Section 44AD of Income Tax Act, 1961 post amendment by finance act, 2016

All about Section 44AD of the Income Tax Act, 1961 post amendment by finance act, 2016: (More specifically post replacement of Sub-Section 4 and 5 of 44AD)

Before going into the discussion, it is better to understand the gist of this section for the benefit of readers as per current position of the provision:

Section 44AD gives option to certain type of assessees [Individual, HUFs and Partnership Firm (not LLP) and who has not claimed deduction under the heading “C” of Chapter VI-A of the act] carrying certain type of business [all business other than Agency, Commission, Brokerage and S.44AE business] to declare profit at 8% or 6% as the case may be of Total Turnover or Gross receipts of such business or at such higher percentage claimed to have been earned by the assessee.

All deductions allowable under section 30 to 38 is deemed to be allowed including interest and remuneration what partnership firm pays to their partners.

Turnover/Gross Receipt limit to opt for this benefit is below or equal to Two Crore Rupees.

Now let’s see what is the impact after replacement of sub section 4 and 5:

 Pre-Amendment:

Bare act provision:

“(4) The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.

 (5) 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”

 Analysis of the above provision:

 1. Sub Section 4 exempted the assessee taking the benefit of 44AD from advance tax payment compliance.

2. Sub Section 5 mandatorily wanted the assessee to declare the minimum profit as per 44AD Provision if their total income exceeds the maximum amount not chargeable to tax (Rs. 2.50 Lakhs)

Does it mean that even after having the option to exercise this benefit “it was not option” but mandatory to declare minimum profit? Certainly, Yes.

If the assessee declares lower profit then he was suppose to maintain BOA and get audited by CA.

Post-Amendment:

Bare act provision:

“(4) 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).

(5) 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”

Analysis of the above provision:

1. Now, since the sub section 4 is replaced, the assessee is no more exempted from advance tax payment compliance.

Moreover, new sub section puts more conditions on the assessee availing benefit of this section. Let’s understand this with the help of example:

Example

Say, Mr. X an individual carrying the trading business of mobile phone and have a TO of Rs. 80L during the AY 18-19. Now, since the TO is below Rs.2 Cr, he has the option of availing benefits of S.44AD. Accordingly, he exercises this option and declares 8% of Rs.80L (Total Cash Proceeds) as profits from Business Head.

Now, as per new sub section 4, if the assessee declares profit under S.44AD for any year then he has to continue declaring profits under S.44AD for next 5 AYs.

What will happen if he fails to comply with the above provision? Then, new sub section 5 will come into play and accordingly it will apply. Check below analysis

Now, since the assessee has not declared profit as per 44AD provision for consecutive 5 asst years he is no more eligible to claim benefit of S.44AD for next 5 AYs i.e 2023-24 to 2024-2028. Also during such 5 asst years the assessee has to maintain books of accounts and gets audited if his total income exceeds the maximum amount not chargeable to tax.

Important Observations (Conclusion)

Q.1 Can assessee declare lower profit than what is required to be declared as per 44AD in any year assuming asssessee had TO below 1Cr?

Answer:  Unlike erstwhile provision, wherein assessee had the option of declaring lower profit only if he maintains BOA and Gets audited, under new provision assessee have the option of declaring lower profit without any condition since new sub section 5 comes into play only if the assessee fails to comply with sub section 4 and Sub section 4 comes into effect only if assessee opts for 44AD section benefit in any year.

In such a case, the assessee has to maintain BOA as per S.44AA and file regular return form and not presumptive income form.

Q.2 What would have been the position if the assessee had TO above 1Cr ?

Answer: Still he had the option of declaring profit as per 44AD provision being limit of rupees 2 Cr but he had no option of declaring lower profit since audit limit as per section 44AB (a) is still rupees 1Cr falling under regular provision.

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