Section 44AD is a well-known presumptive taxation scheme available to individuals, HUF and partnership firms (not including limited liability partnerships) for declaring their income on a presumptive basis which is not less than 8% of total turnover declared for the financial year.
Section 44AD contain a set of conditions as follows:-
The assessee is required to declare at least 8% of his total turnover for the financial year as Presumptive income under section 44AD.
However the assessee can report 6% of his total turnover as presumptive income if the amount of total turnover or gross receipts is received by:-
For example, of Mr. Ajay has made a sales of Rs. 50000 on 01.02.2018 in credit for which he received Account payee cheque on 30.07.2018. This sales will be covered in above points and thus Mr. Ajay has to show 6% of profits against such kind of sales.
Gross Turnover is a commercial term, therefore it should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Therefore the method of accounting employed by the assessee determines what gross turnover is.
The term ‘turnover’ refers to the total sales after deducting there from:-
There are few adjustments which are not related to turnover and that should not be made i.e. writing off bad debts, royalty etc.
Applying the above generally accepted accounting principles, a few typical cases may be considered:
As per section 145A(ii) the purchases and sales of goods and services and inventory arising therefrom should be done in such a way so as to include amount of tax, duty, cess or fees actually paid or incurred thereon to bring such goods or services to their present location or condition.
Following the above mentioned provision GST is includible in turnover. This will lead to double taxation as assessee has to pay Income tax on GST paid earlier.There is a need of clarification in this regard.
However, earlier also VAT/CST was not included in turnover being refundable duties, similarly GST is also not included in turnover for the same reason.
The amount of presumptive income so declared by the assesse under section 44AD (i.e. equal to or more than 8% / 6% of gross receipts) is considered to be final and thus no further deductions are allowed from it. As per section 44AD, it is considered that the deductions of Section 30 to 38 have already been deducted from the presumptive income and thus no further effect is required.
Though it must be noted here that since it is presumed that depreciation(Section 32) has already deducted from income, the assets in balance sheet should be reflected at Written down value only i.e. after deducting depreciation applicable as per the income tax act.
Section 44AD has introduced a significant condition that if an assessee opts for the presumptive taxation under section 44AD, he has to continue declaring his income as per the provisions of section 44AD for a continuous period of next 5 Assessment years relevant to previous year succeeding such previous year.
For example, If Mr. Aman opts for declaring income under section 44AD for previous year 2017-18 (i.e. AY 2018-19), then in such case he has to report income under section 44AD for the Assessment years-2019-20, 2020-21, 2021-22, 2022-23 and 2023-24.
In case the assessee opts to withdraw from the scheme before the period of 5 years as aforesaid, then he shall not be eligible to claim the benefit of the scheme for five assessment years subsequent to the assessment year relevant to such previous year.
For example, continuing the above example if Mr. Aman opts for regular scheme for declaring income during previous year 2018-19, then in such case he shall become ineligible to opt for section 44AD for the Assessment years- 2020-21, 2021-22, 2022-23, 2023-24 and 2024-25
As per section 44AB, if the following conditions are satisfied then the assessee shall be required to keep and maintain books of accounts and other documents as per section 44AA(2) and get them audited duly by a Chartered Accountant:-
*Here the words total income means the Gross total income from all the 5 heads of income before claiming deductions under Chapter VIA.
A significant point to note here is that as per section 44AB general audit limit is on turnover above Rs. 1 crore but if the assessee opts for section 44AD and shows required 8/6% profit, he is not liable to get the books of accounts audited. But if his turnover exceeds Rs. 2 crores then he is not eligible to opt section 44AD and thus audit is mandatory in this case whether or not his profit is above or below 8/6% of turnover.
For example:- Suppose Mr. Aditya file Income tax return for AY 2018-19 following presumptive taxation under section 44AD. But in next year he files return under regular taxation. Thus, as discussed above he then becomes ineligible to opt for Section 44AD for next 5 Assessment years. In such case if in any of these 5 years his Gross total income exceeds maximum amount not chargeable to tax (say Rs. 250000 in case of individual below 60 years of age), then irrespective of amount of turnover , he is liable for audit under section 44AB.
Audit required only when covered under section 44AD(4) and income exceeds maximum amount not chargeable to tax.
Audit required if Section 44AD not opted in return and claimed profit not less than 8/6% of turnover
Section 44AD cannot be opted and thus mandatory audit