. for the A.Y.2017-18
Particulars | Details | Amount |
Profits and gains of business or profession |
|
|
Income from cloth business (being 6% of ₹ 25,00,000) | 1,50,000 |
|
Income from cloth business (being 8% of ₹ 32,80,000) | 2,62,400 | 4,12,400 |
Capital gains: Long term capital gain |
| 1,40,000 |
Income from Other Sources: Interest Income |
| 90,000 |
Gross Total Income |
| 6,42,400 |
Less: Deduction u/s 80G |
| 15,000 |
Total Income |
| 6,27,400 |
Computation of Professional Income on Presumptive Basis [Sec. 44ADA]
Applicable to | Any resident assessee |
Conditions |
|
Estimated income | 50% of the gross receipts. However, a taxpayer can voluntarily declare a higher income in his return. |
Notes
Deduction u/s 30 to 38: The estimated income is comprehensive and no further deductions u/s 30 to 38 shall be allowed.
Depreciation: Depreciation is deemed to have been already allowed. The written down value of asset will be calculated, as if depreciation has been allowed.
Deductions: The above estimated income is aggregated with other income of the assessee, from any other business or under any other heads of income. Further deduction under chapter VIA shall be available to the assessee as usual.
Brought forward loss: Brought forward loss (if any) shall be subtracted from such estimated income as per provisions of this Act.
Effect if assessee declares lower income: An assessee can declare his income lower than the estimated income as per provision of this section and whose total income exceeds the basic exemption limit, in such case he will have to:
Maintain books of account and other documents as required u/s 44AA; and
Get his accounts audited and furnish a report of such audit as prescribed u/s 44AB.
Note: Assessee can change his option from year to year
Business of plying, leasing or hiring goods carriage [Sec. 44AE]
Applicable to | All assessee engaged in the business of plying, hiring or leasing goods carriage. |
Condition | Number of carriages: Assessee must not own more than 10 goods carriages at any time during the previous year. Owner of carriages includes a buyer under hire purchase or installment system even if the whole amount is unpaid. 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; |
Estimated income | Income from each goods carriage shall be ₹ 7,500 p.m. (or part of a month)
|
Notes:
Deduction u/s 30 to 38: The estimated income is comprehensive and no further deductions u/s 30 to 38 shall be allowed.
Deduction u/s 40(b): In the case of a firm, deduction in respect of remuneration and interest to partner u/s 40(b) shall be further deductible from income so computed.
Depreciation: Depreciation is deemed to have been already allowed. The written down value of asset will be calculated, as if depreciation has been allowed.
Deductions: The above estimated income is aggregated with other income of the assessee, from any other business or under any other heads of income. Further deduction under chapter VIA shall be available to the assessee as usual.
Brought forward loss: Brought forward loss (if any) shall be adjusted from such estimated income.
Maintenance of books of account and audit: An assessee, who estimates income from such business as per section 44AE, or a higher income, is not required to -
Maintain books of account u/s 44AA; and
Get his accounts audited u/s 44AB
- in respect of his income from such business.
However, he has to comply with the requirements of both sec. 44AA and 44AB in respect of his other businesses. Further to note that in computing the monetary limits u/s 44AA and 44AB, the gross receipts or income from the said business shall be excluded.
Effect if assessee declares lower income: An assessee can declare his income lower than the estimated income as per provision of this section. In such case he will have to
Maintain books of account and other documents as required u/s 44AA; and
Get his accounts audited and furnish a report of such audit as prescribed u/s 44AB irrespective of amount of turnover or gross receipts.
Note: Assessee can change his option from year to year.
Illustration 2
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2016, he owns 10 trucks (out of which 6 are heavy good vehicles). On 2/5/2016, he sold one of the heavy goods vehicles & purchased a light goods vehicle on 6th May, 2016. This new vehicle could however be put to use only on 15-6-2016.
Compute the total income of Mr. Sukhvinder for the A.Y. 2017-18, taking note of the following data:
Particulars | Amount | Amount |
Freight Charges collected |
| 8,70,000 |
Less: Operational expenses | 6,25,000 |
|
Depreciation as per Sec. 32 | 1,85,000 |
|
Other Office expenses | 15,000 | 8,25,000 |
Net Profit |
| 45,000 |
Other business and non-business income |
| 70,000 |
Solution
Alternative 1) Direct estimation of income u/s 44AE
Vehicle | No. of vehicle | Details | Amount |
Light | 4 | ₹ 7,500 * 4 vehicles * 12 months | 3,60,000 |
Heavy | 5 | ₹ 7,500 * 5 vehicles * 12 months | 4,50,000 |
Heavy | 1 | ₹ 7,500 * 1 vehicle * 2# months | 15,000 |
Light | 1 | ₹ 7,500 * 1 vehicles * 11# months | 82,500 |
Income from business of plying goods carriage | 9,07,500 | ||
Add: Other business and non-business income | 70,000 | ||
Total Income | 9,77,500 | ||
# Income shall be calculated from the month when assessee acquired the property whether it has been put to use or not. For this purpose, any fraction of the month shall be considered as month.
Alternative 2) Computation of income as per the provision of sec. 28 to 38
Particulars | Amount | Amount |
Freight charges collected |
| 8,70,000 |
Less: Expenditure related to business |
|
|
Operational expenses | 6,25,000 |
|
Depreciation u/s 32 | 1,85,000 |
|
Other office expenses | 15,000 | 8,25,000 |
Income from business of plying goods carriage |
| 45,000 |
Add: Other business and non-business income |
| 70,000 |
Total Income |
| 1,15,000 |
Since Mr. Sukhvinder has lower taxable income in alternative 2 hence his total income is ₹ 1,15,000. But to claim such lower income than the estimated income (computed in alternative 1) as per provision of section 44AE, he will have to —
- Maintain books of account as required u/s 44AA; and
- Get his accounts audited.
Test your knowledge
Choose the correct answer:
The presumptive taxation scheme of section 44AD cannot be adopted by __________.
Resident Individual
Resident HUF
Resident Firm
Limited Liability Partnership
A person who is carrying on any agency business and a person who is earning income in the nature of commission or brokerage cannot adopt the provisions of section 44AD
True
False
While computing income as per the provisions of section 44ADA, separate deduction on account of depreciation is available.
True
False
A person opting for the presumptive taxation scheme of section 44AD will ________ to pay advance tax in respect of income from business covered under section 44AD.
Be liable
Not be liable
The presumptive taxation scheme of sec. 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than ________ goods vehicles at any time during the year.
50
30
10
5
Answer
1: | d | 2: | a | 3: | b | 4: | a | 5: | c |