Critical Analysis of New Section 44AD
(inserted by Finance (No 2)Act, 2010)
CA Pinkesh N. Jain
Till the 31st March,2010, the Chapter Profit & gains of Small business on Presumptive Basis was having majorly 3 sections for Indian entities.
From 01.04.2010 the honorable finance minister Mr. Pranab Mukharjee has kept the last two intact and has amended the first section i.e. 44AD along with 5 sub sections to facilitate the business operations of small taxpayers.
Earlier this section was extended to civil constructions only but now this section has been extended to all small businesses.
Apparently the section 44AD is very straightforward, but has lots of implications on the taxpayers.
I have tried to analyse the section in all its tiny parts and upto all its implications.
The new section 44AD is as follows:
“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 per cent 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”.
For better understanding of sub section 1 of newly inserted section 44AD, we must know the meaning of following:
Who is an Eligible Assessee?
(explanation 1 to Section 44AD)
Eligible Assessee means:-
(1) an individual
(2) Hindu undivided family
(3) a partnership firm
(4)who is a resident.
but does not include 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).
A assesee 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;
Who all are the aseessees not covered under Section 44AD?
After understanding the meaning of Eligible assessee, now we move to Eligible Business:
What is eligible Business ?
“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 [sixty lakh rupees].
Meaning of the above section:
This provision is straightforward and includes all the business whether it is:
The only criteria is that, the turnover of eligible Business should not exceed Rs. Sixty lacs in the previous Year.
What is not included in the Business?
The profession is not included in the business because:
What do you mean by Total Turnover/Gross Receipts?
What are the receipts which forms Part of Turnover?
1) Sales Tax, excise duty, Cess, and other Levy.
2) Sales of unusables empties and Packages.
3) Service Charges charged for delivery
Then what are the Receipts which does not form Part of Turnover?
1) Sale of Property, Plant and equipments
2) Advance received from customers, deposits Received or retention money.
3) Any Security, retention or other deposit obtained from employees.
4) Interest Income or other similar receipts
5) Value of Inventory
How to calculate limit of 60 lakhs?
Whether section 44AD applicable on him?
The Answer is NO because turnover of eligible business exceed Rs.60 Lakhs.
Section 44AD and 44AE both are applicable, as profession is not included under section 44AD and section 44AD and 44AE are independent of each other.
Who bears the onus of proof to prove the turnover?
What documents you should provide to the AO to prove the turnover?
What is the meaning of “Notwithstanding Anything to contrary contained in section 28 to 43C”?
What is the meaning of Claimed to have been earned?
By the introduction of these words in section 44AD(1), the legislature shows his intention to accept specified income as returned income even if higher sum is earned by eligible assessee unless it is claimed by assessee in his Income Tax Return.
X is carrying on small business . The Turnover is Rs.50 lakh. The profit as per his books or calculation is Rs.8 Lakhs. However, he opts to return the income under section 44AD @ 8% i.e Rs.4 Lakh. The proceeds of business are deposited in a bank account.
Can the AO assess the difference amount as undisclosed income?
No, The Answer is No due to following reasons:
– The section has been amended for the benefit of the assessee.
– The word “Claim” signifies the right of assessee, and it is not an obligation of the assessee.
The distinction between Right and obligation is very necesrary here.
The language of section of section 44AD(1) requires claims to have been made by an assessee for returning higher income.
If there is no claim made by assessee in return for higher income, there is no higher income.
The following judicial decisions support this view:
(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 :
Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.
Computation of Taxable Profit u/s 44AD in case of Partnership Firm
Profit from Business
|44 AD ( Say the turnover is Rs.40 lacs) then the income would be 8%||3,20,000|
|Interest allowable u/s 40(b)||1,00,000|
|Remuneration to partners allowable||1,00,000|
|Total Income of the Firm U/s. 44AD||1,20,000|
Section 44AD (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.”
Tapan an Resident individual having a machinery of RS.1,00,000/- as on 31-03-2011 eligible for depreciation under section 32 @ 15%.In A.Y 2011-12, he opts for Section 44AD. In the Assessment Year 2012-13, his turnover is Rs.65 lakh, so he calculated his profit as per normal provisions of the Act. In A.Y 2013-14, he again opts for Section 44AD, In this Assessment year he sold the Assets for Rs.80,000/-.
Calculation of WDV:
|WDV as on 31-03-2011||1,00,000|
|Less: Depreciation @ 15%||15,000|
|WDV as on 31-03-2012||85,000|
|Less: Depreciation @ 15%||12,750|
|WDV as on 31-03-2013||72,250|
|Less : Sale Price||80,000|
|WDV as on 31-03-2014||Nil|
Calculation of Capital Gains
|Less WDV as on 31-03-2013||72,250|
|Short Term capital gain U/s 50||7,750|
Whether the Assessee can carried forward unabsorbed depreciation?
“The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.”
On plain reading of this subsection, we conclude that eligible assessees are exempt from payment of Advance Tax.But the second part of Provision creates a blunder so far it relates to eligible business, which creates lot of doubt.
The following example will better clear your understanding :
Profit under section 44AD Rs 4.00 lac
(Say Turnover is RS.50 lakhs)
Interest Income Rs.5.00 Lac
Total Income Rs.9.00 lac
In this situation, whether the assessee is exempted from provisions of advance tax in all or whether the assessee is liable to Pay advance Tax on interest income of Rs.5.00 lac.
From the understanding of Law, it is clear that the assessee have to pay advance tax on interest income of Rs.5.00 lac. But how this tax calculation is to be made is no where define in legislature?
This sub-section has created lots of doubts and debates in the mind of all the CAs and Tax consultants. This Sub-section is very much important for all the very small businessmen. Please give attention and read it care fully.
“Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1)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”
The assessee is bound to get the books of accounts audited, if the following two conditions are satisfied:-
1. His profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) i.e. his net profit is lower than 8% of turnover.
2 Whose total income exceeds the maximum amount which is not chargeable to income-tax.
Here see both the conditions are simultaneous and the assessee required to get his accounts audit only and only if his profits from the business u/s 44AD are lower than 8% of this turnover and further his total income is more than maximum amount which is not liable to tax.
Though the proposed provision is applicable from assessment year 2011-12 but if for example and to understand the effect of this provision we presume the minimum amount which is not liable to tax is Rs. 1.60 Lakh and the turnover of the eligible business is Rs.38 Lakhs and the Net profit is Rs. 1.52 lacs which comes to only 4% hence the first condition for the compulsory audit is there but since the income is only Rs.1.52 Lakhs hence the second condition of section 44AD(5) is not complete, hence the audit is not mandatory.
If whatever mentioned above is the intention of law then in most of the cases where the income of the assessee is below taxable limit, they are not required to get their books of accounts audited, even if the rate of profit is below 8%.