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2017

All you need to know about Presumptive Taxation U/s. 44AE

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What is Presumptive Taxation Scheme?

Despite being an important task, maintaining books of accounts become very tedious particularly for small businesses operating at relatively lower profit margins and scale. To give relief to such small businesses, The Income Tax Department has provided for provisions of Presumptive Taxation Scheme. Under Presumptive Taxation Scheme, an assessee does not require to maintain books of accounts. On the other hand, a prescribed percentage of total turnover is presumed to be the profit for the respective financial year. The tax is payable on such presumed amount of profit.

The Presumptive Taxation System is governed under Section 44AD, 44ADA and 44AE of Income Tax Act, 1961.

In this article, we are going to zero in on only section 44AE

Purpose of the presumptive taxation scheme of section 44AE:

  • The scheme of section 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing of goods carriages.


Eligible taxpayer and business for the purpose of the presumptive taxation scheme of section 44AE:

The benefit of presumptive taxation scheme U/S 44AE is available to businesses subject to following conditions:

  • The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.)
  • The presumptive taxation scheme of section 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages
  • Only those businesses which do not own more than 10 goods vehicles at any time during the year can avail the benefit of this scheme


Hence, only those businesses which fulfil all three criteria above can take benefit of this scheme.

Can a person who owns more than 10 goods vehicles adopt the presumptive taxation scheme of section 44AE?

No, the important criterion of the scheme is the restriction on owning not more than 10 goods vehicles at any time during the year. Thus, if a person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of this scheme.

The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AE:

  • In case of a person who is willing to opt for the presumptive taxation scheme of section 44AE, income will be computed on an estimated basis.
  • Income will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer during the year. Part of the month would be considered as full month.


Note: If the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can be declared.


Illustration:

Mr. A is engaged in the business of plying, hiring or leasing of goods carriage. Throughout the year 2016-17, he owned 9 goods vehicles (5 heavy goods vehicles and 4 other than heavy goods vehicles). What will be the taxable income from the business of plying, hiring or leasing of goods carriages if he adopts the provisions of section 44AE?

As per the provisions of section 44AE, income will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer. The rate of Rs. 7,500 per month is same for every goods vehicle.
In the present case, Mr. A owned 9 goods vehicles throughout the year and, hence, income will be computed as follows:

PARTICULARS AMOUNT(Rs.)
Income per month per goods vehicle 7500/-
No. of Goods Vehicles 9
Monthly income as per the provisions of sections 44AE from 9 goods vehicle 67,500 (7500*9)
Total annual income from business of plying,
hiring or leasing goods carriages as per the provisions of sections 44AE
8,10,000/- (67,500*12)

 


The presumptive income computed at the rate of Rs. 7,500 per goods vehicle per month is the final income and no further expenses will be allowed or disallowed:

  • Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.
  • In case of a person who is opting for the presumptive taxation scheme of section 44AE, the provisions of allowance/disallowances as provided for under the Income-tax Act, will not apply and income computed at the presumptive rate of Rs. 7,500 per goods vehicle per month will be the final income. In other words, the income computed at the rate of Rs. 7,500 per goods vehicle per month will be the final taxable income of the business and no further expenses will be allowed or disallowed.


Presumptive Scheme U/S 44AE for Partnership Firms:

  • In case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the rate of Rs. 7,500 per goods vehicle per month, further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act).

Treatment of Depreciation:

  • While computing income as per the provisions of section 44AE, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.


No need to maintain books of account as prescribed under section 44AA:

  • In case of a person opting for the presumptive taxation scheme of section 44AE, the provisions of section 44AA relating to maintenance of books of account will not apply.
  • In other words, if a person adopts the provisions of section 44AE and declares his income at the rate of Rs. 7,500 per goods vehicle per month, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AE.


Applicability of the provisions relating to payment of advance tax:

  • There is no concession as regards payment of advance tax in case of a person who adopts the presumptive taxation scheme of section 44AE and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.
  • Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AE and declares income at a lower rate, i.e., at less than Rs. 7,500 per goods vehicle per month
  • A person can declare his income at lower rate (i.e., at less than Rs. 7,500 per goods vehicle per month). However, if he does so, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited under section 4AB.

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