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presumptive-taxation-for-business-income-section-44ad

 

Presumptive Taxation for Business Income Section 44AD

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Introduction about this scheme (section 44AD)-
A person engaged in any business is required to maintain regular books of accounts. They have to engage an accountant in house and have to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under section 44AD. A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account and also from getting the accounts audited. The assessee has to file ITR 4 for presumptive income under section 44AD.

The scheme of section 44AD is provide relief to small taxpayers engaged in any business, except the following 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 in the nature of commission or brokerage
  • A person carrying on profession as referred to in section 44AA (1).
Apart from above discussed businesses, the above scheme also not apply to the following businesses-
  • An insurance agent
  • A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000

Eligibility under this scheme (section 44AD) The following persons can adopted the scheme:
  • Resident Individual
  • Resident Hindu Undivided Family
  • 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 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.

Tax computation under this scheme (Section 44AD)- If a person adopting the provision of section 44AD, income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.

In order to promote digital transactions and to encourage small unorganized business 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%, if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or 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). Hence, in case of a person adopting the provisions of section 44AD will be computed @ 6% or 8%, as the case may be, of the turnover or gross receipt. However, a person may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.

Note-    Any person opting for the presumptive taxation scheme under section 44AD, he has to keep in mind the following points that-
  • The presumptive income computed as per the prescribed rate is the final income and no further expenses will be allowed or disallowed. 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.
  • The provision of section 44AA (1) relating to maintenance of books of accounts will not apply.
  • An assessee declaring his income under this scheme (section 44AD) can also claim tax benefit of deductions under chapter VI-A.

Advance Tax under this scheme (section 44AD)-
The whole amount of advance tax is to be paid on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.

Consequences if a person opts this scheme (section 44AD)-

If a person opts this scheme then he is also require to follow the same scheme for next 5 years. Or if he failed to do so, then the above scheme will not be available to him for next 5 years.

For example- If an assessee opt this scheme (section 44AD) for AY 2017-18, AY 2018-19 and 2019-20 and offers income on basis of presumptive taxation scheme. However, for AY 2020-21, he did not opt for presumptive taxation Scheme.  In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs i.e. from AY 2021-22 to 2025-26.

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 maximum amount not chargeable to tax].
Note- If a person does not opt for the presumptive taxation scheme of section 44AD and declare income at lower rate (i.e., at less than 6% or 8%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.



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