Presumptive taxation of business income under section 44AD (as set, 1961 Act, AY 2017-18)

Section 44AD in its present form was substituted by Act 33 of 2009 with effect from 1 April

2011. The Finance Act, 2016 (Act 28 of 2016) then substituted its sub-sections (4) and (5) and raised the turnover limit, and the Finance Act, 2017 (Act 7 of 2017) inserted the 6% rate for digital receipts, all with effect from assessment year 2017-18 (the section's footnotes). The rules for assessment year 2017-18 are these.

Who may use it

An eligible assessee is a resident individual, Hindu undivided family or partnership firm, but not a limited liability partnership, which has not claimed a deduction under sections 10A, 10AA, 10B or 10BA, or under heading C of Chapter VI-A (deductions in respect of certain incomes), in that year (Explanation (a) to section 44AD).

Which business

An eligible business is any business, other than plying, hiring or leasing goods carriages (covered by section 44AE), whose total turnover or gross receipts for the year do not exceed ₹2 crore (Explanation (b); the limit was raised from ₹1 crore by Act 28 of 2016). The section does not apply at all to a person carrying on a profession referred to in section 44AA(1), a person earning commission or brokerage income, or a person carrying on an agency business (section 44AD(6)): such a person is shut out of the scheme, not merely for that income.

Income deemed

The profits of the business are deemed to be 8% of the total turnover or gross receipts of the year, or any higher sum the assessee declares (section 44AD(1)). For the part of the turnover received by account payee cheque or bank draft, or through the electronic clearing system through a bank account, during the year or before the due date of the return specified in section 139(1) for that year, the rate is 6% (proviso to section 44AD(1)).

No further deductions

All deductions allowable under sections 30 to 38 (rent, repairs, depreciation, salaries, interest and so on) are deemed to have been allowed in full, and no further deduction under those sections is allowed (section 44AD(2)). The written down value of the business assets is computed as if depreciation had been claimed and allowed for every year (section 44AD(3)).

Leaving the scheme

• If an eligible assessee declares profit under the scheme for a year and then, in any of the next five years, declares profit not in line with it, he cannot use the scheme for the five assessment years after the year in which he left (section 44AD(4)).
• Such an assessee whose total income is above the amount not chargeable to tax must keep and maintain the books of account and other documents section 44AA(2) requires, get them audited and furnish the audit report as section 44AB requires (section 44AD(5)).

Advance tax

An assessee under the scheme pays the whole of the advance tax on this income in one instalment by 15 March of the previous year (section 211(1)(b)); any advance tax paid on or before 31 March is also treated as advance tax paid in that financial year (proviso to section 211(1)).

Example

Mr. Vivek, a resident running a hardware shop, has a turnover of ₹90,00,000 for 2016-17: ₹60,00,000 received during the year by account payee cheques and through the electronic clearing system into his bank account, and ₹30,00,000 in cash. Only the ₹60,00,000 received by those modes, within the time the proviso allows, qualifies for the 6% rate; a sum merely deposited in the bank after being received in cash would not. His deemed business income is 6% of ₹60,00,000 + 8% of ₹30,00,000 = ₹3,60,000 + ₹2,40,000 = ₹6,00,000, with no deduction for his expenses or depreciation, unless he shows a higher profit.