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:
(a) Eligible business u/s 44AD | @ 8% of the total gross receipts (6% for non-cash turnover wef AY 2018-19) |
(b) income from goods carriages u/s 44AE | @ Rs. 7500/- for every month or part of the month |
(c) Profits and gains of profession u/s 44ADA | @ 50% of the total gross receipt. |
The following analysis attempts to address the three inter-related topics linked to presumptive taxation.
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:
Tax incidence on salary payments (Rs.) |
Tax incidence u/s 44ADA on professional receipts u/s 194J (Rs.) |
|
Annual Gross Taxable Receipts | 10,00,000 | 10,00,000 |
Receipt for Tax Purposes | 10,00,000 | 5,00,000 |
Income Tax | 1,25,000 | 25,000 |
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.”
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:
From AY 2011-12 onwards after amendment |
Prior to AY 2011-12 (before amendment) |
a sum equal to eight percent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee shall be deemed to be the profits and gains of such business …… |
a sum equal to eight percent of the gross receipts paid or payable to the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum declared by the assessee in his return of income shall be deemed to be the profits and gains of such business …… |
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.
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:
From AY 2011-12 onwards after amendment |
Prior to AY 2011-12 (before amendment) |
(i) being a heavy goods vehicle, shall be an amount equal to five thousand rupees for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher; (ii) other than a heavy goods vehicle, shall be an amount equal to four thousand five hundred rupees for every month or part of a month during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher |
(i) being a heavy goods vehicle, shall be an amount equal to three thousand rupees for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year or, as the case may be, an amount higher than the aforesaid amount as declared by him in his return of income; (ii) other than a heavy goods vehicle, shall be an amount equal to three thousand one hundred rupees for every month or part of a month during which the goods carriage is’ owned by the assessee in the previous year or, as the case may be, an amount higher than the aforesaid amount as declared by him in his return of income.” |
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 above view is fortified by the following relevant case laws:
ABCAUS 9431 2016 (06) ITAT |
ABCAUS 1199 (2017)(04) ITAT |
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View Comments
if my gross receipt 10 lakh, actual profit 9 lakh, can i still show my earning is 80K INR? i.e pay tax only for 80K INR? and if this is true can i invest rest of money to PPF/NSC/Stock market etc without any issue? can TAX department raise question about the invested money?
at AO level, you may face trouble.