Test tables

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:

  • Limited liability partnership firm

  • A person carrying on profession as referred to u/s 44AA

  • A person earning income in the nature of commission or brokerage; or

  • A person carrying on any agency business

  • A person carrying on the​​ business of plying, hiring or leasing goods carriages referred to in sec. 44AE

Conditions

  • Eligible Business: Assessee must be engaged in any business other than the business​​ referred above.

  • Maximum Turnover: Total turnover or gross receipts in the previous year of eligible business should not exceed​​ ₹​​ 2 crore.

  • Restriction on claiming deductions: The assessee​​ has not claimed any deduction u/s 10AA or 80HH to 80RRB in the relevant assessment year.

Estimated income

  • Where amount of turnover or gross receipts is received by an account payee cheque or account payee bank draft or use of ECS during the previous year or before the due date of filing return of income

6% of such turnover or receipts

  • In any other case

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

  • Engaged in Profession: Assessee must be engaged in any profession referred to in sec. 44AA (i.e.,​​ Legal, medical, engineering, architectural profession or profession of accountancy, technical consultancy, interior decoration, etc.)

  • Maximum Receipts: Gross receipts of the assessee in the previous year should not exceed​​ ₹​​ 50 lakh.

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)

  • Income shall be calculated from the month when assessee acquired the​​ goods carriage​​ whether it has been put to use or not.

  • An assessee can declare higher income.

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

 

 

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