Comprehensive analysis of Section 44AD with other related aspects

The provisions of Section 44AD were introduced in the Chapter of Profits & Gains from Business or profession to reduce the compliance burden of resident small Taxpayers. Undoubtedly throughout, the concept related to “Presumptive Taxation Schemes’’ has been very well achieved its objectives.

However, over the period these provisions had also gone through a series of amendments by various Finance Acts.

Amendments passed by Finance Act, 2017 & Finance Act, 2020 concerning Section 44AD & 44AB sometimes lead to many misconceptions specifically on those circumstances when Provisions of both sections interrelate to each other & also with the chapter of TDS.

This article is prepared to analyze the provisions of Section 44AD along with other interconnected provisions of the Income Tax Act, 1961 in a user-friendly Language. Read on……….

1) –Decode Section 44AD clause wise comprehensively with appropriate illustrations & highlight key issues.

Ans- Section 44AD has 6 sub-sections followed by two explanations. This Article is divided into the following four parts:

PART A – Deals with Section 44AD(1), Section 44AD(2) , Section 44AD(3), 44AD(6) followed by two explanations to Section 44AD & other related provisions of the Income Tax Act,1961.

PART B – Comprehensive coverage of Section 44AD(4) & 44AD(5) relate to Section 44AB of the Income Tax Act, 1961.

PART C – Some important FAQs on Section 44AD & 44AB of the Income Tax Act, 1961.

PART D – Applicability of TDS & other Residuary Provisions of the Income Tax Act, 1961.

PART A-Section 44AD(1) read with Section 44AD(6) followed by Explanations to Section 44AD is presented hereunder: (Note:- Section 44AD(2) & 44AD(3) is discussed in the latter part of PART–A)

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight percent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession” :

Provided that this sub-section shall affect as if for the words “eight percent”, the words “six percent” had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account 92[or through such other electronic mode as may be prescribed] during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.

(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to—

(i) a person carrying on profession as referred to in sub-section (1) of section 44AA; 

(ii) a person earning income like commission or brokerage; or 

(iii) a person carrying on any agency business. 

Explanation.—For this section,— 

(a) “eligible assessee” means,— 

(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and 

(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” in the relevant assessment year; 

(b) “eligible business” means,— 

(i) any business except the business of plying, hiring, or leasing goods carriages referred to in section 44AE; and 

(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.

Decoding of the above provisions:

A) Notwithstanding anything to the contrary contained in sections 28 to 43C………….. 

1) Section 44AD overruled Section 28 to 43C of the Income Tax Act, 1961. Section 28 to 43C in Income Tax Act, 1961 deals with the Chapter of PGBP.

2) It means No Depreciation will be allowed to the assessee whose case is covered U/s 44AD since it overrides Section 32.

3) Similarly, Unabsorbed Depreciation in The Income Tax Act deals as per section 32(2). Hence, Assessee whose case is covered us 44AD will not eligible to get the benefit of the Set-off of Unabsorbed Depreciation.

4) Section 44AD doesn’t override chapter VI. Chapter VI in the Income Tax Act, 1961 deals with Set-off or Set-off & Carry forward of losses. Therefore, the assessee can claim the current year as well as brought forward losses against the deemed income U/s 44AD.

5) However, it is to be noted that irrespective of the fact that Section 44AD overruled Section 28 to 43C which includes Section 43B also but Section 43B is itself a Non-Obstante Clause which overruled the entire act.

6) Therefore, even if the case of the assessee is covered under section 44AD disallowances of Section 43B may attract.

7) For Example, the Gross Turnover of Mr. X was Rs 80 lacs during the Assessment Year 2020-21. Deemed Income claimed in Return of Income was Rs 6.4 Lacs. Mr. X Fails to pay the interest of Rs 1 Lacs payable to the Scheduled Bank. Section 43B disallowances will be attracted. Total Taxable income will be Rs 7.4 Lacs.

8) Section 44AD also overrides Section 35AD, Section 35(1)(ii)/(iii) etc…,Section 40A(3), Section 40A(2), Section 43, Section 40(b), Section 28(V). The impact of which is as follows:

  • The Assessee whose case is covered U/s 44AD can pay his revenue expenditure above Rs 10,000/- per day per person. No Disallowances will be there.
  • Even the payment for Depreciable Assets can be made over Rs 10,000/- in cash mode. However, Section 44AD(3) said that WDV has been deemed to be calculated even though the assessee is not entitled to claim the Depreciation.
  • Therefore, while calculating Deemed Depreciation & WDV of the Assets such disallowances will be taken into account.
  • Payment made to the related party more than legitimate business need will not attract disallowances U/s 40A(2) of the Act.
  • No Deduction will be allowed for making any donation of Scientific nature referred to in Section 35(1)(ii) etc….
  • There are no restrictions on the assessee who runs the business which is covered U/s 35AD to claim the benefits of Section 44AD. For Example, Mr. X who runs the business of operations of the warehouse can opt for Section 44AD.
  • However, Section 44AD overrides Section 35AD. Therefore, the assessee can’t claim the benefits of Section 35AD deduction. Hence, indirectly there are restrictions on Section 35AD deduction.
  • Any Salary, Commission, bonus, remuneration by whatever name called paid by the Partnership Firms shall be allowed as a deduction to the extent of limits as specified in Section 40(b). Such Salary, commission, etc. to the extent allowed in the hands of the Firm shall be taxable in the hands of the partners under the head business/profession us 28(v).
  • Section 44AD overrides Section 40(b) also. Suppose, Partnership Firms ABC & co. whose Gross Turnover during the Previous Year 2019-20 was Rs 120 lacs opt for Section 44AD. The total remuneration paid to the partners was Rs 18 Lacs.
  • Since the Firm opts for Section 44AD hence, the entire Rs 18 Lacs will be disallowed.
  • Hence, nothing is taxable in the hands of the Partners U/s 28(v).

B) in the case of an eligible assessee engaged in an eligible business…………….

1) To claim the benefits of Section 44AD twin requirements must be satisfied. First, the assessee must be an Eligible Assessee who runs the eligible business. If Assessee is eligible one but who runs the business which is ineligible the benefits of Section 44AD couldn’t opt for such ineligible business.

2) The definition of the eligible business is given in explanation (ii) to Section 44AD. Which includes all business whose total turnover/ gross receipts during the previous year doesn’t exceed Rs 2 Crores as an eligible business except the business of Plying/hiring/ leasing goods carriages as referred to in Section 44AE

3) It means even if the turnover of Business of Plying/Hiring/Leasing of Goods carriage etc. is below Rs 2 Crores it will not cover U/s 44AD at any cost.

4) Eligible Assessee means a Resident Individual, HUF, Partnership Firms except for Limited Liabilities Partnership Firms & who hasn’t claim any deduction u/s 10A/10AA/10B/10BA/Part- C of Chapter VIA.

5) Certain comprehensive examples on whether the assessee can opt for Section 44AD or not?

Case A: Mr. X an individual who engaged in the Business of Trading in Shares at the Bombay Stock Exchange. Gross Receipts during the Previous Year was Rs 75 Lacs. Can he opts for Section 44AD if he is Resident one & if he is a Non-Resident Individual?

Ans- If Mr. X is a Non-Resident Individual then he can’t claim the benefits of Section 44AD since Section 44AD only applies to the Resident Assessee.

  • If Mr. X is a Resident Individual then he can claim the benefits of Section 44AD only when the Income from the Sales of Shares is taxable under the head PGBP. Section 44AD only covers the Income to be taxable under the head PGBP.
  • Only Stock Brokers who earn the income like commission or brokerage can’t opt for section 44AD.
  • In the given case Mr. X is engaged in the trading of shares & after assuming that his income is taxable under the head PGBP he can claim Section 44AD.

Case – B – Mr. X who is an individual & register broker at National Stock Exchange earns Rs 70 Lacs from trading of Shares & Rs 10 Lacs from the brokerage. Can he opt for Section 44AD?

Ans- A person who earns income like commission or brokerage is completely out of Section 44AD. It doesn’t matter that he earn other income in conjunction which brokerage income. Hence he can’t opt for Section 44AD.

Case – C –

  • XYZ & Co. is a partnership firm engaged in the infrastructure development projects eligible for deduction u/s 80IA. The Gross Receipt during the Previous year 2016-17 was Rs 1.3 Crores. Return of Income was filed after the due date mentioned U/s 139(1). As per Section 80AC, it can’t claim the deduction U/s 80IA. Since the total turnover is less than 2 crores firm decided to opt for Section 44AD. The assessing officer during Assessment us 143(3) denied the claim of the assessee & said that the Firm is since eligible to claim Section 80IA benefits & hence it is not eligible to opt for Section 44AD. Comment

Ans- Explanation (a) of Section 44AD treats assessee as ineligible for Section 44AD if they claim the deduction U/s 10A/10AA/Part-C of Chapter VIA. It means if the assessee does not claim the deduction under those sections he should be considered as eligible one. Just because the assessee may claim the benefits of Section 80IA doesn’t make him ineligible for Section 44AD. What is relevant whether it claims such deductions or not.

In the given case, since Partnership Firm doesn’t claim Deduction u/s 80IA hence it will not be considered as ineligible one. Therefore, the contention of the AO is not as per law.

Case – D- Mr. X during the Previous Year ended in 2019-20 runs three businesses. All the businesses are eligible as per the explanation to Section 44AD. The turnover inclusive of all taxes are as follows:

Business  Gross Turnover
Trading of Cloth Rs 80 Lacs
Trading of Species Rs 60 Lacs
Trading of Grocery Rs 70 Lacs

Can he opt for Section 44AD while filing the ROI for PY 2019-20?

Ans- For better understanding I am reproducing Explanation (b) to Section 44AD again: 

(b) “eligible business” means,— 

(i) any business except the business of plying, hiring, or leasing goods carriages referred to in section 44AE; and 

(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees 

  • Definition of eligible business covers all the business whose turnover is less than 2 Crores (except the business of plying, hiring, etc.)
  • It nowhere mentioned that the aggregate turnover of all businesses should be up to 2 Crores.
  • From a plain reading of explanation (b), it can be understood that each business turnover shouldn’t exceed by 2 Crores.
  • It means if assessee runs multiple businesses then the turnover of each business shouldn’t exceed 2 Crores.
  • However, this interpretation is against the legal intent because Section 44AD is incorporated in the act to benefitted the small taxpayers & this view is also supported by the Income Tax return forms (ITR-3 & ITR 4)
  • While filling the ITR – 3 or ITR – 4 we can add up the details of multiple eligible businesses but at the place of filing up the amount of Turnover as soon as the amount exceeded by 2 Crores the red mark highlighted by indicating that if the turnover is exceeded by 2 Crores then you are required to fill the return as the normal assessee & Tax Audit is required to perform.
  • It means the limit of Rs 2 Crores is to check on an aggregate basis. Hence, applying the above rationale assessee is not eligible to opt for Section 44AD.

Case – E – Can a Professional Covered U/s 44AA(1) opt for Section 44AD?

Ans –

  • This issue holds a considerable debate in the Income Tax Act, 1961 since its inception. There are two schools of thought while discussing the issue.
  • As per one view, the professional as a person is totally out of the scope of Section 44AD. Even if he runs a business that is an eligible business for Section 44AD he is not eligible to opt for Section 44AD.
  • For Example, if a Tax Consultant which is covered U/s 44AA(1) i.e. Professional simultaneously runs a business of Trading of cloths is not eligible to opt for Section 44AD even for his Trading Business.
  • He can only opt for Section 44ADA for his professional income & can declare profit up to 50% of the Gross Receipts provided his Gross Receipts doesn’t exceed Rs 50 Lacs during the Previous Year.
  • It means as per this view, Provisions of both the Sections are not mutually exclusive & as per my view, the plain reading of the bare act somehow supports this also.
  • I am presenting the relevant portion of Section 44AD(6) as under:

(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to— 

(i) a person carrying on profession as referred to in sub-section (1) of section 44AA; 

  • The Second view concerning the applicability of Section 44AD to the professional covered u/s 44AA(1) is that provisions of this section don’t apply to the professional income earned by the persons covered U/s 44AA(1).
  • It means the assessee who is a professional covered u/s 44AA(1) can simultaneously opt for Section 44AD, 44ADA & 44AE. In nutshell, all these sections are mutually exclusive from each other.
  • The benefits of Section 44AD couldn’t be denied to the person for his eligible business merely on the ground that he is a professional covered u/s 44AA(1).
  • What can be restricted is that professionals are not eligible to opt for Section 44AD for their professional Incomes.
  • For Example, Mr. Legal a Tax Practitioner earn the following income during the previous year

From his Tax Practices – Rs 48 Lacs

From the business of Trading of Household Items –  Rs 1.4 Crores. (entire sales in on cash basis)

Gross Receipts from the business of Plying & Hiring Business (Total 8 Heavy Vehicles truck & unladen weight is 12 Tones) – Rs 40 Lacs. (All the trucks were operated for the full 12 Months)

  • In the above case, Mr. Legal can opt for Section 44AD only for his Trading of Household Items since the turnover is less than 2 Crores & it is an eligible business for Section 44AD & can claim a minimum of 8% as deemed income from the trading business.
  • Further, he can opt for Section 44ADA for his professional income to the tune of 50% as deemed income.
  • Similarly, he can opt for Section 44AE for plying, hiring, etc, business & declare a minimum of Rs 1,44,000/- (Rs 1,000*12*12)
  • This view is also supported by Income Tax Returns form No. ITR – 3 or ITR – 4.
  • We can select all three sections simultaneously for the professional covered u/s 44AA(1).
  • If the first view that was discussed earlier is correct, then as soon as we select that assessee earned income from professions & declare income as per section 44ADA, the relevant portion of Section 44AD should be deactivated or freeze for any further entries.
  • Still, we can put the values in the relevant area of Section 44AD. It means assessee can claim all the three sections simultaneously.
  • The Income Tax Returns form is the replica of the Income Tax Laws & it allows the assessee to claim the benefits of all the sections simultaneously.
  • In the above example, the restrictions applicable to Mr. Legal are as follows:

i) He couldn’t able to opt for Section 44AD for his Professional Income of Rs 48 Lacs & declare the income as 8%/6% of Rs 48 Lacs.

ii) He couldn’t be able to opt for Section 44AD for his Transportation income & declare a minimum of 8%/6% of the Gross Receipts since Transportation Business is not an eligible business for Section 44AD.

iii) The assessee can’t opt for Presumptive Scheme for Professional Income & Regular provisions for Business Income during the same previous year.

iv) For Example, suppose in the above case, the business income of Mr. Legal is Rs 2.5 Crores & balance all the scenarios are the same. Can he opt for Section 44ADA for professional Income & business income can he go for regular provisions?

v) The answer is no. The turnover of the business is Rs 2.5 Crores. The assessee is ineligible to opt for section 44AD for the business since the turnover is more than 2 Crores.

vi) The assessee couldn’t able to select the ITR – 4. Because ITR – 4 is only for the assessee who declares their entire income as per the Presumptive scheme.

vii) The only relevant form applicable in the given case for an individual is ITR – 3.

viii) Now, if Mr. Intended to declares his professional income as per Section 44ADA, then in the Part–A–General of the Income Tax Return form assessee have to click ‘’Yes’’ at the place‘’whether the assessee is declaring Income only under section 44AE/ 44AD44ADA/44B/44BB/44BBA/44BBB’’……

ix) The word ‘’only’’ makes the return exclusively for assessee either to opt for the Presumptive scheme fully or either to opt for the regular scheme. Partial applicability is not possible at all.

x) To conclude the following points are important to note:

  • Any persons who earn income which is like commission or brokerage are totally out of the chapter of the presumptive scheme under The Income Tax Act, 1961.
  • They are not even eligible to opt for Section 44AD for their eligible business which is run by them apart from the agency or brokerage business.
  • They are not even eligible to opt for Section 44ADA since the Presumptive Taxation U/s 44ADA is applicable only for the Professionals covered u/s 44AA(1). Section 44AA(1) doesn’t include an agent or broker.
  • This is the reason when we select the assessee list from Drop-Down while filing the ROI using ITR – 3 or ITR – 4 under section 44ADA we don’t find Agent or Broker there.
  • It means they are either not mentioned in Section 44AA(1) or neither notified by the Central Board of Direct Taxes as mentioned in Section 44AA(1) read with Section 44ADA.
  • The limit of the Rs 2 Crores for determining the applicability of Section 44AD should be considered on an aggregate basis.
  • Professional covered u/s 44AA(1) can opt for Section 44AD also only to the extent of their eligible business income & not for their professional income. It should be declared a minimum of 50% of the Gross Receipts as per Section 44ADA & a rate of 8%/6% is not applicable for professional income.
  • Professional covered U/s 44AA(1) can opt for Section 44AE for its transportation Business Income but such income can’t be taxed as per the rate given in Section 44AD i.e. 8%/6% of the Gross Receipts. It must be taxable as per the provisions of Section 44AE.
  • Professionals covered u/s 44AA(1) can opt for Section 44AD, 44ADA, 44ADA during one previous year simultaneously.
  • He is not even required to maintain the books of accounts U/s 44AA & get his accounts audited as per Section 44AB until he is disclosing its income as per respective sections.
  • Partial application of the Presumptive scheme for one source of income & regular provisions of another source of income is not possible at all. Either opt for the presumptive scheme fully or not opt for it at all.

c) a sum equal to eight percent of the total turnover or gross receipts of the assessee in the previous year on account of such business…………………..

1) The minimum rate of the profit is 8% on Total Turnover or Gross Receipts of the Assessee. Now, the question arises what does Total Turnover or Gross Receipts means?

2) For the calculation of Total Turnover or gross receipts reference of section 145 & Section 145A must be given.

3) Section 145 of the Income Tax Act, 1961 deals with the method of accounting to be followed by the assessee. It gives an option to the assessee that while calculating the income under the head Business/Profession assessee may opt for Cash system or accrual system of accounting.

4) This is the reason Section 44AD also gives reference to the word Gross Receipts with an intent to cover those cases where assessee follows the cash system of accounting.

5) Gross Turnover means without including any purchase cost & any other direct or indirect cost. It should be the Gross revenue which is received or to be received by the assessee from the sale of goods or services.

6) If the assessee opts for Section 44AD then he doesn’t require to maintain the books of accounts at all. This means he doesn’t require to prepare the details of expenditures etc.

7) It is the simplest version of taxation for small taxpayers where the assessee is required to pay taxes on deemed Income. Such deemed income will be calculated based on gross turnover/gross receipts.

8) Therefore where the Purchase of Goods or services & other expenditures are inclusive of taxes or not is not a matter of concern for the assessee who is covered by Section 44AD.

9) However, whether tax, duties, cess, etc. which is collected by the Assessee covered u/s 44AD should be part of turnover or not is a matter of consideration.

10) As per Section 145A(ii), the valuation of goods or services shall be adjusted including the amount of any tax, duty, cess, or fess by whatever name called….. It means CGST/SGST/IGST etc. collected from the buyer by the assessee should also become part of the Gross Turnover.

11) For Example, the gross turnover without including GST is Rs 1.9 Crores. GST @ 18% was also collected i.e 34.2 Lacs. Total Turnover inclusive of Taxes is Rs 2.242 Crores which is exceeded by 2 Crores. Hence, Assessee is not eligible to opt for Section 44AD.

12) Section 44AD specially mentioned the word ‘’Such Business’’. It means it does not apply to the professional income earned by the assessee during the previous year.

D) …………….. as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”……………

1) Discussions made in Para – C makes it very clear that in Section 44AD, the assessee must have to declare a minimum of 8% of the Gross Turnover or Gross Receipts as his deemed income.

2) However, Section 44AD(1) further gives an option to the assessee that if he claims that actual income earned by his more than 8% he can claim such income in his Return of Income.

3) It means it is the option given to the assessee & not to the Revenue to presume higher income of the assessee while making an assessment.

4) This statement has a significant impact on practical life.

5) The assessee whose case is covered U/s 44AD/44AE/44ADA is not liable to maintain the books of accounts U/s 44AA & get their accounts audited by a Chartered Accountants U/s 44AB of the Income Tax Act, 1961.

6) The law gives an option to the assessee that he is not liable to maintain the books of accounts. If he wishes to maintain the books of accounts he can do so. Since it is the option to the assessee.

7) Therefore in many cases, Assessee maintains their books of accounts even they are not liable to maintain it.

8) Suppose, Mr. X, prepared a profit & loss account along with a balance sheet & computation of Income for the previous year ended on 31/03/2020. The net profits from business declare in the PL Account was Rs 14 Lacs. The Gross Turnover during the year was Rs 1.4 Crores. While filing the Return of Income he opts for Section 44AD & declares the deemed profits @ Rs 11.2 Lacs & pays the self-assessment tax accordingly. The Assessing Officer while making the Assessment U/s 143(3) enhanced the assessment & calculate the tax liability after assuming Rs 14 Lacs as his income & finalized his order & raise the demand U/s 156. Comment on the action of the Assessing Officer & initiate the penalty proceedings U/s 270A of the Act.

  • The action of the Assessing officer is not as per the law. Section 44AD gives the option to the assessee that either he can declare deemed income @ a minimum of 8% or such higher sums while filing the Return of Income for the previous year.
  • It doesn’t give the option to the Revenue to presume the Income of the Assessee.
  • X is not under an obligation to show the income as per the books of accounts. Because he is not even liable to maintain the books of accounts.
  • Had this action of the assessing officer will be considered as valid one then the assessee will allow claiming the losses if he declared losses in its books of accounts.
  • For example, The Gross Turnover of Mr. X for the Previous Year 2019-20 was Rs 80 Lacs. Mr. X opts for Section 44AD. He also prepared PL Account & as per PL Account, the net result from the business was a Loss of Rs 60,000. No further disallowances will attract & these losses represent the loss under the head PGBP. Will assessee allow claiming the losses while filing his ITR for Assessment Year 2020-21 using ITR – 4?
  • The answer is No. Since, as soon as we fill deemed income lower than 8%/6% in ITR-3 or ITR- 4 the form will not allow the same.
  • Therefore, when the assessee is not allowed to claim the losses based on Books of Accounts he prepared then how can he is liable to pay tax on the income (i.e. Rs 14 Lacs in the above example) which he declared in his PL Account.
  • Hence, it can be fairly presumed that the action of the Assessing Officer is not tenable as per Law.

E) ……….Provided that this sub-section shall affect as if for the words “eight percent”, the words “six percent” had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account 92[or through such other electronic mode as may be prescribed] during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year………..

1) As per the Proviso to Section 44AD, the eligible assessee can claim deemed Income @6% instead of 8% provided the Gross Turnover/Gross Receipt received by the assessee using electronic means like RTCG/NEFT/Account Payee Cheque, etc or simply other than Cash mode.

2) The rate of 6% is also applicable to those receipts which are received by the assessee after the end of the previous year but before the due date of filing of Income-tax Return.

3) For Example, the total turnover of Mr. X during the Previous Year 2017-18 was Rs 1.2 Crores. The debtors at the end of the year i.e. as of 31/03/2018 were Rs 12 Lacs. The cash sale was Rs 40 Lacs. Sales made through Banking Channels was Rs 68 Lacs. Out of the balance Rs 12 Lacs, Rs 7 Lacs received using NEFT on 25/06/2018 & balance on 04/09/2018. The Due date of filing of Income Tax Return was 31/07/2018. Calculate the deemed Income as per Section 44AD assuming the Assessee is following:

  • Cash System of accounting for the head PGBP.
  • Accrual System of accounting for the head PGBP.

4) If the assessee follows the cash system of accounting then Income under the head PGBP shall be taxable on Receipt Basis. The gross receipt during the Previous Year 2017-18 was Rs 108 Lacs. Out of which Rs 40 Lacs shall be taxable @ 8% & Balance Rs 68 Lacs will be taxable @6%.

5) Balance 12 Lacs which was received during the Previous Year 2018-19 will be part of the turnover of the Previous Year 2018-19 & taxable in that year only.

6) However, if the assessee follows the Accrual System of Accounting then the entire Rs 1.2 Crores will be treated as the Turnover of the Previous Year 2017-18.

  • Rs 40 Lacs shall be taxable @ 8% since it is received in Cash Mode.
  • Rs 68 Lacs shall be taxable @ 6% since it is received in Electronic Mode.
  • Rs 7 Lacs shall be taxable @ 6% since the amount received in electronic mode before the due date of filing of Income Tax Return U/s 139(1).
  • Rs 5 Lacs shall be taxable @ 8% since the amount is received after the due date mentioned in 139(1).

7) Certain clarifications concerning the Rate of 6% as mentioned in Proviso to Section 44AD:

√ The Rate of 6% is solely applicable for eligible businesses covered U/s 44AD.

√ Even the 100% professional Income received by the persons covered U/s 44AA(1) they are still liable to disclose the income @ a minimum of 50% of the gross receipt if they opt for Section 44ADA during the previous year.

√ Professional who runs the eligible business & opt for Section 44AD can take the benefits of a reduced rate of 6% only to the extent of eligible business & not for their professional income.

√ The Rate of 6% is not applicable for the deemed income as mentioned in Section 44AE of the Income Tax Act, 1961.

√ It is a facility to promote the digital transactions carried out by the assessee. But currently, this facility is only available for the eligible business covered U/s 44AD.

√ It may be possible that similar amendments also incorporate in Section 44ADA & 44AE to promote digital transactions in the upcoming Finance Bill(s).

F) ……….(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed………….. 

1) Deductions of expenditures & allowances of losses while computing the income under the head PGBP shall be governed as per Section 30 to Section 38 of the Act.

2) Examples of some allowances & expenditures are as follows:

  • Allowances of Rent, repairs, taxes, etc. of Buildings & Plant & Machinery, etc. used for business or profession.
  • Allowances of depreciation on assets used for business or profession.
  • Allowances of the amount deposited in the Tea development account, etc.
  • Allowances of donations made to scientific research, National Laboratory, pre-incorporation expenses, etc.
  • Allowances of Bad Debt, Keyman Insurance Premium, Securities Transaction Taxes, Commodity Transaction Taxes, Interest on borrowed capital, etc.
  • Deductions of General Revenue Expenditures incurred exclusively for business purposes etc.

3) It means if Mr. X opts for Section 44AD for the Previous Year ended on 31/03/2020 & paid Interest of Rs 1 Lacs to the Financial Institutions he will not allow the deductions of such interest expenses U/s 36 of the Act.

4) Mr. X incurred the following expenditures during the previous year ended on 31/03/2018 & 31/03/2019:

Note – 1 – During the Previous Year ended on 31/03/2018, the Gross Turnover was Rs 1.8 Crores &  assessee opts for Section 44AD. However, during the previous year ended on 31/03/2019, the assessee was not eligible to opt for Section 44AD since his Gross Turnover exceeds by Rs 2 Crores. Further Mr. X was not eligible to claim the expenditures of Rs 8 Lacs during the P/Y 2018-19 by Section 44AD(2).

Note – 2 – During the Previous Year ended on 31/03/2019, since he was not eligible to opt for Section 44AD. Therefore, he is eligible to claim the expenditures of Rs 8.4 Lacs. Now, the question arises that can Mr. X claims the expenditures of Rs 8 Lacs during the previous Year 2019-20? The Answer is No. Section 44AD(2) mentioned that all the expenditures are deemed to be given the full effect & no further allowances will be there in the future. Therefore, Mr. X is not eligible to claim the benefits of Rs 8 Lacs during the Previous Year ended on 31/03/2019.

An important Issue – ABC & Co. a partnership firm opts for Section 44AD during the Previous Year 2018-19 fails to pay interest of Rs 4 Lacs to the scheduled Bank. Assessing Officer while making the Assessment U/s 143(3) enhanced the assessment by Rs 4 Lacs by invoking the disallowances U/s 43B be a Non-Obstante Clause. The Firm paid such interest during the Previous Year 2019-20 & claim allowances of such Interest while filing the ROI. Assessing Officer disallows the Interest contending that Section 44AD(2) restricts the assessee claims of any expenditure U/s 30 to 38 & Interest Expenditure is governed as per Section 36. Comment on the action of the AO.

The Action of the AO is not as per the law. Once the disallowances of interest were attracted U/s 43B the same will be allowed as per Section 43B itself.

It means normally interest expenditure is allowed U/s 36 read with Section 43B on the payment basis if it is payable to the scheduled Bank.

If Assessee fails to pay the interest then such interest will be disallowed as per Section 43B.

Further, the proviso to Section 43B allows such expenditure during the Previous Year in which it is paid.

Therefore, in the given case the Assessee firm is eligible to claim the Deduction of the Interest since such allowances are as per Section 43B & not as per Section 36.

If Interest paid is further disallowed it will tantamount to Double Taxation.

G) ……….. (3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years………….

1) The Assessee who opt for Section 44AD doesn’t eligible to claim the expenditures u/s 30 to 38 as per Section 44AD(2).

2) Depreciation in the Income Tax Act, 1961 is governed as per Section 32. As per Section 32(1)(ii), Depreciation shall be allowed on the written down value of the block of the assets at the prescribed percentages.

3) The written down value is calculated as per Section 43(6) of the Income Tax Act, 1961.

4) One thought may prevail that since the assessee is not eligible to claim the benefits of Depreciation therefore there is no requirement of calculation of Depreciation & WDV of the Block of the assets. If this view holds good then other questions may arise that what is the relevance of this sub-section?

5) Lets understood it through an Example:

Assessee is a partnership firm engaged in the business of manufacturing of consumables goods from Financial Year 2017-18. It acquired Machinery on 12/04/2017 worth Rs 10 Lacs out of which Rs 1.5 Lacs paid on 12/04/2017 in cash mode. Turnover during the Previous Year 2017-18 was Rs 80 Lacs. The firm decided to opt for Section 44AD & declare its profits @ Rs 6.4 Lacs. No depreciation was allowed since the profits were declared as per section 44AD. The Assessee declares its Income as per Section 44AD in the next previous Year also i.e. in Previous Year 2018-19.

During the Previous Year 2019-20, the firm was not eligible to opt for the benefits of section 44AD since its Gross Turnover during the Previous Year was Rs 3 Crores. Now, the assessee is eligible to claim the benefits of depreciation also since the restrictions put by Section 44AD(2) are no longer valid. Now, the question arises on what value depreciation will be calculated? Let’s analyze:

  • Depreciation is calculated on the value of Closing WDV of the block of the Assets before depreciation @ the prescribed Percentage.
  • The actual cost of the assets as determined by section 43(1) shall be considered.
  • Amendment carried by the Finance Act, 2017 which disallow the portion of the cost of the assets which is paid in cash mode to a person in a single day.
  • It means so much of the portion of the cost of the assets which is paid by the assessee other than electronic means to a single person in a single day will not become the part of the actual cost.
  • No depreciation will be allowed on the same. In the given case, Rs 8.5 Lacs is an eligible amount to be considered as an Actual Cost for calculation of Depreciation.
  • Section 44AD(1) overrides Section 43 also. It means until the assessee is covered u/s 44AD no disallowances will attract U/s 43.
  • The wordings of this clause are as such that depreciation is hypothetically calculated & effect of Section 43(1) disallowances will also be taken into account even though assessee is not eligible to claim the depreciation.
  • In this manner, it provides a safeguard to the revenue for the disallowances of section 43(1).
  • Now, during the Assessment Year 2020-21, it will be more beneficial for the assessee to claim the depreciation on Rs 8.5 Lacs.
  • If the assessee claims the depreciation on Rs 8.5 Lacs it will be amounting to give it double benefits. Further, the restrictions put by Section 44AD(2) will be no longer valid.
  • Numerical Data is presented hereunder:

Situation A–If Assessee was allowed to claim the depreciation on Initial Cost of Rs 8.5 Lacs then Depreciation U/s 32 for the Previous Year 2019-20 would be Rs 1,27,500/- i.e. (8,50,000*15%)

Situation B–As per the provisions of Section 44AD(3), the assessee is eligible to claim the depreciation of Rs 92,118.75 i.e. (8,50,000*.85*.85*.15)

  • Hence, from the above, it can be observed that the assessee may obtain additional benefits of Rs 35,381.25/-.
  • It means earlier year disallowances u/s 44AD(2) got reversed to that extent which is against the legislative intent.

PART B – Comprehensive coverage of Section 44AD(4) & 44AD(5) relate to Section 44AB of the Income Tax Act, 1961

Section 44AD(4) of the Income Tax Act, 1961 is presented hereunder:

A) …………….Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1)………………

1) Section 44AD(4) is applicable only when the assessee opted for Section 44AD earlier at least one & declare profits as per Section 44AD(1). It is not applicable in the first year of the adoption of Section 44AD at all.

2) For Example, ABC & Co. a partnership Firm declares profit of the Previous Year 2018-19 as per Section 44AD & if it declares profits of the assessment year 2020-21 to 2024-25 less than 8%/6% as the case may be in any of the Assessment Year, say for Assessment Year 2022-23 the firm declares Profits less than 8%/6%, then from Assessment Year 2023-24 to 2027-28, it can’t opt for Section 44AD.

3) Important FAQs on Section 44AD(4):

FAQ: 1) The turnover of X & Co. a partnership firm for the Previous Year 2018-19 was Rs 60 Lacs. He wishes to declare net profits of Rs 3 Lacs during the Year i.e. less than 8%. Whether section 44AD(4) will attract in the given case assuming that the assessee never opted for section 44AD in earlier years?

  • The question of applicability of Section 44AD(4) will arise only when the assessee already opted for Section 44AD in an earlier year’(s).
  • This is the first year in which the assessee wishes to opt for Section 44AD. However, since the Firm wishes to declare profits lower than 8%/6%, he is not eligible to opt for Section 44AD also.
  • The Firm has to file the ROI as a normal assessee using appropriate ITR Forms other than ITR- 4.

FAQ: 2) Suppose, The Turnover of Mr. X is Rs 160 Lacs in the PY 2018-19. He opts for Section 44AD & declare income @ 12.8 Lacs. The turnover of Mr. X during the Previous Year 2019-20 & 2020-21 was 220 Lacs & 180 Lacs respectively. Can he opt for section 44AD in the Previous Year 2020-21? Discuss

Section 44AD(4) gives a reference to Section 44AD(1) only. As per section 44AD(1), an eligible assessee may declare deemed profits of 8% or higher. Section 44AD(4) states that the assessee must disclose its ‘’Profits’’ as per the rate given by Section 44AD(1) i.e. 8%/6% for the next 5 years following the previous year in which he opts for Section 44AD.

  • If during those five years the deemed profits declared by the assessee is not as per section 44AD(1) i.e. less than 8%/6%, then he is not eligible to opt for Section 44AD for the next five Previous Years.
  • It means section 44AD(4) will attract only when the assessee declares its deemed profits lower than 8%/6%. It will not attract when the Gross Turnover of the assessee increased beyond Rs 2 Crores.
  • Because as soon as the Gross turnover of the assessee exceeds Rs 2 Crores he will not be considered as the eligible one for Section 44AD.
  • X was out of Section 44AD(1) not because of the applicability of Section 44AD(4). Therefore, the restrictions of 5 years which apply only when section 44AD(4) attracts doesn’t impose here.
  • Hence, Mr. X can opt for Section 44AD while filing the ROI of the Previous Year 2020-21.

FAQ – 3) – Mr. X a proprietorship Firm engaged in the business of wholesale of Grocery Items & having a turnover of Rs 0.60 Crores during the Previous Year 2017-18. During the Previous Year 2018-19, he started an agency business for one of India’s leading FMCG & earn a net commission of Rs 70 Lacs apart from the Gross Turnover of Rs 50 Lacs for his main business i.e. trading of grocery items. This contract was only for 1 Year. During the Previous Year 2019-20, the agency contract got over & the Gross Turnover from trading of grocery items was Rs 1.4 Crores. Can he opt for Section 44AD during the Previous Year 2019-20?

  • The answer is on the same line as discussed in FAQ No. 2. The restrictions that assessee couldn’t opt for Section 44AD for the five years will be applicable only when he declares the profits lower than the 8%/6%.
  • If because of any other reasons, he couldn’t be able to opt for Section 44AD, then restrictions of Section 44AD(4) shouldn’t impose. Since 44AD(4) gives the reference of Section 44AD(1) only & it also uses the word ‘’Profit not as per Section 44AD(1)’’ i.e. percentage of rate.
  • The assessee is not eligible to opt for section 44AD in the previous year 2018-19 since he is earning income like commission which is totally out of Section 44AD. Even for his trading business, he can’t opt for Section 44AD.
  • But he can opt for section 44AD during the Previous Year 2019-20.

B) ………… Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB……………

1) The assessee is not required to maintain the books of accounts & gets the audit of his accounts until his case is covered by Section 44AD & he declares the deemed profits @ 8%/6% of Gross Turnover/Gross Receipt or such higher sums claimed to have been earned by him.

2) Even the Gross Turnover of the assessee is more than the limits of 1 Crore then also he is not liable to maintain the books of accounts.

3) The assessee who opts for section 44AD is liable to maintain his books of accounts & gets his accounts audited only when Section 44AD(5) attracts.

4) Section 44AD(5) attracts when the conditions laid down in Section 44AD(4) haven’t complied with. It means profits declares is less than the prescribed rate of 8%/6%.

5) It is not appropriate to conclude that every assessee who is subject to Section 44AD(5) is required to gets his accounts audited U/s 44AB under every circumstance.

6) Section 44AD(5) further adds that tax audit will be required only when the total income of the assessee exceeds the maximum amount not chargeable to tax.

7) The maximum amount not chargeable to tax in case of Individual or HUF is Rs 2,50,000 & for the firm it is Nil.

8) It means an individual who is subject to Section 44AD(5) is required to gets his accounts audited only when his total income exceeds the maximum amount not chargeable to tax.

9) Further, a partnership firm that is subject to Section 44AD(5) will not require to get its account audited if it incurred any losses. However, if a firm earns any positive income it will require getting its accounts audited U/s 44AB.

10) Total Income will calculate as per Chapter IV of the Act followed by Chapter VI & Chapter VI-A. it means income from all other heads of income will be considered even though Section 44AD(5) belongs to the chapter of PGBP.

11) The effect of Brought forward losses as per chapter VI, unabsorbed depreciation as per section 32(2), etc. will have to be considered.

12) Rebate u/s 87 is calculated on Net Tax Liability before giving Rebate u/s 87A. Discussion of Section 87A for section 44AD(5) is redundant.

13) Since the relevance of rebate u/s 87A will arise only when the total income of the assessee increased beyond Rs 2,50,000. If the case of the assessee is covered u/s 44AD(5) & his total income exceeds the maximum amount not chargeable to the Income Tax he is subject to Tax Audit.

14) Tax Audit will be conducted as per Section 44AB & hence, it is very important to quote the relevant part of Section 44AB read with 44AA(2) of the Income Tax Act,1961. I am presenting the provisions of section 44AB in the next part of the article i.e. PART – C

15) I am also presenting that part of Section 44AB which exempts the assessee from the requirement of the filing of the Tax Audit report even if the Gross Turnover exceeds beyond Rs 1 Crore.

The first proviso to Section 44AB is hereunder:

……..Provided that this section shall not apply to the person, who declares profits and gains for the previous year in accordance with the provisions of sub-section (1) of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year:………..

1. Section 44AB(a) casts an obligation to every assessee who runs the business to gets his accounts audited in case their turnover from the business is exceeding Rs 1 Crores.

2. Proviso means an exception to Section 44AB is also there. As per the first proviso until the assessee who declares the profit as per Section 44AD(1) i.e. 8%/6% of Gross Turnover or Gross Receipts he is not required to get his accounts audited.

3. For professionals who opted for 44ADA are also not required to gets his accounts audited. This relaxation has been given indirectly. Section 44AB(b) casts an obligation to every professional to gets his accounts audited if their gross receipts exceed Rs 50 Lacs.

4. It means until the Gross receipts don’t get exceeded by Rs 50 Lacs they are not required to gets their accounts audited. The presumptive taxation scheme for the professional is governed by section 44ADA who also restricts the Gross Receipts for a maximum of Rs 50 Lacs to opt for the benefits of Section 44ADA.

5. Hence, we can conclude that until your case is covered by section 44ADA you are not required to get accounts audited U/s 44AB(b).

PART C – Some important FAQs on Section 44AD & 44AB of the Income Tax Act, 1961.

1) X & Co. a trading Firm having Gross Receipts of Rs 55 Lacs during the Previous Year 2018-19. Net Profit under the head PGBP was Rs 2.4 Lacs. Is he required to get his accounts audited because deemed Profits as declared in the ROI is less than 8%/6% assuming that he wishes to file his ROI as regular assessee claiming all the expenditures?

Ans-

  • It is a very common misconception that we should show at least a profit of 8% or higher otherwise Tax Audit is required. Had this been true then the concept of Losses will not exist.
  • The Rate of 8%/6% is valid only for Section 44AD. If the assessee opts for Section 44AD then the net profit must be 8%/6% of Gross Turnover or more.
  • If the assessee follows regular computation i.e. claiming all the expenditures including Depreciation, etc. then even if the net result from the business is Loss, there is no tax audit required provided his turnover doesn’t exceed Rs 1Cr/Rs 5 Cr.
  • Therefore, since the gross turnover doesn’t exceed Rs 1 Crores, the assessee is not liable to get his accounts audited.

Y a trader in Dry Fruits having a Gross Turnover of Rs 2.5 Crores during the Previous Year 2019-20. Entire receipts & payments made through the banking channels. Mr. X wishes to file the return using ITR – 4 because he is in view that since more than 95% of the receipts & payment are made using banking channels, therefore, he is eligible to opt for presumptive taxation?

  • The view of Mr. X is not as per the law.
  • The amendment made by the Finance Act, 2020 through which the Limits is extended to Rs 5 Crores is applicable only for Section 44AB & not for section 44AD.
  • As soon as the turnover is exceeded by Rs 2 crores the assessee is totally out of Section 44AD even though the entire receipt & payments made using the banking medium.
  • In the given case, since section 44AD is not applicable. However, it is to be noted that even the turnover is more than 1 crore still assessee is not required to get his accounts audited.
  • As per the Finance Act, 2020 the limits of a tax audit are increased to 5 crores provided more than 95% of the receipts & payments are routed through the banking channels.

A opted for Section 44AD in the Previous Year 2017-18. During the Previous Year, he declares the profit lower than 8%/6% of the Gross Turnover. The Gross Turnover of the Previous Year 2018-19 was Rs 90 Lacs & he claimed a loss under the head PGBP to the tune of Rs 80,000/-. Long Term Capital Gains also earned by him of Rs 4,00,000/-. Is he liable to gets his accounts audited u/s 44AB in the Previous Year 2018-19?

Ans –

  • The assessee was subject to section 44AD(4) during the Previous Year 2018-19.
  • As per section 44AD(5) if his total income exceeds the maximum amount not chargeable to tax i.e. Rs 2,50,000 then he is liable to get his accounts audited U/s 44AB(e).
  • While calculating the Total Income of Rs 2,50,000/- capital gains income will also be considered.
  • Therefore, in the given case total income is Rs 3,20,000 & therefore the assessee is liable to get his accounts audited u/s 44AB(e).

Suppose, in the above case the assessee has an LTCG of Rs 1,00,000/-. Sale Consideration from sales of the Long -Term Capital Assets was Rs 12 Lacs. Will your answer be the same?

Ans –

  • Now, the total income of the assessee was Rs 20,000 which is below Rs 2,50,000.
  • Only the gross turnover from business shall be taken into account for the calculation of the applicability of Section 44AB.
  • Therefore, the assessee is not liable to get his accounts audited as per section 44AB(e).
  • However, if the turnover/receipts from the business exceed by Rs 1 Crore/5Crores then he is liable to get his accounts audited. This is as per the requirement of clause (a) of Section 44AB.
  • The total receipts/Gross Turnover exceeds Rs 1 crore in the given case but it also includes Receipts from other heads of Income. what is relevant is that business receipts must exceed Rs 1 crore.
  • Since the turnover/Gross Receipts is less than 1 Crore hence, the assessee is not liable to get his accounts audited.

PART D – Applicability of TDS & other Residuary Provisions of the Income Tax Act, 1961.

1) The Provisions of the Tax Deduction at source is equally applicable to the assessee whose case is covered under section 44AD subject to certain exceptions.

2) Even though the assessee is not getting any deductions of any expenditures covered under section 30 to 38 still he is liable to deduct the TDS subject to certain exceptions.

3) For example, X & Co. a partnership firm made the payment of Rs 60,000 as an interest to Mr. P. it made the payment without deducting the TDS U/s 194A of the Income Tax Act, 1961. The management of the firm is in view that since the firm will not be getting any deduction of Interest Expenses since it is going to declare its income u/s 44AD. Hence, it is not under an obligation to deduct the TDS. Comment on the action of the AO?

Ans- The action of the Firm is not as per the law.

  • Indeed, the firm will not allow any deduction of interest expenses since it is abiding by the provisions of section 44AD still the exemption from non-deduction of TDS is not given to it.
  • Deduction or non-deduction of TDS is a statutory obligation on the part of the deductor which is cast by the chapter XVII-B of the Income Tax Act, 1961.
  • The basic principle of deduction of TDS is that Income must be taxable in the hands of the recipient & income which is to be paid or credited by the deductor must be covered u/s 192 to 196D of the Act.
  • It is redundant where the expenses which are to be paid by the deductor is deductable in his hands or not. What is important is that income must be taxable in the hands of the recipient & on which Tax is to be deductable.
  • Chapter XVII-B provides some exemption for non-deduction of TDS but that is too limited to only Individual or HUF after fulfilling certain conditions.
  • Under all the circumstances the firm is liable to deduct the TDS whether deduction of such interest payment is allowed to it or not.
  • However, if the recipient obtained the certificate from the Assessing Officer U/s 197 for non-deduction of TDS, then in such a case firm is not required to deduct the TDS.

4) Discuss in detail the applicability of the provisions of the TDS when the deductor being Individual or HUF is subject to Section 44AD.

Ans-

  • Deduction of TDS is dealt with as per chapter XVII-B of the Act. Chapter XVII-B also provides an exemption to Individual or HUF for the requirements of deduction of TDS subject to certain conditions.
  • The exemption for non-deduction of TDS is mainly connected with the following sections:

> Section 194C – Payment to Resident Contractors read with section 194M

> Section 194J- Payment to Resident professionals for their Professional Services.

> Section 194H – Payment of commission or brokerage to the residents

> Section 194I – Payment of Rental Income to the residents

> Section 194A- Payment of Interest to the residents.

  • No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.
  • Even if the Gross Turnover or Gross Receipts as the case may be during the preceding Previous year exceeds Rs 1 Cr or Rs 50 Lacs.

5) Position of deduction of TDS before Finance Act, 2020 in case the payer is Individual Or HUF is as follows:

  • Individual or HUF is liable to deduct the TDS u/s 194C/194J/194H/194I/194A only if they were liable to tax audit under section 44AB(a) or 44AB(b).
  • It means if they are liable for Tax Audit under any other clause of Section 44AB then they are not required to deduct the TDS.
  • Section 44AB(a) makes it obligatory for the assessee to submit the report of the Tax Audit on or before the Filing of the ITR in case his turnover from business exceed Rs 1 Cr.
  • Similarly, section 44AB(b) cast an obligation on Professional if their Gross Receipts exceeds Rs 50 Lacs to submit the Tax Audit report on or before the filing of the Income Tax Return.
  • The Assessee who is covered U/s 44AD is not liable to Tax Audit even if his Gross Turnover/Gross Receipts exceed Rs 1 Crore.
  • It means if an individual or HUF opts for Section 44AD in the Preceding Financial Year then he is not liable to deduct the TDS even if his turnover exceeds Rs 1 Cr since they are not liable for deduction of TDS in the current Financial Year.
  • The position of the law will remain the same even if in the current year assessee is not eligible for Section 44AD.
  • Therefore, to bring the parity & to widening the Tax base it is necessary to amend the respective sections.

6) Position of the Law after the amendment made by Finance Act, 2020 in the chapter of TDS is as follows:

> The words …..Section 44AB(a) & 44AB(b)…… have been substituted with words….’’Gross Receipts of 1 Cr for Business or Rs 50 Lacs for professional’’ …..

> The Relevant Part of the amendment is ….. [………..has total sales, gross receipts or turnover from business or profession carried on by him exceeding one crore rupees in case of business or fifty lakh rupees in case of profession]

> This amendment is effected from the previous Year 2019-20 & onwards.

> It means if the Turnover of the assessee in the preceding Financial Year from the business exceeds Rs 1 Cr & Rs 50 Lacs for Professionals they are liable to deduct the TDS in all cases even if:

i) They are not liable for Tax Audit

ii) His case is covered U/s 44AD or Section 44ADA or Section 44AE

> However, if the payment made to the contractors & professionals covered U/s 194C & 194J & the payment is exclusively for the personal use of an Individual or HUF then no TDS is required to deduct even if the Gross Turnover or Gross receipts exceeds Rs 1 Cr or Rs 50 Lacs as the case may be.

> If the turnover of Mr. X for the Financial Year 2019-20 is 1.3 Crores & during the Financial Year 2020-21 is Rs 60 Lacs. Mr. X is liable for deduction of TDS even if:

  • He is not liable for Tax Audit under clause (a) or (b) of Section 44AB.
  • His case is covered U/s 44AD during the Preceding Financial Year or Current Financial year.
  • The turnover of the Gross Receipts of the current financial year is not the determinative factor.

Disclaimer:-  This article is for information and shall not be treated as a solicitation in any manner or of any other purposes whatsoever. For the benefits of the reader, a short glimpse of provisions is presented in my language as per my capabilities. It shall not be used for any legal advice/opinion and shall not be used to rendering any professional opinion. Readers are advised to kindly go through original government publications and published case laws and judicial pronouncements. Errors may creep in and hence it will be highly appreciable to highlight such errors or providing suggestions for effective improvements.

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7 Comments

  1. BARATHIDASON says:

    In the PARA B – Case A,
    “Gross receipt 70 Lakhs” is used, whereas “Turnover” is the term used in Sec 44AD. In the case of intraday share trade the absolute difference only to be considered as “Turnover”. Hence, it need to amplified what constitutes 2 Crores threshold.

  2. Sudip Kumar Lahiri says:

    Thanks to Mr. Dhanuka for this very exhaustive and well written article. Lots of example given by him brought more clarity. He deserves full appreciation

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