Presumptive Taxation : Section 44AD

For small businesses to comply with the taxation provisions without consuming much time and resources, the government of India has incorporated a scheme of presumptive taxation. Businesses adopting the presumptive taxation scheme are not required to maintain regular books of account.

Section 44AD(1) says :

“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”.

Understanding the above clause :

An eligible assessee who is carrying eligible business, can show profit of 8% of total turnover/gross receipts or such higher amount as claimed by the assessee, which shall be the deemed income of the assessee.

In respect of the turnover or gross receipts received through banking channels, the above 8% shall be read as 6%.

Who are Eligible Assessee :

Resident  Individual,

Resident HUF,

Resident Partnership Firm AND

Who does not claim deductions under Section 10A, Section 10AA, Section 10BA, Section 10B, or other income based deductions as mentioned in Chapter VIA under the heading C.

In other way,

Who all are not eligible assessee :

• Individual, HUF and Partnership firm who are not resident
• Limited Liability Partnership
• Association of Person
• A local Authority
• A Co-operative society
• Companies
• Individual/HUF/Firms claiming any deduction under chapter III of the Act i.e Section 10A,10AA,10B,10BA relating to units located in FREE Trade Zone, Hardware & Software, Technology Park etc or any deduction under Chapter VIA Part-C (deductions in respect of certain Incomes) i.e. Section 80H to 80TT

> Which business is Eligible Business :

Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE

Turnover Criteria :

The business whose annual turnover and the gross receipts in the previous financial year does not exceed the limit of Rs. 2 crores

> Who can not take the benefit of this scheme?

 As per subsection 6 of section 44AD

A Person –

• who is carrying profession referred u/s 44AA(1), or
• Who is earning the income in the nature of commission or brokerage, or
• Who is carrying any agency business.

As per above, person carrying profession referred u/s 44AA(1) can not take the benefit of section 44AD and for such profession, section 44ADA applies. Then, is section 44AD is applicable to professions other than the profession referred u/s 44AA(1)? Section 44AD says eligible “business”. So does that mean business includes profession for the purpose of this section?

As per Supreme court decision in Barendra Prasad Ray V. Income Tax Officer, 1981 (2) SCC 693, it was stated that expression “business connection” used in s.9(1) also includes “profession”.

As per Supreme court decision in G.K. Choksi & Company vs Commissioner Of Income Tax 295 ITR 276, court stated that Part D of the Act consists of Sections 28 to 43 of the Act which deals with profits and gains of business or profession. Though the phrase has been used in certain sections as “business or profession”, but nowhere has the phrase been used as the “business and profession”. In fact, wherever the legislature intended that the benefit of a particular provision should be for both business or profession, it has used the words “business or profession” and wherever it intended to restrict the benefit to either business or profession, then the legislature has used the word either “business” or “profession”, meaning thereby that it intended to extend the benefit to either “business” or “profession”, i.e., the one would not include the other.

Also section 44AD has kept only one limit of turnover and that is for business.

According to the author of this article, “eligible business” does not include “profession”.

E.g. 1. Can a practicing CA offer income u/s 44AD?

Ans : No. As chartered accountancy is a profession mentioned in section 44AA(1).

E.g. 2. Mr. A is carrying an eligible business, Turnover being Rs. 50,00,000/-

And he is also earning commission income of Rs. 15,000/-

Can he claim benefit for eligible business u/s 44AD?

Ans : No. Subsection 6 to section 44AD specifically says that provision of this section shall not apply to a person carrying business in the nature of commission or brokerage. Even though Mr. A’s primary business is eligible business, since he is earning commission income, Mr.A can not take benefit of section 44AD even for eligible business.

E.g. 3. Mr.B, an interior decorator having gross receipts from profession of Rs. 20,00,000/-

He is also having business of selling plywood, turnover being Rs. 6,00,000/-

Can he claim section 44AD benefit for business of selling plywood?

Ans :  No. Reason being same as E.g.2. Interior decoration is a specified profession as mention u/s 44ADA.

E.g. 4. Can finance consultant, being a profession not covered u/s 44AA(1), take the benefit of section 44AD?

Ans : Since finance consultancy is a profession, section 44AD is not applicable as 44AD applicable to business only.

E.g. 5. A finance consultant, apart from the profession of consultancy is also in the business of selling gift articles. Is section 44AD applicable to the business of gift articles?

Ans : Yes. 44AD will be applicable to the business of gift articles. But will not be applicable to consultancy business.

How to calculate the turnover limit of Rs. 2 crores for the section 44AD ?

• Even though while reading section, it can be interpreted that the turnover limit is qua business but following the ICAI guidelines on section 44AB, can be said that section 44AD limit also should be qua assessee.
• Therefore It includes all the eligible businesses carried on by an eligible assessee during the previous year and turnover limit of Rs. 2 crores will be for all of them cumulatively.

For E.g.1. Mr. Suleman is a resident individual carrying on below mentioned businesses, the turnover of which is as under :

A. Manufacturing Business : Rs.125 Lac

B. Trading Business : Rs. 55 Lac

C. Running coaching classes : Rs. 30 Lac

Is section 44AD is applicable to Mr. Suleman ?

The Answer is No. As Turnover from eligible business exceeds Rs. 2 Crores.

E.g. 2. Mr. Suleman who is resident individual is carrying two businesses :

Business A –  Manufacturing – Rs. 120 lacs

Business B – Goods carriage business as mentioned u/s 44AE – 85 Lacs

In the above case section 44 AD will be applicable with respect to manufacturing business run by Mr. Suleman. As while calculating turnover limit, turnover from eligible business only has to be clubbed together. Since, Section 44AE business is ineligible, turnover from it shall be excluded while arriving at the turnover limit.

Subsection (4) of Section 44AD reads as :

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).

Section 44AD(5) says:

 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.

Understanding above sub sections :

E.g.1. Mr. X opts for section 44AD since AY 2018-19, with 8% of profit. But in AY 2019-20, he shows profit of 5%, which is below the minimum profit percentage. Since, Mr. X does not show profit in accordance with the provision of sub section(1) in AY 2019-20, he will not be able to claim benefit of this section for next 5 years i.e. from AY 20-21 to AY 24-25.

E.g.2. Continuing the above example, Since section 44AD(4) is applicable to Mr.x in AY 2020-21, and if his total income is above basic exemption, (being individual, basic exemption is Rs.2,50,000/-), Mr.X

will have to maintain books of account u/s 44AA and get it audited u/s 44AB.

For sub section (5), two conditions are required to be fulfilled :

1. Applicability of subsection (4) AND

2. Total income exceeds the maximum amount not chargeable to tax.

Year	Section 44AD
AY 2014-15	Opted
AY 2015-16	Opted
AY 2016-17	Not opted
AY 2017-18 to AY 2021-22	Eligible for Sec 44AD?

E.g.3. Is Mr.Y eligible for section 44AD in below mentioned situation ?

Ans : Subsection 4 of Section 44AD got effective from AY 2017-18. Therefore, position before AY 2017-18 is not to be considered. This amendment does not have retrospective effect.

E.g. 4. Mr. Z in AY 17-18 applied Section 44AD.

For next 5 years till AY 2022-23 also applied Section 44AD

In 6^th year, i.e. in AY 2023-24 Offered 5% profit i.e. Section 44AD not claimed.

So now, is Section 44AD(4) applicable in 6^th year i.e. in AY 2023-24?

Will he have to maintain books and get it audited in 6^th year?

Can he apply section 44AD in 7^th year?

Ans :   Section 44AD(4) does not apply in the 6^th year as criteria is that assessee has to apply section 44AD for 5 years, and since, Mr. Z has followed the criteria, 44AD(4) is not applicable. As section 44AD(4) is not applicable, section 44AD(5) does not apply and he’ll not have to maintain books and get it audited. Mr. Z can claim benefit of section 44AD in 7th year.

E.g. 5.

	Year	Section 44AD
Year 1	AY 2018-19	Opted
Year 2	AY 2019-20	Opted
Year 3	AY 2020-21	Not Opted

Sub section (4) is applicable in above case, but from which year ?

Ans : As per Income Tax portal FAQ, Section 44AA and Section 44AB will be applicable from default year till next 5 year. Therefore, section 44AD(4) is applicable from 3rd year i.e. Ay 2020-21 and for next 5 assessment years thereafter. and therefore section 44AD(5) will apply accordingly.

E.g.6. Mr. Suleman has opted out of section 44AD in year 3.

	Year	Section 44AD
Year 1	AY 2018-19	Opted
Year 2	AY 2019-20	Opted
Year 3	AY 2020-21	Not Opted

If he shows 90% profit in AY 2021-22, still he’ll have to do audit u/s 44AB?

Ans : Yes, if total income exceeds maximum amount chargeable to tax. Percentage of profit does not matter.

E.g.7. Mr. Ramesh was eligible to opt for section 44AD so he opted and showed the income in accordance to provision of section 44AD. however, in AY 2019-20, he also earned commission income, which made him ineligible to opt for section 44AD. Now in AY 2020-21 he is eligible. Can he opt for section 44AD? or section 44AD(4) will be applicable to him ?

	Year	Section 44AD
Year 1	AY 2018-19	Eligible and Opted
Year 2	AY 2019-20	Not eligible
Year 3	AY 2020-21	Eligible

Ans : Yes, Mr. Ramesh can opt for section 44AD in AY 2020-21. Section 44AD(1) provision does not apply to ineligible assessee or assessee carrying on ineligible business, and Section 44AD(4) is to be read with all other provisions.

Is there is any requirement to deduct TDS in year subsequent year to year in which accounts audited u/s 44AB rear with section 44AD?

No. As all the sections such as 194A, 194C, 194H, 194I, 194J says the ‘turnover of the business should be in excess of the monetary limit specified u/s 44AB(a) or 44AB(b) and there is no reference to section 44AB(e).

What does “Notwithstanding anything contained in Section 28 to 43C” mean ?

Section 44AD(1) starts with the above wordings, it means section 28 to section 43C is not applicable to assessee showing income under section 44AD.

For E.g.1. Mr. X paid Rs. 70,000 in cash to Mr. Y for purchase of material on 15th March, 2020.

Since Mr. X is a small business provider opting for section 44AD, disallowance u/s 40A(3) will not be made.

For E.g.2. Mr. A has recovered certain bad debts written off in earlier years of Rs.35000/-. It may not be added in specified amount declared.

Section 44AD overrides section 28 to 43C but does not override chapter VI. Therefore, current year losses & brought forward losses can be setoff against deemed income.

However, current year & brought forward depreciation can not be set off against the deemed income since that is governed by sec 32.

Can we show income higher than 8% or 6% as applicable to the respective case?

Yes. There is clear distinction between language of section 44AD, 44ADA, 44AE and Section 44B, 44BB, 44BBB. If real income is higher than presumptive income, then show the real income.

Other points :

• Onus of proof to prove the turnover is on the assessee. That is why even though there is no need to maintain books of accounts, assessee should maintain enough documents with respect to turnover shown. From AY 2020-21, ITR 4 has new column where assessee will have to report opening balance of cash and bank (aggregate of all bank accounts), receipts during the year, and payments or withdrawals made in the previous year.
• All deductions u/Sec. 30 to 38, including depreciation and unabsorbed depreciation, are deemed to have been already allowed and no further deduction is allowed. The WDV is calculated, as if depreciation as applicable has been allowed.
• Up to A.Y 2016-17, in case of Firm, the normal deduction in respect of salary and interest to partners u/Sec. 40(b) shall be allowed. (From A.Y 2017-18 this deduction is Not Available)
• An assessee option for section 44AD can pay advance tax pertaining to his business income in one installment. (i.e. on or before 15th March)
• Presumptive Income to be 6% in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of Section 139 in respect of that previous year.