44AD & 44ADA

By: Sakina Bohra - 26th August, 2021

Introduction

As per the Income-tax Act, a person engaged in business or profession is required to maintain regular books of account and further, he has to get his accounts audited. To give relief to small taxpayers from this tedious work, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD and 44ADA.

Presumptive Taxation Scheme of Section 44AD

Eligibility

The presumptive taxation scheme of section 44AD can be adopted by following persons-

1. Resident Individual

2. Resident Hindu Undivided Family

3. Resident Partnership Firm (not Limited Liability Partnership Firm)

Businesses not covered under the presumptive taxation scheme

• Business of plying, hiring, or leasing of goods carriages referred to in section 44AE

• A person who is carrying on any agency

• A person who is earning income in the nature of commission or brokerage

• An insurance agent

• A person engaged in a profession

• A person whose total turnover or gross receipts for the year exceed Rs. 2,00,00,000

• A person who has made any claim towards deductions under section 10A/10AA/10B/10BA or under sections 80HH to 80RRB in the relevant year

Computation of Income Tax

In case of a person adopting the provisions of section 44AD, income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year or a sum higher than the aforesaid sum claimed to have been earned by the assessee.

In order to promote digital transactions and to encourage small unorganized business to accept digital payments, section 44AD 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 or through such other electronic mode as may be prescribed during the previous year or before the due date of filing of return under section 139(1).

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. The written down value of an eligible asset shall be deemed to have been calculated as if the eligible assessee had claimed and had been allowed the deduction in respect of depreciation for each of the relevant assessment years.

Payment of Advance Tax

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

Such person 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.

Presumptive Taxation Scheme of Section 44ADA

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

Eligibility

A person resident in India engaged in following professions can take advantage of presumptive taxation scheme of section 44ADA-

1. Legal

2. Medical

3. Engineering or architectural

4. Accountancy

5. Technical consultancy

6. Interior decoration

7. Any other profession as notified by CBDT

The Finance Act, 2021 has amended provisions of section 44ADA to define eligible assessee. W.e.f. Assessment Year 2021-22, the benefit of section 44ADA is eligible only in case of assessee who is an:

• Individual; and

• Partnership firm other than a Limited Liability Partnership as defined under clause (n) of sub-section (1) of section 2 of Limited Liability Partnership Act.

Computation of Income Tax

In case of a person 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%.

Such person is deemed to have claimed all deduction of expenses. Any further claim of deduction is not allowed after declaring profit @ 50%.

Payment of advance tax

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

Maintenance of books of account

If a person opts 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.

Conclusion

In a nutshell, the presumptive taxation scheme under Section 44AD is a great benefit to small and medium sized taxpayers as it will free them from maintaining books of accounts and getting them audited for the taxation purpose under Income Tax Act 1961.

And

The presumptive taxation scheme under Section 44ADA is beneficial for small businesses people and professionals to save their income tax and also conduct business with much ease.

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