Section 44AD of the Income Tax Act 1961

Table of Contents

Section 44AD of the Income Tax Act, 1961 –

Section 44AD, a scheme launched for the benefit of small businesses, wherein the assesses which are eligible for the scheme do not have to maintain books of accounts and file returns on a presumptive basis. This was done to ease the compliance burden on the small businesses. Now they can opt for this scheme and Instead of maintaining a complete set of accounts, file returns on a presumptive basis. However there are a few eligibility conditions for this scheme.

Looking for schemes for small businesses – See the brief article on presumptive schemes.

Who is eligible for this scheme –

Eligible Assessee – The benefit of this section can be availed, if :

(i) The assessee is an individual, HUF and partnership firm (but not LLP)

(ii) Who has not 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 would be covered under this scheme.

The following persons are specifically excluded from the applicability of the presumptive provisions of section 44AD –

(a) a person carrying on profession as referred to in section 44AA(1) i.e., legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board (namely, authorized representatives, film artists, company secretaries and profession of information technology have been notified by the Board for this purpose);

(b) a person earning income in the nature of commission or brokerage; or

Eligible Business – An assessee who is carrying an eligible business can claim presumptive rate of tax would be 8% / 6%* of the total turnover or gross receipts in the previous year where total turnover or gross receipts does not exceed `.1 Crore w.e.f. A.Y.2017-18 `.2 Crore (except the business of plying, hiring and leasing goods carriages covered under section 44AE).

However, the assessee has the option to declare in his income higher than 8% of gross receipts / turnover.

Recent amendment in section 44AD by Finance Act 2017 (w.e.f. A.Y.2017-18) –

New Rate –

The presumptive rate of 6% of total turnover or gross receipts will be applicable in respect of amount which is received –

by an account payee cheque; or
by an account payee bank draft; or
by use of electronic clearing system through a bank account

during the previous year or before the due date of filing of return under section 139(1) in respect of that previous year.

Other Amendments –

In the case of a firm, partners are not eligible to claim salary and interests. [Earlier, this was allowed. But with the amendment , the same is not allowed as a deduction.]
Where an eligible assessee declares profit of any previous year not accordance with the provision of sub section (1), then he shall not eligible to claim the benefit of the provisions of this section for five assessment year subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).
An eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the basic exemption limit has to maintain books of account under section 44AA and get them audited and furnish a report of such audit under section 44AB. This is provided in new sub-section (5) of section 44AD.
Further, since the threshold limit of presumptive taxation scheme has been enhanced to ` 2 crore, the eligible assessee is now required to pay advance tax by 15th March of the financial year.

Other important points to note –

All deduction allowable under sections 30 to 38 shall be deemed to have been allowed in full and no further deduction shall be allowed.

The WDV of any asset of such business shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of depreciation for each of the relevant assessment years.

Conclusion –

The intention of widening the scope of this scheme is to reduce the compliance and administrative burden on small businessmen and relieve them from the requirement of maintaining books of account. Such assessees opting for the presumptive scheme are not required to maintain books of account under section 44AA or get them audited under section 44AB. Before applying for the scheme, the eligibility criteria should be met. The scheme will help small businesses in reducing their compliance burden. However, All the conditions should be noted and followed.