Amendment of section 44AE of Income Tax Act 1961 AY 2017-18

Amendment of section 44AE of Income Tax Act 1961 AY 2017-18

Existing provisions of section 44AD

The existing provisions of section 44AD of the Act, inter-alia, provides for a presumptive income scheme in case of eligible assesses (individuals, HUFs and firms excepting LLPs) carrying out eligible businesses. Under this scheme, in case of an eligible assessee engaged in eligible business having total turnover or gross receipts not exceeding 2 crore rupees in a previous year, a sum equal to 8% of the total turnover or gross receipts, or, as the case may be, a sum higher than the aforesaid sum declared by the assessee in his return of income, is deemed to be the profits and gains of such business chargeable to tax under the head "profits and gains of business or profession".

Proposed Amendment-lower presumptive profit rate of 6% on turnover realized in account payee cheque or DD or ECS on or before due date for filing ITR

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, it is proposed to amend section 44AD of the Act by reducing the existing rate of deemed total income of 8% to 6% in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year. 

In other words, if a credit sale is made then payment must be received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account on or before the due date u/s 139(1) in order to qualify for the lower presumptive rate of 6%. However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in any other mode. This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

This proposed amendment (proposed new proviso to section 44AD) gives effect to clarification in Press Release dated 19-12-2016 wherein it was clarified that "In order to achieve the Government's mission of moving towards a less cash economy and to incentivize small traders / businesses to proactively accept payments by digital means, it has been decided to reduce the existing rate of deemed profit of 8% under section 44AD of the Act to 6% in respect of the amount of total turnover or gross receipts received through banking channel / digital means for the financial year 2016-17."

So, it appears turnover/gross receipts received through banking channel /digital means other than those specified in proposed new proviso

Turnover or gross receipts received in cash/ other than an account payee cheque or account payee DD or ECS

First of all, minimum presumptive income of 8% has to be shown instead of 6% in respect of such turnover or gross receipts. Secondly provisions of proposed new section 269ST read with section 271D shall apply in addition if the transaction is effected on or after 01-04-2017. There is no exemption from proposed new section 269ST for section 44AD assesses unless Central Government notifies exemption under section 269ST. The Finance Bill, 2017 proposes to insert new section 269T relating to "Mode of undertaking transactions". Proposed new section 269T provides that no person shall receive an amount of three lakh rupees or more,—

(a)  in aggregate from a person in a day;

(b)  in respect of a single transaction; or

(c)  in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or account payee bank draft or electronic clearing system through a bank account.

It is further proposed to provide that the said restriction shall not apply to Government, any banking company, post office savings bank or co-operative bank. Further, it is proposed that such other persons or class of persons or receipts may be notified by the Central Government, for reasons to be recorded in writing, on whom the proposed restriction on cash transactions shall not apply. Transactions of the nature referred to in section 269SS are proposed to be excluded from the scope of the said section. 

It is also proposed to insert new section 271DA in the Act to provide for levy of penalty on a person who receives a sum in contravention of the provisions of the proposed section 269ST. The penalty is proposed to be a sum equal to the amount of such receipt. The said penalty shall however not be levied if the person proves that there were good and sufficient reasons for such contravention. It is also proposed that any such penalty shall be levied by the Joint Commissioner. It is also proposed to consequentially amend the provisions of section 206C to omit the provision relating to tax collection at source at the rate of 1% of sale consideration on cash sale of jewellery exceeding five lakh rupees. These amendments will take effect from 1st April, 2017.

Note: Assesses availing presumptive scheme under section 44AD must keep in view the provisions of section 269ST as also provisions of section 206C(TCS) while accepting cash payments/advances from customers.