For resident taxpayers, there are only two sections providing for presumptive determination of income from business. They are
- Section 44AD meant for computing income at 8 per cent of the turnover and
- Section 44AE meant for persons engaged in the business of plying, hiring or leasing goods carriages.
The Budget presented in July 2009 replaced Section 44AD to cover a wider range of business than only retail trade covered till then. However, the substituted Section 44AD is effective only from the current financial year.
The change in law is a great boon to the small taxpayers who are large in numbers. Any resident taxpayer regardless of the nature of activity is eligible to avail presumptive income determination provision for the Financial Year 2010-11.
The provision will not apply to
- company and limited liability partnerships; and
- other taxpayers availing deduction under Sections 10A, 10AA, 10B, 10BA or under any provision of Chapter VI-A under the heading “C - Deductions in respect of certain incomes”.
- The presumptive income is 8 per cent of the total turnover/gross receipts or a sum higher than 8 per cent as the case may be.
- In the case of partnership firm, deductions such as interest on capital and working partner salary are allowable on such presumptive income subject to the satisfaction of the conditions prescribed in Section 40(b).
- The provisions relating to tax deduction at source will not apply to such presumptive income estimated business called as ‘eligible business'.
- Also, the taxpayers are spared from maintenance of books of account otherwise mandated under Section 44AA of the Act.
- If a taxpayer does not opt for such presumptive income determination then the books of account have to be audited under Section 44AB.
- Also, where the total turnover/gross receipt exceeds Rs 60 lakh, the presumptive income determination provision will not apply.
- A taxpayer who has business turnover exceeding Rs 40 lakh for the financial year 2009-10 whose accounts were audited under Section 44AB of the Act might opt for presumptive income under Section 44AD if his turnover was below Rs 60 lakh for the financial year 2010-11 and in which case the provisions relating to tax deduction at source which are otherwise applicable, will not apply.
- If a taxpayer has more than one business and each business has turnover of less than Rs 60 lakh each, then it is possible to contend that the provisions of Section 44AD be applied, since the condition for availing presumptive income determination is with reference to ‘eligible business' and not the total turnover of the taxpayer. Consequently, the taxpayer having more than one business can pick and choose any particular business to be governed by Section 44AD and allow other business or businesses to be governed by regular provisions, in which case such accounts are to be audited under Section 44AB only in respect of those businesses not opted for under Section 44AD. When the income is not offered on presumptive basis but audited under Section 44AB(d), the taxpayer is not liable for tax deduction at source provisions in the subsequent financial year as the law exempts application of TDS provisions.