Section 44AE Of the Income Tax Act: Calculation of Taxable Income

To simplify complicated taxation procedures for small business owners, the Government of India has incorporated the Presumptive Taxation Scheme in the Income Tax Act. In this article, we discuss Section 44AE of this presumptive scheme. 

What is Section 44AE of the Income Tax Act?

Section 44AE of the Income Tax Act is a presumptive taxation scheme which aims at simplifying the calculations of the taxable income of small business owners engaged in hiring, plying, and/or leasing goods carriages.

The assessee eligible under Section 44AE of the Income Tax Act need not regularly maintain their books of accounts. They also enjoy the benefit of exemption from getting their accounts audited.

Applicability of Section 44AE

Section 44AE of the Income Tax Act applies to all types of taxpayers. Therefore, regardless of whether you are an individual, a partnership firm, a public or private company, or a Hindu Undivided Family (HUF), Section 44AE applies to you if you are engaged in the business of goods carriages for plying, hiring, or leasing purposes.

Eligibility Conditions For Section 44AE

To be eligible for the benefits of simplified calculations of taxable income under Section 44AE of the Income Tax Act, you must fulfil the following conditions –

1. Nature of Business

You must be involved in the business of plying, hiring, or leasing goods carriage vehicles. Please note that those engaged in the business of passenger-carrying vehicles are not eligible for the benefits of this presumptive taxation scheme.

2. Number of Good Carriage Vehicles

You must not own more than 10 goods carrying-vehicles at any point in time during the previous year. 

How is Taxable Income calculated under Section 44AE?

Given that Section 44AE is a section under the presumption taxation scheme, taxable business income under this section is calculated on an estimated basis. It estimates the gross profit earned by the small business from all goods-carrying vehicles, considering the previous financial year as the year of income.

Please note that there can be two types of goods carriages – heavy goods vehicles and other goods vehicles. Based on the type of the goods carriages, the income is ascertained under Section 44AE. Here is how it is determined for the following types of vehicles –

• Heavy Goods Carrying Vehicles

Section 44AE lays down two ways in which taxable income can be calculated for heavy goods-carrying vehicles. One way is to tax an amount equivalent to ₹1,000 for every ton of the gross vehicle weight or the unladen weight for every month (or a part of the month) the vehicle is owned by the assessee.

Another way is to tax the amount that the assessee claims to earn during the previous financial year.

• Light Goods Carrying Vehicles

In the case of light goods-carrying vehicles, an amount equivalent to ₹7,500 must be taxed each month. This applies to the vehicles owned by the assessee in the preceding fiscal year.

It is important to note that if the vehicle was owned by the assessee only for a part of the month, then that part is considered a full month. Moreover, if the assessee had taken such vehicles on hire, they are also considered to be owned by them.

What are Heavy and Light Goods-Carrying Vehicles?

The Motor Vehicles Act defines the two categories of goods-carrying vehicles in the following manner –

1. Heavy Goods-Carrying Vehicles – Good carriages featuring a gross vehicle weight of more than 12,000 kg.
2. Light Goods-Carrying Vehicles – Good carriages which have a gross vehicle weight of up to 12,000 kg.

Examples

Let us understand the provisions under Section 44AE of the Income Tax Act for the calculation of taxable business income, with the help of the following examples –

Example 1

Let us say Mr X is engaged in the business of hiring goods-carrying vehicles. He hired 4 heavy goods-carrying vehicles with a gross weight of 13,000 kilograms from April 01, 2021, to November 20, 2021, and hired 3 light goods carriages from October 01, 2021, to March 31, 2022.

As per Section 44AE of the Income Tax Act, Mr X’s business income will be calculated as follows –

Taxable Income For Heavy Goods-Carrying Vehicles =

Number of Vehicles * Number of Months * 1000 * Number of Vehicle’s Tons

Taxable Income For Light Goods-Carrying Vehicles =

Number of Vehicles * Number of Months * 7500

(1 ton = 10,000 kilograms)

Example 2

Ms B is a small business owner who is involved in plying, leasing, and hiring goods carriages. She hires 5 light goods-carrying vehicles from May 14, 2021, to December 29, 2021, and 4 heavy goods-carrying vehicles featuring a gross weight of 14,000 kilograms from September 10, 2021, to March 15, 2021.

Let us see how her taxable business can be calculated as per Section 44AE of the Income Tax Act –

(1 ton = 10,000 kilograms)

Availability of Income Deductions For Partnership Firms

If the taxpayer is a partnership firm under Section 44AE of the Income Tax Act, then they can make deductions for salaries paid to employees and partners and for interest payments as well. This is clarified in more detail under the provisions of Section 40(b). Through these deductions, partnership firms can reduce their taxable income and their resulting tax liability.

Allowances/Disallowances Under Section 44AE of the Income Tax Act

No allowances or disallowances are available under Section 44AE of the Income Tax Act. Please note that no expenses are allowed as deductions from the taxable income, calculated as per the provisions of Section 44AE of the Income Tax Act. However, partnership firms are allowed to claim the aforementioned expenses as per the provisions of Section 40(b).

How is Depreciation Treated Under Section 44AE?

As stated above, no deductions are available under Section 44AE of the Income Tax Act, not even for the depreciation of assets. However, you can calculate the depreciation of an asset and deduct it from its total value. Accordingly, you can find the written-down value (WDV) of a block of assets, as per the rules of Section 32.

What if Assessee’s Actual Income is Lower Than The Estimated Income?

If the actual taxable income of the assessee is lower than the taxable income calculated as per the provisions of Section 44AE, then he/she may declare so. However, please note that he/she will have to fulfil the following two conditions –

1. He/she must maintain his/her books of accounts as per the provisions of Section 44AA
2. Moreover, he/she must get his/her accounts audited as per Section 44AB.

What if Assessee’s Actual Income is Higher Than The Estimated Income Under Section 44AE?

If the assessee’s actual taxable income is higher than the one calculated under Section 44AE of the presumption taxation scheme, then they may declare the same as it will be beneficial.

Frequently Asked Questions