Business of civil construction

With effect from the assessment year 1994-95, section 44AD has been introduces for simplification of tax computation relating to Civil Construction buisness. The salient features of the scheme are as under :
 

• Section 44AD is applicable to all assessees whose gross receipts from the civil construction business do not exceed Rs. 40 lakh. Gross receipts are the amount received from the clients for the contract and will not include the value of material supplied by the client.
• Civil Construction includes the construction or repair of buildings, dams, bridges or other structures, or of roads or canals. It will also include the execution of any other works contract. Thus,it will include work related to electrical fittings, plumbing job, landscaping work, etc.
• The income from the civil construction business will be estimated at 8 per cent of the gross receipts paid or payable to an assessee. A taxpayer can voluntarily declare a higher income in his return.
• The rate of 8 per cent will be deemed to have been computed after alloweing all deductions under sections 30 to 38 including depreciation and no further deduction will be allowed under these sections. However, in the case of a firm, the normal deduction under section 40(b) shall be allowed. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed.
• The assessees who file the return, estimating income at 8 per cent of gross receipts, or a higher income, will neither be required to maintain books of account under the provisions of section 44AA, nor required to get accounts audited under the provisions of section 44AB, in respect of their income from the business of civil construction. However, even such an assessee has to comply with the requirements of both sections 44AA and 44AB in respect of his businesses which are not covered by this scheme. For instance, a person may have gross receipts of Rs. 35 lakhs from civil construction business and of Rs. 30 lakhs from trading in cloth and Rs. 20 lakhs from oil manufacture. Although his total gross receipts are Rs. 85 lakhs, he will not be required to have his accounts audited, since his gross receipts after excluding those from the business of civil construction are still less than Rs. 40 lakhs, the prescribed limit under sec.44AB.
• The income from the business of civil construction, estimated in accordance with this provision, will be aggregated with other incomes of the assessee, from any other business or under other heads of income, in accordance with the normal provisions of the Income-tax Act. Accordingly, all deductions under sections 80CCC to 80U and rebate under sections 88 and 88B will be available to the assessee, if the conditions therein are fulfilled.

The business of plying, leasing or hiring trucks

With effect from the assessment year 1994-95, section 44AE has been
inserted with a view to providing for a method of estimating income from the business of plying, hiring or leasing trucks.

• The salient features of the scheme are given below :The scheme applies to a person owning not more than 10 goods carriages. For this purpose, an assessee who is in possession of a goods carriage, whether taken on hire purchase or on instalments and for which the whole or part of the amount payable is still due, shall be deemed to be the owner of such goods carriages.
• The income from each goods carriage being a “heavy goods vehicle” will be estimated at Rs. 2,000 for every month or part of a month during which the goods carriage is owned by the assessee. The income from each goods carriage, other than a heavy goods vehicle will be estimated at Rs. 1,800 for every month or part of a month during which the goods carriage is owned by the assessee. In either case, the taxpayer can declare his income from trucks at a higher amount than that specified above.

• For this purpose “goods carriage” means any motor vehicle constructed or adapted for use solely for the carriage of goods, or any motor vehicle not so constructed or adapted when used for the carriage of goods; and “heavy goods vehicle” means any goods carriage the gross vehicle weight of which, or a tractor or a road-roller the unladen weight of either of which exceeds 12,000 kilograms.

• For instance, an assessee owns a light commercial vehicle for 9 months and 6 days, a medium goods vehicle for 10 months and a medium goods vehicle for 12 months during the previous year. His profits and gains from the three trucks shall be deemed to be (Rs. 1,800 ×10) + (Rs. 1,800 × 10) + (Rs. 1,800 × 12), i.e., Rs. 57,600/-
• If an assessee owns a heavy goods vehicle (weight exceeding 12,000 kg.) for 9 months and 5 days, a medium goods vehicle for 10 months and 10 days and a light commercial vehicle for 6 months during the previous year. His profits and gains from the three trucks shall be deemed to be (Rs. 2,000 × 10) + (Rs. 1,800 × 11) + (Rs. 1,800 × 6), i.e., Rs. 50,600/-
• The estimated income is comprehensive. All deductions under sections 30 to 38 including depreciation will be deemed to have been already allowed and no further deduction will be allowed under these sections. However, in the case of a firm, the normal deduction under section 40(b) shall be allowed. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed.
• The assessee  will neither be required to maintain books of account under the provisions of section 44AA, nor required to get his accounts audited under the provisions of section 44AB, in respect of his income from truck business. However, even such an assessee should comply with the requirements of both sections 44AA and 44AB in respect of his businesses which are not covered by this scheme.
• Income from the truck business, estimated in accordance with this provision, will be aggregated with other incomes of the assessee, from any other business or under other heads of income, in accordance with the normal provisions of the Act. Accordingly, all deductions under sections 80CCC to 80U and rebate under sections 88 and 88B will be available to the assessee, if the conditions therein are fulfilled.

In order to simplify the procedure of computation of income of retail traders, a new scheme has been introduced from the assessment year 1998-99 under section 44AF. The salient features of the new scheme are as follows—
 

• The scheme is applicable in the case of an assessee who is engaged in retail trade in any goods or merchandise. He may be an  individual, HUF, firm, company or any other taxpayer.
• The turnover of the assessee does not exceed Rs. 40 lakhs.
• If the above two conditions are satisfied, then profits and gains of such business shall be presumptively computed at 5  per cent of the gross receipt, or, as the case may be, a sum higher than the aforesaid sum as may be declared by the assessee in his return of income.
• Under this scheme, the assessee will be deemed to have been allowed the deductions under sections 30 to 38. Deduction under section 40(b) shall be available i.e., remuneration to partners.
• The assessee will not be required to maintain books of account under section 44AA and get the accounts audited under section 44AB in respect of such income unless the assessee claims that the profits and gains from the aforesaid business are lower than the profits and gains deemed to be his income under section 44AF.

Expenditure in excess of Rs.20,000/- made otherwise than crossed demand draft or crossed cheque
 

Amounts not deductible in respect of expenditure exceeding Rs. 20,000† [Sec. 40A(3)] * - If an assessee incurs any expenditure in respect of which payment in excess of Rs. 20,000 is made otherwise than by a crossed cheque or crossed bank draft, 20 per cent of such expenditure will be disallowed as expenditure. Rule 6DD, however, prescribes the cases and circumstances in which payment in excess of Rs. 20,000 may be made otherwise than by a crossed cheque or crossed bank draft without attracting the disallowance. Even payment made for purchase of goods falls within the expression “expenditure” occurring in this section.

49.3-1 EXCEPTIONS - Rule 6DD prescribes the following circumstances under which no disallowance will be made of the expenditure even if the payment exceeding Rs. 20,000 is made otherwise than by a crossed cheque or demand draft :

l Payment made to banking and other credit institutions, such as the Reserve Bank of India commercial banks in the public and private sectors, co-operative banks or land mortgage, banks, primary credit/agricultural credit societies, Life Insurance Corporation of India, Industrial Finance Corporation of India, Industrial Development Bank of India, State Financial Corporations, etc. [rule 6DD(a)].

l Payment made to Government (both Central and State Governments), if under the rules framed by it, such payment is required to be made in legal tender, such as a payment of direct taxes, customs duty, excise, railway freight, sales tax, etc. [rule 6DD(b)].

l Payment required to be made in cash under a contract entered into before April 1, 1969 [rule 6DD(c)].

l Payment through the banking system, e.g., letters of credit, mail or telegraphic transfer, book adjustment in the same bank or between one bank and another and bills of exchange including hundies made payable to a bank [rule 6DD(d)].

l Payment made by book adjustment by an assessee in the account of the payee against money due to the assessee for any goods supplied or services rendered by him to the payee [rule 6DD(e
)].

l Payment to a cultivator, grower or producer in respect of the purchase of agricultural or forest produce or product of animal husbandry (including hides and skins) or dairy or poultry farming or fish or fish products or products of horticulture or apiculture (even if these products have been subjected to some processing provided the processing has been done by the cultivator, grower or the producer of the product) [rule 6DD(f)].

l Payment made to a producer in respect of the purchase of the products manufactured or processed without the aid of power in a cottage industry [rule 6DD(g)].

l Payment made to a person who ordinarily resides or carries on business in a village not served by any bank [rule 6DD(h)], [if, however, the payment is made in a town having banking facilities to a villager whose village has no bank, the exemption from the operation of section 40A(3) will not be available—Press Note dated May 8, 1969].

l Payment of terminal benefits, such as gratuity, retrenchment compensation, etc., in respect of employees drawing salary not exceeding Rs. 7,500 per year in the year of retirement, etc., or in the preceding year [rule 6DD(i)].

l Payment made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 and when such employee —

a.  is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship ; and
b. does not maintain any account in any bank at such place or ship [rule 6DD(j)]1.

l Payment required to be made on a day on which the banks were closed either on account of holiday or strike [rule 6DD(k)].

l Payment made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person [rule 6DD(l)].

49.3-2 SCOPE OF SECTION 40A(3) -The following points should be considered to understand the scope of section 40A(3)—

1. If an assessee makes payments at different times during the day and he has no idea that he has to pay to the same person on more than one occasion, he cannot be subjected to the statutory provision of section 40A(3), unless any one payment exceeds Rs. 20,000.

2. If an assessee makes payment of two different bills (none of them exceeds Rs. 20,000) at the same time in cash or by bearer cheque, section 40A(3) is not applicable even if the aggregate payment is more than Rs. 20,000. This is because of the fact that section 40A(3) is applicable only in respect of an “expenditure” which is excess of Rs. 20,000. In other words unless the amount of the bill and the amount payment exceed Rs. 20,000, section 40A(3) is not applicable.

3. Where the assessee made payment over Rs. 20,000 at a time, partly by crossed cheque and partly in cash to some parties but the payment in cash alone at one time did not exceed Rs. 20,000, section 40A(3) is not attracted.

4. Provision of section 40A(3) does not apply in respect of an expenditure which is not to be claimed as deduction under sections 30 to 37. For instance, if an assessee gives donation in cash, section 40A(3) is not applicable, since donation is not deductible under sections 30 to 37.

5. Section 40A(3) is not applicable if an assessee purchases a capital asset.