Meaning of presumptive taxation scheme
As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account, and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA, and 44AE.
A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from the tedious job of maintenance of books of account and also from getting the accounts audited.
For whom the presumptive taxation scheme of section 44AD is designed?
The presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring, or leasing of goods carriages referred to in section 44AE).
The presumptive taxation scheme of section 44AD can be adopted by the following persons :
1) Resident Individual
2) Resident Hindu Undivided Family
3) Resident Partnership Firm (not Limited Liability Partnership Firm)
This scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year.
Businesses not covered under the presumptive taxation scheme of section 44AD
The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:
> A person who is carrying on any agency business.
> A person who is earning income in the nature of commission or brokerage
A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000 cannot adopt the presumptive taxation scheme of section 44AD
The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AD
In the case of a person adopting the provisions of section 44AD, income is computed on a presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year.
In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1).
However, a person may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.
In the case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided for under the Income-tax Act will not apply and income computed at the presumptive rate of 6% or 8% will be the final taxable income of the business covered under the presumptive taxation scheme. In other words, the income computed as per the prescribed rate will be the final taxable income of the business covered under the presumptive taxation scheme, and no further expenses will be allowed or disallowed.
While computing income as per the provisions of section 44AD, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.
No need to maintain books of account as prescribed under section 44AA
Section 44AA deals with provisions relating to the maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.
In the case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income @ 6% or 8% (as the case may be) of the turnover, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD.
Payment of advance tax in respect of income from business covered under section 44AD
Any person opting for the presumptive taxation scheme under section 44AD is liable to pay the whole amount of advance tax on or before 15th March of the previous year. If he fails to pay the advance tax by 15th March of the previous year, he shall be liable to pay interest as per section 234C.
Provisions to be applied if a person does not opt for the presumptive taxation scheme of section 44AD and declares income at a lower rate, i.e., at less than 8%
A person can declare income at a lower rate (i.e., at less than 6% or 8%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited as per section 44AB.
Consequences if a person opts out from the presumptive taxation scheme of section 44AD
If a person opts for the presumptive taxation scheme then he is also required to follow the same scheme for the next 5 years. If he failed to do so, then a presumptive taxation scheme will not be available for him for the next 5 years. [For example, an assessee claims to be taxed on a presumptive basis under Section 44AD for AY 2018-19. For AY 2019-20 and 2020-21 and he offers income on basis of a presumptive taxation scheme. However, for AY 2020-2 1, he did not opt for the presumptive taxation Scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2022-23 to 2026-27.]
Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds the maximum amount not chargeable to tax]
Many a time we come across a situation, especially in the case of proprietorship firms where more than one business is carried on by the assessee. But, due to ignorance or whatsoever the reason be, they claim the benefit of section 44AD without looking in the fact that they might be carrying business in nature of commission or brokerage, agency business, or even profession as referred to in Section 44AA(1), which they are legally not entitled to avail due to provisions of subsection (6) of section 44AD.
Even though receipts of such ineligible business or profession might not be routed through books of accounts, whatever the reason be, or might be earned in a personal capacity, still, such assessee shall be ineligible to avail the benefit of Section 44AD.
This is simplified with the help of an example which is as follows:
Often architects/interior designers [profession referred in Section 44AA(1)] also supply material, labor, etc. under their own name or carry on such contractor business in addition to the profession referred above. So, in such cases, these persons cannot avail the benefit of Section 44AD for contractor business or for turnover from the supply of material because they are also engaged in the profession as referred above and such profession is outside the purview of this scheme as referred to in subsection (6) of section 44AD.
The same will be the case of doctors/medical professionals who are providing medical, nursing home, medical consultation (OPD) services and in addition to that are also carrying on business activities like medical supplies, charging room rent from their patients, etc.
Section 44AD doesn’t override chapter VI. Chapter VI in the Income Tax Act, 1961 deals with Set-off or Set-off & Carry forward of losses. Therefore, the assessee can claim the current year as well as brought forward losses against the deemed income U/s 44AD.
However, it is to be noted that irrespective of the fact that Section 44AD overruled Section 28 to 43C which includes Section 43B also but Section 43B is itself a Non-Obstante Clause which overruled the entire act.
Therefore, even if the case of the assessee is covered under section 44AD disallowances of Section 43B may attract.
For Example, the Gross Turnover of Mr. X was Rs 80 lacs during the Assessment Year 2020-21. Deemed Income claimed in Return of Income was Rs 6.4 Lacs. Mr. X Fails to pay the interest of Rs 1 Lacs payable to the Scheduled Bank. Section 43B disallowances will be attracted. Total Taxable income will be Rs 7.4 Lacs.
Section 44AD also overrides Section 35AD, Section 35(1)(ii)/(iii) etc…,Section 40A(3), Section 40A(2), Section 43, Section 40(b), Section 28(V). The impact of which is as follows:
- The Assessee whose case is covered U/s 44AD can pay his revenue expenditure above Rs 10,000/- per day per person. No Disallowances will be there.
- Even the payment for Depreciable Assets can be made over Rs 10,000/- in cash mode. However, Section 44AD(3) said that WDV has been deemed to be calculated even though the assessee is not entitled to claim the Depreciation.
- Therefore, while calculating Deemed Depreciation & WDV of the Assets such disallowances will be taken into account.
- Payment made to the related party more than legitimate business need will not attract disallowances U/s 40A(2) of the Act.
- No Deduction will be allowed for making any donation of Scientific nature referred to in Section 35(1)(ii) etc….
- There are no restrictions on the assessee who runs the business which is covered U/s 35AD to claim the benefits of Section 44AD. For Example, Mr. X who runs the business of operations of the warehouse can opt for Section 44AD.
- However, Section 44AD overrides Section 35AD. Therefore, the assessee can’t claim the benefits of Section 35AD deduction. Hence, indirectly there are restrictions on Section 35AD deduction.
- Any Salary, Commission, bonus, remuneration by whatever name called paid by the Partnership Firms shall be allowed as a deduction to the extent of limits as specified in Section 40(b). Such Salary, commission, etc. to the extent allowed in the hands of the Firm shall be taxable in the hands of the partners under the head business/profession us 28(v).
- Section 44AD overrides Section 40(b) also. Suppose, Partnership Firms ABC & co. whose Gross Turnover during the Previous Year 2019-20 was Rs 120 lacs opt for Section 44AD. The total remuneration paid to the partners was Rs 18 Lacs.
- Since the Firm opts for Section 44AD hence, the entire Rs 18 Lacs will be disallowed.
- Hence, nothing is taxable in the hands of the Partners U/s 28(v).
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