Section 44AD is a well-known presumptive taxation scheme available to individuals, HUF and partnership firms (not including limited liability partnerships) for declaring their income on a presumptive basis which is not less than 8% of total turnover declared for the financial year. Section 44AD is not applicable in the following cases:-
- Person carrying on profession referred to in section 44AA(1)[explained below]
- Any person earning commission or brokerage
- Any person carrying on any agency business
Because of the 1st point above, professionals were earlier unable to opt for presumptive taxation under section 44AD. Therefore for opening doors of presumptive taxation for professionals Section 44ADA was introduced from 01-04-2017.
Who can opt for Section 44ADA?
- Resident Assessee
- One who is carrying on profession referred to in section 44AA(1) of the act
- Assessee having total gross receipts not exceeding Rs. 50 lakhs in a previous year.
Which profession is referred to in Section 44AA(1)?
Assessees carrying on following professions are covered in Section 44AA(1):-
- Technical consultancy
- Interior decoration
- Any other profession as may be notified by the board in the official gazette.
Below is a list of activities or occupations termed as Business
What is meant by Gross receipts?
Gross receipts is a commercial term, therefore it should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Therefore the method of accounting employed by the assessee determines what gross receipts are.
For this purpose GST received shall not form part of gross receipts received.
What is Deemed income under Section 44ADA?
The assessee has to declare at least 50% of his total gross receipts as income from profession, though obviously, he has to declare more than 50% of his gross receipts in case he has earned more than 50%.
List of further deductions and allowances allowed from above-calculated income
The amount of presumptive income so declared by the assessee under section 44ADA(i.e. equal to or more than 50% of gross receipts) is considered to be final and thus no further deductions are allowed from it. As per section 44ADA, it is considered that the deductions of Section 30 to 38 have already been deducted from the presumptive income and thus no further effect is required.
Though it must be noted here that since it is presumed that depreciation(Section 32) has already deducted from income, the assets in balance sheet should be reflected at Written down value only i.e. after deducting depreciation applicable as per the income tax act.
Audit under section 44ADA
As per section 44AB(d), any professional who satisfies the following conditions is liable to get his accounts audit by a Chartered Accountant:-
- Assessee opts to claim his income as per section 44ADA
- But claims his income from profession to be less than minimum income to be reported as per section 44ADA (i.e. less than 50% of total gross receipts earned)
- And his *income exceeds the maximum amount of income not chargeable to tax in the act.
*The word income used in the 3rd point above refers to Gross total income declared by the assessee during that particular financial year and thus including Total income from all 5 heads of income and before claiming deduction under Chapter VIA.