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Section 44AD – Profits Calculated on Presumptive Basis

U.C Date : 28 June 2016

Eligible Assessee –

  • A resident individual, resident HUF, resident partnership firm but not a limited liability partnership firm.
  • Who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA, or deduction under any provisions of section 80-IA to 80RRB in the relevant assessment year. 

The following persons are not covered under this section

  • Profession of legal, medical, engineering, architectural, accounting, technical consultancy, interior decoration, film artist or authorised representative or any specified profession notified by the board under section 44AA.
  • A person earning income in the nature of commission or brokerage.
  • A person carrying on any agency business.

Eligible Business –

  • any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
  • whose total turnover or gross receipts in the previous year does not exceed an amount of rs. 1 crore. Limit is raised to Rs. 2 crore from financial year 2016-17.

Extra Eligibility criteria from Financial year 2016-17

If a person claims lower profits than 8% of turnover in any of the 5 succeeding years, then such person cannot claim benefit of this section for next 5 years of the year in which lower profits are claimed. The words given in act are “Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year”. It is a confusion that if 5 succeeding year of “All years” are to be considered than what  is sense of using “5” years, then it may be simply written that if lower profits are claimed in any year. It may mean that first year is considered as base therefore assessee should claim higher profit for minimum  6 years from assessee’s first year or year of applicability of this provision. Further clarification are sought from CBDT.

Provisions under section 44AD

In case an eligible assessee carrying on the eligible business, the profits and gains of such business is deemed to be 8% of the total turnover or gross receipts from such business. However, the assessee can claim higher profits.

However an assessee 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. If the total income of asseessee (i.e 8% of turnover plus all other incomes) doesn’t exceed the maximum amount not chargeable to tax, then he is not required to maintain accounts and  get them audited.  (From Financial year 2016-17, if a person claims profits lower than 8% of turnover and get accounts audited then such person has to gets his accounts audited also for next 5 years from such year)

A confusion has been created when the limit under section 44AD is increased to Rs. 2 crore. It is now clarified by department that assessee with turnover of more than rs. 1 crore but less than rs. 2 crore and filing return under section 44AD is not required to conduct audit under section 44AB. Press Release – 20th June 2016

Deductions from deemed profit :-

No deduction of Section 30 to 38 (including unabsorbed depreciation) is allowed from such deemed profit.

Where the eligible assessee is a partnership firm, salary and interest to partners  subject to section 40(b) shall be deducted from such deemed profit. (These deductions are not allowed from Financial year 2016-17)

And also disallowance under sections 40,40A, 43B is not to be considered if income is deemed under this section.

WDV of depreciable assets:-

The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant years.

An assessee opting for the above scheme is not required to pay advance tax in relation to such business profits.
The assessee is also not required to maintain books of account under section 44AA if he files return under section 44AD.

Bare Act for Sec 44AD

Bare Act for Sec 44AD

(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed :

Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40. (Deduction under section 40(b) is not deductible from Financial year 2016-17)

(3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.

Following provision is substituted with clause (4) above with following provision from financial year 2016-17-

“(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).”

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

Following provision is substituted with clause (5) above with following provision from financial year 2015-16-

“(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.”

[(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to—

(i)  a person carrying on profession as referred to in sub-section (1) of section 44AA;

(ii)  a person earning income in the nature of commission or brokerage; or

(iii)  a person carrying on any agency business.

Explanation.—For the purposes of this section,—

(a)  “eligible assessee” means,—

(i)  an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and

(ii)  who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” in the relevant assessment year;

(b)  “eligible business” means,—

(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 in the previous year does not exceed an amount of one crore rupees (Two crore from financial year 2016-17) .

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