Introduction
Are you looking to understand about Simplifying the Special Provision for Computing Profits and Gains of Business on Presumptive Basis Section 44AD of Income Tax Act 1961 ?
This detailed article will tell you all about Simplifying the Special Provision for Computing Profits and Gains of Business on Presumptive Basis Section 44AD of Income Tax Act 1961.
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The Income Tax Act 1961 is the backbone of the taxation system in India. It lays down the rules and regulations for computing the income tax payable by individuals, companies, and other entities. One of the sections of the Income Tax Act 1961 that is of great significance for small businesses is Section 44AD.
Section 44AD provides a special provision for computing profits and gains of business on a presumptive basis. This provision is applicable to certain eligible taxpayers who are engaged in certain specified businesses. The objective of this provision is to provide relief to small businesses from the burden of maintaining detailed books of accounts and getting them audited.
In this blog, we will simplify the special provision for computing profits and gains of business on a presumptive basis Section 44AD of the Income Tax Act 1961 and explain its various aspects.
Eligibility Criteria for Section 44AD
To avail of the benefits of Section 44AD, a taxpayer must satisfy the following conditions:
The taxpayer must be an individual, Hindu Undivided Family (HUF), or a partnership firm. Companies and Limited Liability Partnerships (LLPs) are not eligible for this provision.
The taxpayer must be engaged in any eligible business. The eligible businesses are those that have a turnover of less than Rs. 2 crores. These businesses include:
- Civil construction
- Carriage of goods by any mode other than railways
- Retail business
- Restaurant business
- Professionals such as doctors, lawyers, architects, engineers, and accountants
Presumptive Income under Section 44AD
The presumptive income under Section 44AD is calculated as a percentage of the total turnover or gross receipts of the eligible business. The percentage of presumptive income varies based on the type of business. The following table shows the percentage of presumptive income for different types of businesses:
| Business Type | Presumptive Income Percentage |
|---|---|
| Civil construction | 8% |
| Carriage of goods | 8% |
| Retail business | 6% |
| Restaurant business | 6% |
| Professionals | 50% |
For example, if a retail business has a total turnover of Rs. 50 lakhs, the presumptive income under Section 44AD will be Rs. 3 lakhs (6% of Rs. 50 lakhs).
Advantages of Section 44AD
Section 44AD provides several advantages to small businesses. Some of these advantages are:
- No need to maintain detailed books of accounts: Under Section 44AD, eligible taxpayers are not required to maintain detailed books of accounts. They only need to maintain a record of their gross receipts or turnover and any other expenditure related to the business.
- Relief from tax audit: Eligible taxpayers under Section 44AD are also not required to get their accounts audited. This provides relief to small businesses from the burden of getting their accounts audited and the associated costs.
- Lower tax liability: The presumptive income calculated under Section 44AD is generally lower than the actual income earned by the business. This results in lower tax liability for eligible taxpayers.
Disadvantages of Section 44AD
While Section 44AD provides several advantages, it also has some disadvantages
Disadvantages of Section 44AD
Some of the disadvantages of Section 44AD are:
- Higher tax liability for certain businesses: The presumptive income percentage under Section 44AD for professionals is 50%. This may result in higher tax liability for professionals as compared to the actual income earned by them.
- Limited eligibility: Section 44AD is applicable only to certain eligible businesses with a turnover of less than Rs. 2 crores. Businesses with a turnover of more than Rs. 2 crores are not eligible for this provision.
- No deduction for expenses: The presumptive income under Section 44AD is calculated as a percentage of the total turnover or gross receipts. This does not take into account the actual expenses incurred by the business. Therefore, eligible taxpayers cannot claim any deduction for expenses while calculating their income tax liability.
FAQs
- Can a company or an LLP avail of the benefits of Section 44AD?
No, only individuals, HUFs, and partnership firms are eligible for the benefits of Section 44AD. Companies and LLPs are not eligible for this provision.
- What is the presumptive income percentage for civil construction and carriage of goods businesses?
The presumptive income percentage for civil construction and carriage of goods businesses is 8%.
- Are eligible taxpayers under Section 44AD required to maintain detailed books of accounts?
No, eligible taxpayers under Section 44AD are not required to maintain detailed books of accounts. They only need to maintain a record of their gross receipts or turnover and any other expenditure related to the business.
- Can eligible taxpayers claim any deduction for expenses while calculating their income tax liability under Section 44AD?
No, eligible taxpayers cannot claim any deduction for expenses while calculating their income tax liability under Section 44AD. The presumptive income is calculated as a percentage of the total turnover or gross receipts and does not take into account the actual expenses incurred by the business.
Conclusion
Section 44AD of the Income Tax Act 1961 provides a special provision for computing profits and gains of business on a presumptive basis. This provision is applicable to certain eligible taxpayers who are engaged in certain specified businesses with a turnover of less than Rs. 2 crores. The objective of this provision is to provide relief to small businesses from the burden of maintaining detailed books of accounts and getting them audited.
The presumptive income under Section 44AD is calculated as a percentage of the total turnover or gross receipts of the eligible business. The percentage of presumptive income varies based on the type of business. While Section 44AD provides several advantages such as relief from tax audit and lower tax liability, it also has some disadvantages such as limited eligibility and no deduction for expenses.
Overall, Section 44AD is a useful provision for small businesses that meet the eligibility criteria. It simplifies the process of computing income tax liability and reduces the burden of compliance.
Section 44AD, of Income Tax Act, 1961
Section 44AD, of Income Tax Act, 1961 states that
(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 or through such other electronic mode as may be prescribed22 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 be allowed.
(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.
(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.
(6) 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; 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 assessment year;
(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 crore rupees.