Presumptive Taxation Scheme for Business Section 44AD of Income Tax Act

Introduction: The Income Tax Act, India, has provisions to simplify taxation for small taxpayers and business owners. Section 44AD, also known as the Presumptive Taxation Scheme, is one such provision designed to relieve taxpayers from maintaining detailed accounts and undergoing audits. In this article, we will delve into the intricacies of Section 44AD, exploring its provisions, eligibility criteria, and key insights.

Also Read: Understanding Section 44ADA: Presumptive Tax for Professionals

Understanding Section 44AD:

1. Presumptive taxation scheme is a simplified scheme designed to give relief to small taxpayers from maintaining accounts and undergoing audits. Section 44AD of Income Tax governs the provisions of presumptive scheme for businesses.

2. In this article, an attempt has been made to further simplify the tax provisions of the presumptive taxation scheme with the help of Illustrations and Judicious pronouncements.

3. The provision under section 44AD starts with “Notwithstanding anything to the contrary contained in Section 28 to 43C “. It means this section overrides all the provisions of sections 28 to 43C of the Income Tax Act.

3.2 Since provisions of sections 28 to 43C are not applicable for an assessee who opted for a presumptive taxation scheme, the disallowance under these sections will also not apply to him.

3.3 Illustration: Mr. Bipin made interest payments to NBFC, reliance capital, and various unsecured loan parties without deduction of tax at source and filed his return of income under section 44AD on a presumptive taxation basis showing a turnover of Rs. 92 lakhs.

3.3.1 In a normal case, if an assessee fails to deduct tax at source on sum payable to a resident, 30% of such sum payable will be disallowed under section 40(a)(ia) of the Income Tax Act.

3.3.2 Disallowance under section 40(a)(ia) will not apply to Mr. Bipin as he opted for presumptive taxation scheme under Section 44AD.

3.4 Judicial Pronouncement:  It was held by Surat Tribunal in the case of Bipin Chandra V ITO Surat (2021) that provisions of section 44AD override all other provisions contained in sections 28 to 43C and the provisions of section 40(a)(ia) of the Act falls within this range of sections 28 to 43C of the Income-tax Act.

3.4.1 When an income is presumptively taxed u/s 44AD of the Act any further business income by applying the provisions of sections 28 to 43C (including section 40(a)(ia) of the Act) would get telescoped with the presumptive income determined.

3.4.2. This decision supports the view that when the assessee cannot claim any expenses after applying the net profit rate, then the AO too cannot make an addition after applying the net profit rate. Even if the assessee commits any default under Chapter XVIIB of the Act with regard to the TDS provision, it is only for the TDS officer to take suitable action on the assessee, the doors of the AO are absolutely shut when the income is determined on presumptive basis u/s 44AD of the Act.

4. Eligibility for Presumptive Taxation: In case of an eligible assessee engaged in an eligible business, 8% (6% in case of electronic clearance, account payee cheque /draft etc.) the total turnover or gross receipts in the previous year shall be deemed to be profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”. Section 44AD (1).

4.1 Eligible Assessee means an Individual, HUF, or Partnership Firm, who is a resident, but not an LLP (Limited liability Partnership). Non-residents are not eligible assessee under section 44AD of the Act. – Explanation (a) to Section 44AD

4.2 Eligible Business means (i) any business except the business of plying, hiring, or leasing goods carriage 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. –Explanation (b)(i) & (ii) to Section 44AD.

4.3 Non- Eligible Person (Negative list): The following persons are not eligible for presumptive taxation scheme for business under section 44AD: –

(a) A person carrying on a profession as referred to in subsection (1) of section 44AA.

(b) person earning income in the nature of commission brokerage; or

(c) a person carrying on any agency business

4.4 The professions referred to in section 44AA (1) are legal, medical, engineering architectural profession, or the profession of accountancy technical consultancy interior decoration, or any other profession as notified by the Board in the Official Gazette.     

4.5 Illustration: Mr. Anuj is an engineer who is also engaged in trading business. His gross receipt from the engineering profession is Rs 48 lakhs and his turnover from business is Rs 1.65 crores. He cannot opt for the presumptive scheme for his trading business as he is not an eligible person under section 44AD of the Act.

However, Mr. Anuj can opt for a presumptive scheme under section 44ADA for his professional receipt as there is no such condition mentioned in section 44ADA

4.6 Earning income in nature of Commission: A person is ineligible for a presumptive tax scheme if he earns commission income on which the customer deducted tax at source under section 194H.

4.6.1 Illustration:  Mr. Anupam engaged in arranging transportation, and received commission on which customers deducted TDS under section 194H. Mr. Anupam claimed that the nature of income was not of commission and the customer had deducted under the wrong head. However, before filing his return, he has not made any effort to get the correction.

4.6.2 Mr. Anupam is an ineligible person under section 44AD(6)(b) of the Act, even if he has not disclosed such income as commission income in his return.

4.6.3 Judicial Pronouncement:   It was held by Jaipur Tribunal in the case of Airlink international V Income Tax Officer CPC (2023) that since customers had deducted TDS under section 194H on payment of a certain amount and the assessee made no efforts to get the same corrected from them, the assessee is ineligible for presumptive tax under section 44AD.

4.7 Commission as part of business income: Commission received on completing business targets etc. will be added in business income and the person receiving such commission is not ineligible person for the purpose of sec 44AD.

4.8 Illustration:  Ms. Divya received Rs 10 lakhs as a commission from the distributor on achieving the annual target of business. Her turnover from business is 90 lakhs. She is not ineligible for presumptive taxation under sec 44AD as such commission will be considered her business income

5. F&O (Future & Option) business under Presumptive Scheme: The income/loss arising from trading in F&O transactions would be treated as a Business Income / Loss for the purpose of taxation and the normal provisions of the Income Tax Act will apply in this case

5.1 Since F&O is classified as a business under the Act and does not fall under the negative list, the person engaged in F&O trading is an eligible person for presumptive taxation under section 44AD of the Act.

6. Business expenses cannot be separately claimed for set off against income disclosed under section 44AD. It is not permissible to separately claim set off of business expenses as the same were to be deemed to have been already given full effect while computing income under the deeming provision

7. Interest Income of FDR / deposits is required to be reported separately: It is held by the Raipur Tribunal in the case of Krishna Kumar Agarwal v Income Tax Officer (2023) that interest income by no means would fall within the domain of deemed income of assessee worked out under section 44AD. Hence, an addition made by the Assessing Officer qua interest on FDR/deposits deserved to be upheld.

8. OPT IN AND OPT OUT FROM THE PRESUMPTIVE TAXATION: Subsection (4) of Section 44AD governs the provision of opting in and out from the presumptive taxation scheme.

8.1 If the assessee declares profit as per 44AD, and then, in any of the five successive FYs, declares profits not in accordance with section 44AD, then he cannot opt for section 44AD for five successive years, after the year of default. –Section 44AD (4)

8.2 For the year of default and five successive previous years, he has to maintain books of accounts and get them audited, if his income exceeds the basic exemption limit.

8.3 Illustration:  Mr. Farookh opted for presumptive tax in FY 2020-21 He decided to opt out from the scheme in FY 2022-23. As Mr. Farrokh  has not completed five years in presumptive scheme,  he will become ineligible to opt for the presumptive scheme till 2028-29(for the subsequent 5 years)

9. Opting out due to gross turnover exceeds the presumptive tax limit: The restriction under section 44AD (4) will not be applicable when the assesse cannot opt for the presumptive schemes due to non-eligibility. If the assessee does not qualify for a presumptive scheme due to the gross turnover exceeding the presumptive scheme limit (i.e., Rs 2 crore), he can opt for the scheme in the subsequent year if his gross turnover is in the prescribed limit (less than 2 crores). Exception to Sec 44AD (4)

9.1 Illustration:  For the year 2021-22, the turnover of Mr. Govind was 1.8 crores. He declares his income of Rs 14.4 lakh and opts for a presumptive income scheme under section 44AD. The turnover of Mr. Govind for FY 2022-23 is Rs 2.5 crore, and for FY 2023-24 is Rs 1.7 crore. In such conditions, even if Mr. Govind declares income as per normal provisions (not presumptive scheme) in the FY 2022-23, he can opt for the presumptive scheme in the FY 2023-24

10. Tax Audit Requirement:   In case an assessee opts-out from presumptive taxation scheme and declares losses or income at less than the presumptive rate in any of the subsequent five years of opting presumptive taxation scheme, the audit is required to be done under section 44AB

10.1 Illustration: Ms. Harsha engaged in trading business and her turnover in FY 2021-22 was Rs 90 lakhs. She opted for presumptive taxation and declared her income of Rs 7.2 Lakhs (8% of turnover) and paid tax accordingly. In the FY 2022-23, she suffered losses and wished to opt out of the scheme. In that case, she needs to maintain books of accounts and tax audit is required to be done.

11. Other relevant Judicial Pronouncements & Provisions

11.1 Remuneration and Interest from Partnership Firms: Remuneration and interest from the partnership cannot be treated as turnover or Gross receipt for the purpose of section 44AD.

11.2 In the case of A Anandkumar v Assistant Commissioner of Income Tax (2021), it was held by the Hon’ble Madras High Court that the partner has not done any sales nor rendered any services but has been receiving remuneration and interest from the partnership firms which amount has already been debited in the profit and loss account of the firms.

11.3 Section 44AD (2) states that any deduction allowable under the provision of Section 30 to 38 for the purpose of sub-section (1) be deemed to have been already given full effect and no further deduction under those sections shall be allowed. Thus, conspicuously section 28(v) has not been included in sub-section (2) of Section 44AD which deals with any interest, salary, bonus, commission, or remuneration by whatever name called, due to or received by, a partner of a firm from such firm. “

11.4 Therefore, the remuneration and interest of the partner cannot be treated as gross receipts for the purpose of Sec 44AD.

12. Section 68 (Unexplained Income) cannot be invoked: Where the assessee offers income under section 44AD on a presumptive basis and is not required to maintain account books, the Assessing Officer cannot call for details of sundry debtors and creditors and make addition to assessee’s income for unexplained sundry creditors invoking provisions of section 68 – held by Jodhpur Tribunal in case of Sumit Gehlot V Income Tax Officer.

13.1 Section 44AD (2) prescribes that any deduction allowable under the provisions of sections 30 to 38 shall be deemed to have been already given full effect and no further deduction under those sections shall be allowed.

13.2 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 allowed the deduction in respect of the depreciation for each of the relevant assessment years.

14. Other Relevant Points

(a) The total accumulated turnover that all the businesses earn during the course of the financial years shall be taken into consideration in order to opt for a presumptive scheme under Section 44AD.

(b) The prescribed limit of turnover under section 44AD will be exclusive of GST.

(c) Any person opting for the presumptive taxation scheme under section 44AD is liable to pay the whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of the previous year, he shall be liable to pay interest as per section 234C.

(d) Taxpayers opting for presumptive taxation under Section 44AD should report such income as PGBP Income and file Form ITR 4. If the taxpayer has income from capital gains along with presumptive income, he/she should file Form ITR 3.

(e) Tax Audit cannot be done on the wish of the assessee. The Tax Audit can be done only if it is required to be done under any provision of the Income Tax Act.

 (f) Chapter VIA © deductions not available under presumptive taxation scheme

15. Amendment: The following provisos have been inserted after subclause (ii) of clause (b) of Explanation to section 44AD by Finance Act 2023 w.e.f. 01 April 2024.

The eligible business means turnover or gross receipts in the previous year does not exceed Rs 3 crores subject to the fact that cash receipts shall not exceed 5% of total turnover or the gross receipts.

For this purpose, the receipt of the 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.

Conclusion: Section 44AD of the Income Tax Act provides a taxpayer-friendly framework for small businesses and individuals. By understanding the eligibility criteria, exemptions, and implications of opting in or out of the presumptive taxation scheme, taxpayers can navigate the tax landscape more efficiently. This provision not only simplifies tax compliance but also promotes ease of doing business.

Disclaimer: The article is for educational purposes only.

The author can be approached at caanitabhadra@gmail.com