Section 44AD – Profits Calculated on Presumptive Basis

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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. There is a separate provision for presumptive income for them in section 44ADA.
  • 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.

From Financial year 2017-18 6% is taken in lieu of 8% in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account.

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 40b are also not deductible from such deemed profit. (Till financial year 2015-16 such salary and interest to partners is deductible)

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.

Confused about complicated laws? Take our GST consultation services to get your issues solved from GST experts. Click here to know more.

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