TAX TREATMENT OF CASH CREDITS

Any sum found credited in the books of the taxpayer, for which he offers no explanation about the nature and source thereof or the tax authorities are not satisfied by the explanation offered by the taxpayer, is termed as cash credit. In this part you can gain knowledge about various provisions relating to tax treatment of cash credit.

Basic provisions

The provisions relating to tax treatment of cash credit are given in section 68. As per section 68, any sum found credited in the books of a taxpayer, for which he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income-tax as the income of the taxpayer of that year.

In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:

• the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and
• such explanation in the opinion of the Assessing Officer has been found to be

The above discussed provisions of share application money, share capital, etc., shall not apply if the person, in whose name such sum is recorded, is a venture capital fund or a venture capital company as referred to in section 10(23FB).

Conditions to be satisfied for applicability of section 68

From the reading of section 68, following conditions can be stated to attract the applicability of section 68 :

• Assessee has maintained ‘books’
• There has to be credit of amounts in the books maintained by the taxpayer of a sum during the year.
• The taxpayer offers no explanation about the nature and source of such credit found in the books or the explanation offered by the taxpayer in the opinion of the Assessing Officer is not satisfactory.
• If the taxpayer is a closely held company and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:

(a) the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer has been found to be satisfactory.

If all the above conditions exist, sum so credited may be charged to tax as income of the taxpayer of that year.

Other provisions to be kept in mind

Apart from the provisions relating to taxing of cash credit given under section 68, similar provisions are designed under section 69, 69A, 69B, 69C and 69D in respect of certain other items. The provisions in this regard are as follows:

Section	Brief overview
69	Unexplained investments
	Where in a year the taxpayer has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and he offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, than the value of the investments may be deemed to be the income of the taxpayer of such year.
69A	Unexplained money, etc.
	Where in any year the taxpayer is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the taxpayer offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, than the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the taxpayer for such year.
69B	Amount of investments, etc., not fully disclosed in books of account
	Where in any year the taxpayer has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the taxpayer for any source of income, and the taxpayer offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, than the excess amount may be deemed to be the income of the taxpayer for such year.

69C	Unexplained expenditure, etc.
	Where in any year the taxpayer has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the taxpayer for such year. Aforesaid unexplained expenditure which is deemed to be the income of the taxpayer by virtue of section 69C shall not be allowed as a deduction under any head of income.
69D	Amount borrowed or repaid on hundi
	Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the such amount. It will be treated as income for the year in which it was borrowed or repaid, as the case may be.
	However it should be noted that if any amount borrowed on a hundi has been treated as income of any person by virtue of section 69D, than such person shall not be liable to be assessed again in respect of the same amount on repayment thereof.
	Amount repaid shall include the amount of interest paid on the amount borrowed.

Tax rates applicable to amount charged to tax by virtue of sections 68, 69, 69A, 69B, 69C and 69D

As per section 11 5BBE, where the total income of a taxpayer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of—

a)  The amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of 30% (plus surcharge and cess as applicable); and

b) the amount of income-tax payable on his other income (i.e., income other than covered by sections 68, 69, 69A, 69B, 69C, and 69D) at the rates applicable to such other income.

Section 11 5BBE further provides that no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the taxpayer under any provision of Income-tax Act in computing his income referred to in sections 68 to 69D.

Thus, the taxpayer is neither entitled to claim any deduction nor entitled to set off any loss for the unexplained expenditure and nor entitled to adjust the basic exemption limit against cash credits charged to tax by virtue of provisions of sections 68 to 69DTaxGuru Newsletter Subscription

Information You Can Rely On.

Daily Latest Updates In Your Mailbox.

 

Presumptive taxation U/s. 44AD, 44ADA, 44AE

Article discusses about Meaning of presumptive taxation scheme, Presumptive Taxation Scheme of Section 44AD,  Section 44ADA, Section 44AE, For whom the presumptive taxation scheme of is designed?, Businesses not covered under the presumptive taxation scheme, No need to maintain books of account as prescribed under section 44AA, Eligible taxpayer and eligible business for the purpose of the presumptive taxation scheme.

TAX ON PRESUMPTIVE BASIS IN CASE OF CERTAIN ELIGIBLE
BUSINESSES OR PROFESSIONS

To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, section 44ADA and section 44AE. In this part you can gain knowledge about various provisions of the presumptive taxation scheme of section 44AD, section 44ADA and section 44AE.

Meaning of presumptive taxation scheme

As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA and 44AE.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited.

Meaning of presumptive taxation scheme

For small taxpayers the Income-tax Act has framed two presumptive taxation schemes as given below:

     1. The presumptive taxation scheme of section 44AD.

2. The presumptive taxation scheme of section 44ADA.

 3. The resumptive taxation scheme of section 44AE.

Presumptive Taxation Scheme of Section 44AD

For whom the presumptive taxation scheme of section 44AD is designed?

The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE).

The presumptive taxation scheme of section 44AD can be adopted by following persons :

1) Resident Individual

2) Resident Hindu Undivided Family

3) Resident Partnership Firm (not Limited Liability Partnership Firm)

In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).

This scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 801111 to 80RRB in the relevant year

Businesses not covered under the presumptive taxation scheme of section 44AD

The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

·                  Business of plying, hiring or leasing of goods carriages referred to in section 44AE.

·                  A person who is carrying on any agency business.

·                  A person who is earning income in the nature of commission or brokerage

Apart from above discussed businesses, a person carrying on profession as referred to in section 44AA(1)is not eligible for presumptive taxation scheme.

An insurance agent cannot adopt the presumptive taxation scheme of section 44AD

A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD. Insurance agents earn income by way of commission and, hence, they cannot adopt the presumptive taxation scheme of section 44AD.

A person engaged in a profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD

A person who is engaged in any profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD.

A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 cannot adopt the presumptive taxation scheme of section 44AD

The presumptive taxation scheme of section 44AD can be opted by the eligible persons, if the total turnover or gross receipts from the business do not exceed Rs. 2,00,00,000. In other words, if the total turnover or gross receipt of the business exceeds Rs. 2,00,00,000 then the scheme of section 44AD cannot be adopted.

Manner of computation of taxable business income under the normal provisions of the Income-tax Act, i.e., in case of a person not adopting the presumptive taxation scheme of section 44AD

Generally, as per the Income-tax Act, the taxable business income of every person is computed as follows:

Particulars	Amount
Turnover or gross receipts from the business	XXXXX
Less : Expenses incurred in relation to earning of the income	XXXXX
Taxable Business Income	XXXXX

 Manner of computation of taxable business income under the normal provisions of the Income-tax Act, i.e., in case of a person not adopting the presumptive taxation scheme of section 44AD

For the purpose of computing taxable business income in the above manner, the taxpayers have to maintain books of account of the business. Income will be computed on the basis of the information revealed in the books of account.

The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD

In case of a person adopting the provisions of section 44AD, income will be computed on presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the year.

In other words, in case of a person adopting the provisions of section 44AD, income will not be computed in normal manner as discussed earlier (i.e., Turnover less Expenses) but will be computed @ 8% of the turnover.

The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD

Income at higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%.

The presumptive income computed @ 8% is the final income and no further expenses will be allowed or disallowed

Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.

In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided for under the Income-tax Act will not apply and income computed at the presumptive rate of 8% will be the final taxable income of the business covered under the presumptive taxation scheme. In other words, the income computed @ 8% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.

While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

No need to maintain books of account as prescribed under section 44AA

Section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income @ 8% of the turnover, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD.

Payment of advance tax in respect of income from business covered under section 44AD

Any person opting for the presumptive taxation scheme under section 44AD is liable to pay whole amount of advance tax on or before 1 5^thMarch of the previous year. If he fails to pay the advance tax by 15^th March of previous year, he shall be liable to pay interest as per section 234C.

Note: Any amount paid by way of advance tax on or before 31^st day of March shall also be treated as advance tax paid during the financial year ending on that day.

Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AD and declares income at a lower rate, i.e., at less than 8%

A person can declare income at lower rate (i.e., at less than 8%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.

Consequences if a person opts out from the presumptive taxation scheme of section 44AD

If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years. [For example, an assessee claims to be taxed on presumptive basis under Section 44AD for AY 2017-18. For AY 2018-19 and 2019-20 and he offers income on basis of presumptive taxation scheme. However, for AY 2020-2 1, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 202 1-22 to 2025-26.]

Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]

Presumptive Taxation Scheme of Section 44ADA

For whom the presumptive taxation scheme of section 44ADA is designed?

The presumptive taxation scheme of section 44ADA is designed to give relief to small taxpayers engaged in specified profession.

Eligible persons who can take advantage of the presumptive taxation scheme of section 44ADA

A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA:-

1) Legal

2) Medical

3) Engineering or architectural

4) Accountancy

5) Technical consultancy

6) Interior decoration

7) Any other profession as notified by CBDT

Manner of computation of taxable income in case of a person adopting the presumptive taxation scheme of section 44ADA

In case of a person adopting the provisions of section 44ADA, income will be computed on presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such person can declare income higher than 50%.

In other words, in case of a person adopting the provisions of section 44ADA, income will not be computed in normal manner but will be computed @50% of the gross receipts.

The presumptive income computed @ 50% is the final income and no further expenses will be allowed

A person who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.

While computing income as per the provisions of section 44ADA, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

Payment of advance tax in respect of income from professions covered under section 44ADA

A person opting for the presumptive taxation scheme of section 44ADA is also liable to pay advance tax.

Maintenance of books of account if a person opts for presumptive taxation scheme of section 44ADA

In case of a person engaged in a specified profession as referred in section 44AA(1) and opts for presumptive taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of books of account will not apply. In other words, if a person opt for the provisions of section 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.

Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44ADA and declares his income from profession at lower rate (i.e. less than 50%)

A person can declare income at lower rate (i.e. less than 50%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.

Presumptive Taxation Scheme of Section 44AE

Applicability of the presumptive taxation scheme of section 44AE

The scheme of section 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring or leasing of goods carriages.

Eligible taxpayer and eligible business for the purpose of the presumptive taxation scheme of section 44AE

The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm, company, etc.).

The presumptive taxation scheme of section 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods vehicles at any time during the year.

A person who owns more than 10 goods vehicles cannot adopt the presumptive taxation scheme of section 44AE

The presumptive taxation scheme of section 44AE can be adopted by a person who is engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods vehicles at any time during the year.

The important criterion of the scheme is the restriction on owning of not more than 10 goods vehicles at any time during the year. Thus, if a person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of this scheme.

The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AE

In case of a person who is willing to opt for the presumptive taxation scheme of section 44AE, income will be computed on an estimated basis.

Income will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer during the year. Part of the month would be considered as full month.

Note: If the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can be declared.

Illustration

Mr. Khush is engaged in the business of plying, hiring or leasing of goods carriage. Throughout the year 2015-16 he owned 9 goods vehicles (5 heavy goods vehicles and 4 other than heavy goods vehicles). What will be the taxable income from the business of plying, hiring or leasing of goods carriages if he adopts the provisions of section 44AE?

**

As per the provisions of section 44AE,income will be computed @ Rs. 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer. The rate of Rs. 7,500 per month is same for every goods vehicle.

In the present case, Mr. Khush owned 9 goods vehicles throughout the year and, hence, income will be computed as follows:

Particulars	Amount (Rs.)
Income per month per goods vehicle	7,500
(×) No. of goods vehicle	9
Monthly income as per the provisions of sections 44AE from 9 goods vehicle	67,500
(×) No. of months in the year during which the vehicles were owned	12
Total income from business of plying, hiring or leasing goods carriages as per the provisions of sections 44AE	8,10,000

The presumptive income computed at the rate of Rs. 7,500 per goods vehicle per month is the final income and no further expenses will be allowed or disallowed

Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act and after disallowing expenses which are not deductible as per the Income-tax Act.

In case of a person who is opting for the presumptive taxation scheme of section 44AE, the provisions of allowance/disallowances as provided for under the Income-tax Act, will not apply and income computed at the presumptive rate of Rs. 7,500 per goods vehicle per month will be the final income. In other words, the income computed at the rate of Rs. 7,500 per goods vehicle per month will be the final taxable income of the business and no further expenses will be allowed or disallowed.

However, in case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the rate of Rs. 7,500 per goods vehicle per month, further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act).

While computing income as per the provisions of section 44AE, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

No need to maintain books of account as prescribed under section 44AA

Section 44AA of the Income-tax Act, 1961 has provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.

No need to maintain books of account as prescribed under section 44AA

In case of a person opting for the presumptive taxation scheme of section 44AE, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AE and declares his income at the rate of Rs. 7,500 per goods vehicle per month, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AE.

Applicability of the provisions relating to payment of advance tax

There is no concession as regards payment of advance tax in case of a person who adopts the presumptive taxation scheme of section 44AE and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.

Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AE and declares income at a lower rate, i.e., at less than Rs. 7,500 per goods vehicle per month

A person can declare his income at lower rate (i.e., at less than Rs. 7,500 per goods vehicle per month). However, if he does so, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited under section 4AB

Republished with amendment.