Ordinarily a tax-payer is compulsorily required to regularly maintain books of accounts of his business such as cash book, ledgers, stock registers, etc which need to be supported with documentary evidence and get them audited by a chartered accountant. For this substantial expenditure is required for maintaining account books and for audit. Income from business is declared after making prescribed adjustments under the Income Tax Act, on the basis of annual profit and loss account and statement of Assets and Liabilities drawn at the end of the year which is called Balance Sheet.
However, there are certain special provisions in the Income-Tax Act which allows you to declare income on presumptive basis without any hassles and troubles of maintaining account books and getting them audited by a chartered accountant and incurring costs.
This is applicable to Small Businesses under section 44AD, Professionals under section 44ADA and Transporters under section 44AE. These schemes are optional at the discretion of the taxpayer.
Small Businesses (u/s44AD)
This scheme applies to any resident individual, HUFs or partnership firm, who carries on any business like bakers; vendors of fish, fruits, vegetables, food, shop-keepers, all types of contractors, workshops and small industries, operators of taxis and buses etc. provided total turnover or gross receipts in a financial year does not exceed Rs two crore from financial year 2006-07 onwards. (This limit was one crore for earlier years).
The profit from the business is deemed to be 8% of the total turnover, chargeable to tax which needs to be offered as profit of business. He is not eligible to claim deductions for any other expenses such as cost of purchases, administrative expenses, interest costs, depreciation etc. For example, if your business turnover is Rs one crore, income from business will be calculated @ 8% of one crore ie Rs eight lakhs. If you are a Goan, married under Portuguese Civil Code, this will be split between husband and wife in equal shares ie Rs four lakh each. The benefit of this section cannot be availed by assessee having income in the nature of commission or brokerage or agency business.
Professionals (u/s 44ADA)
From current financial year, a new category of tax-payers is added for presumptive income scheme. Any professionals, like doctors, lawyers, engineers, technical consultants, chartered accountants, Interior decorators, company secretaries etc. whose total gross receipts does not exceed Rs fifty lakh in a year are covered under this scheme. A sum equal to 50% of the total gross receipts on account of such profession will be deemed to be profit or gains of such profession. No other expenses incurred for carrying on profession such as office expenses, travelling or depreciation can be claimed. This scheme is applicable to resident individuals and partnership firms.
For example, in-case of a doctor or lawyer whose annual gross receipts from profession is Rs 10 lakh, his income from profession will be calculated @ Rs 5 lakh. If he is married under Portuguese Civil court, this income will be split between the spouses in equal ratio ie Rs 2.5 lakh each.
Transporters (Section 44AE)
This scheme applies to any person engaged in the business of plying, leasing or hiring of trucks owning not more than ten goods vehicles at any time in the previous year including those taken on hire purchase or on installments.
This scheme does not apply to those who operate trucks on hire without owning them. His deemed profit for the year is computed at Rs Seven Thousand Five Hundred for every month or part of the month for each goods carriage including heavy goods vehicle owned by him. He will not be allowed to claim any expenditure towards maintenance and running of vehicle including depreciation.
To compute total taxable income for the year, the income from business and profession computed as above on presumptive basis is aggregated with other income of the taxpayer, if any, such as salary, capital gains, house property, investments etc. Thereafter deductions under Chapter VIA and tax rebates under Chapter III such as payments towards life insurance premia, contribution to providend fund u/s 80C etc. can be claimed .If a person opts for above Presumptive Taxation Scheme, then he is required to follow the scheme for next five years. If he fails to do so, then he will not be able to opt for this scheme for next five years.
If the above referred tax-payers offer income less than presumptive income as specified above, on the basis of books of accounts maintained, the same are required to be audited by a chartered accountant under section 44AB irrespective of the monetary limit of turnover.
