DEAR FRIENDS LET US DISCUSS HOW TO COMPUTE PROFITS AND GAINS OF BUSINESS ON PRESUMPTIVE BASIS

SECTION 44AD

SCOPE

1. First we will discuss the business which has been eligible for scheme provided by section 44AD of income tax act, 1961. This scheme covers up almost all small businesses which has total turnover up to 200 lakh. Total turnover is the crux of this section. Here important is total gross turnover; gross turnover is before deducting any expense.

RATE OF TAX

2. Profit  would be assumed as 8% of total turnover or gross receipts with Turnover Less than Rs. 2 Crore Per Annum.

One new point which has to be kept in mind that this 8% rate is not final rate of tax, when tax payer received any amount;

  • by an account payee cheque or
  • by an account payee bank draft or
  • by use of electronic clearing system through a bank account

During the previous year or before the due date of filing of return under section 139(1) in respect of that previous year.

(Crux-That means assessee must receive money on or before 30th September 2018 when the previous year is 2017-18).

Than the rate of tax in respect of above amount received is 6%.

This is the new relaxation provided by government to assessee to give more exposes to transaction by bank.

So basically now there are two rate of Income Presumption are there in section 44AD

  • 8% of Turnover
  • 6% of Turnover

ELIGIBLE PERSON

3. The persons who are eligible for this scheme is also important. Eligible persons are mentioned below.

  • Resident individuals,
  • HUFs and partnership firms, except LLPs and
  • Who has not claimed deduction under any of the section 10AA or deduction under any provisions of Chapter VIA under the heading “C.—Deductions in respect of certain incomes” in the relevant assessment year.

Above would be covered under this scheme.

EXPENSES DEEMED TO BE ALLOWED

4. In this section when income is assessed no further deduction is allowed. Which means all deductions allowable under sections 30 to 38 shall be deemed to have been allowed in full and no further deduction shall be allowed.

BOOKS OF ACCOUNTS AND AUDIT

5. Purpose of section 44AD is to grant relief from maintenance of books of accounts and audit. The purpose of widening the scope of this plan is to reduce the compliance and administrative burden on small businessmen and tone down them from the requirement of maintaining books of account. Such assessees opting for the presumptive scheme are not required to maintain books of account under section 44AA and also not required to get them audited under section 44AB.

This will encourage the assessee to pay taxes without any hurdle of compliance of audit and books of accounts.

AUDIT LIMIT

6. One more benefit which has been given to assessee is that if he opts for section 44AD he is not liable to get his account audited even if his gross receipts are up to 2 crores.

In any other case this benefit is only up to 1 crores i.e. Section 44AB makes it obligatory for every person carrying on business to get his accounts of any previous year audited if his total sales, turnover or gross receipts exceed 1 crore.

(Crux- section 44AD give benefits of exemption from audit up to 2 crores which would otherwise be up to 1 crores.)

SPECIAL POINTS

7. If the assessee is carrying on more than 1 business, which is occur very often, then the consolidated turnover (all business turnover) will be taken to compute gross sales figures under section 44AD.

8. If on the other hand assessee is carrying on business as well as professional income than section 44AD only apply to income earned under business income. Professional income would be taxed on normal rates.

TREATMENT OF WRITTEN DOWN VALUE OF ASSETS

9. The written down value of the asset of such business shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction for depreciation for each of relevant assessment years.

Deduction on account of depreciation is not obtainable. However, the WDV of any asset used in the business covered under the scheme of section 44AD shall be calculated as if depreciation as per section 32 is claimed and allowed. This means WDV of assets for the purpose of income tax would be taken after deducting depreciation. Thus, even though no depreciation is available separately, yet for purpose of computation of the WDV of the asset, depreciation will be deducted.

ADVANCE TAX

11. Eligible assessee is now required to pay advance tax on 15th march of the previous year for which the income is to be assessed. This liability of advanced tax has been imposed w.e.f 01.04.2017. Since 01.04.2017 assessees opting for section 44AD are not liable to pay advance tax.

SPECIFIC EXCLUSIONS

12.Persons not eligible for presumptive taxation scheme: The following persons are specifically excluded from the applicability of the presumptive provisions of section 44AD

i. A person carrying on profession as referred to in section 44AA(1) i.e.,

  • Legal,
  • Medical,
  • Engineering or
  • Architectural profession or
  • The profession of accountancy or
  • Technical consultancy or
  • Interior decoration or

Any other profession as is notified by the Board (namely, authorized representatives, film artists, company secretaries and profession of information technology have been notified by the Board for this purpose);

ii. A person earning income in the nature of commission or brokerage or;

iii. A person carrying on any agency business.

DIFFICULTY IN OPTING SCHEME

13. Previously any person can easily get out of the scheme in any PY and can opt for the scheme in any succeeding years. But now this practices has been discontinues due to section 44AD (4).

Now if a person chose option to get out of scheme in any P.Y. succeeding to the P.Y. in which he opt for the scheme, than he can’t avail the benefit of the scheme for next 5 years succeeding to the year in which he opt out of the scheme.

This can be under stand by following example.

AY 2018-19

Assessee opt for scheme in

AY 2018-19.

AY 2019-20

Get out of scheme in AY 2101-20

AY 2020-21

Now he cannot claim exemption from AY 2020-21 to AY 2024-25

SOME RECENT AMENDMENTS

• When assessee cannot opt scheme for continuous FIVE year period than he shall not opt scheme for continuous succeeding FIVE years from the AY from which he opt out of the scheme.
• Salary, interest, remuneration paid to partner as per section 40(b) is not deductible. Which is prior to amendment is deductible.
• Increase in threshold limit of eligible business from 1 crore to 2 crore.
• Advance tax which was previously exempt now is payable as on 15th march.

Author Bio

Qualification: Student - CA/CS/CMA
Company: UPPER INDIA GROUP OF COMPANIES
Location: Haryana, IN
Member Since: 30 Nov 2017 | Total Posts: 2

My Published Posts

More Under Income Tax

Posted Under

Category : Income Tax (25538)
Type : Articles (14986)
Tags : Section 44AD (112)

9 responses to “Section 44AD Profits and Gains of Business on Presumptive Basis”

  1. CA. M. Lakshmanan says:

    1. 8% or 6% is not rate of tax; it is income i.e. 8% or 6% of the gross receipts/turnover will be taken as income and tax would be calculated on the income.
    2. Practically differentiating the receipts between 8% and 6% is not easy because all the turnover are not receipts. For example receipts would for the sale made earlier (before the commencement of the year) and it may be more or less than the turnover. If the turnover is Rs. 1 Crore and receipts by way of account payee cheque, DD, transfer etc., are Rs. 1.5 crores due to payments received for sales made earlier years, income calculation can not be done properly. Likewise the receipts may be less than the turnover also.

  2. SATISHBHAI PATEL says:

    advise me when section 44ad(5) be applicable, and when compulsory audit of books is required ?

  3. Tax.Adv.BSKRAO says:

    If one maintain books of accounts, he/she need not adhere to presumptive taxation scheme under Income-Tax. Because very purpose of Section 44AB is to enforce maintainance of books. This is evident from circular issued for inserting S.44AB. I am against presumptive taxation scheme & fulfill very purpose of S.44AB & declare Income as per books maintained.

  4. A Singh says:

    The total turnover for the purpose of income calculation excludes vAT amount. Please clarify.
    Secondly, in case of payments received in cash and through banking channels …is it 8%for cash receipts and 6% for bank receipts. Thank you.

  5. A Singh says:

    The total turnover excludes vat amount (for AY 2017-18). Please reply. Thanks.

  6. Shiv Kumar says:

    Please confirm…..
    S. 44AD applies only if the Total Income of the eligible assessee exceeds the maximum amount which is not chargeable to tax.
    So, for example, this section would not apply to a proprietor trader having turnover less than 2 crores, and claiming profits and gains from his proprietorship business at less than 6%/8%, in case his total income including set-off of losses (if any) under other heads (House-Property / Other Sources) is not more than 2.5 Lakhs

  7. CA Akbar Basha says:

    Hi,
    8% and 6% are not the rate of taxes, it is the minimum rate of income on turnover to be taxed at normal rates specified in respective finance acts.

    • GAURAVBAKSHI says:

      First thanks for reading this artical carefully. I think rate of tax word used in it is for the purpose of sec 44AD only and sec 44AD itself talk about computation of income not tax. So your inference is good but i also want to say the same thing.

  8. ca hitesh says:

    these amendments are making the beneficial scheme from simple to complex

Leave a Reply

Your email address will not be published. Required fields are marked *