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Comprehensive Analysis of Section 44AD and Related Aspects

The provisions of Finance Act- Section 44AD were introduced in the Chapter of Profits & Gains from Business or profession to detract the burden of compliance of resident small Taxpayers. Without any doubt throughout, the concept related to “Presumptive Taxation Schemes’’ has been very well achieved their purposes.

As an interesting move, a new condition has been made to presumptive taxation scheme which is – you are about to lose presumptive tax benefits, if you do not continue them for at least 5 years.

This extra condition has been added by substituting sub section (4) of section 44AD which is –

If you are selecting the presumptive scheme, you must-

  1. At least 5 years in continuation for File presumptive scheme.
  2. You will lose presumptive benefits & not allowed from presumptive taxation for the subsequent 5 years if you decide to file profits as per regular business (ITR-3) before the end of these 5 years

5 years will be counted starting the year in which you first file usual taxes for such business.

According to the changes made in the Budget of 2016, businesses who have turnover up to INR 2 crores can opt for presumptive taxation scheme. Before this time period the limit was INR 1 crore. Take a look on the features of this scheme-

  1. Your turnover must be less than INR 2 crores.
  2. Your Net income will be considered as 8% of your turnover
  3. You do not have to maintain accounting records.
  4. You do not need to pay advance tax (from Financial Year 2016-17, assessee opting for presumptive taxation need to pay 100% advance tax by 15th March of that particular financial year).
  5. You do not have to get your accounting records audited.
  6. You can file your tax return in ITR-4 a much shorter and simpler form than ITR-3.

Income presumed to be 8% of turnover in Section 44AD

Under Section 44AD, income would be presumed to be 8% of the total turnover of the assessee, only if the total turnover of the assessee is less than INR 2 Crore. In case the total turnover, of the assessee is more than INR 2 Crore, income would be computed as per the normal provisions of the Income Tax Act.

In addition, if an assessee is applying section 44AD, he/she won’t be allowed to claim any expense or depreciation. Any deduction related to this are allowed under provisions of Section 30 to 38 shall, for the purpose of income computed under this section be assumed to have been already given full effect and no further deduction will be allowed under these sections.

What are the Amendments introduced in Section 44AD vide Finance Act 2016?

Amendments have also been made in Finance Act 2016- Section 44AD would be applicable from Financial Year 2016-17 onwards:-

The Salary or Interest paid to Partners or Remuneration would also not be allowed to be claimed as a deduction.

Businesses claiming benefit of Section 44AD would also be needed to comply with the provisions of Advance Tax. To keep the compliance at minimal in such cases – the business would be needed to pay 100% of the tax applicable by 15th March of the FY. In this case no other provisions of Advance Tax would apply.

What is the Applicability of Section 44AD?

  1. Section 44AD applies to all businesses except plying business, hiring or leasing goods business. These kinds of business have already been covered under section 44AE.
  2. Section 44AD will not applicable in case of Agency Business and in case of a business earning income from Commission or Brokerage.
  3. Section 44AD cannot be applied in case of professionals because Section 44AD particularly mentioned the word business.
  4. Section 44AD only applies in case of Individuals, HUF & Partnership provided they are Resident in India. This section does not apply in case of LLP (Limited Liability Partnerships) as they have been particularly excluded from this Section 44AD.
  5. If the taxpayer opts for filing his/her ITR under this scheme, he/she can opt for disclosing his income tax return at any percentage above 6% or 8% as the case may be. The assessee may select not to opt for the scheme and may declare an income lower than 6% or 8% of the gross receipts. However in such a case, the assessee need to keep and maintain books of accounts and get his/her accounts audited by a professional CA (chartered accountant).

Eligible Business or Profession

For section 44AD, eligible business inter alia means whose turnover or gross receipts does not exceed INR 2 Crore in the previous year. For section 44ADA, eligible profession means profession referred to in sub-section (1) of section 44AA, whose gross receipt does not exceed INR 50 lacs in the previous year. Insertion of section 44AD & 44ADA is a big relief for small &medium assessee from the tedious requirement of maintaining books and undergoing auditing of tax.

Section 44AD for Businesses

Any individual who is eligible to get the benefit from Section 44AD according to the eligibility described above can opt for the scheme of Presumptive Taxation at any time.

According to the latest amendment under this amended law – if a person opts out of the scheme of Presumptive Taxation of Section 44AD, then he/she cannot avail the benefit of the Presumptive Taxation scheme for the next 5 years.

See this table for your better understanding:-

ParticularsPresumptive Taxation under Section 44AD for Business  
Assessment Year 2017-18, 2018-19,
AY 2019-20
Opts for Presumptive Taxation
Assessment Year 2020-21Does not opt for Presumptive Taxation
Assessment Year 2021-22 to Assessment Year
Cannot opt for Presumptive Taxation

In case a person opts out of the provisions of Section 44AD – he/she would also be required to get his/her accounts audited under Section 44AB by a professional CA (Chartered Accountant).