Section 44ADA and 44AD – Presumptive Taxation Scheme

What is a presumptive taxation scheme?

The Government of India has incorporated a scheme of presumptive taxation in income tax.  The motive behind the Scheme is to minimize the tax burden. Also to provide relief from tedious work to small tax assessees.

Businesses adopting the Scheme are not required to maintain regular books of account. They can declare the income at a prescribed rate.

In this editorial, we are going to discuss the provisions of the income tax Act. For this, we will discuss the following sections of the Act.

1. Section 44AD
2. Section 44ADA
3. Section 44AE   (Will discuss in another article)

Section 44AD: Special provision for computing profits and gains of business on a presumptive basis.

(1) In spite of 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 8% of the total turnover/gross receipts recorded by the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee as presumptive income, 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 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 used for the purpose of the business referred to in sub-section (1) shall be deemed to have been calculated as if the 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 sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub-section (1) and in computing the monetary limits under those sections, the gross receipts or, as the case may be, the income from the said business shall be excluded.

(5) Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April 1997 or any earlier assessment year, are lower than the profits and gains specified in subsection (1), and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of the assessment made under subsection (3) of section 143.]

(6) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub-section (1), if he keeps and maintains such books of account and other documents as required under subsection (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.]

Explanation: For the purposes of this section, the expression “Eligible Business” refers to:

• Any business except the business of plying, hiring, or leasing goods carriages referred to in Section 44AE
• The total turnover/gross receipts of the business in the previous year are not greater than Rs. 2 crores.

Who are the persons eligible for the Presumptive Taxation Scheme under sec 44AD?

Here is the list of the assessee who can opt for this scheme.

• Resident Individuals
• Hindu Undivided Families
• Partnership Firm (except LLP or Limited Liability Partnership Firm)

Note: A non-resident and persons other than given above cannot avail of this scheme. 

Eligible businesses not covered under presumptive taxation scheme U/s 44AD-

• Assessee they have claimed any deductions under Sections 10A, 10AA, 10B, 10BA.
• Assessee, they have claimed deductions under Section 80HH to 80 RRB.
• Assessee engaged in the business of plying and hiring goods carriages cannot adopt.
• Assessee engaged in professional services [(44AA(1)] cannot adopt presumptive taxation schemes.
• An insurance agent.
• Assessee having gross receipt or annual turnover in the previous year exceeded Rs. 2 crores.

Other Important Points:

• If the assessee is running more than one business, the turnover of all the businesses is in question needs to be considered to check the eligibility to opt for a presumptive taxation scheme under Section 44AD.
• In case the assessee is involved in both business and professional practice, then provisions of presumptive taxation under Section 44AD can be adopted only for the business, and the income of the profession has to be calculated as per the normal provisions of the Income Tax Act, 1961.
• An assessee can claim tax deductions and avail benefits under Chapter VI-A (Section 80C to 80U) even if he is declaring income as per the presumptive taxation scheme under Section 44AD of the Income Tax Act.

For Example, Ms. Komal has a provisions store. The annual turnover of her shop for the last year was Rs. 90 lakh. She can opt for the scheme to avoid tedious paperwork

Let’s take one more example for better understanding – 

PQ Private Limited is a company involved in the business of manufacturing. And the turnover of the Company is 96 Lakhs.  In such case, even if the company satisfies all the conditions of the Scheme.  But it cannot opt for the scheme because private limited companies are not eligible. 

Applicable Rate and Income Computation under Section 44AD-

Assesses opting for the presumptive taxation scheme under section 44AD have to calculate their income on an estimation basis.

The tax is to calculate at the rate of 8% of Gross receipts or total annual turnover of the business for the previous year.  The assessee can declare a higher income than the presumptive income shown as per the scheme.

For example, Mr. Arun is running a stationery shop whose turnover is Rs. 80 lakh for the previous year.  He is willing to opt for the scheme for the filing of an Income-tax return.  Now as per the provisions of the act, He will calculate his income at the rate of 8% of gross receipts or total turnover. 

In this case, Mr. Arun having a stationary business with Rs. 80 lakh turnover (less than Rs. 2 cr as per the provisions of Section 44AD) can adopt the provisions of the scheme. And his annual presumptive tax will be Rs. 6.4 lakhs (i.e. 8% of 80 lakh).

Also read: House Rent Allowance – Exemption & Tax Deductions

Section 44ADA

The presumptive taxation scheme of section 44ADA is also designed to give relief to small taxpayers engaged in specified professions. This section is effective from 1st April 2017.

Section 44ADA: Special provision for computing profits and gains of profession on a presumptive basis.

(1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty percent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession 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.

(3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession 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 subsection (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

Who are the persons eligible for the Presumptive Taxation Scheme u/s 44ADA?

A person engaged in the following professions can opt for a presumptive taxation scheme under section 44ADA. Also noted that person should be an Indian resident.

• Legal
• Medical
• Engineering or architectural
• Accountancy
• Technical consultancy
• Interior decoration
• Any other profession as notified by CBDT

Section 44ADA Limits: 

Section 44ADA was introduced for small professionals with the objective to simplify taxation, reduce compliance burden and facilitate the ease of doing business for certain small professionals.

It also aims at bringing parity between small businesses who enjoy the Presumptive Taxation Scheme under Section 44AD and small professionals.

In case of a person adopting the provisions of section 44ADA, income will be computed on a presumptive basis, @ 50% of the total gross receipts of the profession.

The total gross receipts from the profession should not exceed Rs 50 lakh for a financial year.

Also Read: Depreciation on Goodwill is now no more

Provisions for Eligible Partnership Firm

If the assessee is a partnership firm, it can claim the deductions of interest paid to its partners and also the remuneration paid within the limits prescribed under Section 40 b) of the IT Act.

However, in such cases, the firm is not eligible to claim any deductions, etc. under Sections 40,40A and 43B after computation of income at the applicable rate.

That means disallowances under Sections 40, 40A, and 43B are not applicable to an assessee who is willing to adopt the presumptive taxation scheme under Section 44AD.

For example, let’s say Ram Corporation is a partnership firm engaged in the business of manufacturing wooden photo frames.

The firm has declared its income for the previous year as per the provisions of the presumptive taxation scheme under Section 44AD.

After computation of income on basis of estimation i.e. at the rate of 8% on gross receipts, the firm wanted to claim further deductions on account of interest paid to its partners.

In this case, Ram Corporation can claim deductions for the interest paid to partners as deductions of interest paid to its partners, and also the remuneration paid within the limit prescribed under Section 40 b) of the IT Act is allowed as a deduction under the presumptive taxation scheme.

Computing Written down Value (WDV) of depreciable assets:

As mentioned above, assessees willing to adopt the provisions of the presumptive taxation scheme under Section 44AD are not permitted to claim deduction on account of various expenditures including depreciation and unabsorbed depreciation.

Also read: 8 Reasons why Income tax department hold your Refund

With regards to the computation of the written down value of a depreciable asset, the following provision has to be kept in mind.

Though deductions on account of depreciation and unabsorbed depreciation are not available, it is necessary to calculate the depreciation for the purpose of computation of written down value of an asset used for a business or professional practice covered under the presumptive taxation scheme.

Let’s understand this with an illustration. AB Corporation, a steel manufacturing firm has declared its income as per the provisions of the presumptive taxation scheme as under Section 44AD of the Income Tax Act.

The presumptive income of AB Corporation was calculated at the prescribed rate i.e. 8% without deducting any depreciation as it is presumed that there is no deduction on account of depreciation is allowed under the provisions of the presumptive taxation scheme.

In this case, it is important to note that, even though the depreciation on the business asset is not available for deduction, it is necessary for the computation of the written value of the particular asset. The depreciation needs to be calculated and deducted.

Provisions relating to maintenance of books of account :

The main objective of the Presumptive taxation scheme is to relieve the small taxpayers from the tedious work of maintaining books of accounts.

An assessee, who adopts the provisions of the presumptive taxation scheme under Section 44AD of the Income Tax Act, is not required to maintain any books of account.

Basically, this is applicable to the businesses that are covered under Section 44AA of the IT Act. For such assessee or businesses, it’s not required to get their books audited as per the provisions of Section 44AB.

Also read: Section 140: Who must Sign or Verify an Income Tax Return

To understand this, let’s take an example. Mr. Mani is running a provision store. Turnover of his business for the previous year is Rs. 40 lakh.

He declared his business income as per the provisions of the presumptive taxation scheme of Section 44AD. In this case, Mr. Mani is not obliged to maintain the books of account relating to his business as per the provisions of Section 44AD.

And also, he is not required to get his books audited as his business is not covered under Section 44AA and Section 44AB of the IT Act.

Declaring Lower-Income or Higher Income under the Presumptive Taxation Scheme:

In case, the assessees’ actual business income is lower than that of the presumptive income as declared under the presumptive taxation scheme of Section 44AD (i.e. 8% of the total turnover or gross receipt), then there is no relief on maintaining the books of account as per the scheme.

That means, if the assessee’s actual business income is lower than the presumptive income, then he is required to maintain the books of account pertaining to his business as per Section 44AA. And also, he is required to get the books audited as per the provisions of Section 44AB of the Income Tax Act, 1961.

In case, the actual income is more than the presumptive income scheme, this provision allows the assessee to declare the higher income at his option (higher than the prescribed rate of 8%).

Lastly, the presumptive taxation scheme under Section 44AD is a great relief to small and medium taxpayers with regards to maintenance of books of account and getting it audited which is often quite a very tedious job with a high probability of errors.