The Government of India provides for a scheme of presumptive taxation scheme (hereinafter referred to as “the scheme”) for small taxpayers. Under this scheme, small businesses such as kirana stores are not required to maintain regular books of account or financial records as required under section 44AA of Income Tax Act, 1961 (hereinafter referred to as “the Act”).
A person under this scheme can declare income at a prescribed rate. He would be exempted from maintaining of books of account as required under section 44AA and also from getting the accounts audited under section 44AB of the Act.
Section 44AD deals with the special provision for computing profits and gains of business on presumptive basis.
Eligibility Criteria to get Benefits under Section 44AD
The following tax assesses should be resident of India, are eligible to adopt the provisions of the scheme under Section 44AD:
- Any Individual,
- Hindu Undivided Families (HUF), and
- Partnership Firm (except Limited Liability Partnership Firm)
The following conditions need to be satisfied for adopting the scheme under Section 44AD:
- The annual turnover or Gross receipts in the relevant previous year should not be exceeded an amount of Rs. 2 crores,
- Who has not claimed tax deduction under the Sections 10A, 10AA, 10B, 10BA or under Section 80HH to 80 RRB during an assessment year,
- Any Individual or firm who is engaged in the business of plying, hiring or leasing goods carriages referred to in Section 44AE cannot adopt the scheme under Section 44AD.
- Any person or firm who is earning income in the nature of brokerage or commission cannot adopt this scheme.
- Any person who is engaged in a profession as prescribed under sub-section (1) of Section 44AA i.e. Legal, Medical, Engineer etc. cannot adopt the scheme under Section 44AD. However, they can adopt the presumptive taxation scheme under the new Section 44ADA.
Computation of Income under Section 44AD
Under the scheme, the total turnover of the assessee must be less than Rs. 2 crores then only his income would be presumed to be 8% of the gross receipts or the total turnover of the business. Income in income tax return can be declared higher than the presumptive income shown as per the scheme by an assessee.
In case the total turnover of the assessee is more than the Rs. 2 crores, income would be computed as per the normal provisions of the Act and the assessee would also be required to get his accounts audited under section 44AB.
Under section 44AD, the assessee would not be allowed to claim any expense or depreciation. It is deemed to have been allowed any kind of deduction under section 30 to 38 of the act for the purpose of computation of income and no further deduction shall be allowed under these sections.
In order to encourage small unorganized businesses to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% instead of 8%.
In other words, now we need to calculate separately of the amount received from the banking channel and amount received in cash.
Mr. A is running a stationery shop and his annual turnover is 1 crore for the assessment year 2016-17. He is willing to adopt the benefits of presumptive taxation scheme under Section 44AD. As per the Section 44AD, income may be computed on the basis of estimation at the rate of 8% of gross receipts or total turnover of the eligible business for the previous year.
If Mr. A receives 1 crore from Cash, we will compute income as per following:
= 8% of 1 crore
= 1,00,00,000 * 8/100
If Mr A receives 80 lakhs out of 1 crore through banking channels i.e. amount received by way of Cheque, Bank draft, NEFT/RTGS, Electronic clearance system and 20 lakhs from Cash, we will compute income as per following:
= 6% of 80 lakhs + 8% of 20 Lakhs
= 80,00,000 * 6/100 + 20,00,000 * 8/100
= 4,80,000 + 1,60,000
Section 44AD – Opt-In or Opt-Out for Businesses
A person who is eligible according to aforesaid conditions can avail the benefits of presumptive taxation by opting for section 44AD at any time.
Similarly, any person can opt out of presumptive taxation at any time. However, a new condition has been added to the presumptive taxation scheme by substituting sub-section 4 under section 44AD. However, this condition of 5 years’ time-limit is applicable only to businesses.
If a person is opting for the scheme, he has to file presumptive taxation (ITR-4) for at least 5 subsequent years.
Meanwhile, if he decides to opt out of the scheme and shows profits as per regular business (ITR-3), he will be disallowed from presumptive taxation for the subsequent 5 years.
The foregoing points can be summarised as below:
|Assessment Years||Presumptive Taxation under Section 44AD for Businesses|
|2017-18, 2018-19, 2019-20||Opts for the Scheme|
|2020-21||Does not Opt for the Scheme|
|2021-22, 2022-23, 2023-24, 2024-25, 2025-26||Cannot Opt for the Scheme|
This sub-section 44AD(4) has been inserted to put some restrictions on the frequent switchover between “declaring profits on the presumptive basis” and “declaring lower profits by maintaining books of accounts and getting audit report” in different years.
Important Points Regarding Section 44AD
- An Assessee, applying for presumptive taxation under section 44AD, should file his Income-tax return through ITR form 4 – Sugam.
- An Assessee, carrying on more than one business, should take into account turnover of all the businesses.
- An Assessee, computing his income as per presumptive taxation under section 44AD, can also claim tax benefit of deductions under Chapter VI-A (Section 80C to 80U).
Section 44ADA – Presumptive Taxation for Professionals
In order to provide the benefits of presumptive taxation scheme to the Professionals, Section 44ADA has been incorporated in the Income Tax Act, 1961.
Section 44ADA deals with the special provision for computing profits and gains of professionals on a presumptive basis.
Professionals, specified under sub-section (1) of the Section 44AA, whose total gross receipts do not exceed more than Rs. 50 lakhs in an assessment year can avail the benefits of presumptive taxation under section 44ADA from the FY 2016-17 onwards.
Under section 44ADA, the income of a professional would be computed to be 50% of the total gross receipts of the profession. The following are the professionals who can avail the benefits of this section:
- Architectural Profession
- Profession of Accountancy
- Technical Consultancy
- Interior Decoration
- Any other profession as is notified by the Board in the Official Gazette such as authorized representatives, film artists, certain sports-related persons, company secretaries, and information technology
Under Section 44ADA, the assessee would not be required to maintain books of accounts or financial records under section 44AA and not required to get the accounts audited under section 44AB.
However, if a professional show his income less than 50%, he will only require to maintain books of account and to get them audited.
Unlike the restriction specified in section 44AD(4), section 44ADA allows a professional to opt in or opt out at any time without any kind of restriction.
The scheme reduces the workload of Government of scrutinizing the books of account of small businesses. The scheme was introduced in 1993 and it became applicable to the professionals from the financial year 2016-17. Now, the scheme provides benefits to small businesses as well as professionals.
 Income Tax Act 1961, s 44AD https://www.legalcrystal.com/act/23179/income-tax-act-1961-section-44ad> accessed 18 December 2018.
 Income Tax Act 1961, s 44ADA <https://incometaxindia.gov.in/Acts/Finance%20Acts/2016/102120000000058859.htm> accessed 18 December 2018.
 Income Tax Act 1961, s 44AA <https://www.incometaxindia.gov.in/Acts/Income-tax%20Act,%201961/2010/102120000000024200.htm> accessed 18 December 2018.