"44ad of income tax act.

To give relief to small taxpayers from the tedious job of maintenance of books of account and from getting the accounts audited, the Income-tax Act has framed the section name presumptive income under section 44ad.

In this part, you can gain knowledge about various provisions of the presumptive taxation scheme of section 44AD. This is a very useful scheme for small businesses allowing them to show 8%/6% of Profit on their Turnover without maintaining any books of accounts.

APPLICABILITY OF SECTION 44AD

The presumptive taxation scheme of section 44ad of income tax act can be adopted by the following persons:

1. Resident Individual
2. Resident Hindu Undivided Family
3. Resident Partnership Firm (not Limited Liability Partnership Firm)

In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF, or a partnership firm (not a Limited Liability Partnership Firm).

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 to 80RRB in the relevant year.

SECTION 44AD: INCOME PRESUMED TO BE 8% OF TURNOVER.

Under income tax 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 Rs. 2 Crore. In case the total turnover, of the assessee is more than Rs. 2 Crore, income would be computed as per the normal provisions of the Income Tax Act (i.e. Revenue –Expense-Depreciation) and the assessee would also be required to get his accounts audited under section 44AB. 

Moreover, if an assessee is applying section 44AD, he won’t be allowed to claim any expense or depreciation. Any deduction allowed under provisions of Section 30 to 38 shall, for income computed under this section be deemed to have been already given full effect, and no further deduction shall be allowed under these sections.

Amendments introduced in Section 44AD vide Finance Act 2016.

Several other amendments have also been introduced in Section 44ad of income tax act in Finance Act 2016, and these would be applicable from Financial Year 2016-17 onwards:

1. The Salary/ Remuneration/ Interest paid to Partners would also not be allowed to be claimed as a deduction.
2. Businesses claiming the benefit of Section 44AD would also be required to comply with the provisions of Advance Tax. However, to keep the compliance at a minimum in such cases – the business would be required to pay 100% of the tax applicable by 15th March of the Financial Year. No other provisions of Advance Tax would apply in this case. Also, Advance Tax is only payable if your Tax Liability is more than ₹10,000.

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Amendments introduced in Section 44AD vide Finance Act 2017.

To encourage businesses to receive payments digitally, the govt has also decided to give several incentives to businesses who receive the payments digitally. One such incentive is that if a business receives payments digitally, he can claim his Income to be 6% of the total payments received digitally i.e. through Cheque/ Demand Draft/ Debit Cards/ Credit Cards/ NEFT/ RTGS or any other Cashless mode. 

For all payments received digitally, the profits would be assumed at 6% of such payments provided the payment is received during the year or before the due date of filing of Income Tax Return under Section 139(1).

This incentive was announced in 2016 after the Demonetization of Currency and is applicable from Financial Year 2016-17 onwards. For all payments received in cash, the assumed profit percentage would be remaining the same i.e. 8%.

ELIGIBILITY TO OPT SECTION 44AD ALONGWITH OTHER INCOMES

This has been a great doubt with the taxpayers that if their business turnover is up to ₹2 Crores, but they have also other incomes like Interest, Capital Gain, Income from House Property, etc. For calculating Turnover for opting Section 44AD only Business Turnover is considered and not any other income.

Let’s take an example that if a person is having turnover from the business of ₹1,00,00,000 and other income by way of interest, capital gain, and house property aggregating ₹1,25,00,000, then also he will be eligible to opt for section 44AD since business turnover does not exceed ₹2,00,00,000

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SPECIFIC EXCLUSION OF SOME BUSINESSES: -

• Business of plying, hiring or leasing of goods carriages referred to in section 44AE.
• A person who is carrying on any agency business.
• A person who is earning income like commission or brokerage.

• Apart from the above-discussed businesses, a person carrying on profession as referred to in section 44AA (1) is not eligible for presumptive taxation scheme.

BENEFITS OF OPTING FOR SECTION 44AD: -

• No need to maintain books of account as prescribed under section 44AA.

• Liable to pay the whole amount of advance tax on or before 15th March of the previous year.
• If he fails to pay the advance tax by 15th March of the previous year, he shall be liable to pay interest as per section 234C. For other than presumptive taxation the advance tax liability is to be discharged in 4 installments in a financial year, and Interest under Section 234A/B/C is chargeable.

Let’s take an example, suppose Ram is having Tax liability of ₹20,000/- in FY 19-20. Now, if he doesn’t opt for section 44AD then this 20,000 has to be discharged in 4 equal installments in FY 19-20, But if he opts for Section 44AD, then he is liable to pay only one installment of Advance Tax by the 15th March 2020.

Note: Any amount paid by way of advance tax on or before the 31st day of March shall also be treated as advance tax paid during the financial year ending on that day.

Also, if your Tax liability is up to ₹10,000, then no need to pay advance tax since no interest is chargeable up to an amount of ₹10,000.

CONSEQUENCES OF OPTING OUT FROM SECTION 44AD

If a person opts for a presumptive taxation scheme, then he is also required to follow the same scheme for the next 5-years. If he failed to do so, then a presumptive taxation scheme will not be available for him for the next 5-years. [For example, an assessee claims to be taxed on a presumptive basis under Section 44AD for AY 2018-19. For AY 2019-20 and 2020-21 and he offers income on basis of a presumptive taxation scheme. However, for AY 2020-2 1, he did not opt for the presumptive taxation Scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2022-23 to 2026-27.]

Further, 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 the maximum amount not chargeable to tax]

CONCLUSION

Section 44ad of income tax is the most beneficial section for that businesses who don't maintain books of account or have a less profit margin in the business. Even you have a profit of less than 6% on your sale, you can minimize your profit percentage by conduction an audit. The turnover limit is also 2 crore. so many prefer 44ad of income tax as a comparison to others.

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