Section 44AD of Income Tax Act – 1961

Section 44AD

The government continually discourages the taxpayers to misuse the tax laws and hence keep changing their laws often. This scheme is old and useful, but the Government has brought in the specific improvements. Today we will  talk about Section 44AD of income tax Act 1961.

Section 44AD of Income Tax Act 1961

Section 44AD of income tax Act deals with the presumptive taxation. To reduce the administrative burden of government and the compliance of small assessees, the government has introduced the section 44AD in Income Tax Act. It is not compulsory to maintain the books of accounts for an assessee, who adopts the provisions of sections 44AD. This section presumes their profits to be a certain percentage of gross receipts or turnover.

The government introduced section 44AD to give relief to small assessees engaged in business except for the business of hiring, plying, or leasing of goods. Provisions of this section apply to an individual, HUF and partnership firm but not to a limited partnership firm. This section also not covers a person earning income in nature of commission or brokerage and nor a person carrying on any agency business.

Section 44AD

Profits Assumed

According to the current scheme of presumptive taxation, the profits of a business are assumed as under:

  • Section 44AD: For businesses with the turnover of less than Rs. 2 crores per annum, section 44AD will assume profit at 8% of sales.
    If the turnover is more than Rs. 2 crores per annum, income would be computed as per the normal provisions of the Income Tax Act. It is also mandatory for an assessee to get his accounts audited U/S 44AB.
  • Section 44ADA: For professionals with the turnover of less than Rs. 50 lakhs per annum, this section will assume profit at 50% of sales.
  • Section 44AE: For transporters, section 44AE will assume profit at Rs. 7,500 per vehicle per month.

To encourage the businesses to receive payments digitally, the government has provided an incentive to businesses who receive payments digitally. This incentive is applicable from the financial year 2016-17 and is only provided to businesses U/S 44AD and not to professionals or transporters. As per this, section 44AD will consider the profits at 6% of total payments received digitally. But for the cash payments, the profit will remain to continue to be at 8%.

If an assessee is applying U/S 44AD, he cannot claim any expense or depreciation. Any deduction which the provisions of section 30 to 38 allow, for the purpose of income computed U/S 44AD shall be deemed to have been already given full effect and so this section will not allow any further deduction.

Amendments

The government has introduced several amendments in section 44AD in Finance Act, 2016. These are applicable from the financial year 2016-17. They are as follows:

  • Section 44AD will not allow the deduction of salary, remuneration, or any interest paid to partners.
  • Businesses claiming benefit U/S 44AD needs to pay 100% tax applicable by the 15th march of the FY. Even no other provisions of Advance Tax are applicable.

An assessee must remember that if he is opting for the presumptive scheme, he must file presumptive scheme for at least 5 years in a continuation or he stands to lose presumptive tax benefits. This section will also disallow him from presumptive taxation for the next 5 years. An assessee should also remember that if he is not opting for presumptive taxation U/S 44AD, section 44AD will not make him liable to maintain the books of accounts. He is liable only when his total income exceeds the taxable limit.

Some of the relevant points U/S 44AD

  • If an assessee is carrying on more than one business, section 44AD takes into account the total turnover of all the business.
  • If he is carrying on business as well as profession, section 44AD shall apply only to the income earned from business. The standard provisions of the Income Tax Act shall apply to the income earned from a profession.

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