Sunday, February 22, 2009

Special Provisions for Civil Construction and Retail

SPECIAL PROVISIONS FOR COMPUTING PROFITS AND GAINS FROM BUSINESS OF CIVIL CONSTRUCTION, PLYING, HIRING OR LEASING OF GOOD CARRIAGES AND RETAIL BUSINESS ACIVITIES.

Exceptional provisions that prescribe certain simple methods to compute income for the purpose of Income-tax assessment, are discussed in this article. The application of these provisions are where an assessee does not/could not maintain proper books of accounts.

Section 44AD: This section provides that the income of a person engaged in civil construction or supply of labour, a sum equal to 8% of the gross receipts received or payable to him or any higher sum if so admitted by an assessee, shall be deemed to be the income of the person from this business.

This provision will not, however apply to cases, where the gross receipts exceed Rs.40 lakhs as in such cases, the accounts are to be mandatorily audited and a report rendered by a Chartered Accountant.

Similarly, if an assessee admits income below 8% and which is not covered by statutory audit under section 44AB, (where the receipts are below Rs.40 lakhs), the assessing Officer is entitled to complete the assessment under section 143(3), invoking necessary scrutiny powers,, duly examining the relevant books of accounts and other documents which he may direct to be produced to substantiate the claim of income admitted being below the 8% limit prescribed under this section.

The other conditions are that all expenses incidental to the business as recognized, in sections 30 to 38 shall be deemed to have been allowed.

Similarly in respect of depreciable assets, depreciation shall be deemed to have been allowed and the value of the assets shall be taken at the depleted value, notionally construing that depreciation has been allowed.

At the same time if the assessee is a firm, expenses on salary of partners and interest on capital of partners would be allowed in the manner provided under section 40(b) of the Act, which are:

  • On the 1st 75,000 of the book profits Rs.50,000 or 90% which ever is more
  • On the next Rs.75,000 of the book profit 60%
  • On the balance of the book profit @ 40 percent.
Similarly interest payment on capital shall not be more than 12 percent per annum.

This is a special provision by which persons who could not maintain proper accounts and whose gross receipts do not exceed Rs.40 lakhs are covered. Civil Construction has been defined for the purpose of application of this section to be:
  1. The construction or repair of any building, bridge, dam or other structure or of any canal or road
  2. The execution of any works contract.
Section 44AE: This section provides for adhoc estimate of profit in respect of persons who are engaged in the business of Plying, Hiring and Leasing of Goods Carriages. The extent of adhoc profit as envisaged is:
  1. where heavy goods vehicle are operated, the profit shall be estimated @ 3,500 per month per vehicle
  2. Other than goods vehicle, the estimate shall be Rs.3,150 per month per vehicle.
This simple estimate would be applicable only if the person operating goods carriage has 10 or less vehicles in operation. This provision would not apply for cases where the gross receipts exceeds Rs.40 lakhs. At he same time, if a person who has 10 or less vehicles admits income below the limit as above, will have to substantiate by production of proper books of accounts and other documents, to prove that his income is in reality below the prescribed limit. For this purpose the assessment would be taken up under scrutiny under section 143(3) of the Income-tax Act, by the assessing Officer. The other conditions are that all expenses incidental to the business as recognized, in sections 30 to 38 shall be deemed to have been allowed.

Similarly in respect of depreciable assets, depreciation shall be deemed to have been allowed and the value of the assets shall be taken at the depleted value, notionally construing that depreciation has been allowed.

At the same time if the assessee is a firm, expenses on salary of partners and interest on capital of partners would be allowed in the manner provided under section 40(b) of the Act, which are:
  • On the 1st 75,000 of the book profits Rs.50,000 or 90% which ever is more
  • On the next Rs.75,000 of the book profit 60%
  • On the balance of the book profit @ 40 percent.

Similarly interest payment on capital shall not be more than 12 percent per annum.

This is a special provision by which persons who could not maintain proper accounts and whose gross receipts do not exceed Rs.40 lakhs are covered.

This apart if an assessee has his over all receipts exceeding Rs.40 lakhs, which includes receipts from carriage of goods, contracts etc., then for the purpose of section 44AB, the receipts from these sources where adhoc estimates are made, shall be eliminated and if only the balance exceeds Rs.40 lakhs, then the assessee would be required to obtain and furnish an audit as provided under section 44AB of the ACT.

Section 44 AF: If any person is engaged in retail trade and his turn over is below Rs.40 lakhs, by virtue of this provision, his income shall be estimated @ 5% of the turn over. The other conditions such as deemed depreciation, deemed deduction of expenses from sections 30 to 38 would also suo motu apply to these cases. Similarly if a person claims lesser profits, he would be subjected to scrutiny of his books of accounts by the assessing Officer, in an assessment proceedings under section 143(3) of the Act. This apart, if the over all turn over of an assessee including retain turn over exceeds 40 lakhs and if the person opts to adopt this provision in respect of retail trade viz. estimation of his profit @ 5% of the turn over attributable to retail trade, then such turn over would be eliminated from the over all turn over and if only the residue exceeds Rs.40lakhs, then he would be required to obtain and furnish an audit report as laid down under section 44AB of the Income-ax Act.

These are all unique provisions which are exceptional to the normal ones, with a view to avoid hardship and also to quicken the pace of faster finalisation of Income-tax cases by the assessing Officers.

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