Presumptive Taxation Scheme for Business or Profession (Section:44AD)

Meaning:

Presumptive taxation scheme was introduced in order to give relief to small taxpayers from complying with section 44AA and 44AB. The presumptive taxation scheme can be opted by the eligible persons, if the total turnover or gross receipts from the business does not exceed Rs.2 Crores. Presumptive taxation scheme of section 44AD can be adopted by the following eligible persons:

• Resident Individual
• Resident Hindu Undivided Family
• Resident Partnership Firm (not Limited Liability Partnership Firm)

Rules:

1. How Income is Estimated:
2. Income is computed @ 8% of turnover or a higher percentage as claimed by the   assessee.
3. Income is computed @6% of turnover if gross receipts or turnover is received by way of account payee cheque or by account payee bank draft or by use of electronic clearing system during the previous year or before due date of filing return of income

• Eligibility of Further Deductions:

The income computed as per the prescribed rate will be the final taxable income & no further expenses will be allowed or disallowed. No deduction under Section 10AA or chapter VIA will be allowed. Any deduction U/S 30 to 38 shall be deemed to have been already given full effect to. No further deduction under those sections shall be allowed. However, WDV of assets has to be reduced as per the normal provisions of Section 32 but Depreciation claimed will not be allowed. Also, brought forward business losses from earlier assessment years can be set off.

•  Advantages of this scheme:
• No need to maintain Books of Accounts
• No need for Tax Audit
• Advance Tax (Whole amount-one instalment) should be paid on or before 15^th March
• Important Condition:
• If a person opts for Presumptive Taxation Scheme, then he is required to follow the same scheme for the next 5 years. If he failed to do so, then the Presumptive Taxation Scheme will not be available for him for next 5 years. Further, he is required to maintain books of accounts U/S 44AA & he is also liable for Tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme.

• Who Cannot Avail this Scheme:
• Aperson carrying on any profession notified u/s 44AA
• A person earning income in the nature of Commission or Brokerage
• A person carrying on any agency business
• A person engaged in plying of Goods carriage
• Limited Liability Partnership & Company assessee
• Due dates for filing IT return:
• If the assesse opts for presumptive scheme then audit is not required, therefore 31^st July will be the due date
• If the assesse does not opt for presumptive scheme then audit is required and therefore 30^th September
• Declaration of lower income:
•  If the actual income from the business covered under section 44AD is lower than the income prescribed under the presumptive scheme, then the assessee can declare income from the business at a lower rate than 8% or 6% as the case may be. If the assessee does so, i.e., declares income at a rate lower than the presumptive rate and his actual income exceeds the basic exemption limit, then the relief from maintenance of books of accounts is not available and he is required to maintain the books of account as per section 44AA and he has to get such books of account audited as per section 44AB.

Facts of the case:

ABC entity is a Resident Partnership Firm (Not LLP) whose aggregate turnover is 96,95,868 (Financial Year 2020-21) which has not exceeded the threshold limit of Rs.2 Crores and has adopted Presumptive Taxation Scheme of Section 44AD.

Issues raised by the Querist:

• TDS on Technical service, consulting fees, rental fees, Computer hiring fees & Insurance payment has not been deducted. Whether TDS needs to be deducted when section 44AD has been adopted?
•  The maximum remuneration allowable u/s 40(b) or actual remuneration received by the partners-Which is taxable in the hands of the partners?
• Whether during the first year of opting section 44AD, income lower than the presumptive rate can be declared? If so, what are the consequences of declaring lower income than the presumptive income?

Issue 1:

Applicability of TDS provisions:

Section 40(a)(ia) stipulates the applicability of TDS provisions. Any payment made to a Resident without deducting TDS shall be disallowed to the extent of 30%.However when the assessee opts for section 44AD,clause 1 excludes the applicability of sections 28 to 43C.

As per SECTION 44AB(e),

Every person,—

(e)  carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,

get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :

Provided that this section shall not apply to the person, who declares profits and gains for the previous year in accordance with the provisions of sub-section (1) of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year

Section 44AD(1) specifically states,

 Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”

Conclusion for Issue 1:

So, as per section 44AD(1) and 44AB(e),eligible persons who have opted for presumptive taxation scheme are not required to comply with the TDS provisions.

Issue 2:

Section 40(b)- Partner of firm receiving remuneration and/or interest from the firm:

The firm is eligible to claim remuneration as deduction to the extent specified therein and such remuneration is deductible in hands of the firm. The balance amounts are subjected to tax as profits in the hands of the firm.

In other words, the eligible remuneration is deductible in the hands of firm and taxable in hands of partners, the remaining profit is taxable in hands of the firm and exempted in the hands of partners u/s 10(2A).

Conditions:

• Remuneration should be paid only to Working partners
• Remuneration should be authorised by the partnership deed

Hence, in the hands of the partner, the following will be the impact:

1. Remuneration which was allowed as deduction in the  firm will be taxable
2. Profit which was taxed in the hands of the firm will be exempt.

Remuneration as per the Act is based on Book Profits,that is profit before charging remuneration but after allowing Interest on capital.

Remuneration as per the Act:

1. on the first Rs.3,00,000 of the book-profit or in case of a loss Rs.1,50,000 or at the rate of 90% of the book-profit, whichever is more;
2. on the balance of the book-profit at the rate of 60

Conclusion for Issue 2:

However, Section 40(b) will not be applicable to an assessee who has opted for presumptive taxation scheme. Hence, remuneration and interest to partners will not be allowed u/s 44AD in the hands of the firm. But in the hands of the partners, the maximum remuneration allowable u/s 40(b) or the actual remuneration received by the partners, whichever the firm would have taken as allowable remuneration for computing Income from business, if the firm had followed Normal provisions, shall be taxable in the hands of the partners.

Issue 3:

Declaration of Lower Income:

The assessee can declare income at a rate lower than the presumptive rate provided, the assessee maintains books of accounts and gets them audited, if the total income exceeds basic exemption limit.

ILLUSTRATIVE TABLE:

Sl.No.	Turnover	Book Profit	Deemed profit @8%	BP + Other Income	Eligibility of  Presumptive Taxation	Assessee opted Presumptive Taxation	Applicability of 44AB	TDS
Indl	1.5 Cr	7 lacs	12lacs	12 lacs	Yes	Yes	No	No
Indl	1.5 Cr	7 lacs	12lacs	7 lacs	Yes	No	Yes	Yes
Indl	1.5 Cr	2.4 lacs	12 lacs	2.4 lacs	Yes	No	Yes	Yes
Indl	0.9 Cr	5 lacs	7.2 lacs	7.2 lacs	Yes	Yes	No	No
Indl	0.9 Cr	5 lacs	7.2 lacs	5 lacs	Yes	No	No	No
Indl	0.9 Cr	2.4 lacs	7.2 lacs	2.4 lacs	Yes	No	No	No
Indl	2.5 Cr	25 lacs	20 lacs	25 lacs	No	Could not opt	Yes	Yes

IMPORTANT NOTE:

If the assessee has opted for section 44AD for the past 3 years (Eg: AY 2019-20,2020-21,2021-22) and wants to opt out from the section from the 4th year(2022-23) then he will not be eligible to claim the benefit of this section for the next five assessment years starting from 2023-24.Such assessees, if their total income is above the basic exemption, shall maintain books of accounts and get them audited u/s 44AA and 44AB,even if the turnover is less than Rs.1 Crores.

EXAMPLE1:

An Individual, X carries on business and his total turnover from the business is Rs.1.5 Crores. He has opted for presumptive taxation scheme. His Book profit is Rs.7 lacs and he declared deemed profit @ 8% which is Rs.12 lacs. Is he required to get his books audited under Income Tax Act?

Turnover of X is less than Rs.2 Crore. So he has opted for presumptive taxation scheme under section 44AD and declared income of Rs.12 lacs which is equal to 8% of his total turnover. Now as per the section 44AD,

• The turnover should not exceed 2 Crores

And

• The declared profit should be equal to or greater than 8%

As both the conditions are fulfilled, X is not required to get his books audited and TDS provisions are not applicable. So, for a point of time for the understanding purpose, you can say that 44AD has an overriding effect over 44AB.

EXAMPLE 2:

XYZ partnership firm carries on business and the total turnover from the business is Rs.1.5 Crores. The firm opted for presumptive taxation scheme. The firm’s Book profit is Rs.2.4 lacs. But the deemed profit @ 8% was Rs.12 lacs and the firm declared profit of Rs.2.4 lacs. Is the firm required to get the books audited under Income Tax Act?

XYZ has opted for presumptive taxation scheme under section 44AD

But, the declared profit is less than 8%.

Since XYZ has declared lower income than the presumptive income, it has to comply with section 44AA and 44AB.So the firm is required to maintain books of accounts and get them audited u/s 44AB and TDS provisions are also applicable.

EXAMPLE 3:

An Individual, A carries on business and his total turnover from the business is Rs.90 lacs. He has opted for presumptive taxation scheme since the last 3 years and in the current year he has a Book profit of Rs.5 lacs and the presumptive income @ 8% was Rs.7.2 lacs. But he declared profit of Rs.5 lacs. Is he required to get his books audited under Income Tax Act?

A has opted for presumptive taxation scheme under section 44AD.

But, the declared profit is lower than 8%.

Now the assessee says, although the declared profit is less than 8% but the turnover is less than 1 crore. So, according to him he is not required to get his books of accounts audited u/s 44AB in the current year

As per the provisions of 44AD(4) & (5), if an assessee has opted for this section then he has to maintain it for next continuous 5 years. In case he opt out from this section then he will not be allowed to opt this section again for the next 5 Assessment years and also for the next 5 years he is required to maintain his books and get them audited if the profit is more than basic exemption limit, irrespective of the turnover.

So, A has to declare the profit of minimum 8%. If not, he will not be allowed to opt for this section again in the next 5 subsequent assessment years and he has to maintain his books of accounts and get them audited for the next 5 years even if the turnover is less than 1 Crore, if his profit exceeds the basic exemption limit.

Since the profit is Rs.5 lacs which is more than the basic exemption limit of Rs.2.5 lacs, the assessee is required to comply with section 44AA and 44AB, even if the turnover is less than Rs.1 Crore.

EXAMPLE 4:

An Individual, Z carries on business and the total turnover from the business is Rs.2.5 Crores. Is he eligible to opt for section 44AD?

Z is not eligible to opt for section 44AD, as the total turnover is more than Rs.2 Crores. Since he is not eligible to opt for presumptive income scheme, and his turnover is more than Rs.1 Crore, he is required to maintain books of accounts u/s 44AA and get them audited u/s 44AB,and the provisions of TDS also applies.

EXAMPLE 5:

Mr.S carries on an agency business and he wants to opt for section 44AD.Whetehr he is eligible to opt for presumptive income scheme?

No. Mr.S is not eligible to opt for section 44AD,since he is carrying on agency business. As per the section, the following persons are not eligible to opt for presumptive income scheme:

• Aperson carrying on any profession notified u/s 44AA-Specified Professionals include: Legal, medical, engineering or architectural profession, or accountancy or technical consultancy or interior decoration or any other profession notified by CBDT(notified profession includes: authorised representative, film artist, company secretary and information technology)
• A person earning income in the nature of Commission or Brokerage
• A person carrying on any agency business
• A person engaged in plying of Goods carriage
• Limited Liability Partnership & Company assesse

Conclusion for Issue 3:

During the first year of opting Section 44AD, if the assessee declares income lower than the presumptive income, then even if the total turnover is less than Rs.1 Crore, if the total profit exceeds the basic exemption limit, the assessee is required to comply with section 44AA and 44AB.Though the turnover of ABC entity is less than Rs.1 Crore, if it declares lower income, then it has to maintain books of accounts and get them audited.

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