Section 44AD- A comprehensive coverage

SECTION 44AD

Who is eligible to adopt Section 44AD?

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:-

• Status of Assessee
• Individual
• HUF
• Partnership firm(not including Limited liability partnership)

• Non eligible Business
• Business of plying, hiring or leasing goods carriages referred to in section 44AE
• Having total turnover or gross receipts in the previous year exceeding Rs. 2 crores

• Specific Exclusions
• Person carrying on profession referred to in section 44AA(1)
• Any person earning commission or brokerage
• Any person carrying on any agency business

Eligible profits under Section 44AD

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:-

• Account payee cheque
• Account payee bank draft
• Through electronic clearing system through a bank account during the previous year or before the due date specified under Section 139(1).

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.

What is meant by Turnover?

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:-

• goods returned,
• price adjustments,
• trade discount (not including discounts which are not part of invoice) and
• Any other returns or cancellations

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:

• Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can be deducted from the turnover.
• Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover.
• Turnover discount is normally allowed to a customer if the sales made to him exceed a particular quantity. This being dependent on the turnover, as per trade practice, it is in the nature of trade discount and should be deducted from the figure of turnover even if the same is allowed at periodical intervals by separate credit notes.
• Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. If it is in the nature of commission on sales, the same cannot be deducted from the figure of turnover.
• Price of goods returned should be deducted from the figure of turnover even if the returns are from the sales made in the earlier years.
• Sale proceeds of fixed assets would not form part of turnover since these are not held for resale.
• Sale proceeds of property held as investment property will not form part of turnover.
• Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover.

Section 145A and Section 44AD

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.

List of further deductions and allowances allowed from above calculated income

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.

To be opted continuously for 5 years (Section 44AD(4))

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

Audit under section 44AD

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:-

• Assessee is covered under section 44AD(4) and
• *Total income exceeds the maximum amount which is not chargeable to income tax and
• Total turnover or gross receipts are more than Rs. 2 crores

*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.

Summary of Audit in case of Section 44AD

• Turnover below 1 cr-

Audit required only when  covered under section 44AD(4) and income exceeds maximum amount not chargeable to tax.

• Non eligible Business-

Audit required if Section 44AD not opted in return and claimed profit not less than 8/6% of turnover

• Turnover above 2 cr-

Section 44AD cannot be opted and thus mandatory audit