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4AD. (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":

Provided that this sub-section shall have effect as if for the words "eight per cent", the words "six per cent" had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account 53[or through such other electronic mode as may be prescribed] during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.

(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 beallowed.

(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 assessmentyears.

(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section(1).

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable 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 section44AB.

(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not applyto—

(i) a person carrying on profession as referred to in sub-section (1) of section44AA;

(ii) a person earning income in the nature of commission or brokerage;or

(iii) a person carrying on any agency business. Explanation. - For the purposes of this section, -

(a) "eligible assessee"means, -

(i) an individual, Hindu undivided family or a partnership firm, who is a 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 assessmentyear;

(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 two crorerupees.

Provisions of Section 44AD - Part 1

A. Meaning of terms used in sec 44AD(1)

To understand the provisions of sec 44AD(1)of the act, we must study the meaning of following terms:

1. Eligible assessee:

1) Resident Individual
2) Resident Hindu Undivided Family
3) Resident Partnership Firm (not a Limited Liability Partnership Firm as defined under LLP Act,2008)

Note: While explaining the meaning of eligible assessee, a rider also provided in Explanation (a) to Sec. 44AD for eligibility i.e.

NON-ELIGIBLE ASSESSEES UNDER SEC. 44AD

Explanation (a) to sec. 44AD provides the following are not covered under these provisions:

• An Individual / HUF / a Partnership Firm who is a resident and claiming deduction under chapter III of the Act section10A,10AA,10B,10BA relating to units located in FREE Trade Zone, Hardware & Software Technology Park etc.OR

• Claiming deduction under Chapter VI-A Part-C (deductions in respect of certain Incomes) i.e. Sections80HH to80RRB.

SO- THE FOLLOWING ARE NOT COVERED U/s 44AD

  • Individual /HUF who is not Resident
  • Association of Person
  • Firm having non-resident Status.
  • A local Authority
  • A co-operative Society
  • LLP both Indian as well as Foreign
  • Companies both Domestic and Foreign company
  • Every Artificial Juridical Person

2. Eligible business: The presumptive taxation scheme under section 44AD covers all small businesses with total turnover/ gross receipts of up to 2 crores (except the business of plying, hiring and leasing goods carriages covered under section 44AE). Sub- sec. (6) of sec. 44AD states that ― the provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to-

 

(i) a person carrying on profession as referred to in sub section (1) of section 44AA;
(ii) a person earning income in the nature of commission or brokerage;
(iii) A person who is carrying on any agency business.

(Note : An insurance agent cannot adopt the presumptive taxation scheme of section 44AD)

 

Eligible Business-COVERED

So Eligible Business includes :

  1. Manufacturing
  2. Trading
  3. Wholesale
  4. Retail
  5. Job Work
  6. Service business
  7. Speculative/ Non speculative.

ASSESSEE AND SEVERAL BUSINESSES

The provisions of Sec. 44AD of the Act apply to an ‗Assessee‘. Hence when a person carries on several businesses, viz. wholesale and/or retail and or manufacture, the turnover or gross receipts of all the businesses are to be considered for the purposes of this section. Whether separate books or combined books are maintained by the assessee is not material. Combined turnover or gross receipts of all the businesses would form the basis for calculation of presumptive income.

Example: Mr. Harjot Singh, A Resident individual, is carrying on three eligible business, the turnover of which is as under -

Business A (Rs.145 Lac) Business B ( Rs.35 Lac) Business C ( Rs.25 Lac).

Whether he can opt for sec 44AD?

The Answer is NO because turnover of eligible business exceeds Rs.2 Crores. It is to be noted that when we take combined turnover of three businesses, it exceeds Rs. 2 crore. Hence, the assessee is not eligible for sec 44AD of the Act.

Example: Mr. Harjot Singh, a Resident individual, is carrying on two businesses, the turnover of which is as under -

Business A (Eligible Business) Rs.70 Lakhs Business B (Transport u/s 44 AE) Rs.8 Lakhs

Section 44AD and 44AE both are applicable. In the above-said case, turnover of both the business shall not be clubbed and both the business shall be chargeable to tax u/s 44AD and 44AE of the Act respectively.

Example: A Person doing brokerage business who have received brokerage for Rs. 90,00,000 and declaring income @5% of Rs.4,50,000. Should his books of Accounts be audit u/s 44AB since he is offering income less than 8%?

Ans. Audit u/s 44AB is applicable if he is declaring income lower than the rate specified u/s 44AD. But, section 44AD is not applicable to Agency, Commission and Brokerage. Hence, he can declare income less than 8%.

Example: An Eligible Assessee is engaged in trading business of goods both in his own name and also as a consignee for another person. The Total Sales amount to Rs.1.30 Crores, Turnover Details are as follows:

Own Business Turnover = Rs.90 Lakhs Consignment Sales Turnover = Rs.40 Lakhs

Whether Assessee can opt for Presumptive income computation or not?

For computing Turnover for 44AD, the turnover of sale of goods on his own name should alone to be considered i.e. Rs.90 Lakhs. Here, the commission received on Consignment sales is liable for Tax Audit only when such commission exceeds the limit of Rs.1 Crore. Consignment Commission can be offered at any rate (Even below 8%), provisions of Sec.44AD will not govern the commission income.

3. Presumptive Rate of Income: The presumptive rate of income would be 8% of total turnover or gross receipts.

However, Proviso to sub-section (1) provides that the presumptive rate of 6% of total turnover or gross receipts will be applicable in respect of amount which is received

  • By and account payee chequeor
  • By an account payee bankdraft
  • By 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) in respect of the previous year.

However the assessee can declare in his return an amount higher than presumptive income so calculated, claimed to have been actually earned by him.

Other Electronic Prescribed by CBDT: The Central Board of Direct Taxes has prescribed other electronic modes to provide for the followings as an acceptable electronic mode of payments-

  • (a) CreditCard;
  • (b) Debit Card;
  • (c) Net Banking;
  • (d) IMPS (Immediate PaymentService);
  • (e) UPI (Unified Payment Interface);
  • (f) RTGS (Real Time GrossSettlement);
  • (g) NEFT (National Electronic Funds Transfer),and
  • (h) BHIM(Bharat Interface for Money) Aadhaar Pay

For this purpose, a new Rule 6A BBA with the heading "Other electronic modes" is introduced in the Income Tax Rules, 1962. This rule has been given a retrospective effect and will come into force from 01- 09-2019 even though the notification was issued on29-01-2020.

This proviso to sub-section (1) has been inserted w.e.f. 01/04/2017 to promote digital transactions. The government has offered incentive to the seller for accepting payment by banking channels or digital means by allowing lower rate of income. This was particularly necessary to encourage digital transactions after demonetization.

Assessee accepting payment through account payee cheque/ account payee draft or ECS through bank or another electronic mode can declare income at 6 % of turnover/ sales or gross receipts. However, the payment must be received before the due date of filing of return.

Example: Mr. Arshdeep Singh, an individual carrying business of laptops has a Turnover of Rs. 80 Lakhs during the F.Y. 19-20. He has received the payments as

Rs.60 Lakh in cash

Rs.10 Lakh by account payee cheque during the previous year Rs. 4 Lakh by ECS through bank account upto 31st July 2019 Rs. 6 Lakh has not been received yet.

Now, since the TO is below Rs.2 Cr, he has the option of availing benefits of section 44AD. Mr. Arshdeep Singh can exercise this option and declare income as

8% of Rs.66,00,000 (60 Lakh + 6 Lakh)

5,28,000

6% of Rs. 14 Lakh (10 Lakh + 4 Lakh)

84,000

Total income from PGBP

6,12,000

Computation of Income under Section 44AD

Computation of Income under Section 44AD

Benefit of the reduction of deemed profit rate under Section 44AD of the Income-tax Act to taxpayers who will accept digital payments

Section 44AD of the income tax Act, 1961 provides that if taxpayer is engaged in any eligible business and having a turnover of Rs. 2 crore or less ,its profits are deemed to be 8 per cent of the total turnover or gross receipts.

in order to achieve the government's mission of moving towards a cash-less economy and to provide incentive small traders/businesses to proactively accept payments by digital means, it has been decided to reduce the existing rate of deemed profit of 8 per cent under Section 44AD of the Act to 6 per cent in respect of the amount of total turnover or gross receipts received through banking channels digital means.

However, the existing rate of deemed profit of 8 per cent referred to in Section 44AD of the Act, shall continue to apply in respect of the total turnover or gross receipts received in cash.

The benefit to traders and small businesses is explained in following different scenarios considering FY 2020-21:

Particular

100% Cash Turnover

80% Digital Turnover

100% Digital Turnover

Total Turnover

1.90 Crore

1.90 Crore

1.90 Crore

Cash Turnover

1.90 Crore

38 Lakh

NIL

Digital Turnover

NIL

1.52 Crore

1.90 Crore

Profit on Cash Turnover @ 8%

15.20 Lakh

3.04 Lakh

NIL

Profit on Digital Turnover @ 6%

NIL

9.12 lakh

11.40 Lakh

Total Profit

15.20 Lakh

12.16 Lakh

11.40 Lakh

Tax Payable under New Regime

201240

122928

107120

Tax Saving

NIL

78312

94120

From the above table, it is clear that if an assessee makes his transactions in cash on a turnover of Rs. 1.90 crore, then his income under the presumptive scheme will be presumed to be Rs. 15.20 Lakh at the rate of 8 per cent of turnover, his total Tax Liability under new tax regime will be Rs. 201240. However, if an assessee shifts to 100 percent digital transactions and his profit will be presumed to be Rs. 11.40 Lakh at the rate of 6 per cent of turnover, his total Tax Liability under new tax regime will be Rs.107120. It is to be noted that by adopting digital system i.e.non cash system.he will save income tax ofRs.94120.00

Lower Rate of Income in Different Scenarios

As per the proviso to 44AD(1), income can be declared as 6% of the turnover if the payment is received digitally or through banking channel before the due date of return filing u/s 139(1). However, many a times due date for return filing is extended or sometimes it may happen that assessee files his return after due date or he has filed return earlier than the due date. We shall discuss here whether the assessee can claim 6% of turnover as his income under these scenarios.

Case 1- Due date of return filing is extended

The due date of return filing u/s 139(1) is extended by the Income Tax Department due to different reasons such as natural calamities, pandemic, technical glitches etc. The extended date becomes the due date u/s 139(1) of the Act for that assessment year. Therefore, any payment received through banking channel/ digitally up to the extended due date u/s 139(1) of the Act shall be eligible for claiming 6% of turnover as income.

Example: Suppose the due date for filing return u/s 139(1) for the A.Y. 2019-20 has been extended to August 31, 2019. An eligible assessee who has received payment through account payee cheque, account payee draft, ECS through banking channel or other prescribed modes up to 31/08/2020 shall be eligible for declaring profits at the rate of 6% of turnover.

Case 2- If the assessee files his return after the due date of return.

The proviso to sec 44AD(1) of the Act requires payment to be received up to due date of return filing. Any payment received even digitally/ through banking channel after the due date of return filing shall not be eligible for lower rate of income i.e 8% of turnover or higher shall be assumed asincome.

Example: Suppose the due date for filing return u/s 139(1) for the A.Y. 2019-20 is July 31, 2019 and the assessee files his return on Dec 26, 2019. Whether receipts through banking channel/ digitally up to Dec 26, 2019 will be eligible for claiming 6% of turnover as profits?

The receipts through banking channel/ digitally up to July 31, 2019 shall be eligible for claiming 6% of turnover as profits. The payments received after the due date i.e 31/07/2019 shall not be eligible for lower rates and these payments received after the due date of filing return will not be given the benefit of 6% of turnover .

Case 3- If the assessee files his return before the due date of return.

When the assessee files his return before the due date u/s 139(1) of the Act, he would have considered the facts on the date of filing of return and not assumed the facts beyond that date. The receipts through banking channel/ digitally up to date of return filing are considered for lower rate of income and the amount not received yet shall be considered for 8% of turnover as profits. The interesting issue here is what about the payments received through banking channel/ digitally after the date of return filing but before the due date of return filing. Whether these will be considered for 8 % of turnover or 6% of turnover as profits? If 6% is to be considered whether the return can be revised? Let us understand this with help of an example.

Example: Mr. Raj has a turnover of Rs. 80 Lakh for the A.Y. 2019-20. The due date of return filing is July 31, 2019. He files his return on May 15, 2019. He has received the following payments by account payee cheque:

  • Up to 31/03/2019 - Rs.50,00,000
  • Up to15/05/2019- Rs. 15,00,000 From 16/05/2019 to 31/07/2019 - Rs. 10,00,000
  • Received after 31/07/2019 - Rs.5,00,000

Mr. Raj has filed return on 15/05/2019. Till that date, payments to the extent of Rs.65,00,000 has been received by account payee cheque. Mr. Raj can declare progits from business as:

  • 6% of Rs.65,00,000 = Rs.3,90,000
  • 8% of Rs. 15,00,000 (80L- 65L) = Rs.1,20,000
  • Total profits = Rs.5,10,000

Mr. Raj has received Rs. 10,00,000 after date of return filing but before due date of return filing. Mr. Raj can can not claim 6% of Rs. 10,00,000 as profits by revising the return. There is no doubt that the return can be revised u/s 139(5) before the end of assessment year or up to completion of assessment whichever is earlier. But,as per the provisions of sec 44AD of the Act,the income claimed by Mr.Raj in his income tax return will be final and subsequently by revising return ,the same cannot be reduced.

The assessee has to maintain complete records about the receipts from customers, whether they are received in cash or through banking channel/ digitally and whether they are received up to due date of return filing or not. Further, the record maintenance is for two financial years. Maintenance of all these records is a cumbersome task for a small business person. It is also against the basic object of presumptive taxation which is to make the taxation system simple, easy and hassle-free for small taxpayers. There is a need to create a balance between the object of less-cash economy and creating 'ease of doing' business environment.

Article Continued in the Second Part.

To read Part 2 of Section 44AD: Click Here


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Category Income Tax, Other Articles by - CA.R.S.KALRA 



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