Section 44AD of Income Tax Act, 1961

Meaning of section 44AD of Income Tax Act

In order to reduce the tax burden and to provide relief to the taxpayers from tax compliances, the government of India incorporated a simplified scheme. The scheme of presumptive taxation under section 44AD of Income Tax Act. Businesses that are adopting the presumptive taxation scheme are not required to maintain regular books of accounts. 

A presumptive income scheme allows the assessee to declare their income at a prescribed rate under the income tax act. Section 44AD is one of the sections of such a scheme. This saves a lot of time and the related compliance cost.

Applicability of section 44AD of Income Tax Act

There are special provisions contained in section 44AD of the income tax act applicable to the assessee. Below are the types of an assessee who can opt for the provisions of the scheme:

1. Individual resident taxpayers
2. Hindu Undivided Family
3. Partnership firms(excluding limited liability partnership)

In order to avail the provisions of the scheme, the assessee should not have claimed deduction under section 10AA or chapter VI-A “deductions in respect of certain incomes”. It is applicable to businesses whose total turnover or gross receipts in the previous year is less than Rs. 3 crore. The limit is extended from Rs 2 crore to Rs 3 crore with Budget 2023 with the objective to promote the growth of micro enterprises. Furthermore, the cash receipts should not be more than 5%

Let us understand the above with the help of an example. Suppose Amit is in the business of selling electronics and the total annual turnover of his store for the previous year was Rs. 60 lakhs. In this case, Amit can adopt the provisions of section 44AD of income tax act and avoid the long tax filing process. Alternatively, if Amit wishes to opt for the normal scheme for tax calculation he can do the same as well.

Below are a few assessees who cannot opt the scheme mentioned under section 44AD:

1. A firm or an individual assessee who is involved in providing professional services and earning the income which is in the nature of brokerage or commission cannot adopt the presumptive income scheme. However, for professionals, a separate section 44ADA has been introduced which allows them to opt for the presumptive scheme.
2. A person carrying on any agency business
3. An assessee who is claiming deduction under section 10AA or chapter VI A under part C – deductions in respect of certain income.

Features of section 44AD of Income Tax Act

Section 44AD provides an option to the assessee to choose between the normal provisions of the or opt for the presumptive scheme. Below are some of the features of the presumptive income scheme:

• As per the provisions of the scheme, a sum equal to 8% of the total turnover or gross receipts of the assessee or a percentage higher than 8% shall be deemed to be the profits of such business.
• In order to promote digital transactions and to encourage businesses to accept digital payments, the rate of 8% has been brought down to 6%. Thus, in effect, assessee accepting digital payments can consider their deemed total income to be 6%. This is only applicable in a case where the amount of such turnover or gross receipts is received by:

1. Account payee cheque or account payee bank draft
2. Credit Card
3. Debit Card
4. Net Banking
5. IMPS
6. UPI
7. RTGS
8. NEFT

• However, the assessee 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.
• The eligible assessee needs to pay the advance tax to the extent of the whole amount on or before 15th March.
• The assessee opting for the scheme will get exemption from maintaining books of accounts.
• In a case where an assessee opts for the presumptive scheme and declare profits in accordance with the scheme and does not declare the profits for any five consecutive assessment years, not in accordance with the scheme, he shall not be eligible to claim the benefit of the provisions for further five assessment years starting from the year in which profits were not declared in accordance with the scheme.

Let’s understand the same with the help of an example:

1. An assessee claimed to be taxed on a presumptive basis for the assessment year 2020-21. He offers an income of Rs. 8 lakh on a turnover of Rs. 1 crore. For the next two assessment years(2021-22 & 2022-23) he offered the income in accordance with the same provisions. 
2. However, for the assessment year 2023-24, he offered an income of Rs. 4 lakh on a total turnover of Rs. 1.4 crore. Since he has not offered the income for five consecutive years, he will not be able to claim the benefit of this section from the assessment year 2024-25 to 2028-29.

Deductions and allowances in case of section 44AD presumptive income:

1. Any deductions allowable under the provisions of section 30 to 38 shall be deemed to have already been provided. The taxpayer cannot claim any further deduction in such a case. 
2. Provisions of section 44AD do not allow a firm to claim a deduction on account of interest and salary paid to the partners.
3. No disallowances as per section 40, 40A, and section 43B

Applicability of Advance Tax for Presumptive Income Section 44AD

In simple terms, advance tax means that income tax should be paid in advance instead of the year-end. It falls in the category of ‘pay as you earn’ and has to be made in installments as per the due dates provided in the income tax act.

An assessee opting for the presumptive tax scheme, must pay the advance tax to the extent of the whole amount on or before 15th March of the financial year.

Applicability of Written down Value for Presumptive Income Section 44AD

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

Applicability of Section 44ADA for Professionals

The provisions of section 44AD are only applicable in case the assessee is carrying on any business. In a case where the assessee is carrying on a profession, the provisions of section 44ADA will come into force.

Section 44ADA is also one of the presumptive tax schemes which were introduced from the financial year 2016-17. It provides a simple method of taxation for small professionals.

The scheme is applicable to the following assessee:

1. who engages in any profession referred to in section 44AA(1). Professions such as legal, medical, engineering or architectural profession. Additionally, the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette
2. Whose gross receipts do not exceed Rs 75 lakhs in the previous year. This limit has been extended from Rs 50 lakhs to Rs 75 lakhs. Furthermore, the cash receipts should not be more than 5%.

In the case of such assessee’s, the presumptive income under section 44ADA would be a sum equal to 50% of the total gross receipts or a higher amount as may be provided for by the assessee. Any deductions which are allowed under section 30 to 38 shall be deemed to have already been provided for. No further deduction shall be allowed.

Just like section 44AD, the assessee opting for section 44ADA is required to pay the advance tax. The asseesee must the payment by 15th March of the financial year. The taxpayer is gets exemption from the maintenance of books of accounts under section 44AA(1) in respect of such income.

An Assessee may claim that his profits and gains from the above profession are lower than the profits and gains deemed to be his income under section 44ADA. If such total income exceeds the basic exemption limit, he has to maintain books of account under section 44AA. The books of accounts must also undergo audit. Additionally, he needs to furnish a report of such audit under section 44AB.

Who can file a return under section 44AD of Income Tax Act?

The following assessee’s can file teturn under section 44AD:

1. A resident individual, HUF, and a partnership firm (excluding LLP’s. The assessee must engage in eligible businesses. He must not claim any deduction under section 10A/10AA/10B/10BA  or chapter VIA – deductions in respect of certain income(80IA to 80RRB).
2. The individual or firm’s gross receipts in the previous year does not exceed an amount of Rs. 3 crores. 
3. Individuals or firms engaged in any business other than a business of plying, hiring, or leasing goods carriage.

Further, the assessee must declare a minimum of 8% or 6% of the total turnover or gross receipts.

What is turnover under section 44AD of Income Tax Act?

For the purpose of section 44AD, total turnover or gross receipts is the amount that is received or receivable from the client in respect of the sales made in the previous year. Section 145 of the income tax provides an option to the assessee to choose either the mercantile or cash method of accounting.

Gross receipts do not include the value of material supplied by the client. Below are a few receipts that do not form part of the gross receipts:

1. Value of inventory
2. Advances received from customers
3. Retention money
4. Interest income
5. Sale of property, plant, and equipment

Is maintenance of books of account mandatory under presumptive income?

If the assessee is opting for the presumptive income scheme, he can claim relaxation in maintenance of books of accounts.

Compulsorily maintain his books of accounts

1. if a person declares his income below 8%/6% of total turnover or gross receipts
2. total taxable income is above the exemption limit.

No maintenance of books of accounts

1. total income is below the exemption limit.
2. profits are also declared below 8%/6% of gross turnover or gross receipts.

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