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Special Provision for Computing profits and gains of business on presumptive basis under Section 44AD of Income Tax Act, 1961

Section 44AD provides for a simplified method of computing the business income of any business (excluding business of plying, hiring or leasing goods carriage). The following are the salient features of this section.

01. The scheme is laid down in the said section 44AD.

02. The scheme applies to a resident assesse being an individual, HUF or a partnership firm, i.e. it will not applies to Limited Liability Partnership Firm and Company. It will not be applicable to an assesse who has availed deductions u/s 10A, 10AA, 10B or 10BA of the Act or deduction under any provisions of Chapter VI-A under the heading “C – Deductions in respect of certain incomes” in the relevant assessment year.

03. The scheme is applicable for any business referred to in section 44AE, whose total turnover or gross receipts in the previous year does not exceed Rs. 3,00,00,000 (Rs. 3 crore ).

Assessment Year Turnover Threshold
2011-12 Exceed Rs. 60,00,000
2013-14 Exceed Rs. 1,00,00,000
2017-18 Exceed Rs. 2,00,00,000
2024-25 Exceed Rs. 3,00,00,000

Where the amount of aggregate of the amounts received during the previous year, in cash, does not exceed 5% of the total turnover or gross receipts of such previous year.

For the purpose of the above, the receipt of amount or aggregate of amounts by a cheque drawn on a bank or by a bank draft which is not account payee, shall be deemed to be the receipt in cash.

04. The profits and gains of from the business referred to in (03) above shall be deemed to be 8% of the total turnover or gross receipts of the assesse in the previous year or higher sum as may be declared by the assesse and the said deemed income is chargeable to tax under the head “Profit and Gains of business or profession”.

In respect of the amount of the total turnover or gross receipts which is received by an account payee cheque or an account payee draft or use of electronic clearing section through a bank account or through such other electronic mode as may be prescribed, during the previous year or before the due date specified u/s 139(1), then 6% as against 8%, of such total turn over or gross receipts will be deemed income. It may be noted that the existing rate of deemed income of 8% of the total turnover or gross receipts in any other mode, i.e. cash will still apply.

05. Any deduction allowable u/s 30 to 38 shall be deemed to have been allowed and no further deduction under those sections shall be allowed from the deemed profits and gains as in(4) above. In the case of a firm, deductions u/s 40(b), i.e. interest/salary paid to any partner by a firm, will not be allowed to the firm in computing the firm’s deemed profits and gains as in (4) above.

06. Similarly, depreciation on assets used for the purpose of business shall also be deemed to have been allowed and written down value of the said assets shall be worked out on that basis.

07. The assesse is not required either to maintain books of accounts u/s 44AA or to get accounts audited u/s 44AB in respect of business. In computing the monetary limits u/s 44AA/44AB, the total turnover or, as the case may be, gross receipts of the said business shall be excluded.

Section 44AD(5) provides that an eligible assesse to whom the provisions of section 44AD(4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, is required to keep and maintain such books of account and other documents as required u/s 44AA(2) and get them audited and furnish a report of such audit as required u/s 44AB.

08. The profits and gains computed above shall be aggregated with other income of the assesse and thereafter deduction under chapter VI-A and tax rebate under chapter VIII, if any will be allowed.

09. Such an assesse is required to pay advance tax on or before 15th March relation to business.

10. Provisions of section 44AD shall not apply to a person:

(a) Carrying on profession as referred to in section 44AA(1);

(b) Earning income in the nature of commission, or brokerage,

(c) Carrying on any agency business.

Conclusion: Section 44AD offers a simplified tax computation method for eligible businesses, reducing administrative burden. However, certain professions and income types are excluded from its purview. Understanding its provisions is crucial for efficient tax planning and compliance.

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June 2024