Introduction of Section 44AD has simplified taxation for small businesses. However, when it comes to taxation, nothing is ever simplified. Tax laws always come with complexities and confusions. Section 44AD related to presumptive taxation has few traps which need to be understood to escape from scrutiny and demands.    To give relief to small taxpayers from this tedious work, the Income-tax Law has framed the presumptive taxation scheme under sections 44AD and 44AE. 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 and
• Getting the accounts audited.

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) These provisions cannot be adopted by person:

• who has made any claim towards deductions under section 10A/ 10AA/10B/ 10BA or under sections 80HH to ​ 80RRB in the relevant year
• Business of plying, hiring or leasing goods carriages referred to in sections 44AE​
• A person who is carrying on any agency business
• A person who is earning income in the nature of commission or brokerage
• Carrying on profession as referred to in section 44AA​(1) is not eligible for presumptive taxation scheme.

​​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 the limit of audit prescribed under section 44AB (i.e., Rs. 1,00,00,000). In case of a person adopting the provisions of section 44AD, income will be computed on presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the year. Income computed as per section 44AD will be net income for the business covered under this scheme and shall not be permitted to claim any deduction under sections 30 to 38 (including depreciation or unabsorbed depreciation). In addition, for assessee adopting the presumptive taxation scheme of section 44AD, no disallowance under sections 40, 40A and 43B shall apply. Following shall be included in computation of turnover:

• VAT, Excise Duty, Cess and other levy
• Sales of unusable empties and supplies
• Service charges charged for delivery

Following shall not be included in computation of turnover:

• Advance or deposits received
• Consideration received on sale of Fixed Assets
• Cash or other discounts

 Notes:

1. An assessee, being a partnership firm, can claim further deduction of remuneration and interest paid to its partners within the limit specified under section 40(b).

Section 40(b) specifies the upper limit/ ceiling for the remuneration and interest paid to the partners. Interest is restricted to 12% whereas remuneration is restricted to: In case of loss or up to first 3 lakhs of profit- Rs.1,50,000 or 90% of the book profit whichever is higher On the balance amount, if any 60% of the book profit Now, it may click to your mind that earlier it was mentioned that maintenance of books were not required but for calculating the book profit, do we need to maintain the books? Not to worry, as section 44AD is an overruling section. Thus, presumptive profit (i.e., 8%) shall be considered as book profit. Example: Turnover – Rs. 50Lakhs Profit @ 8% – Rs. 4Lakhs Restriction as per sec. 40(b) shall be computed as: On first Rs.3,00,000 – 90% of 4lakhs i.e. Rs. 2,70,000 On balance Rs. 1,00,000 –  60% of 4lakhs i.e. Rs. 60,000 Total limit – Rs. 3,30,000 Thus, remuneration can be paid up to Rs. 3,30,000

2. Even though no depreciation is claimed by the firm, yet for purpose of computation of the WDV of the asset, depreciation will be deducted from the value of the block.

Example: Assessee opted for presumptive taxation and sold an asset after using it. WDV on 31.03.2013 – Rs. 5lakhs Depreciation @15% – 75000 WDV on 31.03.2014 – Rs. 4,25,000 Sold during the year – Rs. 4,50,000 (Sales Consideration) Capital Gain – Rs. 25,000

3. If assessee carries more than 1 business then, turnover of all businesses shall be considered.
4. Assessee declaring income under presumptive taxation can claim deduction under chapter VI A.
5. Person adopting the provisions of presumptive taxation scheme of section 44AD is not liable to pay advance tax in respect of the business covered under section 44AD.

Gross receipt from eligible business – Rs. 50lakhs Other Income – Rs. 10lakhs Assessee not liable to pay advance tax in respect of income from eligible business. However, in regards to other income, he shall be liable to pay advance tax since the tax liability on other income exceeds Rs. 10,000.

6. The loss from any eligible business shall be set off against profit from another eligible business only. If any loss carried forward then it shall be adjusted only against eligible business in the consequent year.
7. Assessee applying presumptive taxation under section 44AD shall file ITR Form 4S- Sugam.

What provisions will apply if a person does not opt for the presumptive taxation scheme of section 44AD and declares his income at a lower rate (i.e. less than 8%)? ​​A person can declare income at lower rate (i.e., less than 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​ and has to get his accounts audited. If the actual income from the business covered under section 44AD is higher than the income prescribed under the presumptive scheme, then the assessee has to declare such higher income from aforesaid business. Provision of the said section is beneficial to assessees depending upon their business. Through this section, where government has allowed to tax income at fixed rate, it has also brought the assessees who are showing their income below the specified percentage of 8% under the scope of Tax Audit. For any assistance visit: taxmantra.com   ______________________________________________________________________________________________________________