I have 20 lakh annual turnover, out of which 15 lakh was my profit. I want to go ahead with presumptive taxation under section 44AD. I will declare profit more than 8% i.e in my case as 75% (15lakh of 20lakh is 75%).
So far so good. However i also decided to purchase a laptop worth Rs. 2 lakh to assist me in trading. Now since laptop is a capital asset, would there be any changes in terms of actual profit (15 lakh or 13 lakh). Section 32 of IT Act (depreciation on capital asset) doesn’t apply with 44AD because it is already intrinsically included in 44AD i.e. 8% of turnover.
So now my question is -
At the end of year i.e. March end, i have 15 lakh profit but only 13 lakh in my bank account as remaining money because i spent 2 lakh for capital asset. Should i show profit as 13 lakh or 15 lakh?
I’m not an expert but I think if your turnover is 20 lacs and you’re opting for presumptive taxation, then the profit that you need to declare would be 20 lacs x 6% = 1,20,000.
For digital businesses, such as trading, you can declare profits at 6% of turnover instead of 8%.
44AD says either declare 8% or higher if actual profit is greater than 8%. I want to declare as 75%. But how would capital asset purchase would be treated in 44AD, that is my question.
People (small business) opt for 44AD because they do not have to maintain book of accounts, and you get to declare a profit of 6% (for digital based transaction), anything below 6% will attract an audit. Why do you want to declare 75% profit and pay more tax ?
Since you are not required to maintain an BoA, your capital expenditure, depreciation etc all are factored in. You cannot take that benefit. Maybe @Jason_Castelino can throw more light here
Please understand that 44AD doesn’t mandatorily ask to declare 8% profit. It says you can declare 8% or higher (if you have high margin business). If tomorrow, I want to purchase a flat, i can’t show source of income by showing meagre 8% profit. Please understand my point. If i show 75% profit, i am legitimate to keep this in my account.
Assume you have 13 lakh at the end of financial year in your bank account (~75%), and you are paying taxes only for 8% i.e. 1.6 lakhs. It is a case of tax evasion. @nithin in his article on presumptive income tax has clearly mentioned it.
So my question really is -
After purchasing laptop for Rs. 2 lacs, would i show income as 13lakhs or 15 lakhs. How much should i show as my income 13 lakh or 15 lakhs?
Is this F&O income? If yes, have you calculated the turnover properly? I think that a profit of 15 lacs on a turnover of just 20 lacs sounds very unlikely. Normally, my profit margin varies between 1 to 2%.
@Suyash.K please don’t into the details of exact number. My turnover could be 1 crore and actual profit may be 50% but that doesn’t matter.
My question is more related to capital expenditure expense. Should i show my income under presumptive taxation as 13lakh or 15lakh (as per above mentioned scenario in my original first post.)
As @Anikethan said, if you’re claiming presumptive taxation, it means that you don’t maintain books of accounts and therefore, you can’t claim depreciation or expenses on laptop purchase.
Your understanding is absolutely correct. Its always better to show actual income because your cash flows will then match. It will definitely increase your networth.
Lets say your turnover is 1CR and your actual profit is 40Lakhs. If you show at 6L as profit considering 6%, you are under-reporting your income. Lets say you accumulate such profits for 5 years and buy a big house for 2cr. Your income just doesnt match. Now lets say you get a notice asking you for source of income, will you then say my actual profit was more but i showed only 6%? So alot of practical things are to be considered.
Legally speaking you can still show 6 percent and get away. You wont be getting any notice as such. The ITR will be processed without any issue. But most of the CAs (including me) suggest you show actual income.
Personally, my income from FNO is around 22percent of my turnover and I went ahead showing actual profits.
I usually dont say this in forum because unnecessarily there will be debate over the provisions of the Act.
Since you have spent 2lakhs on computer purchase, consider 40percent Depreciation on the same. So that is 80lakhs. So show a net profit of 14.2L.
I hope I was able to answer your query. Feel free to clear your doubts if any.
So you mean, out of 15 lakh, i can deduct 40% of 2 lakh i.e. 0.8 lakh and i can show total taxable income as 15-0.8 = 14.2 lakh.
Now next financial year assuming my turnover & profit remains same, can i further apply depreciation @40% on WDV of laptop i.e. 40% of 1.2 = 48,000/- i.e. my taxable income next financial year would be 15 lakh - 0.48 lakh =14.52 lakh. Am i doing it right?
In next financial year, i am showing my taxable income as 14.52 lakh, although actual amount lying in my bank account is 15 lakh (because laptop was purchased a year earlier, no outgo has been made in this year, the deduction is only because of WDV).
Now a very important question arises. Section 44AD doesn’t take into consideration section 32 of IT Act i.e. no depreciation is allowed. Can’t assessing officer ask me (here we are talking about next financial year) - why have you declared your taxable income as 14.52 lakh, you should have declared as 15 lakh since you have total of 15 lakhs lying in your account at the end of year. He can also assert that you can’t apply section 32 since you have opted for 44AD so you can’t deduct this 40% of 1.2 lakh. How would I respond to him?
Am I missing something here? Would be grateful for your assistance. Thanks
If you are going for 44AD he won’t question you if you are showing more than 6 percent. Moreover, you have all records of your actual income.
Why I suggest to show actual profit is because your cash and cash equivalents should match at the end. And since you have actually paid for the laptop your cash will match.
Best is to show the books of accounts and not even go for presumptive profits when your profits are more than 6percent. In FNO there is nothing that you would want want hide from the AO. Maintain books of accounts and show actual profit.
ok @Jason_Castelino . I have understood your point. Thanks very much for your clarification.
In crux, section 44AD is very helpful for small time traders but we should understand its nitty gritty and apply it in its true spirit.
Closing this thread from my query point of view. If anyone has any further query related to 44AD, they can respond here. We are privileged to have people like @Jason_Castelino and strong online community here.
As far as my understanding about presumptive income goes, you can declare anything more than 6% upto your actual profit. As audit is not required, you can’t be questioned.
But it may create in future, as you yourself said, disparity between your assets and income and hence “tax-evasion”. My CA discourages me to use this scheme (as I already need audit for my main source of income, I don’t mind). I started helping my wife in trading FnO in Feb-march of 2021, and she generated 11000 odd profit at 24000 turnover. I used the exact figures and chose presumptive income thing for her.
My plan for her is to use presumptive income if she qualifies for it, will declare income more than 6% and below the actual profits, may be 30-40% lower to compensate for expenditures like you mentioned: laptops/mobiles/Internet bills etc.
Simply put, i want to be accountable for this 30-40% lower taxable income. This amount must have been debited from your account either online way or cash. As Jason mentioned, cash flows must match.
Can i treat all expenditures below Rs. 5000 as revenue expenditure and not as capital expenditure (as per IT Act, we are not talking about companies act here since i am an individual). Is there such provision? For instance, if i purchase a coffee maker for my office @Rs. 4500/-, can i deduct Rs. 4500/- from my taxable income 100% at one go? or i need to apply depreciation a fixed % every year.
If i purchased laptop on say 1st Jan, i can book only 50% of allowable depreciation since i used it less than 180 days. Is my understanding correct?
Hi @usha, you can claim depreciation on your capital asset which in this case is your laptop. Since, you will be showing a profit more than 8%, all business expenses shall be allowed including depreciation. So the profit for you shall be 15 lakhs less depreciation on laptop worth 2 lakh rupees.