Analysis of Section 44AD & 44ADA of the Income Tax Act, 1961

Brief History : Special Provisions for computing Profits and Gains of Business on Presumptive Basis

Presumptive Taxation u/s 44AD and 44AE was introduced by the Finance Act, 1994 wherein section 44AD was applicable to assessees engaged in the business of civil construction or supply of labour for civil construction.

Further, by virtue of Finance Act(No.2) of 2009, both sections 44AD and 44AE have been substituted by new section 44AD, which is considered as the paradigm shift in the entire scheme of presumptive taxation.

The, then Finance Minister Mr. Pranab Mukherjee, in his budget speech quoted that there is a substantial increase in the small businesses and service providers who earn significant income but they are outside the tax net therefore the presumptive taxation scheme was introduced for those small businesses and service providers without much compliance cost and less time consuming.

Section 44AD of the Income Tax Act, 1961

The Section read as follows:

(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“

Analysis of section 44AD are as under :

Who is an Eligible Assessee?

For the purpose of application of the provisions of the section the assessee should be an “eligible assessee“. Eligible assessee for this purpose is a person resident in India who is individual, a Hindu Undivided Family or a partnership firm (not being a Limited Liability Partnership firm).

The assessee has not claimed any deduction under sections 10A, 10AA, 10B, 10BA, 80HH to 80 RRB in the relevant assessment year.

Therefore, in other words, the scheme of presumptive taxation cannot be adopted by a non resident and by any person  other than mentioned above.

What is an Eligible Business?

The assessee should be engaged in any business whether it is retail, trading or civil construction  or any other business except the following businesses:

• Business of plying, hiring or leasing of goods carriages referred to in section 44AE.
• A person who is carrying on any agency business.
• A person who is earning income in the nature of commission or brokerage.
• whose total turnover or gross receipts in the previous year exceeds an amount Two Crore Rupees (for AY 2017-18 & before the limit was One Crore Rupees). 

Apart from above businesses, a person carrying on profession as referred to in section 44AA(1) is not eligible for presumptive taxation which are legal, medical, engineering , architectural, accountancy, technical consultancy or interior decoration or any other profession as notified by the Board. (To cover all the above mentioned professions, Section 44ADA was introduced which is discussed later in the post).

Conditions if satisfied –

1. If the assessee is an eligible assessee and carry on the eligible business then the income from the eligible business will be estimated at 6% of the gross receipts or total turnover.
2. The rate of 6% will be taken as 8% in respect of the total turnover or gross receipts which is received otherwise by an account payee cheque/draft or use of electronic clearing system through a bank account during the previous year as applicable from the AY 2017-18.
3. All deductions u/s 30 to 38 , including depreciation and unabsorbed depreciation , are deemed to to have been already allowed and no further deduction is allowed.
4. From AY 2017-18, in the case of a firm, the normal deduction in respect of salary and interest to partners u/s 40(b) shall also not be allowed. ( Whereas the same is allowed earlier).
5. Further, it will be assumed that the disallowance,if any, u/s 40, 40A and 43B has been considered while calculating the estimated income.
6. Further, the assessee who opts for the scheme is now also require to pay advance tax relate to such business. However, advance tax can be paid during the financial year and there is no need to pay the same in installments. (This is applicable from AY 2017-18)
7. An assessee opting for the above scheme is not required to maintain books of accounts related to such business as required u/s 44AA of the act.

Concept of declaring lower income in presumptive taxation scheme –

From AY 2017-18 onwards : Where an eligible assessee decided to opt the presumptive taxation scheme and declares profit for the previous year at the rate of 6% or 8% of turnover u/s 44AD and in the next 5 consecutive assessment years decided to opt out of the scheme and shows income lower than the said percentage then the assessee shall not be eligible to opt the scheme again for the next 5 consecutive assessment years.

i.e if an assessee opts the scheme in AY 2017-18 and is taxed on the presumptive basis u/s 44AD of the act. He follows the same routine for next two years i.e AY 2018-19 and AY 2019-20 but decided to show lower income in AY 2020-21, then in that case the assessee will not be eligible to claim the benefit of section 44AD for the next 5 AYs, i.e. for AY 2020-21 to 2025-26.

Before AY 2017-18 : If the assessee shows income as per section 44AD in one assessment year and opted not to follow the benefits of section 44AD then the assessee has to maintain the books of account as mentioned u/s 44AA and is required to get his accounts audited u/s 44AB, if applicable.

Section 44ADA of the Act, 1961

Section 44ADA is introduced by the Finance Bill, 2016 wherein the scope of presumptive taxation is extended to professionals with gross receipts upto Fifty Lakhs Rupees with the presumption profit being 50% of the gross receipts.

The Section read as follows:

(1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”

The provisions of the section are as follows:

Conditions to satisfy for applicability of the section –

1. The assessee is resident and engaged in the profession referred to in section 44AA of the act. (Detailed above).
2. Gross receipts of the assessee from the profession does not exceed Rs. 50 Lakhs.

If the above conditions are satisfied, income shall be calculated on estimated basis at a sum equal to 50% of the total gross receipts.

All deductions u/s 30 to 38 , including depreciation and unabsorbed depreciation , are deemed to to have been already allowed and no further deduction is allowed.

An assessee can show lower income than the deemed profits. In that case, assessee has to maintain the books of account as mentioned u/s 44AA and is required to get his accounts audited u/s 44AB, if applicable.