Section 44AD of Income Tax Act – Presumptive Taxation

  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms. The scheme of presumptive taxation is applicable for any business, which has maximum gross sales or turnover or gross receipts of Rs. 2 crore.
  • The presumptive rate of net income is prescribed at 8% of gross turnover/gross receipts (6% in case of digital receipts).
  • An assessee who opts for presumptive taxation scheme, shall be exempted from maintenance of books of accounts related to such business as required u/s 44AA of the Income Tax Act.
  • An assessee may have gross sales/ turnover less than Rs. 2 crore, but show a net income below the presumptive rate of 8% or 6% (where applicable). In such a case, the assessee will need to maintain books of accounts (if such an assessee falls in any tax bracket and also get them audited.
  • The assessee cannot deduct any business expenses against the income under presumptive taxation scheme.
  • Section 44AD shall not apply to-

I. A person carrying on profession;
II. A person having income from commission or brokerage; or
III. A person carrying on agency business

  • Once the presumptive taxation scheme u/s 44AD has been opted by the assessee, he is required to file Income tax return under the presumptive taxation scheme only for a period of 5 years.
  • In case a taxpayer has filed the return as a normal taxpayer under presumptive taxation scheme or opted out of presumptive taxation scheme, then he cannot re-opt for the presumptive taxation scheme for the next 5 years.
  • ITR 4 would be applicable under this.

Maintenance of Books of Accounts

Income Tax Law makes a mandatory requirement for businesses and professionals to maintain books of accounts as per Section 44AA and Rule 6F.

A) A person carrying on a specified profession would be required to maintain the book of accounts if his or her gross receipts are more than Rs.1,50,000 in previous three years. Specified profession under section 44AA and rule 6F of the Income Tax Act includes professions such as:

  • Legal
  • Medical
  • Engineering
  • Architectural
  • Accountancy
  • Technical Consultancy
  • Interior Decoration
  • Authorized Representative
  • Company Secretary
  • Film artist

B) Businesses or Professions other than specified above:

As per section 44AA(2), it is mandatory to maintain books of accounts in the following cases:

  • In case of income from business or profession, book of accounts must be mandatorily maintained if the income exceeds Rs.2,50,000 during current year Or if total sales or turnover or gross receipts exceed Rs.25 lakhs in any one of the previous 3 years.
  • Where in case of a new business or profession, if the income is expected to exceed Rs 2,50,000 or the total sales or turnover or gross receipts are expected to exceed Rs 25 lakhs.
  • If the assessee is covered under section 44AD or section 44AE or section 44ADA and has claimed his income lower than the profits or gains deemed under section 44AD or section 44AE or section 44ADA respectively in the Income Tax Return.

Note: The limit of Rs. 150,000 has been increased to Rs. 250,000 from FY 2017-18 (AY 2018-19).

Specified books of account to be maintained as per Rule 6F:

  • Cash book having day to day cash transactions
  • Journal according to mercantile system of accounting
  • Record of all cash receipts and payments which show cash balance in hand at the end of the day or at the end of each month (not exceeding a month).
  • Carbon copies of bills or receipts of more than Rs 25 in value issued by you must be kept
  • Carbon copies of bills of expenditure of more than Rs 50 in value incurred by you must be kept
  • A ledger should also be maintained.

There are further requirements for those taxpayers who are involved in the medical profession, (for e.g. physicians, surgeons, dentists, pathologists, radiologists, etc.) to maintain additional books along with the books mentioned above. Such as:

  • Daily cash register in Form No.3C with details of patients, services rendered, fees received and date of receipt
  • Details of inventory of drugs, medicines, and other consumables used as on the first and last day of the previous year

Note: These books should be maintained at the Head Office or at each of the offices.

Period of maintenance of Books of Accounts

All the books of accounts mentioned above should be kept for duration of 6years from the end of the relevant assessment year.

Penalty on Non-maintenance of Books of Accounts

In case of Non-maintenance of books of account as per the provisions of section 44AA, then the penalty of Rs. 25,000 shall be levied under section 271A. You can avoid the penalty if you can give a reasonable cause for the non-maintenance of books of accounts to the Assessing Officer.

Presumptive Taxation Scheme

What is Presumptive Taxation Scheme?

Income Tax Law makes a mandatory requirement for businesses and professionals to maintain books of accounts as per Section 44AA. To provide a relief to small taxpayers from this tedious job, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, sections 44AE and sections 44ADA.

A person opting presumptive taxation scheme will get a relaxation from tedious job of maintenance of books of account and can declare income at a prescribed rate.

There are three presumptive taxation schemes as given below:

1.Section 44AD: For Computing Profits & Gains of Business on Presumptive Basis. Such business can be owned by an individual (proprietorship), HUF or a traditional Partnership firm (excluding Limited Liability Partnerships).

2.Section 44AE: For Computing Profits and Gains of Business of Plying, Hiring or Leasing Goods Carriages:

3.Section 44ADA: For computing Profits and Gains of Profession on presumptive basis

Eligibility to take the advantage of Presumptive Taxation Scheme

The scheme under presumptive taxation of Section 44AD can be used by following entities:

1) A Resident Individual; or
2) A Resident Hindu Undivided Family; or
3) A Resident Partnership Firm (excluding Limited Liability Partnership Firm)

In other words, the presumptive taxation scheme under Section 44AD cannot be adopted by non-resident entities, companies or limited liability partnerships.

Moreover, the presumptive taxation scheme cannot be used by any person who has undertaken deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the same year.

Conditions for opting Presumptive Taxation Scheme

  • Once the presumptive taxation scheme has been opted by the assessee, he is required to file Income tax return as per the presumptive taxation scheme only for a period of 5 years. This has been set by the government to discourage the misuse of presumptive taxation scheme.
  • In case a taxpayer has filed the return as a normal taxpayer under presumptive taxation scheme or opted out of presumptive taxation scheme, then he cannot opt for the presumptive taxation scheme for the next 5 years.
  • Unlike as in Section 44AD for businesses, a professional can opt in and out from the scheme at anytime without the 5years restriction.

Section 44AD: For Computing Profits and Gains of Business on Presumptive Basis

  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms. The scheme of presumptive taxation is applicable for any business, which has maximum gross sales or turnover or gross receipts of Rs. 2 crore.
  • The presumptive rate of net income is prescribed at 8% of gross turnover/gross receipts (6% in case of digital receipts).
  • An assessee who opts for presumptive taxation scheme, shall be exempted from maintenance of books of accounts related to such business as required u/s 44AA of the Income Tax Act.
  • An assessee may have gross sales/ turnover less than Rs. 2 crore, but show a net income below the presumptive rate of 8% or 6% (where applicable). In such a case, the assessee will need to maintain books of accounts (if such an assessee falls in any tax bracket and also get them audited.
  • The assessee cannot deduct any business expenses against the income under presumptive taxation scheme.
  • Section 44AD shall not apply to-

I. A person carrying on profession;
II. A person having income from commission or brokerage; or
III. A person carrying on agency business

  • Once the presumptive taxation scheme u/s 44AD has been opted by the assessee, he is required to file Income tax return under the presumptive taxation scheme only for a period of 5 years.
  • In case a taxpayer has filed the return as a normal taxpayer under presumptive taxation scheme or opted out of presumptive taxation scheme, then he cannot re-opt for the presumptive taxation scheme for the next 5 years.
  • ITR 4 would be applicable under this.

Section 44AE: For Computing Profits and Gains of Business of Plying, Hiring or Leasing Goods Carriages

  • In case of an assessee who owns not more than 10 goods carriages or heavy goods vehicles during the previous year and is engaged in the business of plying, hiring or leasing such goods carriages, then the income of such business is taxable under the head “Profits and gains from Business& Profession”, your net income from goods carriage shall be assumed as Rs. 7,500 per month or part of a month for each Light Goods vehicle and Rs.1,000 per ton per vehicle per month for Heavy Goods Vehicle (Budget 2018- Applicable for FY 2018-19).
  • The assessee cannot deduct any business expenses against the income.
  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms
  • An assessee who has possession of a goods carriage, whether taken on hire purchase or on instalments basis and for which the whole or part of amount is still due, shall be deemed to be the owner of that goods carriage.
  • Once the presumptive taxation scheme u/s 44AE has been opted by the assessee, he is required to file Income tax return under the presumptive taxation scheme only for a period of 5 years.
  • In case a taxpayer has filed the return as a normal taxpayer under presumptive taxation scheme or opted out of presumptive taxation scheme, then he will be ceased to opt for benefit of presumptive taxation scheme for the next 5 years.
  • ITR 4 would be applicable under this.

Section 44ADA: For Computing Profits and Gains of Profession on Presumptive Basis

  • The benefit of presumptive taxation scheme was earlier given to Businesses, which has now extended to Professionals also. Thus, Professionals whose Gross Receipts are not more than Rs. 50 Lakhs in a financial year, can enjoy the benefit of presumptive taxation u/s 44ADA from FY 2016-17.
  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms.
  • The Persons engaged in the below mentioned profession can opt for this presumptive taxation scheme u/s 44ADA and net income of such person would be assumed to be 50% of the gross receipts for the relevant financial year:
  1. Legal
  2. Engineering
  3. Medical
  4. Architectural Profession
  5. Accountancy Profession
  6. Technical Consultancy
  7. Interior Decoration
  8. Authorized representatives
  9. Film Artists
  10. Certain Sports related person
  11. Company Secretaries
  12. Information Technology
  • An assessee who opts for this presumptive scheme, shall be exempted from maintenance of books of accounts.
  • The assessee cannot deduct any business expenses against the income under presumptive taxation scheme.
  • However, an assessee would be required to prepare books of accounts u/s 44AA and get his accounts audited, in case the assesse claims that profits and gains are less than 50% of gross receipts.
  • Unlike as in Section 44AD for businesses, a professional can opt in and out of the scheme at anytime without the 5years restriction.
  • ITR 4 would be applicable under this.

Difference between Sole proprietorship & One Person Company (OPC)

Sole Proprietorship:

‘Sole’ means single and ‘proprietorship’ means ownership that means sole proprietorship is a business enterprise owned and controlled by one person who has the entire authority and responsibility of such business. The owner is alone entitled to the entire profit of the enterprise as well as all the liability of the concerned enterprise.

Advantages of sole proprietorship

  • It can be created and dissolved in an easy manner.
  • No cost involved in setting up of sole proprietorship.
  • One person has absolute control over the business and can make quick decisions.
  • Sole proprietor has the complete control over the finance & profits of business.

Disadvantages of sole proprietorship

  • The business will exist only as long as the owner exists.
  • Since one person owns the business, there are problems with raising of capital funds.
  • As a sole proprietorship has an unlimited liability and therefore in situations where a sole
  • proprietor fails to meet his debts, his personal properties could be disposed off to pay his debts.

One Person Company:

A new form of business has been introduced under Companies Act, 2013 , which is a combination of Sole-proprietorship and Company, this is an opportunity for sole proprietors to become a corporate entity. It is thus considered as a private company having a separate legal entity and limited liability.

Lets us understand the difference between them:

Basis Sole- Proprietorship One Person Company (OPC)
Registration requirement Not Mandatory Can be registered under MCA and Companies Act 2013
Corporate existence No separate legal entity Separate legal entity
Liability Unlimited liability Limited Liability to the extent of share capital
Minimum persons Sole Proprietor Minimum 1 person
Maximum persons Maximum 1 person Maximum 2 person
Survival It ceases on the death or retirement of the member Upon the death of member, nominee appointed by the member shall become the member & responsible for the functioning of company
Tax obligation Profits are taxed as per individual proprietor’s slab rates Tax at the rate of 30% on profits plus cess and surcharge. OPC is heavily taxed
Compliances Income Tax Returns will be filed and audit under Section 44AB is required only if turnover crosses the limit File annual returns with the registrar of the company and needs to get its accounts audited
Liability to Register for GST Registration should be done as per the GST provisions Registration should be done as per the GST provisions

Section 44ADA: Profits and Gains of Profession on presumptive basis

The benefit of presumptive taxation scheme was earlier given to Businesses, which has now extended to Professionals also. Thus, Professionals whose Gross Receipts are not more than Rs. 50 Lakhs in a financial year, can enjoy the benefit of presumptive taxation u/s 44ADA from FY 2016-17.

  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms.
  • The Persons engaged in the below mentioned profession can opt for this presumptive taxation scheme u/s 44ADA and net income of such person would be assumed to be 50% of the gross receipts for the relevant financial year:
  1. Legal
  2. Engineering
  3. Medical
  4. Architectural Profession
  5. Accountancy Profession
  6. Technical Consultancy
  7. Interior Decoration
  8. Authorized representatives
  9. Film Artists
  10. Certain Sports related person
  11. Company Secretaries
  12. Information Technology
  • An assessee who opts for this presumptive scheme, shall be exempted from maintenance of books of accounts.
  • The assessee cannot deduct any business expenses against the income under presumptive taxation scheme.
  • However, an assessee would be required to prepare books of accounts u/s 44AA and get his accounts audited, in case the assesse claims that profits and gains are less than 50% of gross receipts.
  • Unlike as in Section 44AD for businesses, a professional can opt in and out of the scheme at anytime without the 5years restriction.
  • ITR 4 would be applicable under this.

Section 44AE: Profits and Gains of Business of Plying, Hiring or Leasing Goods Carriages

In case of an assessee who owns not more than 10 goods carriages or heavy goods vehicles during the previous year and is engaged in the business of plying, hiring or leasing such goods carriages, then the income of such business is taxable under the head “Profits and gains from Business& Profession”, your net income from goods carriage shall be assumed as Rs. 7,500 per month or part of a month for each Light Goods vehicle and Rs.1,000 per ton per vehicle per month for Heavy Goods Vehicle (Budget 2018- Applicable for FY 2018-19).

  • The assessee cannot deduct any business expenses against the income.
  • The scheme shall be applicable to individuals, HUF’s and partnership firms excluding Limited Liability Partnership Firms
  • An assessee who has possession of a goods carriage, whether taken on hire purchase or on instalments basis and for which the whole or part of amount is still due, shall be deemed to be the owner of that goods carriage.
  • Once the presumptive taxation scheme u/s 44AE has been opted by the assessee, he is required to file Income tax return under the presumptive taxation scheme only for a period of 5 years.
  • In case a taxpayer has filed the return as a normal taxpayer under presumptive taxation scheme or opted out of presumptive taxation scheme, then he will be ceased to opt for benefit of presumptive taxation scheme for the next 5 years.
  • ITR 4 would be applicable under this.

Minimum Alternate Tax (MAT)

What is Minimum Alternate Tax?

Minimum Alternate Tax (MAT) is levied under Income Tax Act. This was introduced to target such companies which book high profit but pay almost no or minimal tax by taking the benefit on account of various exclusions, deductions and incentives.
As per Section 115JB of the Income Tax Act, 1961, where in the case of a domestic or foreign company, the income tax payable as computed under the Income Tax Act of any assessment year is less than 18.5% of its book profits, such books profits shall be deemed to be the net income of the assessee and tax payable shall be computed at the rate of 18.5%.

Applicability of MAT

The Minimum Alternate Tax is applicable only on Companies and is not applicable on Individuals, HUF’s, Partnership firms, Limited liability firms (LLP’s) etc.

How to Calculate MAT?

MAT is calculated as per Section 115JB(1) of the Income Tax Act, Tax liability shall be higher of the following amounts:

  • Tax computed under the normal provisions of the Income Tax Act. [30% Tax Rate plus surcharge and cess as applicable].
  • 18.5% of the Book profits (plus surcharge and cess as applicable). The tax so computed at the rate of 18.5% on book profit is called MAT.
  • Where, Corporate Tax Rate for Domestic Companies in India:
Turnover Tax Rate
Total Turnover upto Rs.50 crore in the previous year 25%
Total Turnover more than Rs.50 crore in the previous year 30%

In addition cess and surcharge is levied as follows:

Book Profit is the net profit which is shown in the Profit and Loss account prepared in accordance with Schedule III of Companies Act, 2013 for the relevant year as increased and decreased by the following items –

To be Added to the Net Profit (If debited to P/l A/c i.e. deducted from gross income):

  1. Income Tax paid or payable and calculated as per normal provisions of Income Tax Act, 1961.
  2. Amount carried to any reserve
  3. Dividend paid or proposed
  4. Amount of Provision for loss of subsidiary companies
  5. Depreciation including depreciation on revaluation of assets
  6. Amount and provision of deferred tax
  7. Provision for unascertained liabilities i.e. provision for bad debts
  8. Amount of expense relatable to any income u/s 10,11,12 (other than long term capital gain exempted u/s 10(38) which means it is subject to MAT).
  9. Expenditure relating to income by way of royalty in respect of patent chargeable to tax under section 115BBF.
  10. Provision for diminution in the value of asset.

To be deducted from Net profit (If credited to P/L A/c i.e. if added to the gross income):

  1. Amount of depreciation debited to P&L A/c (excluding the depreciation on revalued Assets) i.e. if the company has a negative depreciation amount
  2. Amount of income to which any of the provisions of section 10, 11 & 12 other than 10(38) apply.
  3. Amount withdrawn from any reserves or provisions if credited to P&L account.
  4. Amount withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of asset.
  5. Brought forward Losses or unabsorbed depreciation; whichever is less as per the books of account. However such loss shall not include the depreciation.(Where in case the brought forward loss or unabsorbed depreciation is nil then nothing shall be deducted.)
  6. Amount of Deferred Tax, if credited to profit & loss account
  7. Income in respect of royalty in respect of patent chargeable to tax under section 115BB.

Let us understand MAT with an Illustration:
Illustration: The taxable income of Saksham Pvt. Ltd. computed as per the provisions of Income-tax Act is Rs. 9,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 17,40,000. What will be the tax liability of ABC Pvt. Ltd. (ignore cess and surcharge)?

The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT u/s 115JB.
Where, Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax at 30% on Rs. 9,40,000 will amount to Rs. 2,82,000 (plus cess). Book profit of the company is Rs. 19,40,000. MAT liability (excluding cess and surcharge) at 18.50% on Rs.19,40,000 will come to Rs. 3,58,900. Thus, the tax liability of ABC Pvt. Ltd. will be Rs. 3,58,900 (plus cess as applicable) being higher than the normal tax liability.

Note : A domestic Company pays tax a rate of of 25% if, its turnover or gross receipt is not more than Rs. 50 crores in the previous year. In this illustration, it is assumed that Company’s turnover exceeds Rs.50 in previous year.

What is MAT Credit?

(i) When any company pays minimum alternate tax under section 115JB of Income Tax Act, instead of regular tax, then the tax paid is higher than tax payable as per normal provisions of the Income Tax Act, the excess amount is credited back as Tax Credit to the company as per the provision of Section 115JAA.
(ii) MAT Credit Available= Tax Paid as per MAT calculation u/s 115JB – Tax Payable under the normal provisions of Income Tax Act.
(iii) MAT Credit shall be set off in the assessment year in which:
Tax payable under the normal Tax payable under
provisions of Income Tax Act> MAT u/s 115JB
(iv) MAT credit shall be allowed to carried forward and set off upto 15 Assessment years.

Let us understand MAT credit with an Illustration:

Illustration – The tax liability of ABC Pvt. Ltd. for the financial year 2018-19 under the normal provisions of the Income-tax Act is Rs. 19,40,000 and the liability as per the provisions of MAT is Rs. 19,00,000. It has brought forward MAT credit of Rs. 2,50,000. Can the company adjust the MAT credit? What will be the tax of the company after adjustment of MAT credit?

  • MAT credit can be set-off in the year in which the Tax liability of the company as per the Income Tax Act 1961 provisions is higher than the Tax liability as per MAT. In this case the tax liability as per the normal provisions of the Income-tax Act is Rs. 19,40,000 and the liability as per the provisions of MAT is Rs. 19,00,000. Tax Liability under the normal provisions is higher than liability as per the provisions of MAT and therefore, the company can adjust the MAT credit.
  • Brought forward MAT credit shall be allowed to be set off in the subsequent years up to the difference between the tax liability as per the normal provisions and tax liability as per the MAT provisions. Thus, after adjusting MAT credit, the liability of the company should not be less than tax liability as per the provisions of MAT. In this illustration, the liability as per MAT is Rs. 19,00,000, and, hence, after claiming set off of the MAT credit, the liability of company cannot be less than Rs. 19,00,000. Hence,out of the credit of Rs. 2,50,000 the company can claim credit of Rs. 40,000 only and the balance credit of Rs. 1,60,000 can be carried forward to subsequent year(s).

So let us try to understand it with the help of another example:

Assessment year Tax Payable as per MAT Tax Payable as per normal provisions Actual Tax Payable MAT Tax Credit Available u/s 115JAA Tax Credit Set off/ adjusted Total Tax Credit Available
2014-15 7,00,000 5,00,000 7,00,000 2,00,000
-
2,00,000
2015-16 10,00,000 7,50,000 10,00,000 2,50,000
-
4,50,000
2016-17 11,00,000 8,00,000 11,00,000 3,00,000
-
7,50,000
2017-18 7,00,000 9,00,000 7,00,000
-
2,00,000 5,50,000
2018-19 6,00,000 11,00,000 6,00,000
-
5,00,000 50,000