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Computation of income of business on presumptive basis under section 44AD of the Income tax act, 1961

Computation of income of business on presumptive basis under section 44AD of the Income tax act, 1961

For small taxpayers- declare income from business @8% or more of total gross receipts/turnover u/s 44AD and get relief from tedious task of maintenance of books of accounts and relaxation from tax audit under Income tax act, 1961

Section 44AD is a special provision for computing profits and gains of business on presumptive basis. It provides that in case of an “eligible assessee” who is engaged in “eligible business”, profits and gains from such eligible business be deemed to be income under the head “Profits and gains of business or profession” @8% or more than 8% of total gross receipts/turnover of such eligible business. All deductions allowable under section 30 to 38 are deemed to have been allowed and no further deduction under these sections be allowed. However if assessee is a partnership firm not being a LLP (Limited liability partnership firm), even after computing income @8% or at a higher rate, deduction on account of remuneration and interest paid to partners shall be further allowed as per the conditions and limits prescribed under clause(b) of section 40.

“Eligible assessee” means an individual, HUF or a partnership firm, being a resident, but not a limited liability partnership (LLP as defined in LLP act)

“Eligible business” means any business except the business of plying, hiring or leasing goods carriage and whose gross receipts or total turnover in the previous year does not exceed One Crore rupees.  

Assessee can declare income from eligible business lower than 8%, however in such a cases assessee has to maintain books of accounts specified u/s 44AA (2) and gets its accounts audited by a chartered accountant in practice as specified u/s 44AB.  

Benefits of section 44AD:

  1. No need to pay advance tax in respect of eligible business u/s 44AD and as such interest under section 234B or 234C, if tax is Rs.10, 000/- more than Rs. 10,000/- is not chargeable in respect of tax amount of eligible business.
  2. No need to maintain books of accounts, only proof of gross receipts declared be shown to assessing officer in case of questions in assessment.
  3. No need to get accounts audited for the purpose of tax audit, if turnover/gross receipts does not exceed One Crore rupees.
  4. No need to deduct TDS in case assessee is declaring income from business lower than 8% and accounts are audited u/s 44AB by referring to section 44AD- only in case of individual or HUF’s.  

Important points/provisions of section 44AD:

  • To whom section applies:

Section 44AD is applicable on “eligible assessee”. Eligible assessee for the purpose of this section means a resident individual, resident HUF (Hindu undivided family) or a resident partnership firm.

 

  • Whether section is applicable on non-resident? :

Section 44AD does not apply to non-resident.

 

  • Who cannot claim benefits of section 44AD? :

Following persons cannot claim the benefit of section 44AD-

  1. A company
  2. A limited liability partnership firm (LLP)
  3. An association of persons
  4. Trusts even if activities are considered in nature of business
  5. Body of individuals
  6. Local authority
  7. Artificial juridical person
  8. An individual, HUF or partnership firm who has claimed deduction under any of the sections 10A, 10AA, 10B, 10BA i.e. undertakings under free trade zone, special economic zone, newly established 100% EOU’s, export of certain articles or things or deductions under any provisions of chapter VIA under the heading “Deduction in respect of certain incomes”

 

  • Whether applicable on person carrying on profession? :

The provision of this section does not apply to a person carrying on profession as referred to in section 44AA (1).

 

  • Which businesses are not covered for applicability of section 44AD? :

Following businesses are not covered for applicability of this section:

 

  1. A person carrying on any agency business
  2. A person earning income in nature of commission or brokerage
  3. A person carrying business of plying, hiring or leasing goods carriages for which section 44AE is applicable. Please note cranes, earth moving machinery are not meant for goods carriage and hence income from plying/leasing of cranes, earth moving machinery can be declared under section 44AD.
  4. A person whose total turnover or gross receipts in the previous year exceed Rs. 1 Crore. In such a cases tax audit is applicable even if income is declared @8% or at a higher rate.

 

  • What will be the treatment of depreciation and how WDV of asset will be determined? :

As per the sub section (3) of section 44AD the written down value of any asset of an eligible business shall be deemed to have been calculated as if depreciation u/s 32 has been claimed and allowed for relevant assessment year.   

 

  • Whether it is mandatory for eligible assessee carrying on eligible business to declare income @8% or higher, even if total income including such income is below maximum amount not chargeable to income tax? :

If assessee has total income below maximum amount not chargeable to tax, section 44AD is not applicable and accordingly profits can be declared below 8% .In such a case, books of accounts are required to be maintained but tax audit will not be applicable.

 

  • Whether tax audit u/s 44AB as required by section 44AD is required in case assessee declared loss in business and has other income chargeable to tax? :

In case assessee has declared loss from eligible business and has other income chargeable to tax and in nutshell total income even after adjustment of loss is exceeding maximum amount not chargeable to tax, then also audit u/s 44AB as required by section 44AD is to done.

  • Whether TDS provisions get attracted in case assessee is getting its tax audit done u/s 44AB as required by section 44AD? :

For individual or HUF’s there is no need to deduct TDS even if tax audit is require to be done u/s 44AB if they declare income u/s 44AD below 8% if total turnover/ gross receipts does not exceeds One Crore rupees.  However for a partnership firm declaring income below 8% under section 44AD and getting its accounts audited u/s 44AB as such, TDS provisions are to be followed. Relaxation is only for individual or HUF’s (Hindu undivided family).

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5 Responses to Computation of income of business on presumptive basis under section 44AD of the Income tax act, 1961

  1. Sir, a person has business of man supply work( bricks making work)he collects a heavy amount of rs. 95,000,00/- by other contractor( bhatta tekedar)through bank. may he will show his income u/s 44AD,

    • supply of manpower neither a profession u/s44AA nor agency business, section 44AD is applicable to such business if other conditions viz turnover etc., are met.

  2. Dear Sahu ji
    In my opinion it is contract for labour and for this he is receiving hire charges of labour not being commission or payment towards agency business. He can claim hire charges received as income under section 44AD which also was in earlier section 44AD which covered labour supply for 8%.

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