presumptive taxation for Business – Section 44AD
Meaning of presumptive taxation scheme
As per sections 44AA of the Income-tax Act, 1961, every person who is engaged in business or profession is required to maintain regular books of account under certain circumstances.
Income-tax Act has framed the presumptive taxation scheme under sections 44AD, sections 44ADA, sections 44AE., Section 44BB and Section 44BBB, to give relief to small taxpayers from the tough job of maintaining books of accounts.
By adopting the presumptive taxation scheme a person can declare income at a prescribed rate and he is not required to maintain of books of account.
The Income-tax Act, 1961 has framed presumptive taxation schemes, as given below, subject to certain conditions in each scheme:
Section 44AD: Computation of income on estimated basis in the case of taxpayers engaged in certain business. In this scheme a resident individual, resident Hindu undivided family or resident partnership firm are eligible but a limited liability firm (LLP) is not eligible.
Section 44ADA: Computation of professional income on estimated basis for assessee being a resident in India and engaged in a profession referred to in section 44AA(1).
Section 44AE: Computation of income on estimated basis in the case of taxpayers engaged in the business of plying, leasing or hiring goods carriages. In this scheme an Individual, HUF, AOP, BOI, Firm, Company, Co-operative society or any other person may be resident or non-resident are eligible.
Section 44B: Taxation of shipping profits derived by a person being a non-resident in India.
Section 44BB: Computation of taxable income of a person being a non-resident (may be an India citizen or a foreign citizen) from activities connected with exploration of mineral oils.
Section 44BBA: Computation of income in respect of foreign airlines.
Section 44BBB: Computation of profits and gains of foreign companies engaged in the business of civil construction.
Eligible and non-eligible to take advantage of the presumptive taxation scheme of section 44AD
Eligible for the presumptive taxation scheme of section 44AD:
1) Resident Individual
2) Resident Hindu Undivided Family
3) Resident Partnership Firm (not Limited Liability Partnership Firm)
Further, this Scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to80RRB in the relevant year.
Non-eligible for presumptive taxation scheme of section 44AD
o Business of plying, hiring or leasing goods carriages referred to in sections 44AE.
o A person who is carrying on any agency business.
o A person who is earning income in the nature of commission or brokerage.
o Any business whose total turnover or gross receipts exceeds two crore rupees.
Apart from above discussed businesses,
- Any person carrying on profession as referred to in section 44AA(1) is not eligible for presumptive taxation scheme under section 44AD.
- Any person who is engaged in any profession as prescribed under section 44AA(1) cannot adopt the presumptive taxation scheme of section 44AD.
However, he can opt for presumptive taxation scheme under section 44ADA and declare 50% of gross receipts of profession as his presumptive income. Presumptive Scheme under section 44ADA is applicable only for resident assessee whose total gross receipts of profession do not exceed fifty lakh rupees.
The presumptive taxation scheme of section 44AD can be opted by the eligible persons if the total turnover or gross receipts from the business do not exceed the limit prescribed under section 44AB (i.e., Rs. 2,00,00,000).
Manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD
In case of a person adopting the provisions of section 44AD, income will be computed on presumptive basis
@ 6% in respect of total turnover or gross receipts which is received by an account payee cheque or draft or use of electronic clearing system or through such other electronic mode as may be prescribed.
@ 8% of the turnover or gross receipts of the eligible business for the year other than above mode means includes cash receipts also.
In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided under the Income-tax Law will not apply and income computed at the presumptive rate of 8%/6% will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.
However, the assessee can claim deduction under chapter VI-A.
While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.
Consequences If a person adopts the presumptive taxation scheme but he opts out from the scheme in any of the subsequent five years
If a person opts for presumptive taxation scheme then he is also required to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years.
He is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. If his total income exceeds maximum amount not chargeable to tax.
There is no concession as regards payment of advance tax in case of a person who is adopting the presumptive taxation scheme of section 44AD and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AD.
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