Special Provisions For Computing Profits And Gains of Business On Presumptive Basis [Section 44AD]

(1) Introduction: – To reduce the tax burden and to provide relief from tedious work to small tax assesses, the government of India has incorporated a scheme of presumptive taxation. Businesses adopting the presumptive taxation scheme are not required to maintain regular books of account. They can declare the income at a prescribed rate.

(2) Eligible business:-

(i) Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

(ii) Whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.

(3) Eligible assesse:-

(i) Individual, Hindu undivided family or a Partnership firm, who is a Resident, but not a limited liability partnership firm

(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain in-comes” in the relevant assessment year would be covered under this scheme.

(4) Presumptive rate:-

(i) Sum equal to 8%of the total turnover or gross receipts of the assesse in the previous year on account of such business shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”

(ii) However, the presumptive rate of 6%of total turnover or gross receipts will be applicable in respect of amount which is received:-

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

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

However, the assesse has the option to declare in his return of income, an amount higher than the presumptive income so calculated, claimed to have been actually earned by him.

(5) Sec 44AD with regards to Allowances and Disallowances: –

(i) All deductions allowable under Sec 30 to 38 shall be deemed to have been already given full effect to and no further deduction under those sections shall be allowed [including Depreciation/Unabsorbed Depreciation].

(ii) No disallowance will be permitted as per Section 40, Section 40A, and Section 43B.

(iii) In case of an assesse, being a partnership firm, from the net income computed as per the provisions of section 44AD, further deduction on account of remuneration and interest paid to its partners within the limit specified under section 40(b) is not allowed. Thus, in this case the firm cannot claim further deduction on account of remuneration paid to its partners, even though it is within the limit specified under section 40(b).

(6) Written down value of the asset: –The WDV of any asset of such business shall be deemed to have been calculated as if the assesse had claimed and had been actually allowed the deduction in respect of depreciation for each of the relevant assessment years.

(7) Relief from maintenance of books of accounts and audit:-Such eligible assesses opting for the presumptive scheme are not required to maintain books of account under section 44AA or get them audited under section 44AB.

(8) Higher threshold for non-audit of accounts for assesses opting for presumptive taxation under section 44AD:-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.

However, if an eligible person opts for presumptive taxation scheme  as  per  section 44AD(1), he shall not be required to get his accounts audited if the total turnover or gross receipts of the relevant previous year does not exceed ` 2 crore.

(9) Advance tax: – Eligible assesse is required to pay 100% of advance tax by 15th March of the financial year.

(10) Persons not eligible for presumptive taxation scheme:- The following persons are specifically excluded from the applicability of the presumptive provisions of section 44AD:-

(i) 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;

(ii) Person earning income in the nature of commission or brokerage; or

(iii) Person carrying on any agency business.

(11) Not eligible to opt for presumptive taxation under this section  for  5  assessment  years:- Where an eligible assesse declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five consecutive 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)[Sec.44AD(4)].

Example:-

Let us consider the following particulars relating to a resident individual, Mr. X, being an eligible assesse whose gross receipts do not exceed ` 2 crore in any of the assessment years between A.Y. 2020-21 to A.Y. 2022-23:-

Particulars A.Y 2020-21 A.Y 2021-22 A.Y 2022-23
Gross receipts 1,60,00,000 1,80,00,000 2,00,00,000
Income offered for taxation 12,80,000 14,40,000 8,00,000
% of gross receipts 8% 8% 4%
Offered income as per presumptive taxation scheme u/s 44AD Yes Yes No

In the above case, Mr. X, an eligible assesse, opts for presumptive taxation under section 44AD for A.Y. 2020-21 and A.Y. 2021-22 and offers income of 12.80 lakh and 14.40 lakh on gross receipts of 1.60 crore and 1.80 crore, respectively.

However, for A.Y.2022-23, he offers income of only 8 lakh on turnover of ` 2 crore, which amounts to 4% of his gross receipts. He maintains books of account under section 44AA and gets the same audited under section 44AB. Since he has not offered income in accordance with the provisions of section 44AD(1) for five consecutive assessment years, after A.Y. 2020-21, he will not be eligible to claim the benefit of section 44AD for next five assessment years succeeding A.Y.2022-23 i.e., from A.Y.2023-24 to 2027-28.

(12) Maintain books of accounts and Audit if sub-section (4) attracted:- An eligible assesse  to whom the provisions of sub-section (4) are applicable and  whose total income exceeds  the basic exemption limit has to maintain books of account under section 44AA and  get   them audited and furnish a report of such audit under section 44AB [as per Sec 44AD(5)].

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