Provision of Presumptive Taxation scheme under Sections 44AD, Section 44ADA and Section 44AE || Eligible business under section 44AD 44ADA, 44AE

Provision of Presumptive Taxation scheme under sections 44AD, section 44ADA and section 44AE ,

Section 44AD, 44ADA and 44AE of Income Tax Act have give relief to small taxpayers (person) from the tedious job of maintenance of books of account and audited of accounts. In this article you can gain knowledge about various provisions of the presumptive taxation scheme of section 44AD, section 44ADA and section 44AE.

Meaning of presumptive taxation scheme

As per Sections 44AA   of the Income-tax Act:–a person engaged in business is required to maintain regular books of account under certain circumstances. To give relief to small taxpayers from this tedious work, the Income-tax Act 1961 has framed the presumptive taxation scheme under Sections 44AD, Section 44AD, Sections.

A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from tedious job of maintenance of books of account.
(Eligible business under section 44AD 44ADA, 44AE)

For small taxpayers the Income-tax Act 1961 has framed presumptive taxation schemes as given below: (Eligible business under section 44AD 44ADA, 44AE)

• Section 44AD of Income Tax Act.
• Section 44ADA of Income Tax Act.
• Section 44AE of Income Tax Act.

(I) Section 44AD of Income Tax Act(Eligible business under section 44AD 44ADA, 44AE)

Eligible persons who can take advantage of the presumptive taxation scheme of section 44AD of Income Tax Act

The scheme of section 44AD Income Tax Act is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring, Transportation or leasing of goods carriages, referred to in section 44AE).

The presumptive taxation scheme of section 44AD of Income Tax Act can be adopted by following persons: –

• Resident Individual
• Resident Hindu Undivided Family (HUF)
• Resident Partnership Firm (not LLP (Limited Liability Partnership Firm)
• In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a Hindu Undivided Family (HUF) or a Partnership Firm (not LLP (Limited Liability Partnership Firm).
• This scheme cannot be adopted by a person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB of Income Tax Act in the relevant year.

Businesses not covered under The Scheme of section 44AD of Income tax Act

The scheme of section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:

• Business of plying, hiring, Transportation or leasing of goods carriages referred to in section 44AE.
• A taxpayer who is carrying on any agency business.
• A taxpayer who is earning income in the nature of commission or brokerage
• Any business whose total turnover exceeds two crores (Rs. 2,00,00,000) rupees
• Apart from above discussed businesses, a person carrying on profession as referred to in section 44AA (1) is not eligible for presumptive taxation scheme 44AD of Income Tax Act.

Example-

1.Question

Mr. A resident of India as per income tax, who is earning income in the nature of commission or brokerage as a Insurance agents. He does not have any other head Income. Can Mr. A adopt the presumptive taxation scheme of section 44AD?

Answer

Mr. A cannot be adopt presumptive taxation scheme of section 44AD, Because he is earning income in the nature of commission or brokerage, Insurance agents earn income by way of commission and, hence, they cannot adopt the presumptive taxation scheme of section 44AD.

2. Question

Mr. B resident of India as per income tax, who is earning income in the nature of professional Work. Can Mr. b adopt the presumptive taxation scheme of section 44AD?

 Answer

Mr. B cannot be adopt presumptive taxation scheme of section 44AD, Because who is engaged in any profession as prescribed under section 44AA (1) cannot adopt the presumptive taxation scheme of section 44AD.

3. Question

A taxpayer whose total turnover or gross receipts for the year exceed 2 Crore Rupees cannot adopt the presumptive taxation scheme of section 44AD

  Answer-

Yes, Because the presumptive taxation scheme of section 44AD can be opted by the eligible persons, if the total turnover or gross receipts from the business do not exceed 2 Crore Rupees.

Taxable Turnover and Tax rate

In case of a taxpayer adopting the provisions of section 44AD, income is computed on presumptive basis at the rate of income tax 8% of the turnover of the eligible business for the year.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD of Income Tax Act is amended with effect from the assessment year 2017-18 to provide that income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date of filing of return under section 139(1) of Income Tax Act.

Hence, in case of a person adopting the provisions of section 44AD, income will not be computed in normal manner as discussed earlier (i.e., Turnover less Expenses) but will be computed @ 6% or 8%, as the case may be, of the turnover or gross receipt.

However, a person may voluntarily disclose his business income at more than 8% or 6%, as the case may be, of turnover or gross receipt.

Under the normal provisions of the Income-tax Act, taxable business income will be computed after allowing deduction in respect of expenses which are deductible as per the Income-tax Act 1961 and after disallowing expenses which are not deductible as per the Income-tax Act 1961.

In case of a person who is opting for the presumptive taxation scheme of section 44AD, the provisions of allowance/disallowances as provided for under the Income-tax Act will not apply and income computed at the presumptive rate of 6% or 8% will be the final taxable income of the business covered under the presumptive taxation scheme. In other words, the income computed as per the prescribed rate will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed.

While computing income as per the provisions of section 44AD (Income Tax Act), separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

No need to maintain books of account as per under section 44AA of Income Tax Act

Section 44AA deals with provisions relating to maintenance of books of account by a person engaged in business/profession. Thus, a person engaged in business/profession has to maintain books of account of his business/profession according to the provisions of section 44AA.

In case of a person engaged in a business and opting for the presumptive taxation scheme of section 44AD, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AD and declares income 6% or 8% (as the case may be) of the turnover, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AD.

Payment of advance tax

Any taxpayer opting for the presumptive taxation scheme under section 44AD of Income Tax Act is liable to pay whole amount of advance tax on or before 15^thMarch of the previous year. If he fails to pay the advance tax by 15^th March of previous year, he shall be liable to pay interest as per section 234C of Income Tax Act.

Note: – Any amount paid by way of advance tax on or before 31^st day of March shall also be treated as advance tax paid during the financial year ending on that day.

Provisions for declares Income at a lower rate (less than 6% or 8%)

A person can declare income at lower rate ( at less than 6% or 8%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA Income Tax Act and has to get his accounts audited as per section 44AB of Income Tax Act.

Consequences if a person opts out from the Scheme section 44AD of Income Tax Act

If a person opts for presumptive taxation scheme then he is also required to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years.

Example,

Mr A claims to be taxed on presumptive basis under Section 44AD of Income Tax Act for Assessment Year 2017-18. For Assessment Year 2018-19 and 2019-20 and he offers income on basis of presumptive taxation scheme. However, for Assessment Year 2020-21, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five Assessment Years, i.e. from Assessment Year 2021-22 to 2025-26.
(Eligible business under section 44AD 44ADA, 44AE)
Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB of Income Tax Act from the Assessment Year in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]

(II) Section 44ADA of Income Tax Act

The presumptive taxation scheme of section 44ADA of Income Tax Act is designed to give relief to small taxpayers engaged in specified profession.

Eligible Persons who can take advantage of the presumptive taxation scheme of section 44ADA of Income Tax Act

A person resident in India engaged in following professions can take advantage of 44ADA scheme: – (Eligible business under section 44AD 44ADA, 44AE)

• Legal
• Medical
• Engineering or architectural
• Accountancy
• Technical consultancy
• Interior decoration
• Any other profession as notified by CBDT (Central Board of Direct Taxation)

(Eligible business under section 44AD 44ADA, 44AE)

Computation of taxable income as per scheme section 44ADA of Income Tax Act

In case of a taxpayer adopting the provisions of section 44ADA, income will be computed on presumptive basis, i.e. 50% of the total gross receipts of the profession. However such person can declare income higher than 50%.

In other words, in case of a person adopting the provisions of section 44ADA, income will not be computed in normal manner but will be computed 50% of the gross receipts.

The presumptive income computed @ 50% is the final income and no further expenses will be allowed

A taxpayer who adopts the presumptive taxation scheme is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.

While computing income as per the provisions of section 44ADA, separate deduction on account of depreciation is not available. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 of Income Tax Act is claimed and has been actually allowed.

Payment of advance tax

Any taxpayer opting for the presumptive taxation scheme under section 44ADA is liable to pay whole amount of advance tax on or before 15^th March of the previous year. If he fails to pay the advance tax by 15^th March of previous year, he shall be liable to pay interest as per section 234C.

Maintenance of books of account

In case of a taxpayer engaged in a specified profession as referred in section 44AA(1) and opts for presumptive taxation scheme of section 44ADA, the provision of section 44AA relating to maintenance of books of account will not apply. In other words, if a person opt for the provisions of section 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of specified profession.

Provisions for declares income at a lower rate (less than 50%)

A taxpayer can declare income at lower rate (less than 50%), however, if he does so, and his income exceeds the maximum amount which is not chargeable to tax, then he is required to maintain the books of account as per the provisions of section 44AA Income Tax Act and has to get his accounts audited as per section 44AB of Income Tax Act.

(III) Section 44AE of Income Tax Act.

The scheme of section 44AE is designed to give relief to small taxpayers engaged in the business of plying, hiring, Transportation or leasing of goods carriages.

Eligible Persons who can take advantage of the presumptive taxation scheme of section 44AE of Income Tax Act

The provisions of section 44AE are applicable to every person (i.e., an individual, Hindu Undivided Family (HUF), firm, company, etc.).

The presumptive taxation scheme of section 44AE can be adopted by a person who is engaged in the business of plying, hiring, Transportation or leasing of goods carriages and who does not own more than 10 nos goods vehicles at any time during the year.

Example

1. Question

Mr. A resident of India as per income tax, who is earning income in the nature of hiring, of goods carriages, and who owns more than 10 nos goods vehicles. Can Mr. A adopt the presumptive taxation scheme of section 44AE?

 2. Answer

Mr. A cannot be adopt presumptive taxation scheme of section 44AE, Because As per Section 44AE of Income tax Act Any Person owns more than 10 nos goods vehicles cannot adopt the presumptive taxation scheme of section 44AE

Note: – if any person owns more than 10 goods vehicles at any time during the year, then he cannot take advantage of the presumptive taxation scheme of section 44AE.

Computation of taxable income as per scheme section 44AE of Income Tax Act

The manner of computation of taxable business income in case of a person adopting the presumptive taxation scheme of section 44AE

In case of a taxpayer who is willing to opt for the presumptive taxation scheme of section 44AE, income will be computed on an estimated basis.

Income will be computed @ Rupees 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer during the year. Part of the month would be considered as full month.

Note:- If the actual income is higher than the presumptive rate, i.e., higher than Rupees 7,500, then such higher income can be declared.

Example-

1. Question

Mr. Singh is engaged in the business of plying, hiring, Transportation or leasing of goods carriage. Throughout the year 2016-17 he owned 8 goods vehicles (5 heavy goods vehicles and 3 other than heavy goods vehicles). What will be the taxable income from the business of plying, hiring, Transportation or leasing of goods carriages if he adopts the Income tax provisions of section 44AE?

 Answer

As per the Income Tax provisions of section 44AE, income will be computed @ Rupees 7,500 per month or part thereof during which the goods vehicle is owned by the taxpayer. The rate of Rupees 7,500 per month is same for every goods vehicle.

In the present case, Mr. Singh owned 8 goods vehicles throughout the year and, hence, income will be computed as follows:

                                                    Computation of Income

The presumptive income computed at 7,500 is the final income and no further expenses will be allowed

In case of a taxpayer who is opting for the presumptive taxation scheme of section 44AE, the provisions of allowance/dis-allowances as provided for under the Income-tax Act, will not apply and income computed at the presumptive rate of Rupees 7,500 per goods vehicle per month will be the final income. In other words, the income computed at the rate of Rupees 7,500 per goods vehicle

per month will be the final taxable income of the business and no further expenses will be allowed or disallowed.

In case of Partnership Firm

However, in case of a taxpayer, being a partnership firm, opting for the presumptive taxation scheme, from the income computed at the rate of Rs. 7,500 per goods vehicle per month, further deduction can be claimed on account of remuneration and interest paid to partners (computed as per the Income-tax Act).

While computing income as per the provisions of section 44AE, separate deduction on account of depreciation is not available, however, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.

Maintenance of books of account

In case of a taxpayer opting for the presumptive taxation scheme of section 44AE, the provisions of section 44AA relating to maintenance of books of account will not apply. In other words, if a person adopts the provisions of section 44AE and declares his income at the rate of Rs. 7,500 per goods vehicle per month, then he is not required to maintain the books of account as provided for under section 44AA in respect of business covered under the presumptive taxation scheme of section 44AE.

Payment of advance tax

There is no concession as regards payment of advance tax in case of a person who adopts the presumptive taxation scheme of section 44AE and, hence, he will be liable to pay advance tax even if he adopts the presumptive taxation scheme of section 44AE.

Provisions for declares income at a lower rate (less than @ 7500 per vehicle)

A taxpayer can declare his income at lower rate (i.e., at less than Rs. 7,500 per goods vehicle per month). However, if he does so, then he is required to maintain the books of account as per the provisions of section 44AA and has to get his accounts audited under section 44AB.
(Eligible business under section 44AD 44ADA, 44AE)

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