Section 44 AD of Income Tax Act

Special provision for computing profits and gains of business on presumptive basis For Assessment Year 2013-14.

Section 44AD (1) of the Income tax act 1961 read as under

“ (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”.”

Understanding of Section  44 AD (1) (when applicable and what will do if applicable?)

Section 44 AD is applicable in the case of an eligible assessee engaged in an eligible business.

1. Eligible assessee: Any resident  individual, HUF or a partnership firm (excluding LLP) and who has not claimed deduction under  sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. - Deductions in respect of certain incomes”.

2. Eligible business: Any business except plying, hiring, or leasing goods carriage referred U/s 44AE and whose turnover is less than 100 lacs.

It covers manufactures, job workers, processing industry and wholesalers. But do not applicable on Professions like legal, medical, engineering, or architectural or accountancy profession or technical consultancy or interior decoration or any other profession notified by the board. Person earning commission

What if section 44AD is applicable?

1.  8% of total turnover or Gross receipt of such business shall be deemed to be the profit from such business.

2.  Assessee may declare higher income.

3.  Section 28 to 43 C of income tax act not applicable to the  assessee.

Section 44AD (2) of the Income tax act 1961 read as under

“(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”.

Understanding of Section 44 AD (2)         

1. It further clarifies that no further deduction is available under section 30 to 38. It shall be deemed that they have already been deducted.

2.  Only in case of Partnership firm Salary and Interest paid to its partners can be deducted subject to condition and limit specified in section 40.

Section 44AD (3) of the Income tax act 1961 read as under

(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.

Understanding of Section 44 AD (3)

1.  It shall be deemed that Depreciation had been claimed and allowed and W.D.V. shall be calculated accordingly.

a. Separate deduction cannot be claimed for Depreciation.

b. W.D.V shall be carried after deducting depreciation. In future depreciation can be claimed on such W.D.V. only.

Section 44AD (4) of the Income tax act 1961 read as under

(4) The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.

Understanding of Section 44 AD (4)

1. Provision related to Advance tax not applicable if such case. It means that there is no need to deposit advance tax even if tax payable is more than threshold limit fixed for payment of advance tax.

Section 44AD (5) of the Income tax act 1961 read as under

(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 are 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 44AB

Understanding of Section 44 AD (5)

1. This section is very important. It provides that Assessee can claim lower profit also than 8% .But Asssessee has to comply the following:

a.  Required to maintain books of accounts as per sub section (2) of section 44AA

b.  Required to get audit of books of accounts under section 44AB

On the basis of above analysis, if section 44 Ad applies to an assessee , following points must be kept in mind :,

1. Assessee can declare 8% or higher sum of his gross receipt as his income under  this section.

2. There is no need to maintain books of account related to such business as required under section 44AA.

3.  There is no need of Audit.

4. The assessee can voluntarily declare a higher income in his return.

5. There is no need to pay advance tax related to such business.

6. Written down value of assets shall be calculated as if the depreciation has been actually allowed

7. In case of Partnership firm assessee, normal deduction in respect of salary and interest paid to the partners shall be allowed as deduction out of such presumptive income subject to conditions and limits specified in clause (b) of section 40.

8. Assessee cannot get deduction u/s 10AA AND business related deduction of chapter 6A. He can get deduction u/s 80c to 80G.

9. In case assessee claims that he has earned income lower than specified percentage and such income is more than maximum amount not chargeable to tax, Ss. 44AD(5) and 44AA(2)(iv), mandates him to maintain books of accounts and other documents as specified u/s 44AA, get them audited from the accountant and furnish report as required u/s 44AB. All deduction u/s 30 to 38 shall be deemed to have been allowed.

This is my first article. So kindly ignore if anybody find any mistake, please come to my knowledge. Your views are welcomed.

Following questions, also in my mind related to this section, which are not answered here.

1.  How to calculate Gross Turnover or Gross receipt?

2.  How to calculate book profit for Partners remuneration as per section 40 (b) if books of accounts not maintained?