Presumptive Tax if actual profit is more. Shifting from salary to professional receipts to take benefit u/s 44ADA

Applicability of Presumptive Tax if actual profit is more than presumptive income. Shifting from salary to professional receipts to take benefit u/s 44ADA

The Income-tax Act 1961 (‘the Act’) provides for taxation of income on presumptive or deeming basis in the case prescribed businesses. Currently, the benefit of presumptive taxation is available in relation to the following incomes:

The following analysis attempts to address the three inter-related topics linked to presumptive taxation.

Shifting from salary to contractual/professional receipts under Presumptive taxation to save tax

Soon after the section 44ADA was inserted by the Finance Act, 2016 w.e.f. 04/04/2017 (i.e. AY 2017-18) it was more than tempting for many chartered accountants/other professionals working in an organisation on employment basis, to shift to contract based arrangements so that they can claim the benefit of the newly inserted section 44ADA by offering to tax only 50% of their remuneration by bringing it under the head “profit and gains from business and profession” than “salary”. This can be better explained by way of the following comparative tax incidence:

However, an essential corollary to the above seemingly perfect tax planning is “whether the presumptive section if opted/applicable to the assessee would put to rest the question of actual profits earned by the assessee.”

Applicability of Presumptive Tax where actual profit is more than arrived at applying presumptive rates

Prior to AY 2011-12, the assessee was required to pay tax only presumptive rates unless higher income was declared in the return of income.

However, the Finance (no. 2) Act, 2009 w.e.f. 01-04-2011 (i.e AY 2011-12) has amended the provisions of the presumptive taxations u/s 44AD and 44AE w.e.f. AY 2011-12

Before the amendment, the assessee had two options. The first option was to declare profit at the prescribed rate. The second option was to offer the amount declared in the return of income, being higher than the first option.

The relevant text which was common in all the presumptive sections was as under:

……..or, as the case may be, an amount higher than the aforesaid amount as declared by him in his return of income;

Thus, before the amendment, the relevant section(s) dealing with presumptive taxation consisted of two parts connected by the word ‘or’. The first part laid down computation of income on presumptive basis. The second part referred the income declared in the return of income, which was higher than the estimated income. Both parts of the clause (i) were connected by the disjunctive ‘or’.

However, by the amendment applicable from the Assessment Year 2011-12, the second option whereby the assessee could offer higher amount by declaring it in the return of income has been altered and substituted. For illustration, the relevant part of section 44AD in post and pre-amendment era is as under:

It can be seen that the phrase, “declared by the assessee in his return of income” have been substituted by the words, ‘claimed to have been earned’.

The Explanatory notes to the Finance (no. 2) Act, 2009 do not throw any light on the intention of the legislature for the choice of the word as used in the amendment made as above.

One view could be that the term “claimed to have been earned” by the assessee would cover the cases where the Assessing Officer can establish that the assessee in actual has earned more than the presumptive profits.

However, as discussed hereinafter, the actual profits can not be taxed if covered under presumptive taxation except carriage of goods u/s 44AE.

Actual Profits can not be taxed under Presumptive Taxation except for carriage of goods

Similar to the amendment made to section 44AD, the Finance (no. 2) Act, 2009 also made amendment to section 44AE which deals with presumptive tax on business of playing, hiring or leasing of carriage goods as under:

Thus it can be seen that in older section 44AE which was worded similar to section 44AD, previously there was a choice to declare the income on estimate basis or to declare higher income from the business of plying of goods carriages.

But w.e.f. assessment year 2011-12, the choice available with the assessee of choosing the option, has been taken away and now, the truck owners are required to declare the income whichever is higher, out of estimated income or the amount claimed to have been actually earned from such vehicle.

Conclusion:
The CBDT circular No. 5 of 2010 dated 03/06/2010 (Explanatory notes to the provisions of the Finance (No. 2) Act, 2009) has clarified with reference to section 44AE that an anti-avoidance clause has been provided to state that a prescribed fixed sum or a sum higher than the aforesaid sum claimed to have been earned by the assessee shall be deemed to be profits and gains of such business.

However, it can be easily seen that the phrase, “whichever is higher” is absent in the amended section 44AD which is a distinctive feature of the amended section 44AE.

Thus it can be safely concluded that despite the addition of the phrase, “or a sum higher than the aforesaid sum claimed to have been earned by the assessee” in all presumptive sections;

• The actual profit, even if higher than the presumptive income can not be brought to tax udder section 44AD or 44ADA once the assessee exercises the option of presumptive rate of tax.
• The actual profit earned if higher than the income declared can be brought to tax u/s 44AE in the case of truck owners

The above view is fortified by the following relevant case laws: