1.1 Present Provision:
Sec. 44AD, 44AF & 44AE
Under the existing provisions
relating to presumptive taxation codified in sections 44AD and 44AF, it
provides for taxation of income of certain assessees, under a presumptive
basis of 8% or 5% respectively, in case where gross receipts or total turnover
does not exceed Rs. 40 lakhs. The assessees covered under section 44AD of the
Act were restricted to only those who were either engaged in the business of
civil construction business or supply of labour for civil construction their
income being presumed at 8% as per their option. Whereas section 44AF were for
the assessee in retail trade in any goods or merchandise and their presumed
rate of taxation being 5% of turnover.
As per the existing provision
of section 44AE, in the case of an assessee who carried on the business of
plying, hiring or leasing goods carriages and who owns not more than 10 goods
carriage in the previous year, the income is calculated on a presumptive
basis. Under this scheme, a fixed amount of income per month per vehicle is
taken as under:
Nature of carrier Deemed
income
For Heavy goods vehicles 3500
Other than Heavy goods 3150
vehicles
1.2 Expansion of the scope
of presumptive taxation as per proposed amendment
With the proposed amendment
it has been planned to substitute section 44AD in its new form thereby
replacing the erstwhile section 44AD and enhancing the applicability of new
section to larger number of assessees.
In view of the proposed
substitution the scope of the presumptive taxation shall be extended to all
businesses. The salient features of the proposed presumptive taxation scheme
are as under:
(a) The presumptive rate of
income is prescribed of a sum equal to 8% of total turnover / gross receipts
or income claimed to have been earned from such business whichever is higher
than the aforesaid sum.
(b) The scheme shall be
applicable to individuals, HUFs and partnership firms excluding Limited
Liability Partnership firms.
(c) The scheme shall also not
be applicable to an assessee who is availing deductions u/s. 10A, 10AA, 10B,
10BA or deduction under any provisions of Chapter VIA under the heading
“C–Deduction in respect of certain incomes”.
(d) The scheme is applicable
for any business (excluding a business already covered u/s. 44AE) which has a
maximum gross turnover/gross receipts of 40 lakhs.
(e) An assessee opting for
the above scheme shall be exempted from payment of advance tax in relation to
such business and therefore tax is payable only on self assessment.
(f) An assessee opting for
such scheme would be exempted from maintenance of books of account related to
such business.
(g) It is also proposed that
in case the assessee is claiming the profits and gains from the aforesaid
business as lower than the deemed profits and gains computed under sub-section
(1) of section 44AD and his income exceeds the maximum amount which is not
chargeable to income tax, then he will be required to maintain books of
account under section 44AA and get the accounts audited under section 44AB of
the Act.
Also, the existing section
44AF is proposed to be merged with the new substituted section 44AD and all
the assessees covered under section 44AF will be brought under new section
44AD.
In section 44AE, it has been
proposed to hike the deemed income per vehicle per month keeping all the other
aspects of section as it is.
|
Nature of carrier |
Proposed deemed income |
|
For Heavy goods vehicles |
5000 |
|
Other than Heavy |
4500 |
|
goods vehicles |
|
1.3 Reasons to expand the
scope of presumptive taxation
Considering the growth of
small and medium businesses in India and to promote small entrepreneurial
ventures thereby lightening them from compliance burden, it has been proposed
to include all businesses under the gamut of presumptive taxation. The
proposed amendment will considerably reduce the compliance cost of assessee
and tax collection cost of department as 8% of profit is very reasonable
considering the competitive businesses in small and medium sector of the
economy. This will also facilitate the business operations of all small
taxpayers and reduce their compliance burden.
1.4 Effective date of
proposed amendment
The new section 44AD is
proposed to take effect from 1st April, 2011 and will accordingly, apply in
relation to the assessment year 2011-12 and subsequent years. The said date
will also coincide with section 44AF becoming inoperative, as the same will be
merged in essential with new section 44AD. The increased rate of deemed income
under section 44AE is proposed to take effect from 1st April, 2011 and will
apply for assessment year 2011-12 and subsequent years.
1.5 Comments
The proposed section 44AD is
an appreciable amendment to the tax law and it provides a very simple
mechanism for many small businesses to become tax compliant without much cost
and interference in its business as no effort will be required in maintenance
of books of account. But its application has to be seen over the future time
considering the issues like selection criteria for scrutiny under section
143(2) as the assessee will have no books of account to show to the assessing
officer. Also, how the assets accumulated over the years can be correlated
with the income that is being taxed on presumptive basis and in absence of
books of account it would be difficult task to explain the asset investments.
There are cases where the department has made an attempt to prove that the
actual income of the assessee is more than the income declared on presumptive
basis and they have proposed to enhance the same. These instances will lead to
lot of litigation. Regarding the application of presumptive tax it would be
relevant to highlight Circular No. 737 dated 23-2-1996 (1996) 218 ITR (St.)
97, that clearly states that it is for the assessee to opt for this scheme of
taxation and the said is optional.
There are instances when the
profits earned by the assessee is more than 8% i.e., presumptive rate of
taxation. In case of Shivani Builders vs. ITO [2007] 108 ITD 520 (Ahmedabad),
the assessee was maintaining accounts and income earned were higher than the
presumptive income. Here the judgment was delivered that in case the assessee
earns higher than the presumptive rate the actual income will be taxable and
section 44AD will not be applicable.
In case of assessee declaring
their profits less than 8% thereby maintaining books of account and getting
their accounts duly audited, it is not proper for assessing officer to reopen
the assessment under section 147 merely by providing the reason that profits
declared is less than 8%, which is less than as provided in section 44AD of
the Act. In this context a reference can be made to the judgement of ITO
Bhopal vs. Project India (2007) 109 ITD 87 (Indore) wherein the reopening of
assessment was held to be invalid. Similarly in case of ITO vs. Mansi
Enterprises (2007) 17 SOT 564 (Mum) it was held that since assessee had
fulfilled all conditions of sec. 44AD, assessment could not be re-opened for
the reason that a partner was not aware about business activities of firm and
therefore the firm was non genuine.
The proposed provisions of
presumptive income were amongst the very few greenshoots that could be seen in
this budget.
2.1 Present provision
Presently deduction in
respect of contribution to political parties has been provided under section
80GGB and section 80GGC and the same provides for deduction in respect of
contributions given to political parties by companies and any person
respectively. The deductions are availed after the assessee contributes to
political party.
2.2 Inclusion of
contribution to electoral trust for availing deduction under section 80GGB and
Section 80GGC
Section 80GGB and section
80GGC are proposed to be amended to provide 100% deduction in respect of
contributions made to electoral trusts. It will be a trust approved by the
Board in accordance with the scheme made in this regard by the Central
Government. (section 2(22AAA))
According to the proposed new
section 13B, any contributions received by an electoral trust though being an
income of the trust, would be exempt from tax if the following conditions are
satisfied:
a) 95% of the aggregate
donations received by such trust during the previous year along with the
surplus, if any, brought forward from any earlier previous year, is
distributed by such trust to any political party and
b) Such electoral trust
functions in accordance with the rules made by the Central Government.
2.3 Reasons for proposed
amendment
It is a welcome move by the
Government to reform the funding of political party, as electoral trust will
be free entity to fund the political party delivering result rather than the
said party being funded directly. At the same time it will ensure new
potential avenues of funding for the political party.
2.4 Effective date of
proposed amendment
The proposal to bring in the
concept of electoral trust under sections 80GGB and 80GGC will take effect
from 1st day of April, 2010 and shall accordingly, apply in relation to
assessment year 2010-11 and subsequent years. The rules in this regard will be
framed shortly.
2.5 Comments
The high cost of operation in
political functions and higher inflation has not spared even political parties
to be more accountable and requiring more funding for its agenda. This
situation calls for more established source of funds for the political
parties. Directly funding of political party did not provide an option to
future rewarding of more performing parties. So, the Government is making an
attempt of including electoral trust as an entity to which the funds are
donated and the said trust at its discretion decides to fund the parties. It
is a good beginning of organized funding system for Indian Political Parties.