Presumptive tax scheme can reduce compliance burden, return filing

Simplifies ITR filing, but can be taxing if actual income is below 8% of turnover

In a recent case, the Amritsar Bench of the Income-Tax Appellate Tribunal (ITAT) reaffirmed that an assessee who has availed of the presumptive taxation scheme (PTS) under Section 44AD of the Income-Tax (I-T) Act has no liability to maintain books of account.

In the Sarabjeet Singh versus I-T Office case, the assessee had filed his I-T returns (ITR) under PTS. The assessing officer (AO) noticed a large deposit of cash in the assessee’s bank account, which was later withdrawn for business purposes. The AO treated the deposit as part of the assessee’s total income and passed an order for reassessment under Section 143(3)/147.

The ITAT, however, took the view that once under special provision, the assessee was exempt from maintaining books of account. His taxable income had to be calculated as 8 per cent of gross receipt, and the assessee was not obliged to explain individual entries of cash deposits in the bank, unless such entries had no nexus with gross receipts.

Sandeep Bajaj, managing partner, PSL Advocates & Solicitors, says, “While passing this judgment, the ITAT relied upon a judgment passed by the High Court (HC) of Allahabad.”

The HC had clarified that even if actual income in a given case is more than the income calculated under PTS, it cannot be taxed.

PTS under Section 44AD

Under the I-T Act, a person engaged in business must maintain regular books of account and get them audited. A person adopting PTS can, however, declare his taxable income at a prescribed rate and, in turn, be relieved from the burden of maintaining books of account and getting them audited.

Normally, the taxable income of a business is calculated by deducting permitted expenses from revenue. Under PTS, it is calculated differently.

V M Kannan, senior associate, SKV Law Offices, says, “A sum equal to 8 per cent of the total turnover or gross receipts of the business shall be deemed to be profits and gains on which I-T can be charged.” 

If the total turnover or gross receipt is received by an account payee cheque, bank demand draft, or any other electronic mode, the applicable rate will become 6 per cent.

Who can avail of it

This scheme is available to resident Indians. Individuals, Hindu Undivided Families, and partnership can avail of it. Limited liability partnerships, however, have been excluded.

Those engaged in the business of plying, hiring or leasing of goods carriages (included in Section 44AE) cannot avail of it. Anyone engaged in an agency business, or someone who earns commission or brokerage is also not eligible.   

“Eligible taxpayers can only avail of PTS if total turnover or gross receipt from business doesn’t exceed ~2 crore,” says Maneet Pal Singh, partner, I.P. Pasricha & Co.

Reduced compliance burden

PTS offers several additional advantages.

Ankit Jain, partner, Ved Jain & Associates, says, “There’s no need to segregate capital and revenue expenditure, no need to maintain a fixed assets chart, and no requirement to prepare financial statements.”

Filing ITR becomes simpler since only the turnover details have to be furnished.

Those who opt for PTS also need not pay advance tax according to a quarterly schedule.

“They must pay 100 per cent advance tax by March 15 of the financial year,” says Singh.

Should you opt for it

Once chosen, taxpayers need to stick to PTS for five years.

Pallav Pradyumn Narang, partner, CNK, says, “If you opt out for any assessment year, you cannot utilise it for five subsequent years.”

Assessees with multiple businesses must remember that the total turnover of all their businesses will be considered. Partnership firms won’t be able to claim deductions on remunerations, interest , and salary paid to partners.

 “Benefits under Chapter VI-A of the I-T Act, 1961, are, however, available,” says Singh.

Taxpayers opting for PTS must use ITR-4 for filing their returns. 

Once you opt for it, stick to it

• Taxpayers who opt for the presumptive tax scheme (PTS) must stick to it for a minimum of five years
• Suppose a person chooses the scheme in year one but opts out voluntarily between year two and five, he/she will not be eligible to opt for the scheme for the subsequent five years
• If the person opts out in year three, he/she will not be eligible to take the benefit of the scheme from year four to year seven
• He/she will then be required to maintain account books, and get them audited from the assessment year in which he/she opts out