Section 44AD of Income Tax

According to Section 44AA of the Income Tax Act of 1961, an individual engaged in a business or profession is required to maintain regular books of account under the specified circumstances mentioned in the Act. To reduce the tedious work on a small taxpayer, the Government has framed the Presumptive Taxation Scheme under several sections, including Section 44AD, 44ADAE and 44AE. A taxpayer choosing to adopt the presumptive taxation scheme may declare income at a prescribed rate and, in turn, is relieved from the complications of maintaining books of account. This article talks about the essential information related to Section 44AD of the Income Tax Act.

Eligibility

The presumptive taxation scheme under Section 44AD was framed by the Income Tax Act to ease the tax burden on small taxpayers who engage in business activities, with the exceptions of those businesses mentioned under Section 44AE.

Eligibility for Individuals

The following individuals are eligible to avail the benefits of the presumptive taxation scheme under Section 44AD. These below-mentioned entities may adopt the presumptive scheme provided that they have not claimed tax deductions under Sections 10A, 10AA, 10B, 10BA or other deductions in respect of individual incomes.

Any resident individual
Resident Hindu Undivided Families (HUFs)
Resident Partnership Firms except for Limited Liability Partnership Firms

Eligibility for Businesses

The following businesses are eligible to avail the benefits of the presumptive taxation scheme under Section 44AD:

Any business with an exception to the companies that are related to playing, hiring or leasing goods carriages referred to in Section 44AE.
A business whose total turnover and gross receipts in the previous year does not exceed an amount of INR 2 Crores.
The assessee has not claimed any deduction under Sections 10A, 10AA, 10B, 10BA, 80HH to 80RRB in the assessment year.

Non-Eligible Business

The provisions related to the presumptive taxation scheme prescribed under Section 44AD shall not apply in the following cases:

An individual carrying on any profession specified under Section 44AA(1).
An individual earning income like commission or brokerage.
A person carrying on any agency business such as insurance agents, as whatever income they earn is in the nature of a commission.

Taxable Profits and Gains

When an eligible assessee engaged in a qualified business, a sum equal to the 8 per cent of the gross receipts or the total turnover of the assessee in the previous year on account of such activity. If not, an amount higher than the previously mentioned amount claimed to have been earned by an assessee shall be termed to be gains and profits of such business chargeable to tax.

Digital Payments

With the aim to promote digital transactions and to encourage small unorganised businesses to accept digital payments, a specific provision has been included in Section 44AD(1) of the Act. The inclusion has the advantageous effect of reducing the existing rate of deemed total income of 8 per cent to 6 per cent with regard to turnover or gross receipts received by an account payee cheque or use of electronic clearing system by a bank account or account payee bank draft during the past year or before the final date mentioned in Section 139(1) in respect to the past year. However, the existing rate of deemed profit of 8 per cent referred to in Section 44AD of the Act, shall continue to apply about the total turnover or gross receipts received in any other mode.

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Other Specifics

Section 44AD(2): No further deductions

Any other deductions allowed under the provisions of Sections 30 to 38 shall, for Section 44AD(1), be considered to have been already given full effect to and no further deductions under those sections would be permitted.

Section 44AD(3): Written down the value of any asset shall be deemed to have been calculated

The written down value of an asset of an eligible business shall be considered to be calculated as if the eligible assessee has claimed and had been allowed the deduction concerning the depreciation for each of the appropriate assessment years. In other words, while computing income as per the provisions mentioned in Section 44AD, separate deduction on account of depreciation is not available. However, the written down value of an asset used in such businesses shall be calculated as if depreciation according to Section 32 is claimed and has been allowed.

Section 44AD(4): Presumptive scheme to opt for a minimum of 5 years

When an eligible assessee declares a profit for any previous year in accordance with the provisions of this section and announces a profit for any of the five assessment years relevant to the prior year succeeding such last year, not in accordance with the provisions mentioned in Section 44AD(1), the individual shall not be eligible to claim the benefit of the provisions of the section for five assessment years subsequent to the assessment year and relevant to the previous year in which the gain has not been declared in accordance with the provisions of Section 44AD(1). In simple words, if a taxpayer who meets the eligibility criteria makes profits declarations for any of the years among the five years preceding the relevant assessment year, the individual will not be allowed to avail any of the benefits outlined as per the provisions detailed under Section 44AD(4).

Payment of Advance Tax

An eligible assessee engaged in a business referred in Section 44AD is liable to pay advance tax in a single instalment on or before the 15th of March every financial year. For an assessee referred to in Section 44AD, interest under Section 234C shall be levied, if the advance tax paid before or on the 15th of March, is less than the tax due to the returned income.

Maintenance of Books of account

When a person is engaged in business and opts for the presumptive taxation scheme of Section 44AD, the provisions of the Act relating to maintenance of books of account will not be applicable. In simpler terms, if an individual adopted the provisions of Section 44AD and declared an income at 8 per cent of the turnover, then the individual is not required to maintain the books of account as stated under Section 44AD as the business is covered under the presumptive taxation scheme of Section 44AD. Moreover, the scheme also relieves the taxpayer from the audit of the books of account as stated under Section 44AD.

Multiple Business

If an individual is running more than one business, the scheme has to be chosen for each business. For example, if an individual runs four businesses where only one is assessed under Section 44AD, the relief of not maintaining accounting records and the no-requirement of an audit is only applicable to the business where the scheme is also relevant. For the rest of the businesses which are not assessed under this section, the account records have to be made, and the audit is also required accordingly.