Section 44AD PROFIT AND GAIN OF BUSINESS ON PRESUMPTIVE BASIS


SPECIAL PROVISIONS FOR COMPUTATION OF PROFIT AND GAIN OF BUSINESS ON PRESUMPTIVE BASIS

To give relief to small assessees, the Income-tax Law has incorporated a simple scheme commonly known as Presumptive Taxation Scheme. There are three schemes, viz., the scheme of section 44AD the scheme of section 44ADA and the scheme of section 44AE.

An assessee adopting these provisions is not required to maintain the regular books of account and is also exempt from getting the books of account audited.

The scheme of section 44AD is designed to give relief to small assessees engaged in any business (except the profession on presumptive basis referred in section 44ADA and business of plying, hiring or leasing of goods carriages referred to in section 44AE). The detailed provisions in this regard are as follows:

Who is the eligible assessee

The presumptive taxation scheme of section 44AD can be adopted by following persons:

1) Resident Individual
2) Resident Hindu Undivided Family
3) Resident Partnership Firm (not Limited Liability Partnership Firm)

In other words, the scheme cannot be adopted by a non-resident.

.Provisions relating to various allowances / dis-allowances:

Income computed as per section 44AD (i.e., @ 8% of turnover or gross receipts of the eligible business, for the previous year) will be net income for the business covered under this scheme.

From the net income computed as above, an assessee is not permitted to claim any deduction under sections 30 to 38 (including depreciation or unabsorbed depreciation).

Provisions in case of a partnership firm:

An assessee, being a partnership firm, can claim further deduction of remuneration and interest paid to its partners within the limit specified under section 40(b). This relaxation in case of partnership firm is not available  from the F.Y. 16-17, the detailed amendment is given in blue fonts.

From income computed at the aforesaid rate, no dis-allowance can be made under sections 40, 40A and 43B. Thus, in case of an assessee adopting the presumptive taxation scheme of section 44AD, no dis-allowance under sections 40, 40A and 43B will apply.

Amendments in Section 44AD vide Finance Act – 2016 Applicable from F.Y. 16-17:

1. Salary, remuneration, Interest on capital paid to partners will not be allowed as expenses.

2. Provision of Advance Tax will also be applicable on business covered u/s 44AD. However to keep compliance at minimum level – the business man required to pay 100% tax by 15th March of the Financial Year.

Amendments in Section 44AD vide Finance Act – 2017 Applicable from F.Y. 17-18:

To encourage bunnies receive payment through digital mode, the govt has decided to give incentives to business who receive the payments digitally. Example of such incentive is that if a business receives payment through digital mode i.e. through cheque, DD, debit card, credit card, NEFT or any other cashless mode, he can claim his income 6% instead of 8%.

Eligible business:

While the presumptive taxation scheme under Section 44AD is framed to relief small taxpayers who carry out business, there are a few exceptions these are:

Any business under section 44AE that involves the renting, hire or plying of goods carriages
Any Profession as referred in section 44AA(1): Professionals are covered in section 44ADA
Any business related to agencies

Scheme of computation of income:

The rate of computation of income on an estimated basis is 8% of turnover or gross receipts of the eligible business for the previous year.

Manner of computation of WDV of depreciable assets:

The WDV of any asset used in the business covered under section 44AD shall be calculated as if depreciation as per section 32 is claimed and allowed. Thus, even though no depreciation is available separately, yet for purpose of computation of the WDV of the asset, depreciation will be deducted.

Provisions relating to maintenance of books of account:

An assessee adopting these provisions is not required to maintain the regular books of account and is also exempt from getting the books of account audited.

Declaration of lower income:

If the assessee wants to declares lower income then prescribed rate 8% and his actual income exceeds the maximum amount which is not chargeable to tax, then the relief from maintenance of books of account is not available and he is required to maintain the books of account as per section 44AA and further, he has to get such books of account audited as per section 44AB.

Declaration of higher income:

Declaring income above the prescribed rate of 8%, the scheme permits the assessee to declare at his option higher income.

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