This article will mainly focus on the various aspects concerning provisions of Section 44AD. Section 44AD of The Income Tax Act 1961 was introduced to ease the burden of small taxpayers, make them more tax compliant with minimal compliances and expand the tax base. After Finance Act, 2017, there are major amendments which have been taken place in this section those all amendments are covered in this article.
Page Contents
- Section 44AD of Income Tax Act, 1961- Computation of profits and gains of business on presumptive basis
- 1. Scope of Section 44AD
- 2. Income Percentage under Section 44AD
- 3. Eligibility for opting Section 44AD
- 4. Person who are not eligible for presumptive taxation scheme u/s 44AD:
- 5. Expenses Deemed To Be Allowed under Section 44AD
- 6. Books Of Accounts And Audit Requirement under Section 44AD
- 7. Audit requirement if Assessee opts for section 44AD
- 8. Special Points related to Section 44AD
- 9. Treatment Of Written Down Value Of Assets
- 10. Advance Tax for Eligible assessee who opts for Section 44AD
- 11. Difficulty In Opting Section 44AD Scheme
- 12. Some Recent Amendments in Section 44AD
Section 44AD of Income Tax Act, 1961- Computation of profits and gains of business on presumptive basis
1. Scope of Section 44AD
1. The assessee who is eligible for this section is a person resident in India who is an individual, a Hindu Undivided Family or a Partnership Firm (Except LLPs).
2. The assessee should be engaged in any business other than mentioned in section 44AA or Commission or Brokerage or any agency business.
3. If assessee wants to opt for this scheme then his total turnover or Gross Receipts in previous year of the business should not exceed Rs 2 crore
2. Income Percentage under Section 44AD
In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year or 6% of the turnover or gross receipts of the eligible business for the year only if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or 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)
So basically now there are two rate of Income Presumption are there in section 44AD
- 8% of Turnover
- 6% of Turnover
3. Eligibility for opting Section 44AD
The person who is 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 section 10A, 10AA, 10B, 10BA, 80HH to 80RRB in the relevant assessment year
4. Person who are not eligible for presumptive taxation scheme u/s 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.
iv. A person who is in the business of plying, hiring or leasing goods carriage
5. Expenses Deemed To Be Allowed under Section 44AD
All deductions under section 30 to 38, including depreciation and un-absorbed depreciation are deemed to have been already allowed and no further deduction is allowed under this section.
Even from AY 2017-18, in case of firm, the normal deduction in respect of salary and interest to partners under section 40(b) will also not allowed.
6. Books Of Accounts And Audit Requirement under Section 44AD
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.
7. Audit requirement if Assessee opts for section 44AD
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.)
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.
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 either on normal rates or for that he can opt for section 44ADA.
9. Treatment Of Written Down Value Of Assets
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.
10. Advance Tax for Eligible assessee who opts for Section 44AD
Eligible assessee who opts for Section 44AD is now required to pay advance tax on 15th march of the previous year for which the income is to be assessed.
11. Difficulty In Opting Section 44AD Scheme
- 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 understand by following example.
AY 2018-19
Assessee opt for scheme in
AY 2018-19
AY 2019-20
Get out of scheme in AY 2020-21
AY 2020-21
Now he cannot claim exemption from AY 2020-21 to AY 2024-25
12. Some Recent Amendments in Section 44AD
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(Republished with Amendments)
Author Bio
Under Section 44AD of Income Tax Act Computation of profits % can be vary
i.e
2018-19 – 8%
2019-20 – 10%
or it should be constant
Can any one give clarification to me,
Before raising my issue just follow the below examples
Case 1: Turnover below 1 crore but offering income lower than 8% or 6% as the case maintaining books of accounts but taxable income doesn’t exceed basic exemption limit, in this situation no tax audit required
Case 2: Turnover above 1 crore but offering lower income than 8% or 6% as the case maintaining books of accounts but taxable income doesn’t exceed basic exemption limit, in this situation has to do tax audit because of tax audit limit if not offering income according to section 44AD
Case 3: Turnover below 1 crore offering income lower than 8% or 6 % as the case maintaining books of accounts but taxable income exceeds basic exemption limit so opt out from section 44AD and has to do tax audit U/S 44AB and not eligible opt for section 44AD for next 5 Asessement years
Case 4: Turnover exceeds 1 crore but below 2 crores not offering income u/s 44AD, in this case section 44AD not applies and section 44AB insists has to do tax audit,
Now i required clarification in case 4: is the assesse considered as optout from section 44AD and not eligible to offer income u/s 44ad for next five assessment years or can he avail benefit of section 44AD in next year as this year tax audit conducted as insist of section 44AB not section 44AD,
A PERSON OPT SEC 44AD CONTINOUSLY 9 YEARS. NOW IN 10TH HE DOESN’T OPT FOR SEC 44AD. CAN HE OPT SEC 44AD IN 11TH YEAR.
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.
advise me when section 44ad(5) be applicable, and when compulsory audit of books is required ?
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.
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.
The total turnover excludes vat amount (for AY 2017-18). Please reply. Thanks.
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
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.
these amendments are making the beneficial scheme from simple to complex