Section 44AD and Section 44ADA of Income Tax( presumptive taxation): Applicability, Eligibility & Example

Section 44AD and section 44ADA provides special provisions to compute business profit at presumptive basis. You can declare profit up to certain % of your business turnover without maintaining books of accounts or get your accounts audited.

What is 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.

Who is eligible for section 44AD?

You are eligible for section 44AD if

1. You are resident of India
2. You are Individual, HUF, Partnership ( Not LLP)

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 for Section 44AD and Section 44ADA?

Section 44AD Eligibility:

Eligible business means

1. Trading of goods and manufacturing business
2. Total turnover or gross receipt in the previous year should not exceed Rs. 2 Crore. ( For A.Y. 2024-25) ( This limit is Rs. 3 Crore if 95% receipt is via online mode)

Section 44ADA Eligibility: 

1. Professional income – legal, medical, chartered accountancy, interior decorator, architecture etc
2. Total turnover or gross receipt in the previous year should not exceed Rs. 50 Lakh. ( For A.Y. 2024-25) ( This limit is Rs. 75 Lakh  if 95% receipt is via online mode)

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:

As turnover of all the business is more than Rs. 2 crore. Mr. Ratan cannot take benefit of section 44AD.  However, he can use section 44ADA for service business as turnover is less than Rs. 50 Lakh.

Example 2:

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 135.  In this case, Mr. Ratan can use section 44AD for his trading business  and use 44ADA for his service business.

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

1. 8% or 6% of total trading business turnover and 50% of total service business turnover shall be deemed to be profit of business.
2. Assessee can show income more than 8% / 6% / 50% of turnover.
3. Section 28 to 43c of income tax act not applicable.
4. 100% advance tax should be paid before 15th march
5. No need of maintaining books of accounts
6. No need of getting accounts audited

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.

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?

Assessee is required to pay 100% advance tax by 15th March 2024.

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.

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 and furnish the audit report.

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 / 44ADA and file your return accordingly.