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  • Section 44AD

    Section 44AD is a presumptive taxation scheme that was introduced by Income Tax Law in order to ease the tax burden on small taxpayers or assessees. Individuals who come under the provisions of this scheme need not maintain or show books of account, nor are they required to get an audit performed on the same. The scheme aims to provide relief to small time assessees who conduct any kind of business, with the exception of those businesses mentioned in Section 44AE. However, with the recent updates in the Budget 2016, the scope of Section 44AD and its benefits have also been extended to include professionals whose total income over the duration of the financial year is below Rs 50 lakhs.

    Features Of Section 44AD:

    • Tax paid by the assessee under Section 44AD is calculated at 8% of the individual’s gross turnover for the financial year, provided that his or her gross turnover is below Rs 1 crore. This limit has been raised to Rs 2 crore as per the Budget 2016.
    • The provisions of this section apply to any business and profession, with the exception of those referred to in Section 44AE
    • Income calculated under this section will be subject to taxation in accordance with the slab rates prescribed by the Income Tax Act
    • Assessees claiming deductions under this section will not be permitted to claim any further expenditure or any form of depreciation, with the exception of any interest or payments made to partners.

    Application Of Section 44AD:

    • The provisions laid out in Section 44AD covers all types of businesses, except ones which involve the leasing, plying or renting of goods. Since these particular businesses fall within the provisions of Section 44AE, no deductions under Section 44AD can be claimed by the assessee.
    • Individual assessees, Hindu Undivided Families (HUFs) and partnerships are eligible to claim deductions under Section 44AD, as long as they are Indian residents. However, limited liability partnerships (LLPs) do not fall under the purview of this section.
    • Any assessee who wishes to file his or her income tax returns under Section 44AD, can choose to file returns at 8% or above. Should he or she decide not to file returns under this section, and show earnings below 8% of the total turnover then the individual in question will be required to keep books of accounts, as well as have an audit performed on the same by a certified Chartered Accountant.
    • Section 44AD is not applicable to those assessees who carry on any profession as mentioned in Section 44AA. Assessees conducting agency type work or who acquire income through commissions or broker deals are also ineligible to claim deductions under this section.

    Application Of Section 44AD With Regards To Allowances And Disallowances:

    • Should an assessee choose to file his or her returns under Section 44AD, then he or she will not be able to claim deductions under Section 30 to Section 38 of the Income Tax Act. This includes any form of depreciation as well.
    • If the assessee in question is a partnership firm, and the firm chooses to file its returns under Section 44AD, then additional deductions can be claimed under Section 40(b) with regards to any remuneration or interest paid to the partners of the firm. However, this deduction can only be claimed up to a certain limit as prescribed under Section 40(b)
    • Should an assessee choose to file his or her returns under Section 44AD, then no disallowance will be permitted as per Section 40, Section 40A, and Section 43B.

    Application Of Section 44AD With Regards To Lower And Higher Income Declaration:

    • The assessee is permitted to declare any business income at a rate less than 8% of the total turnover provided the income he or she has acquired through the business is less than the total turnover permitted under Section 44AD ie: Less than Rs 1 crore
    • If the assessee in question declares any business income at a rate less than 8% of the total turnover, but the total turnover generated by him or her over the course of the financial year is more than the Rs 1 crore limit permitted under Section 44AD, then
      • The assessee will have to keep books of account as per the provisions of Section 44AA
      • The assessee will be required to have an audit performed on his or her books of account as per the provisions of Section 44AB
    • If the income earned by an assessee through his or her business is more than the prescribed limit of Rs 1 crore as mentioned under Section 44AD, then the assessee in question will be required to declare the higher income acquired from the running of the business. This income can be declared at a rate higher than 8%

    Application Of Section 44AD With Regards To Advance Tax:

    • Should an assessee decide to file returns or claim deductions under Section 44AD, then he or she will not be required to pay any kind of tax in advance with regards to the income earned through the business as mentioned under Section 44AD
    • However, if the income earned by the assessee is in the form of commission, then he or she will be required to pay tax in advance if the commission acquired is more than the taxable limit of Rs 10,000

    Application Of Section 44AD With Regards To Written Down Value Of Depreciable Assets:

    • In general, any assessee who chooses to file tax returns under Section 44AD, will not be allowed to claim any further deductions on any extra expenditure or depreciation incurred.
    • However, with regards to any asset that is utilised by any business that falls under those mentioned in Section 44AD, the written down value of said asset will be computed in a manner wherein the depreciation of the asset is permitted and claimed as per the provisions mentioned in Section 32

    Application Of Section 44AD With Regards To Professionals:

    • From the financial year 2016-17 and beyond, any assessee who is a professional will be able to claim deductions and benefits under Section 44AD, provided that his or her total income earned over the course of the financial year is not more than Rs 50 lakhs
    • For any professional claiming deductions under this section, the taxable income will be presumed to be 50% of the total receipts for the financial year
    • The following individuals are deemed to be ‘professionals’ under Section 44AD
      • Lawyers
      • Doctors
      • Technical Consultants
      • Architects
      • Interior Decorators
      • Engineers
      • Chartered Accountants

    Frequently Added Questions:

    1. What if the assessee in question is conducting or running multiple businesses?

      A) If an assessee is conducting more than one business or is running multiple businesses, then the total accumulated turnover that all the businesses earn during the course of the financial years shall be taken into consideration when claiming deductions under Section 44AD

    2. What if the assessee in question is conducting both a business and a profession?

      A) If an assessee is found to be earning income through both a business as well as a profession at the same time, then only the income acquired through the conducting of the business will be eligible for deduction under Section 44AD. Any income that the assessee earns via his or her profession will be computed as per the regular guidelines of the Income Tax Act

    3. What is the income tax form required to be filed by an assessee under Section 44AD?

      A) If an assessee chooses to file his or her tax returns under Section 44AD, then an ITR Form 4S-Sugam will be required to be used to file said returns.

    4. What forms of remuneration or income do not form a part of the total turnover of an assessee with regards to computation of income under Section 44AD?

      A) The following types of income will not be considered as part of the total turnover of an assessee when computing income under Section 44AD:

      • The receipt of any advance payments or deposits
      • Any commission earned through the sale of any fixed assets
      • Any form of cash
      • Any discounts or rebates
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