Presumptive Taxation of Business u/s 44AD

By | May 20, 2016
(Last Updated On: May 20, 2016)

Presumptive Taxation of Business u/s 44AD

After Finance Act 2016

Presumptive Taxation of Business u/s 44AD

What is Presumptive Taxation of Business u/s 44AD

The existing provisions of section 44AD provide for a presumptive taxation scheme for an eligible business. Where in case of an eligible assessee engaged in eligible business having total turnover or gross receipts not exceeding Rs 1 crore (increased to Rs 2 Crore w.e.f AY 2017-18 by Finance Act 2016) , a sum equal to 8 %  of the total turnover or gross receipts, or as the case may be, a sum higher than the aforesaid sum shall be deemed to be profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

Who is eligible assessee under Presumptive Taxation of Business u/s 44AD

“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 assessment year;

What is eligible business under Presumptive Taxation of Business u/s 44AD

“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 [one crore rupees ){ (increased to Rs 2 Crore w.e.f AY 2017-18 by Finance Act 2016 }

Whether Expenses are allowed under Presumptive Taxation of Business u/s 44AD ?

Under the scheme, the assessee will be deemed to have been allowed the deduction under sections 30 to 38 of the Act.and  no further deduction under those sections shall be allowed.

Thus the Assessee will not be allowed to deduct any expenses from this 8% profit.

Whether Assessee can report Income Less than 8% under Presumptive Taxation of Business u/s 44AD ?

The eligible assessee can report income less than the deemed income of eight per cent. of the total turnover or gross receipts not exceeding rupees one crore (increased to Rs 2 Crore w.e.f AY 2017-18 by Finance Act 2016)  provided he maintains books of accounts as per section 44AB.

Further in the case of an eligible assessee, so far as the eligible business is concerned, the provisions of Chapter XVII-C shall not apply.

Applicability of Amendments u/s 44AD of Finance Act 2016 relating to Presumptive Taxation of Business 

Following amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

Turnover limit for Audit increased to Rs 2 Crore under Presumptive Taxation of Business u/s 44AD

In order to reduce the compliance burden of the small tax payers and facilitate the ease of doing business, Finance act 2016  increased the threshold limit of one crore rupees specified in the definition of “eligible business” to two crore rupees.

Deduction of Partner Salary or Interest Not Allowed 

Presumptive Taxation of Business u/s 44AD

Finance Act 2016 has omitted Proviso below sub-section (2)of Section 44AD enabling deduction of salary and interest to partners with effect from the 1st day of April, 2017 i.e AY 2017-18.

Thus partners will not be eligible to claim deduction of Salary and Interest if firm opt for section 44AD. Salary and interest paid to partners would be deemed to have been allowed while computing the profits at 8% of the turnover.

As per the memorandum of Finance Bill 2016

” It is also proposed that the expenditure in the nature of salary, remuneration, interest etc. paid to the partner as per clause (b) of section 40 shall not be deductible while computing the income under section 44AD as the said section 40 does not mandate for allowance of any expenditure but puts restriction on deduction of amounts , otherwise allowable under section 30 to 38. “

If the Assessee opt out of Presumptive Taxation of Business u/s 44AD

Memorandum explaining provisions of the Finance Bill, 2016

“It is also proposed that 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 consecutive 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).

For example, an eligible assessee claims to be taxed on presumptive basis under section 44AD for Assessment Year 2017-18 and offers income of Rs. 8 lakh on the turnover of Rs. 1 crore. For Assessment Year 2018-19 and Assessment Year 2019-20 also he offers income in accordance with the provisions of section 44AD. However, for Assessment Year 2020-21, he offers income of Rs. 4 lakh on turnover of Rs. 1 crore. In this case since he has not offered income in accordance with the provisions of section 44AD for five consecutive assessment years, after Assessment Year 2017-18, he will not be eligible to claim the benefit of section 44AD for next five assessment years i.e. from Assessment Years 2021-22 to 2025-26.”

Advance Tax on or before 15th March under Presumptive Taxation of Business u/s 44AD  

Further as the turnover limit of presumptive taxation scheme has been enhanced to rupees two crore, Finance Act 2016 provided that eligible assessee shall be required to pay advance tax. However, in order to keep the compliance minimum in his case, he may pay advance tax by 15th March of the financial year.

Audit if Total Income Exceeds Rs 2 crore under Presumptive Taxation of Business u/s 44AD

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 section 44AB.”;

Amendment of section 44AD as per Section – 26, Finance Acts – 2016

26. In section 44AD of the Income-tax Act, with effect from the 1st day of April, 2017,—

(a)in sub-section (2), the proviso shall be omitted;
(b)for sub-sections (4) and (5), the following sub-sections shall be substituted, namely:—
“(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 section 44AB.”;
(c)in the Explanation, in clause (b), in sub-clause (ii), for the words “one crore rupees” occurring at the end, the words “two crore rupees” shall be substituted.

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