Maintaining books of accounts and getting them audited may seem like a necessity to validate business profits. Section 44AA of the Income Tax Act requires businesses to maintain a set of books. Besides, Section 44AB of the Act requires that those earning beyond a certain threshold limit must get their books audited by practicing Chartered Accountants. Since profits recorded in books form a basis for income tax calculation, a Tax Audit report u/s 44AB attested by CA, provides assurance on the accuracy of income tax liability.

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Therefore, maintaining books of accounts may seem like a mandatory requirement for any business or profession. What if there was an alternative?

Alternative to maintaining books of accounts

Provisions of the Act on ‘Presumptive Incomes’ discuss the alternatives to maintaining books of accounts. In a normal scenario, business income would be calculated methodically by summing up revenues and deducting expenses. ‘Presumption’ as the term suggests, avoids this calculation by simply allocating a certain amount as income. The revenues and expenditures are ‘presumed’ to be factored into this allocation. Sections 44AD, 44ADA and 44AE elaborate upon presumptive income calculation for resident taxpayers.

Application of presumptive incomes

Section 44AD is applicable for businesses whose total turnover for the year does not exceed Rs 2 crores. Individual proprietors, HUF and partnership firms (other than limited liability partnerships) can choose the presumptive income option if their turnover is below the prescribed limit.

Presumptive income shall be 8 percent of the total turnover. For incomes that reflect in bank account through cheques or any form of electronic transfers, the income presumption would be 6 percent instead of 8 percent.

Let’s take an example of a local store owner who provides groceries to customers within a residential area. Some households pay cash while some use digital wallets to transfer money for their purchases. The store uses a simple bill book to track and reconcile the payments due and received from their customers. Say the bill books reflect a total business of Rs 75 lakh through the year. Out of these, Rs 50 lakh reflect in their bank, indicating payments made by customers through digital wallets.

The Presumptive income for the store would be:

6 percent of Rs 50 lakh = Rs 3 lakh

8 percent of Rs 25 lakh = Rs 2 lakh

Total presumed income = Rs 5 lakh

Section 44ADA is in similar lines and applies to professional practitioners in the field of legal, medical, engineering, accounting, architecture, interior designing, etc. The benefit is available to professionals whose gross receipts from all their clients during the year total to not more than Rs 50 lakh. Presumptive income for such professionals shall be 50 percent of their gross receipts.

For example: A general practitioner consults patients and earns an aggregate fee of Rs 30 lakh through the year. Instead of maintaining books of accounts, they may choose to simply ‘presume’ the total income as Rs 15 lakh (50 percent of Rs 30 lakh) and compute their tax liability on the basis of this presumption.

Section 44AE is designed for owners of goods carriages that are used for plying, leasing or hiring. To avail of the benefit, they must own not more than 10 such vehicles.

While Section 44AD or Section 44ADA presumes a percentage of turnover or gross receipts as income, Section 44AE uses a different basis for calculation.

For heavy vehicles, income shall be calculated as : Rs 1,000 per ton of vehicle weight for each month when the vehicle is owned. I.e. Rs 1,000 x Weight of the vehicle (tonnage) x no of months the vehicle is owned.

For non-heavy vehicles, the income shall be: Rs 7,500 per vehicle per month of ownership.

Income presumption is not for all:

The presumption is made for incomes earned under the head “Business or profession”. Therefore incomes that fall under other heads namely Salaries, House Property, Capital gains and income from other sources do not qualify.

Besides, business incomes by way of commission or brokerage is outside the purview of income presumption. An Insurance agent or a goods trader earning a commission income or a broking firm are examples for those who do not have a choice of Income presumption. Since the proportion of expenses in such business is low, it does not justify a presumption.

Similarly, businesses that exceed Rs 2 crore turnover or professionals whose gross receipts exceed Rs 50 lakh or those owning more than 10 goods carriages will have no option but to maintain books of accounts as required u/s 44AA and comply with the tax audit requirements u/s 44AB.

Newly established undertakings, export undertakings and certain businesses enjoy the benefit of exemption u/s 10A, u/s 10AA, 10B or 10BA and deductions u/s 80HH and u/s 80RRB. Logically speaking, presumptive incomes cannot form a basis for benefits under these sections. Therefore, such businesses cannot opt for presumptive incomes either.

Presumption of Income is an option:

The method of calculation can be followed as an alternative to systematic profit calculation through books of accounts. Choosing the presumptive income alternative while still maintaining books of accounts is at the taxpayer’s discretion. So also declaring an income higher than the presumptive income.

However, If a taxpayer wants to declare an income lower than that calculated through presumptive income provisions, then it is necessary to maintain proper books of accounts as per section 44AA. The provisions of Sec 44AB on getting a Tax Audit done would also apply.

Once the choice is made, it must be continued for 5 consecutive years. In other words, if a business chooses to declare lower income in a certain year by maintaining books of accounts, it must continue with the choice in the following four years and be subject to tax audit in all those years. If in a subsequent year the taxpayer feels that their income as reflected in books is higher and a presumptive income would be a better option, they would have no choice to revert until 5 years. Therefore, the choice must be made with caution.

The writer is a Chartered Accountant and Director at Insphigher Learning Pvt Ltd. The views expressed are personal

(Edited by : Anshul)