section 44AD for presumptive taxationSection 44AD provides special provisions to compute business profit at presumptive basis. Section 44AD has five sub section. Understanding of each one is necessary.Section 44AD is used many assessee while showing business profit. If you are one of them, please read carefully the important points about section 44AD applicability.

Definition of section 44AD as per income tax act, 1961:

 

Before understanding full section 44AD, let’s read the definition of section 44AD:

Section 44AD ( 1)

Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, 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.

section 44AD ( 2)

Any deduction allowed under the provisions of section 30 to 38 shall for the purposes of sub section 1, be deemed to have been already give full effect to and no further deduction under those section shall be allowed.

provided that where eligilbe assessee is a firm, the salary and interest paid to partners shall be deducted from the income computed under sub section (1) subject to the conditions and limits specified in clause (b) of section 40.

section 44AD (3)

The written down value of any asset of any eligible business shall be deemed to have been calculated as if the eligible business has been claimed and had been allowed the deduction in respect of the depreciation for each of the relevant assessment years.

section 44AD ( 4)

provision related to advance tax not applicable.

section 44AD ( 5)

Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his 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 accounts and other documents as required under sub section (2) of section 44AA and get them audited and get audited and  furnish a report of such audit as required under section 44AB.

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Who is eligilble assessee to get benefit of the section?

It is not available for all the assesses. Only eligible assessee can get benefit of the section. Eligible assessee means assessee who is resident in India and who is individual, HUF or partnership firm.

who is not eligible to get benefit of this section?

  1. Non resident Indians ( NRIs)
  2. HUF who is NRI
  3. AOP
  4. NRI firms
  5. Local authority
  6. Co operative society
  7. LLP ( Indian and foreign)
  8. Domestic and foreign companies
  9. Artificial juridical person
  10. Individual, HUF, firm claiming deduction under chapter III relating to hardware and software technology parks, free trade zones ( Deduction u/s 10A, 10AA, 10B, 10BA)

What is eligible business?

The person should not only be eligible assessee but he is also required to in eligible business to get benefit of this 44AD. Eligible business means any business except the following:

  1. A person carrying on profession referred to section 44A(1).
  2. A person earning commission or agency income.
  3. A person carrying on business of plying, hiring or leasing goods.
  4. Total turnover or gross receipt in the previous year should not exceed Rs. 1 Crore. ( For A.Y. 2015-16) ( audit party).

In short, every business is allowed for section 44AD but not profession u/s 44A(1) – legal, medical, chartered accountancy, interior decorator, architecture etc., transport business, commission or agency business or audit able business. Trading, manufacturing, wholesaling, job work, speculative or non speculative businesses are eligible business.

What is turnover as per presumptive taxation ?

  1. Turnover means receipts from business without deducting expenses. It means sales, receipts etc. received from customer.
  2. Also aggregate turnover of all the businesses while calculating limit .
  3. The turnover includes sales tax received, sale value of unusable empties and packages, service charges for delieveries, sale value of material or product.
  4. Turnover does not include sale of capital asset like plant, land etc, advance received, security received from employees, interest income, value of inventory.
  5. Does not include turnover of profession and business u/s 44AE.

Example for calculation of turnover :

Example 1:

Mr. Ratan has Three businesses. Turnover of each business is as under:

BusinessTurnover
Trading35 Lakhs
Manufacturing52 Lakhs
Service44 Lakhs

 

As turnover of all the business is more than Rs. 1 crore. Mr. Ratan cannot take benefit of section 44AD.

 

Example 2:

BusinessTurnover
Trading35 Lakhs
Transportation business ( 44AE)52 Lakhs
Service44 Lakhs

 

Turnover of all the business is more than Rs. 1 Crore. But we are not required to consider turnover of business covered under section 44AE. So net turnover is 35 + 44= 74 Lakhs. In this case, Mr. Ratan can use section 44AD to show business profit on presumptive basis.

Example 3:

BusinessTurnover
Trading52 Lakhs
Manufacturing40 Lakhs
Profession15 Lakhs

 

Turnover of trading and manufacturing should be considered while calculating limit for section 44AD. Turnover total is 92 Lakhs. So Mr. Ratan can avail benefit of the section.

What is impact of presumptive taxation u/s 44AD?

  1. 8% of total turnover shall be deemed to be profit of that business.
  2. Assessee can show income more than 8% of turnover.
  3. Section 28 to 43c of income tax act not applicable.

What is big advantage of presumptive taxation u/s 44AD?

Big advantage of using the section is that assessee can show lower profit ( 8% or more) than actual profit earned.

Considering example, Mr. Pratap has earned Rs. 1,00,000 from his business having turnover of Rs. 10,00,000. He can show profit of 8% of turnover = Rs. 80,000 in income tax return. Because as per section 44AD(1), asses see’s deemed profit is 8% of turnover or he can claim profit more than 8%. Assessing officer cannot assessee excess amount as undisclosed income.

Some case laws supports this view:

Samta construction Co v. Pawan Kumar sharma (2000) 244 ITR 845 ( MP)

CIT v. Arvind Mills Ltd ( 1992)

Non dis allowance applicable under section 28 to 43C and no deduction allowable under section 30 to 38:

No dis allowances of income tax applicable:

Section 28 to 43C of income tax act is not applicable on eligible business. So if you have made transactions which attracts dis allowances, you need not to worry.

Example:

  1. You made payment of Rs. 22000 in cash to pay expenses. Section 40A ( 3) will not be applicable here.
  2. You have made payment of Rs. 30,000 to relative for expenses, no dis allowance u/s 40A(2) will be applicable.

No benefit of contribution made in various schemes and expenses:

There are two sides of each coin. Similarly, If dis allowances are not applicable while showing profit under presumptive taxation, allowances for contribution made or expenses made ( section 30 to 38) are also not allowed.

  1. You cannot claim expenses while showing profit.
  2. Expenses like depreciation, salary, interest etc. are deemed to be allowed while deeming profit of 8%.

Example:

You have shown profit of Rs. 80000 at Rs. 10,00,000 turnover. Now you cannot reduce Rs. 80,000 for further by debiting expenses like salary, rent, bad debts etc.

However, there is clause for allowing remuneration and interest paid to partners and deduct it from income computed under section 44AD(1) subject to section 40(b):

Example:

Details of profit and turnover of XYZ traders ltd. ( Partnership firm). The firm adopts presumptive taxation method to calculate its profit.

ParticularsRs.
Turnover10,00,000
Profit  8% u/s 44AD80,000
Remuneration to partners10,000
Interest8,000
Total income u/s 44AD60,000

 

Is deduction under chapter VI allowed?

Assessee cannot avail business related deductions but deduction under section 80C to 80U are allowed.

Can advance tax provision applicable for presumptive taxation u/s 44AD?

As per clause 4, advance tax provision is not applicable to profit profit u/s 44AD. Complying with advance tax provision is necessary else heavy interest shall be attracted. But there is no worry of advance tax for presumptive taxation profit.However, you are required to pay advance tax on income other than business income. The section has lower clarity about segregation of tax liability of business income and other income. According to author, it is better to pay advance tax to avoid interest.

Is depreciation allowed while computing profit ?

Depreciation is not allowed additionally while computing profit because allowance under section 30 to 38 shall be deemed to be allowed while calculating 8%. However, you are required to calculate written down value of the asset as if depreciation is already allowed.

Example:

You have asset of Rs. 10000. You have possessed it for two years. Depreciation rate is 15%.

In this case, you are not required to deduct 1,500 additionally from the profit calculated at 8%. But suppose you sell the asset at Rs. 9,000 at end of two years. In this case, short term capital gain will be calculated as per following table.

ParticularsRs.
Asset10,000
Less depreciation for first year(1,500)
WDV8,500
Less depreciation for second year(850)
WDV value at end of second year7650
Sale value9000
Short term capital gain1350

Can assessee show lower income prescribed u/s 44AD?

Yes, he can show income less than 8% of turnover as per sub section 5 if he satisfied two conditions mentioned below:

  1. He maintains books of accounts under sub section 44AA.
  2. He gets his accounts audited by chartered accountant under seciton 44AB and furnish the audit report.

However, if his income does not exceed total amount chargeable to income tax ( income less than basic exemption limit) or he is making losses, no need to get accounts audited or maintain the accounts.

I have tried my best to explain provision of section 44AD of income tax act, 1961. I have covered main points. If you still find it difficult, you can avail our service of income tax return filling where we will decide about applicability of section 44AD and file your return accordingly. Send following documents to admin@taxmasala.in – Pan card copy, income details and major expenses details and we will get back to you.