‘Presumptive Taxation Scheme’ Of Section-44AD (Theory & Practical)

In this advance learning session we will learn various practical aspects of the provisions of section 44AD.

1.      Applicability of the scheme

The provisions of section 44AD are applicable to such resident assessee who is an Individual, Hindu Undivided Family and Partnership Firm but not Limited Liability Partnership Firm.

Unlike section 44AE, in case of section 44AD there is a restriction on which categories of assessees can opt for the scheme. Only specific categories of resident assessees as discussed above can opt for this scheme.

Illustration

Mr. Raja is running a proprietary concern under the name of Raja Enterprise. The turnover of his firm during the previous year 2012-13 was Rs. 84,00,000. He wants to adopt the provisions of section 44AD and to declare income as per the presumptive taxation scheme. Can he adopt these provisions even if he is an individual?

**

The provisions of section 44AD can be adopted by such resident assessee who is an Individual, Hindu Undivided Family and Partnership Firm but not Limited Liability Partnership Firm. Thus, Mr. Raja being an individual if satisfies the other criteria of the scheme can adopt the provisions of section 44AD and can declare income on presumptive basis.

Illustration

Raja HUF, whose Karta is Mr. Raja, is running a departmental store. The turnover of the store during the previous year 2012-13 was Rs. 84,25,252. The HUF wants to adopt the provisions of section 44AD and to declare income as per the presumptive taxation scheme. Can it adopt these provisions even if it is an HUF?

**

The provisions of section 44AD can be adopted by such resident assessee who is an Individual, Hindu Undivided Family and Partnership Firm but not Limited Liability Partnership Firm. Thus, being an HUF if it satisfies the other criteria of the scheme can adopt the provisions of section 44AD and can declare income on presumptive basis.

Illustration

SM Enterprise, a partnership firm whose partners are Mr. Soham and Mr. Mohan is running a departmental store. Mr. Soham is also running his proprietary firm. SM Enterprise as well as Mr. Soham wants to adopt the presumptive taxation scheme of section 44AD. In this case can the firm as well as Mr. Soham, both adopt the provisions of section 44AD and declare income as per the presumptive taxation scheme?

**

The provisions of section 44AD can be adopted by such resident assessee who is an Individual, Hindu Undivided Family and Partnership Firm but not Limited Liability Partnership Firm. There is no restriction in adopting the provisions of section 44AD by both - a partnership firm as well as the partners. Hence, in this case, both, i.e., SM Enterprise and Mr. Soham can adopt the provisions of section 44AD if they satisfy the other criteria of the scheme and can declare income on presumptive basis.

2.      Scheme of computation of income

In case of an assessee who is willing to opt for these provisions, income will be computed on an estimated basis. The rate of computation of income on an estimated basis is 8% of turnover or gross receipts of the eligible business for the previous year.

Illustration

Mr. Raja is running a garment factory. The turnover of the factory during the previous year 2012-13 was Rs. 1,84,00,000. Can he adopt the provisions of presumptive scheme of section 44AD in respect of this business?

**

The presumptive taxation scheme under the provisions of section 44AD can be opted for by the eligible assessee who is engaged in any business (except the business of plying, hiring or leasing goods carriages referred to in section 44AE and except by an assessee who is engaged in any profession as prescribed under section 44AA or is running agency business or is earning income in the nature of commission or brokerage), whose turnover or gross receipts from such business do not exceed the limit of audit prescribed under section 44AB (i.e., Rs. 60,00,000 for the previous year 2011-12 and Rs. 1,00,00,000 from the previous year 2012-13).

In this case the turnover of Mr. Raja during the previous year 2012-13 was Rs. 1,84,00,000 which exceeds the limit of Rs. 1,00,00,000 and, hence, he cannot adopt the provisions of section 44AD.

Illustration

Mr. Kumar is a commission agent and is earning income in the nature of commission. His gross commission during the previous year 2012-13 was Rs. 25,84,000. He wants to adopt the provisions of section 44AD in respect of this business. In this case what will be his income as per the provisions of section 44AD?

**

The presumptive taxation scheme under the provisions of section 44AD can be opted for by the eligible assessee who is engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE), whose turnover or gross receipts from such business do not exceed the limit of audit prescribed under section 44AB (i.e., Rs. 60,00,000 for the previous year 2011-12 and Rs. 1,00,00,000 from the previous year 2012-13). Moreover, the provisions of section 44AD cannot be adopted by an assessee who is engaged in any profession as prescribed under section 44AA or is carrying on an agency business or is earning income in the nature of commission or brokerage.

In this case Mr. Kumar is earning income in the nature of commission and, hence, he cannot adopt the provisions of section 44AD.

Illustration

Mr. Kapoor is running a factory. The turnover of the factory during the previous year 2012-13 was Rs. 98,84,252. He wants to adopt the provisions of section 44AD in respect of this business. In this case what will be his income as per the provisions of section 44AD?

**

As per the provisions of section 44AD, income will be computed on an estimated basis @ 8% of turnover or gross receipts of the eligible business for the previous year. In the present case, Mr. Kapoor is running a factory whose turnover during the previous year 2012-13 was Rs. 98,84,252 and, hence, his income as per the provisions of section 44AD will come to Rs. 7,90,740 (i.e., Rs. 98,84,252 * 8%).

Illustration

Miss Khushali is a doctor. She is doing practice in her own clinic. The gross receipts of the clinic during the previous year 2012-13 were Rs. 1,25,52,252. She wants to adopt the provisions of section 44AD in respect of her clinic. In this case what will be her income as per the provisions of section 44AD?

**

The presumptive taxation scheme under the provisions of section 44AD can be opted for by the eligible assessee who is engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE), whose turnover or gross receipts from such business do not exceed the limit of audit prescribed under section 44AB (i.e., Rs. 60,00,000 for the previous year 2011-12 and Rs. 1,00,00,000 from the previous year 2012-13). Moreover, the provisions of section 44AD cannot be adopted by an assessee who is engaged in any profession as prescribed under section 44AA or is carrying on an agency business or is earning income in the nature of commission or brokerage.

In this case Miss Khushali is a doctor (i.e., she is engaged in one of professions prescribed under section 44AA) and, hence, she cannot adopt the provisions of section 44AD.

3.      Provisions relating to various allowances/disallowances

Income computed as per section 44AD (i.e., @ 8% of turnover or gross receipts of the eligible business, for the previous year) will be net income for the business covered under this scheme.

From the net income computed as above, an assessee is not permitted to claim any deduction under sections 30 to 38 (including depreciation or unabsorbed depreciation).

Provisions in case of a partnership firm:

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). In other words, in case of an assessee, being a partnership firm, separate deduction from the net income computed as per presumptive taxation scheme in respect of remuneration and interest paid to its partners is allowed.

Further, from income computed at the aforesaid rate, no disallowance can be made under sections 40, 40A and 43B. Thus, in case of an assessee adopting the presumptive taxation scheme of section 44AD, no disallowance under sections 40, 40A and 43B will apply.

Illustration

Mr. Krunal is running a medical store in his own premises. The turnover of the store during the previous year 2012-13 was Rs. 52,84,848 and he declared income as per the provisions of section 44AD. After computing the income @ 8% of such turnover of Rs. 52,84,848, he wants to claim further deduction on account of following items:

        Salary paid to accountant: Rs. 84,000

        Expenditure on account of insurance of shop: Rs. 25,200

        Depreciation on shop building: Rs. 1,84,000

        Depreciation on computer system: Rs. 48,400

Can he claim deduction on account of above expenditure?

**

Income computed as per section 44AD (i.e., @ 8% of turnover or gross receipts of the eligible business, for the previous year) will be net income for the business covered under this scheme. From the net income computed as above, an assessee is not permitted to claim any deduction under sections 30 to 38 (including depreciation or unabsorbed depreciation).

Thus, in this case Mr. Krunal cannot claim any further deduction on account of any of the above discussed expenditure from the net income computed as per the provisions of section 44AD.

Illustration

SM Corporation, a partnership firm, is running a Color Dying Press in its own premises. The turnover of the press during the previous year 2012-13 was Rs. 84,48,848 and it declared income as per the provisions of section 44AD. After computing the income @ 8% of such turnover of Rs. 84,48,848, the firm wants to claim further deduction on account of following items:

        Salary paid to accountant: Rs. 84,000

        Expenditure on account of insurance of press building: Rs. 25,200

        Depreciation on press building: Rs. 1,84,000

        Depreciation on computer: Rs. 48,400

        Remuneration paid to its partners: 84,000

Can the firm claim deduction on account of above expenditure?

**

As per the provisions of section 44AD, from the net income computed at the prescribed rate, i.e., @ 8% of turnover or gross receipts of the eligible business, an assessee is not permitted to claim any deduction under sections 30 to 38 (including depreciation or unabsorbed depreciation) from such income. Thus, in this case the firm cannot claim any further deduction on account of any of the above discussed expenditure (except remuneration paid to its partners) from the net income computed as per the provisions of section 44AD.

In case of an assessee, being a partnership firm, from the net income computed as per the provisions of section 44AD, further deduction on account of remuneration and interest paid to its partners within the limit specified under section 40(b) is allowed. Thus, in this case the firm can claim further deduction on account of remuneration paid to its partners within the limit specified under section 40(b).

Illustration

Essem Corporation, a partnership firm, is running a Color Dying Press in its own premises. The turnover of the press during the previous year 2012-13 was Rs. 84,48,848 and it declared income as per the provisions of section 44AD. After computing the income @ 8% of such turnover of Rs. 84,48,848, the firm wants to claim further deduction on account of following items:

 Depreciation on press building: Rs. 2,84,000

 Depreciation on computer: Rs. 24,800

 Remuneration paid to its partners: 84,000

 Interest on capital paid to its partners @ 12%: Rs. 25,252

Can the firm claim deduction on account of above expenditure?

**

As per the provisions of section 44AD, from the net income computed at the prescribed rate, i.e., @ 8% of turnover or gross receipts of the eligible business, an assessee is not permitted to claim any deduction under sections 30 to 38 (including depreciation or unabsorbed depreciation) from such income. Thus, in this case the firm cannot claim any further deduction on account of any of the above discussed expenditure (except remuneration paid to its partners and interest on capital paid to its partners) from the net income computed as per the provisions of section 44AD.

In case of an assessee, being a partnership firm, from the net income computed as per the provisions of section 44AD, further deduction on account of remuneration and interest paid to its partners within the limit specified under section 40(b) is allowed. Thus, in this case the firm can claim further deduction on account of remuneration and interest on capital paid to its partners within the limit specified under section 40(b).

4.      Manner of computation of WDV of depreciable assets

As discussed above, an assessee opting for the presumptive taxation scheme is not permitted to claim deduction on account of various expenditures including depreciation. As regards the computation of the WDV of depreciable asset, following provision should be kept in mind:

Deduction on account of depreciation is not available. However, the WDV of any asset used in the business covered under the scheme of section 44AD shall be calculated as if depreciation as per section 32 is claimed and allowed. Thus, even though no depreciation is available separately, yet for purpose of computation of the WDV of the asset, depreciation will be deducted.

Illustration

Mr. Amar is running proprietary firm under the name of Amar Enterprise in the premises owned by him. The turnover of the firm during the previous year 2012-13 was Rs. 52,25,848 and he declared income as per the provisions of section 44AD. After computing the income @ 8% of the turnover of Rs. 52,25,848, he wants to claim further deduction on account of depreciation on the shop premises amounting to Rs. 84,252. Can he do so as per the provisions of section 44AD?

**

As per the provisions of section 44AD, from the net income computed at the prescribed rate, i.e.,@ 8% of the turnover or gross receipts from the eligible business, an assessee is not permitted to claim any deduction under sections 30 to 38 (including depreciation or unabsorbed depreciation) from such income. Thus, in this case Mr. Amar cannot claim any further deduction on account of depreciation amounting to Rs. 84,252 from the net income computed as per the provisions of section 44AD.

Illustration

SM Corporation, a partnership firm is running a factory. The turnover of the firm during the previous year 2012-13 was Rs. 99,84,252 and it declared income as per the provisions of section 44AD. The opening WDV of the block of depreciable asset (machinery @ 15%) as on 1-4-2012 was Rs. 8,25,252. Since the firm has opted for the provisions of section 44AD for the year 2012-13 it has not claimed depreciation. In this case, if in the next year it does not opt for section 44AD, what will be the WDV on which the firm can claim depreciation?

**

As per the provisions of section 44AD, from the income computed as per the provisions of section 44AD, further deduction on account of depreciation is not available. However, the WDV of any asset used in the business covered under the scheme of section 44AD shall be calculated as if depreciation as per section 32 is claimed and allowed. Thus, 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. The WDV eligible for depreciation will be computed as follows:

5.      Provisions relating to maintenance of books of account

The scheme gives a great relief to the assessee in respect of maintenance of books of account. An assessee, who adopts the provisions of section 44AD, is not required to maintain books of account as per section 44AA (applicable only for business covered by this section). Further, in respect of such business, the provisions of section 44AB (relating to audit) are also not applicable.

Thus, the scheme relieves the assessee from the maintenance of regular books of account. Apart from giving relief from maintenance of books of account, the scheme also relieves the assessee from audit of books of account.

Illustration

Mr. Kapoor is running a medical store. The turnover of the store during the previous year 2012-13 was Rs. 60,52,252 and he declared income as per the provisions of section 44AD. In this case will he be liable to maintain the books of account in respect of aforesaid business?

**

As per the provisions of section 44AD, an assessee who adopts the provisions of section 44AD, is not required to maintain books of account as per section 44AA. However, the relief is available only in respect of business covered by the provisions of section 44AD and not in respect of any other business. Thus, if Mr. Kapoor owns any other business, then in respect of such business the provisions of section 44AA in respect of maintenance of books of account will apply.

Illustration

Mr. Jay is an interior decorator. His gross receipts from this profession during the previous year 2012-13 were Rs. 84,48,848. He wants to declare income as per the provisions of section 44AD. In this case will he be liable to maintain the books of account in respect of aforesaid profession?

**

As per the provisions of section 44AD, an assessee who adopts the provisions of section 44AD, is not required to maintain books of account as per section 44AA (applicable only for business covered by this section). The presumptive taxation scheme under these provisions can be opted for by the eligible assessee who is engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE), whose turnover or gross receipts from such business do not exceed the limit of audit prescribed under section 44AB (i.e., Rs. 60,00,000 for the previous year 2011-12 and Rs. 1,00,00,000 from the previous year 2012-13). Moreover, the provisions of section 44AD cannot be adopted by an assessee who is engaged in any profession prescribed under section 44AA or is carrying on an agency business or is earning income in the nature of commission or brokerage.

In this case, Mr. Jay is engaged in one of the professions prescribed under section 44AA and, hence, he is not eligible to adopt the provisions of section 44AD and the provisions of section 44AA relating to maintenance of books of account will apply to him and he will be liable to maintain the books of account as specified under section 44AA.

Illustration

Mr. Kaushal is running a provision shop. The turnover of the shop during the previous year 2012-13 was Rs. 25,84,848. He wants to adopt the provisions of section 44AD for the above business. Apart from the business of running a provision shop, he is also engaged in the business of plying, hiring or leasing goods carriages. He owns 5 heavy goods vehicles. His actual income from the goods transportation business is Rs. 3,000 per month (i.e., less than Rs. 5,000 per month or part thereof) per heavy goods vehicle and he wants to declare his actual income of Rs. 3,000 for this business. In this case will he be liable to maintain the books of account in respect of aforesaid businesses?

**

As per the provisions of section 44AD, an assessee who adopts the provisions of section 44AD, is not required to maintain books of account as per section 44AA. It should be noted that the relief is available only in respect of business covered by the provisions of section 44AD and not in respect of any other business. Thus, in this case he will not be liable to maintain books of account in respect of business covered under section 44AD i.e., business of provision shop but in respect of business of plying, hiring or leasing goods carriages, he will be liable to maintain books of account as provided under section 44AA.

6.      Declaration of lower income/Higher 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 aforesaid business at a lower rate (i.e., at less than 8%).

If the assessee does so, i.e., declares lower income and his actual income exceeds the maximum amount which is not chargeable to tax, then the relief from maintenance of books of account is not available and he is required to maintain the books of account as per section 44AA and further, he has to get such books of account audited as per section 44AB.

As regards the declaration of higher income, i.e., declaring income above the prescribed rate of 8%, the scheme permits the assessee to declare at his option higher income (i.e., higher than 8%).

Illustration

Mr. Rohan is running a medical store. The turnover of the store during the previous year 2012-13 was Rs. 52,25,252. He wants to adopt the provisions of section 44AD. However, his actual income from this business is Rs. 3,65,768 only which is less than Rs. 4,18,020 (i.e., Rs. 52,25,252 * 8%). In this case can he declare his actual income of Rs. 3,65,768 in respect of his business of medical store?

**

As per the provisions of section 44AD, 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 aforesaid business at a lower rate (i.e., at less than 8%). Thus, in this case Mr. Rohan can declare lower income. However, in this case he has to maintain the books of account prescribed under section 44AA and has to get such books of account audited, since his actual income exceeds the exemption limit (i.e., Rs. 2,00,000).

Illustration

Mr. Rahul is running a provision shop. The turnover of the shop during the previous year 2012-13 was Rs. 58,84,848. However, his actual income is Rs. 5,29,636 which is higher than Rs. 4,70,788 (i.e., Rs. 58,84,848 * 8%). In this case can he declare his actual income of Rs. 5,29,636 which is higher than the limit prescribed under section 44AD?

**

As per the provisions of section 44AD, 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. Thus, in this case Mr. Rahul can declare higher income.

7.      Applicability of Provisions of Advance Tax

An assessee opting for the presumptive taxation scheme of section 44AD will not be liable to pay advance tax in respect of business covered under section 44AD. In other words, a 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.

Illustration

Mr. Kumar is running a garment factory. The turnover of the factory for the previous year 2012-13 amounted to Rs. 84,25,848. He adopted the provisions of section 44AD and declared income @ 8% of the turnover. Apart from income from garment factory, he also earned brokerage of Rs. 3,84,252. In this case will he be liable to pay advance tax in respect of his business of factory as well as his brokerage income?

**

An assessee opting for the presumptive taxation scheme of section 44AD is not liable to pay advance tax in respect of business covered under section 44AD. In this case, he will not be liable to pay advance tax in respect of income from garment factory, even though the tax liability in respect of income from the garment factory exceeds Rs. 10,000. However, as regards brokerage income, he will be liable to pay advance tax, since the tax liability on brokerage income exceeds Rs. 10,000.