Deemed profit is a concept in taxation where certain income is presumed or deemed to be the profit of a taxpayer, regardless of the actual profit earned. This concept is often used to simplify tax compliance, particularly for small businesses and certain types of transactions. Deemed profit provisions are specified in tax laws to minimize the administrative burden of detailed bookkeeping and to ensure a minimum level of income is reported for tax purposes.
Deemed Profit in the Context of Section 44AD
Presumptive Income Rate.
For eligible businesses, the income is deemed to be 8% of the total turnover or gross receipts for the financial year. If the turnover or gross receipts are received through digital transactions, the deemed profit is reduced to 6%.
No Need for Detailed Books of Accounts
Taxpayers opting for Section 44AD are not required to maintain detailed books of accounts as specified under Section 44AA of the Income Tax Act. This reduces the administrative burden.
No Requirement for Audit
Taxpayers under this scheme are also exempt from getting their accounts audited under Section 44AB, provided they declare income at the prescribed rates.
Comprehensive Inclusions
The deemed profit rate of 8% or 6% is considered to include all deductions under sections 30 to 38, which means no further business expenses can be claimed separately.
Other Examples of Deemed Profit.
Section 44AE
For taxpayers engaged in the business of plying, hiring, or leasing goods carriages, deemed profit is calculated based on a specified amount per vehicle per month.
Section 44ADA
Professionals like doctors, lawyers, and architects with gross receipts up to Rs. 50 lakhs can opt for a presumptive taxation scheme where 50% of the gross receipts are deemed to be the profit.
Capital Gains
In certain cases, the Income Tax Act deems the consideration received on the transfer of capital assets to be higher than the actual consideration received if it is below the stamp duty value (Section 50C).
Benefits of Deemed Profit Schemes
Simplified Compliance
Reduces the need for maintaining detailed accounts and audits, simplifying tax compliance for small taxpayers.
Certainty in Taxation
Provides certainty regarding the amount of income to be declared and the tax liability, reducing disputes with tax authorities.
Administrative Efficiency
Reduces the administrative burden for both taxpayers and the tax department, allowing for more efficient tax administration.
Illustrative Example
Mr. A, a resident individual, runs a small retail business. His total turnover for the financial year 2024-25 is Rs. 1.5 crore.
Calculation under Section 44AD
Presumptive Income @ 8% = Rs. 12,00,000.
If 60% of the turnover is received through banking channels.
Income on Rs. 90,00,000 (received digitally) @ 6% = Rs. 5,40,000.
Income on Rs. 60,00,000 (received in cash) @ 8% = Rs. 4,80,000.
Total Income = Rs. 10,20,000.
Conclusion
Deemed profit provisions, such as those under Section 44AD, are designed to simplify the tax filing process and ensure a minimum level of income is reported for taxation. These provisions are particularly beneficial for small businesses and professionals, as they reduce compliance costs and provide certainty in tax matters. By opting for presumptive taxation schemes, taxpayers can focus more on their business operations and less on the complexities of tax compliance.