Presumptive Tax

The Estimated Income Method of assessment for certain categories of businesses is prevalent in several countries. The Tax Reforms Committee in India had also recommended gradual introduction of the Estimated Income Method in certain areas to facilitate better tax compliance. It had also been noted that in a number of businesses the assessees do not maintain books of accounts or the books of accounts maintained are irregular and incomplete. Certain businesses have been identified where Estimated Income Method of assessment has been provided with a view to facilitate better tax compliance. The businesses identified are as under.

• Special provision for Profits or Gains of business of Civil Construction
• Special provision for Profits or Gains of business of Goods Carriages
• Special provision for Profits or Gains of retail business

Special provision for Profits or Gains of business of Civil Construction

The details of this provision are contained in new Section 44AD of the Income-tax Act introduced with effect from 1.4.94. The section was introduced with a view to providing for a method of estimating income from the business of civil construction or supply of labour for civil construction work. The new section is applicable to all assessees whose gross receipts from the above-mentioned business do not exceed Rs. 40 lakhs and who declare the Profit or Gains from such business at less than 8% of their Gross receipts. The Gross receipts are the amount received from the clients for the contract and do not include the value of material supplied by the client. The income from the above-mentioned business will be estimated at 8 per cent of the gross receipts paid or payable to an assessee.

The expression "civil construction" will include the construction or repair of buildings, dams, bridges or other structures, or of roads or canals. It will also include the execution of any other works contract. It will, thus, include work related to electrical fittings, plumbing job, landscaping work, etc.

The rate of 8 per cent is comprehensive. All deductions under sections 30 to 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. In the block of assets of the assessee, the written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the Finance Act 1997 has with retrospective effect from 1.4.94 permitted deduction in respect of the salary and interest paid by the firms to the partners from the income deemed under this section subject to the conditions and limits specified in clause (b) of section 40.

The assessees who file the return, estimating income at 8 per cent. of gross receipts, or a higher income, will neither be required to maintain books of account under the provisions of section 44AA, nor required to get accounts audited under the provisions of section 44AB, in respect of their income from the business of civil construction. However, even such an assessee has to comply with the requirements of both sections 44AA and 44AB in respect his businesses which are not covered by this scheme. For instance, a person may have gross receipts of Rs. 30 lakhs from civil construction business and of Rs. 25 lakhs from trading in scrap and Rs. 10 lakhs from garment manufacture. Although his total gross receipts are Rs. 65 lakhs, he will not be required to have his accounts audited, since his gross receipts after excluding those from the business of civil construction are still less than Rs. 40 lakhs, the limit provided in section 44AB.

The income from the business of civil construction, estimated in accordance with this provision, will be aggregated with other incomes of the assessee, from any other business or under other heads of income, in accordance with the normal provisions of the Income-tax Act. Accordingly, all deductions under Chapter VIA and rebate under Chapter VIII will be available to the assessee, if the conditions therein are fulfilled.

Special provision for Profits or Gains of business of Goods Carriages

The details of this provision are contained in new Section 44AE of the Income-tax Act introduced with effect from 1.4.94. The section was introduced with a view to providing for a method of estimating income from the business of plying, hiring or leasing goods carriages, whether a heavy goods carriage or other than a heavy goods carriage owned by the taxpayer.

For the purposes of this section the expressions goods carriage and heavy goods vehicle has been taken from the Motor Vehicles Act, 1998 which provides the following definition :

'Goods carriage' means any motor vehicle constructed or adopted for use solely for the carriage of goods , or any motor vehicle not so constructed or adopted when used for the carriage of goods.

'Heavy goods vehicle' means any goods carriage the gross weight of which, or a tractor or a road roller the unladen weight of either of which, exceeds 12,000 kilograms.

The presumptive scheme applies only to persons who do not own more than ten goods carriage vehicles. It is not applicable to the persons who do not own any such vehicles but operate vehicles taken on hire. However the term owner of the goods carriage also includes those assessees who have taken the vehicles on hire purchase or on installments and for which the whole or part of amount payable is still due.

As per this scheme the income from each goods carriage, being a heavy goods vehicle, will be estimated at Rs. 2,000 for every month or part of a month during which the vehicle is owned by the assessee. The income from each goods carriage, other than a heavy goods vehicle, will be estimated at Rs. 1,800 for every month or part of a month during which such vehicle is owned by the assessee. In either case, the taxpayer can declare his income from such vehicles at a higher amount than that specified above.

Illustration (1) : An assessee owns a light commercial vehicle for 9 months 15 days, a medium goods vehicle for 9 months and a medium goods vehicle for 12 months during the previous year. His profits and gains from the three trucks shall be deemed to be (Rs. 1,800 x 10) + (Rs. 1,800 x 9) + (Rs. 1,800 x 12), i.e., Rs. 55,800.

Illustration (2) : An assessee owns a heavy goods vehicle for 9 months 7 days, a medium goods vehicle for 9 months and a light commercial vehicle for 12 months during the previous year. His profits and gains from the three trucks shall be deemed to be (Rs. 2,000 x 10) + (Rs. 1,800 x 9) + (Rs. 1,800 x 12), i.e., Rs. 57,800.

The estimated income is comprehensive. All deductions under sections 30 to 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. In the block of assets of the assessee the written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the normal deductions to the extent allowed under clause (b) of section 40 will be allowed. The Finance Act 1997 has with retrospective effect from 1.4.94 permitted deduction in respect of the salary and interest paid by the firms to the partners from the income deemed under this section subject to the conditions and limits specified in clause (b) of section 40.

An assessee who files the return, estimating income on the basis of the specified amount per goods carriage or estimating a higher income, will neither be required to maintain books of account under the provisions of section 44AA, nor required to get accounts audited under the provisions of section 44AB, in respect of his income from the business of plying, hiring or leasing goods carriage. However, even such an assessee has to comply with the requirements of both sections 44AA and 44AB in respect of his businesses which are not covered by this scheme.

The income from the goods carriage business, estimated in accordance with this provision, will be aggregated with the other incomes of the assessee, from any other business or under other heads of income, in accordance with the normal provisions of the Income-tax Act. Accordingly, all deductions under Chapter VIA and rebate under Chapter VIII will be available to the assessee, if the conditions therein are fulfilled.

Special provision for Profits or Gains of retail business

With effect from 1.4.98 the Profits and Gains from business of retail trade in any goods or merchandise shall be deemed at the figure of 5% of the total turnover in the previous year on account of such business.

Accordingly, a new section 44AF has been inserted in the Income-tax Act with a view to providing for a method of estimating income from the retail business . The new section is applicable to all assessees whose total turnover from the above-mentioned business do not exceed Rs. 40 lakhs. The income from the above-mentioned business will be estimated at 5 per cent. of the total turnover of the assessee. A taxpayer can voluntarily declare a higher income in his return.

The rate of 5 per cent is comprehensive. All deductions under sections 30 to 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. In the block of assets of the assessee the written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the deduction in respect of the salary and interest paid by the firms to the partners from the income deemed under this section shall be allowable subject to the conditions and limits specified in clause (b) of section 40 .

The assessees who file the return, estimating income at 5 per cent of total turnover , or a higher income, will neither be required to maintain books of account under the provisions of section 44AA, nor required to get accounts audited under the provisions of section 44AB, in respect of their income from the business of civil construction. However, even such an assessee has to comply with the requirements of both sections 44AA and 44AB in respect his businesses which are not covered by this scheme. For instance, a person may have total turnover of Rs. 30 lakhs from retail trade business and of Rs. 25 lakhs from financing or leasing business and Rs. 10 lakhs from garment manufacture. Although his total gross receipts are Rs. 65 lakhs, he will not be required to have his accounts audited, since his gross receipts after excluding those from the retail trade business are still less than Rs. 40 lakhs, the limit provided in section 44AB.

The income from the retail business , estimated in accordance with this provision, will be aggregated with other incomes of the assessee, from any other business or under other heads of income, in accordance with the normal provisions of the Income-tax Act. Accordingly, all deductions under Chapter VIA and rebate under Chapter VIII will be available to the assessee, if the conditions therein are fulfilled.