Section 44AD -

Section 44AD was originally introduced in the Income Tax Act by the Finance Act, 1994 with effect from the assessment year 1994-95 providing the presumptive income schemes to the taxpayers who were engaged in the business of civil construction. Later on the section was amended or substituted by the Finance (No. 2) Act, 2009 extending the provisions of earlier section to all small businesses except that covered under the section 44AE, with effect from assessment year 2011-12 titled as – “ Special provisions for computing profits and gains of business on presumptive basis”. The consequences of the amendment affected section 44AF by making it no n operational as all the retail traders falling under section 44AF can now avail the scheme under section 44AD.

Salient features of section 44AD –

  1. An eligible assessee engaged in an eligible business can presume its presumptive income as – 8% of turnover or gross receipts or such higher amount as shown by the assess in his IT return.
  2. The rate of 8% is a comprehensive rate concluding to an assumption that the deductions under the section 30 to 38 including depreciation are already allowed and no further allowance of such deductions can be availed.
  3. The assessee who files the return under the following scheme is not required to maintain books of accounts under the provisions of section 44AD nor get its accounts audited under the provisions of the section 44AB.
  4. The presumptive income from the eligible business with be the aggregated income with the other incomes of the assess under the other heads of income.
  5. The scheme is optional as a system of rebuttal has been provided. The rebuttable system provides a person to claim that his income as per the above mentioned business is lower than the specified income for which he must maintain books of accounts and get them audited and submit the audit report under section 44 AB.

Some of the features have been amended by the Finance Act, 2016. The following are some features which are explained according to Pre-amendment applicable up to AY 2016-17 and Post-amendment applicable w.e.f AY 2017-18 –

  • Limit of gross receipts extended to Rs. 2 crore -

Any type of business except the business falling under the section of 44AE which having a maximum turnover or gross receipts of Rs. 1 crore during the relevant previous year i.e. 2105-16 and before can avail the scheme. The following feature has been amended by extending the limit of maximum turnover or gross receipts to Rs. 2 crore for FY 2016-17.

  • Restrictions in availing scheme -

The eligible assessee can opt in to the scheme for the FY in which is profit is more than 8% and opt out in the next year and show the profit less than 8% and follow the pattern without any restrictions. There are No restrictions on the assessee regarding the opting of the scheme. The following is amended as - if the eligible assessee opts for the scheme, he has no option of showing the income less than 8% for the next 5 succeeding assessment years i.e. if he avails the scheme for the AY 2017-18 he has to show income as 8% of total turnover of the business for AYs 2018-19, 2019-20, 2020-21, 2021-22. If he shows the income lower than the above mentioned rate in any succeeding AY, he won’t be able to avail the scheme for the next remaining years.

  • Is deduction u/s 40(b) to partnership firms allowed?

Section 40(b) of Income Tax Act places some deductions of expenses available to an assessee assessable as a partnership firm in relation to the remuneration and interest payable to the partners of such firm. The deductions regarding salary to partners and any payment of interest to partners was allowed to be deducted under the scheme. The above deductions will not be allowed to be deducted because of the amendment in the Finance Act, 2016.

  • Liability to pay advance tax -

According to sub section 4 of section 44AD provisions of advance tax are not applicable to an eligible business so far. The following is amended by the sub section 1 of section 211 introduced by the Finance Act, 2016 w.e.f 1st June, 2016 , by making the provisions of advance tax applicable to an eligible business which should be paid up by March 15th.

 For any query you can write to Chirag@cachauhan.in . Before making any decisions do consult your Professional / tax advisor.  Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability neither for the loss or damage of any kind arising out of information in this document nor for any action taken in reliance there on.

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CA Chirag Chauhan

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    I hope by reading this article you got enlighten on ,Changes in Presumptive Tax Regime u/s 44AD from FY 2016-17.Bare act portion of section 47(xi) of income tax act,1961, Capital gain tax treatment of transfer of capital asset being membership of a recognised stock exchange ?, further to mention before taken any financial decision based on this content it is prefered to take an expert opinion as matter can be subjective.