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Section 44AD Presumptive Assessment under Income Tax Act, 1961

Section 44AD Presumptive Assessment under Income Tax Act, 1961

Under this section, an eligible assessee engaged in eligible business with turnover less than 2 Crore can consider his taxable business income (PGBP) as –

  1. 6% of his digitally received turnover or gross receipt [Only for AY 2018-19]; and
  2. 8% of his remaining turnover or gross receipt

The 6% or 8% is the minimum taxable limit and declaration of business income below this limit will cause a taxpayer to maintain proper books of accounts in order to justify his low income. He would also be required to file tax audit if his total income exceeds the maximum amount not chargeable to income-tax [In AY 2018-19 for normal taxpayer it is Rs.2.5 lakh]

Income at a higher rate, i.e. higher than 8% can be declared if the actual income is higher than 8%.

No other deductions are allowed from the computed income, as we can see here that after applying these rates we get the net taxable business income (PGBP). However, deduction of chapter VI-A is available.

Digitally means- Money received through an account payee cheque or an account payee bank draft or RTGS/NEFT/ECS/Debit or Credit Card/IMPS during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.

Example: Mr. Ram, a trader during the FY 2017-18 receives 12 lakh in cash and 14 lakh digitally. He also digitally receives Rs.6 lakh on 15th July 2018 relating to FY 2017-18. Calculate PGBP taxable income under section 44AD.

Solution: Assuming due date for filling u/s 139(1) be 31st July 2018-

1. On Digitally received turnover = (14+6) * 6% = Rs.1,20,000/-

2. On Turnover received in Cash = 12 * 8% = Rs.96,000/-

Therefore, the taxable income under the head PGBP is Rs.2,16,000 (120000+96000)

Who is Eligible for Section 44AD?

An eligible assessee with eligible business is eligible for section 44AD

  1. Eligible Assessee: Following taxpayers are eligible for section 44AD

i. Resident Individual

ii. Resident HUF

iii. Resident partnership firm

Further, the above 3 taxpayers shall not claim any deduction under section 10A/10AA/10B/10BA or under section 80HH to 80RRB in the relevant year.

2. Eligible Business under section 44AD

i. Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

ii. Whose total turnover or gross receipts from all his businesses in the previous year does not exceed 2 crore

3. Who is not eligible for section  44AD?

Following taxpayers are ineligible for this section-

i. Professionals (u/s 44AA) as they are already covered under section 44ADA

ii. Agency Business

iii. Person earning commission or brokerage income

Other presumptive taxation or scheme for at least 5 years (Section 44AD (4))

Once a taxpayer opts for this scheme than it would be beneficial for him to file his next 5 year’s income tax return in the same scheme only. (From AY 2018-19) But If he decides to OPT-OUT of the scheme in any of the next 5 years than he will be DISALLOWED from this scheme for the next subsequent 5 years.

Not only this, If his total income exceeds the maximum amount not chargeable to income-tax [In AY 2018-19 for normal taxpayer it is Rs.2.5 lakh] than-

1. He has to keep and maintain books of accounts [section 44AA(2)], and

2. He will also be required to get his accounts audited (Tax Audit under section 44AB)

 Let’s understand with an example

Particulars

Assessment year

Mr. Ram selected to file income tax return under section 44AD

2017-18, 2018-19 and 2019-20

Subsequently, he selected to file normal income tax return i.e. not under section 44AD

2020-21

He will be disallowed to file income tax return under presumptive taxation scheme for the next 5 assessment years

2021-22 to 2025-26

In addition to the prohibition from filing return under section 44AD, Mr.Ram will also be required to maintain books of accounts and file Tax audit if his total income exceeds the maximum amount not chargeable to income-tax.

Other Important Points under section 44AD
1. Expenses relating to PGBP will not be allowed. [section 30-38 of Income Tax]
2. Although depreciation expense is not allowed, the fixed asset will get depreciated normally as if depreciation has actually been allowed.
3. Assessee under presumptive taxation is also liable to pay advance tax. They can pay 100% of advance tax by 15th March of the financial year.
4. Assessee under presumptive taxation can take the deduction of Chapter VI-A.

Conclusion

Tax Audit under section 44AB(e) will be necessary if assessee’s total income exceeds the maximum amount not chargeable to income-tax AND-

(i) He declares his income below 8% or 6%; or

(ii) He OPT-OUT of the scheme within 5 years of his first OPT-IN.

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