An overview of New Section 44AD of the Income Tax Act, 1961 that comes into effect from A.Y. 2011-2012
Section:
44AD – Special provision for computing profits and gains of business on presumptive basis.
(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in 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 amount 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.
(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.
(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 as 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.
Explanation.—For the purposes of this section,—
(a) “eligible assessee” means,—
(i) an individual, Hindu undivided family or a partnership firm, who is 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 sixty lakh rupees.
Discussion:
Ø What was 44AD earlier to A.Y. 2011-2012?
The section heading was as “Profits and gains of business of civil construction” whereby it was applicable to only such assessees who were engaged in business of civil construction.
Ø What is 44AD w.e.f. A.Y. 2011-2012?
The Finance (No. 2) Act, 2009 has expanded the scope of this section beyond the assessee who are engaged in business of civil construction.
Ø Who is eligible assessee?
a. Individual
b. Hindu Undivided Family
c. Partnership Firm, who is resident.
However, this section has excluded a limited liability partnership firm from its scope.
Further, this section is applicable only to those assessee who have not claimed deductions under the sections 10A, 10AA, 10B, 10BA or under the provisions of Chapter VI-A under the heading “C. Deductions in respect of certain incomes”, i.e. sections 80HH to 80RRB.
Ø What is eligible business?
a. Any business other than the business of plying, hiring or leasing of goods carriages that is covered by section 44AE;
b. The business whose turnover or gross receipts do not exceed ` 60 lakhs.
Ø What is the income deemed under this section?
The income deemed under this section shall be an amount equal to or higher than 8% of the turnover or gross receipts of the business. Such amount shall be deemed to the income charged under the head “Profits and gains of business or profession”.
Ø What are the other consequences?
a. The deductions under sections 30 to 38 shall be assumed to have already been given full effect. No further deduction shall be allowed under this sections.
b. The WDV of the assets used in the eligible business shall be deemed to have calculated as if the eligible assessee had been allowed the deduction of the depreciation for each of such assessment years.
c. The salary and interest to partners are still allowable subject to the limits prescribed under section 40(b)
Ø What are the provisions relating to Advance Tax?
The assessees opting for this section shall be exempted from the provisions of Chapter XVII-C i.e. advance tax. The eligible assessee shall not be required to comply with the provisions relating to advance tax.
Ø What about maintaining books of accounts?
The eligible assessee opting for this section need not maintain the books of accounts related to the eligible business.
Ø What if the income of the assessee is less than the deemed rate, i.e. 8 %?
The assessee has an option to declare income lower than what is deemed in this section. However, he has to fulfill certain conditions and compliances for that. Those compliances are as below:
a. Maintain the books of account and other documents as required under section 44AA
b. Get the books of accounts audited under section 44AB
Ø What about the section 44AF?
The earlier section 44AF which read as “Profits and gains of retail business” shall become inoperative from the assessment year 2011-2012
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