Presumptive taxation under section 44 AD of Income Tax Act

Under income tax act, there are several sections which deals with the computation of income on presumptive basis. This article deals with presumptive taxation under section 44 AD of Income Tax Act.

Questions involved

1. Applicable to whom ?
2. Cases where 44AD not applicable ?
3. Calculation of PGBP in 44AD ?
4. No further deduction if this section opted for ?
5. Requirement of maintaining the books of accounts and Audit ?
6. Provisions of section 44AD(4) Opting in and out this scheme ?
7. Can a person declare profits below the limit specified in the section 44AD?
8. Will Audit be necessary if Turnover of an assessee is more than one crore but less than two crore ?
9. Can an assessee opting for section44AD declare income at 8/6% even if real profits are substantially higher ?

Read - FAQ on Presumptive Taxation u/s 44AD 44AE 44ADA

As per the provisions of section 44AD an eligible assesse engaged in eligible business may declare its income from that business as a specified percentage of turnover/Gross receipts in the previous year.

The relevant provisions are discussed below:

1. Applicable to whom ?

Applicable to: The provisions of this section are applicable to resident Individual, HUF and Firm(Excluding LLP) carrying on an eligible business and total turnover or gross receipts in the previous year does not exceed an amount of Rs.2 crore.

2. Cases where 44AD not applicable ?

Not Applicable to: This section is not applicable to any assessee which 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 incomes" in the relevant assessment year.

Not an eligible Business: An assessee who is engaged in business of plying, hiring or leasing goods carriages referred to in section 44AE,or carrying on any profession as referred to in sec 44AA ,or earning income in the nature of commission or brokerage ,or carry on agency business.

3. Calculation of PGBP in 44AD ?

Presumptive income: Presumptive income shall be higher of the following:

1. Sum equal to eight per cent of the total turnover or gross receipts but if the amount of turnover or gross receipts are received by the assessee 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 specified in sub-section (1) of section 139 in respect of that previous year then the presumptive rate shall be taken to be 6% ,or
2. Amount claimed by assessee.

4. No further deduction if this section opted for ?

Any deduction allowable under the provisions of sections 30 to 38 shall be deemed to have been allowed and no further deduction shall be allowed under the said sections. Also, depreciation shall be deemed to have been allowed for this eligible business. But deductions under Chapter VI-A shall be allowed to be claimed by the assessee. Also, the brought forwarded losses and current year losses can be set off against the presumptive income deemed under section 44AD.

5. Requirement of maintaining the books of accounts and Audit ?

There is no requirement of maintaining the books of accounts and get the books of accounts audited if an assessee opts for this section.

6. Provisions of section 44AD(4) Opting in and out this scheme ?

Provisions of section 44AD(4): If a person declares it’s income as per provisions of this section then he shall be bound to declare it’s income as per this section. If it does not declares as per this section then the following shall be the consequences:

1. Assessee shall not be eligible to claim benefits of this section 44AD
2. Assessee shall be required to maintain books of accounts and get it’s accounts audited under sec44AB provided his income exceed the taxable limit.

Some practical issues on sec 44AD:

1. Can a person declare profits below the limit specified in the section 44AD?

Yes, Section 44AD is an optional section it do not mandate to declare profits more than or equal to the limit specified. One can declare profits below the limit provided compliance of other sections of income tax act are taken care of like maintenance of books of accounts, Audit etc.

2. Will Audit be necessary if Turnover of an assessee is more than one crore but less than two crore ?

No, If section 44AD is opted by an assessee then there is no requirement of getting its accounts audited. Moreover their is no requirement of maintaining books of accounts.

3. Can an assessee opting for section44AD declare income at 8/6% even if real profits are substantially higher ?

Yes, it is very much acceptable. In some cases notice under section 69C is received by assessee and additions are made to the total income of the assessee on contention of AO that assessee is unable to explain the source of expenditure made by assessee in such cases various Tribunals have passed orders in favor of assessee stating that 44AD is a deeming section if an assessee declares its profit @8% then it is deemed 92% of the turnover is expensed so actual expenditure is not given relevance under section 44AD. If any money is actually spent and notice is served under section 69C then the assessee can reply to such notice and provide the day book, sale book, and purchase book maintained.