Profits Calculated on Presumptive Basis Section 44AD: For reducing the tax burden and provide relief from the tedious work to the small tax individuals, the Indian government has induced a presumptive taxation scheme. Businesses adopting this presumptive taxation scheme aren’t required for maintaining regular books of account.
They could declare the income at a suggested rate. The schemes of presumptive taxation are framed under the two sections- Section 44AD and 44AE of the Income Tax Act of the year 1961. The person adopting presumptive taxation schemes are exempt from getting their books of account audited.
- Individuals who are eligible under section 44AD
- Business who are eligible under section 44AD
- Extra Eligibility criteria from the financial year of 2016-17
- Provisions Under Section 44AD
- Deductions from the deemed profit
- WDV of depreciable assets
Individuals Who are Eligible Under Section 44AD
- A resident of India, resident HUF, resident partnership firms but not a limited liability partnership (LLP) firm.
- Who has not claimed deduction under any sections 10A, 10AA, 10B, 10BA, or any deduction under the provisions of section 80-IA to 80RRB of the relevant assessment year.
The following individuals are not covered under this section
- The profession of medical, legal, engineering, architectural, accounting, interior decoration, technical consultancy, film artist or the authorised representative or any other specified profession notified under the board under the section 44AA. There is a different provision for the presumptive income for them in section 44ADA.
- A person is earning income like commission or brokerage.
- A person is carrying on any business agency.
Business Who are Eligible Under Section 44AD
- Any business apart from the business of plying, hiring or leasing goods carriages referred in the section 44AE; and
- whose total turnover or gross receipts in the prior year doesn’t exceed an amount of Rs. 1 crore. Limit has been raised up to Rs. 2 crores from the financial year 2016-17.
Extra Eligibility Criteria from the Financial Year of 2016-17
The words provided in the act are as follows – “Where an eligible individual declares profit for any previous year according to the provisions of this section and they declare profit for any of the five assessment years relevant to the previous year resulting such previous year”.
If an individual claims lower profits than 8% of turnover in any of the five succeeding years, then such person cannot claim the benefit of this section for the next five years of the year in which lower profits are claimed.
It is confusing that if five succeeding years of “All years” are to be considered, what is the sense of using “5” years, then it may be written that if lower profits are claimed in any year. It may mean that the first year is considered as a base; therefore, assessee should claim higher profit for a minimum of 6 years from the assessee’s first year or year of applicability of this provision. Further clarification is sought from CBDT.
Provisions Under Section 44AD
Suppose an eligible assessee is carrying on the qualified business. In that case, the profits and gains of such a company are deemed to be 8% of the total turnover or gross receipts from such business. However, the assessee can claim higher profits.
From the Financial year 2017-18, 6% is taken instead of 8% regarding the amount of total turnover or gross receipts received by an account recipient cheque or an account recipient bank draft or use of the electronic clearing system via a bank account.
However, an individual can claim profits to be lower than 8% by maintaining books of account as mentioned in section 44AA and gets them audited as per section 44AB. Suppose the total income of the assessee (i.e., 8% of turnover plus all the other incomes) doesn’t exceed the maximum amount not chargeable to tax.
In that case, he is not required to maintain accounts and get them audited. (From the Financial year 2016-17, if a person claims profits lower than 8% of turnover and get accounts audited, then such person has to get his accounts also audited for next five years from such year)
Deductions from the Deemed Profit
No deduction of Section 30 to 38 (involving unabsorbed depreciation) is permitted from such considered profit.
Where the eligible individual is a partnership firm, salary and interest to partners subject to section 40B are also not deductible from such deemed profit. (Till the financial year 2015-16 such salary and interest to partners is deductible)
And also, the disallowance under sections 40,40A, 43B is not considered if income is deemed under this section.
WDV of Depreciable Assets
The values that have been written down of any of the assets of an eligible business need to be considered to have been calculated such as the eligible individual must have claimed and had been actually permitted the deduction in respect with the depreciation for each of the relevant years.