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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:
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.
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 –
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
Case – E – Can a Professional Covered U/s 44AA(1) opt for Section 44AD?
Ans –
(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;
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)
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:
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.
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:
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.
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:
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:
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)
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?
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.
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?
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-
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?
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 –
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 –
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.
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-
> 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.
5) Position of deduction of TDS before Finance Act, 2020 in case the payer is Individual Or HUF is as follows:
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:
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.
If we File ITR Under Sec 44AD , is there any affect on Getting Loans.
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.
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
Very detailed and informed Article covering all aspects of section 44AD. Thank you so much