Section 44AD
Section 44AD
Section 44AD
44AD. (1) 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” :
Ads by
Provided that this sub-section shall have effect as if for the words “eight percent”, the words “six per- cent”
had been substituted, in respect of the amount of total turnover or gross receipts which is received by an
account payee cheque or an account payee bank draft or use of electronic clearing system through a
bank account [or through such other electronic mode as may be prescribed] during the previous year or
before the due date specified in sub-section (1) of section 139 in respect of that previous year.
(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-
section (1), be deemed to have been already given full effect to and no further deduction under those
sections shall be allowed.
(3) The written down value of any asset of an eligible business shall be deemed to have been calculated
as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the
depreciation for each of the relevant assessment years.
(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of
this section and he declares profit for any of the five assessment years relevant to the previous year
succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be
eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the
assessment year relevant to the previous year in which the profit has not been declared in accordance
with the provisions of sub-section (1).
(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to
whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum
amount which is not chargeable to income-tax, shall be required to keep and maintain such books of
account and other documents as required under sub-section (2) of section 44AA and get them audited
and furnish a report of such audit as required under section 44AB.
(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall
not apply to—
(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;
(ii) a person earning income in the nature of commission or brokerage; or
(iii) a person carrying on any agency business.
Explanation.—For the purposes of this section,—
(a) “eligible assessee” means,—
(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability
partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability
Partnership Act, 2008 (6 of 2009); and
(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under
any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” in the
relevant assessment year;
(b) “eligible business” means,—
(i) any business except the business of plying, hiring or leasing goods carriages referred to in section
44AE; and
(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore
rupees.
We can decode the provisions of section 44AD(1) of the Act, by dividing the said section into following
parts:
A) Notwithstanding anything to the contrary contained in sections 28 to 43C…
Section 44AD of the Act begins with a non-obstante clause “(1) Notwithstanding anything to the contrary
contained in sections 28 to 43C”… Therefore by virtue of the non-obstante clause, Section 44AD of the
Act has a superior position vis-à-vis the other provisions of the Income Tax Act 1961. Nevertheless,
Section 44AD(2) of the Act also specifically mentions that any deductions allowable under Section 30 to
38 shall be deemed to have been given full effect. Therefore, there are no specific deductions available
for the assessee opting for presumptive taxation under Section 44AD of the Act.
Therefore, Section 44AD (1) determines the taxability by invoking a deeming clause. Further, the section
is titled as “Special provision for computing profits and gains of business on presumptive basis”. Hence
one may infer that Section 44AD is a self-contained code by its own means devoid of Section 28 to 43C
as both chargeability and computation are embedded in it. Having inferred that Section 44AD(1) is a
separate code by itself wherein it determines the profit computation without referring to Section 29 of the
Act. Section 44AD(2) of the Act specifically mentions that the deduction allowable under Section 30 to 38
of the Act are deemed to have been allowed. Such a provision, prima facie appears unnecessary
especially considering that Section 44AD (1) begins with a non-obstante clause “(1) Notwithstanding
anything to the contrary contained in sections 28 to 43C” which on a literal reading specifies that Section
44AD will override all the other provisions relevant for computing profits and gains from business i.e.,
Sections 28 to 43C of the Act, even if the same are contrary.
It is to be noted here that the non-obstante clause stresses on the term contrary. However, a similar non-
obstante clause employed in the newly inserted Section 44ADA of the Act (Special provision for
computing profits and gains of profession on presumptive basis), mentions “Section 44ADA. (1)
Notwithstanding anything contained in sections 28 to 43C”. On a comparison of Section 44AD and
Section 44ADA of the Act, the term ‘contrary’ is absent in the latter section. Now, a question arises that
whether the term ‘contrary’ used in Section 44AD is superfluous. However it does not appear to be
superfluous since the proviso to Section 44AD(2) prior to Finance Act 2016 amendment, specifically
mentioned that while determining the income deemed to be profits and gains of business under Section
44AD of the Act, deduction under Section 40(b) shall be allowed subject to the limits specified.
Therefore, Section 44AD of the Act which appears to be a separate self-contained code, specifically uses
the term contrary in its non-obstante clause so as to enable the eligible assessee to avail the deduction
under Section 40(b) of the Act prior to Finance Act 2016.
The new Section 44ADA of the Act does not provide for any deduction while determining the presumptive
profits and this may be considered the reason for the absence of the word contrary in the non obstante
clause.
It means section 28 to 43C of Income Tax Act, 1961 is not applicable on eligible assessee carrying on
eligible business. Hence, no disallowance / no deemed income under Section 40(a), 40A, 40A(3),
40A(3A), 41 can be made. It has been specifically provided that if the taxable income is to be calculated
at eight percent or six percent of turnover or gross receipts, then in that case provisions of section 28 to
43C are not to be taken into consideration for the purpose of computing taxable income. It is pertinent to
note whether any adverse inference can be drawn by which any amount that would have been added,
while calculating taxable income, such amount can be added while calculating income on presumptive
basis. By exclusion clause in respect of section 28 to 43C it seems that no disturbance can be made on
account of provisions of sec 28 to 43C if the total income is arrived at on the presumptive basis.
Example: Mr. X has paid Rs.15,000 for purchase of goods in cash. Can disallowance be made u/s.
40A(3).
Ans– No disallowance can be made under section 40A(3) for the same.
Example: Mr. X has paid Rs.38,000 to transporter for freight in cash. Can disallowance be made u/s.
40A(3)?
Ans- No disallowance can be made under Section 40A(3).
Example: Mr. X has contributed certain sum to national Laboratory which qualifies for deduction under
section 35(2)(AA). Can deduction be claimed u/s. 35(2)(AA)?
Ans– No, if he chooses section 44AD he will not eligible for benefit of this section.
Example: Mr. Y has claimed bad debts written off of Rs.50,000 in year 2014-15. In P.Y. 2019-20 he has
recovered Rs.30,000.
Ans- Separate addition of bad debts recovered may not be made if the profits are declared under
presumptive taxation scheme.
Example: A Firm engaged in the business of warehousing as mentioned u/s 35AD & total receipts
doesn’t exceed Rs.200. Can he opt for Claim u/s 44AD?
Ans- Yes, the assessee who engaged in the business of warehousing u/s35AD can claim the benefits of
Section 44AD. Since restrictions put via explanation to Section 44AD doesn’t apply to Section 35AD
business. However, it is interesting to note that such person can’t claim the deductions u/s35AD since
section 44AD overrides Section 35AD.
Issue on Disallowance U/S 43B
A very interesting issue on the disallowance u/s 43B of the Income Tax Act,1961 has been considered
by Panaji Tribunal in case of Good Luck Kinetic v. ITO (2015) 58. The Tribunal held that 44AD starts with
“notwithstanding anything to the contrary contained in Sec. 28 to 43C” whereas section 43B starts with
the words “notwithstanding anything contained in any other provisions of this Act”. The non-obstante
clause in Sec. 43B has far wider amplitude. Hence, disallowance could be made by invoking the
provisions of Sec. 43B.
This is because the said provisions u/s 28 to 43C are provisions relating to the computation of business
income of the Assessee. However, a perusal of the provisions of Sec. 43B shows that the said provision
is a “restriction” on the allowance of a particular expenditure representing statutory liability and such other
expenses, claimed in the profit and loss account unless the same has been paid before the due date of
filing the return.
Further, the non-obstante clause in Sec. 43B has far wider amplitude because it uses the words
“notwithstanding anything contained in any other provisions of this Act”. Therefore, even assuming that
the deduction is permissible or the deduction is deemed to have been allowed under any other provisions
of this Act, still the control placed by the provisions of Sec. 43B in respect of the statutory liabilities still
holds precedence over such allowance. This is because the dues to the crown has no limitation and has
precedence over all other allowances and claims. The disallowance made by the AO by invoking the
provisions of Sec. 43B of the Act in respect of the statutory liabilities are in order even though the
Assessee income has been offered and assessed under the provisions of Sec. 44AF of the Act.
Therefore, considering the view held by the aforesaid Tribunal, addition/ disallowance can be made u/s
43B even though the income has been declared u/s 44AD, 44ADA or 44AE
Example: Mr. X, having turnover of Rs.70,00,000 declared profit at 8% amounting to Rs.5,60,000. He
has not deposited employer share of EPF of Rs.25,000 up to due date of return filing. Also, he has not
paid bonus amounting to Rs.40,000 to his employees. Whether addition can be made u/s 43B if Mr. X
opts for sec 44AD?
Yes, addition can be made u/s 43B even if income is declared u/s 44AD. In this case the income will be
assessed as:
Add-Disallowances u/s 43 B
EPF not deposited up to due date of Rs.25,000
return filing
with separate facilities for living, cooking and sanitary requirement, distinctly separated from other
residential units within the building, which is directly accessible from an outer door or through an interior
door in a shared hallway and not by walking through the living space of another household.]
It is to be noted that section 44AD starts with “Notwithstanding anything to the contrary contained in
sections 28 to 43C….” meaning thereby, indirectly, section 44AD is subject to section 43CA. This is not
correct position of law. It is to be noted that the open ended coverage of section 44AD(1) is puzzling since
sale of immovable property held as stock in trade governed by section 43CA is not brought within the
provisions of section 44AD. Section 44AD starts with non-obstante clause by saying that the provisions
would prevail over sections 28 to 43C of the Act. The applicability of the section is however optional. Only
when the taxpayer opts for the provisions of section 44AD, it would prevail over the provisions of sections
28 to 43C. Now a question arises, whether the provisions of sec 43CA of the Act are applicable in case of
presumptive tax. In this connection it is to be noted that both these sections i.e.44AD and 43CA of the Act
are deeming sections. A legal fiction is created only for a definite purpose and is limited to that purpose
and should not be extended beyond it. It should be within the framework of the purpose for which it is
created. Deemed to be is not an admission that it is in reality, rather it is an admission that it is not in
reality what it is deemed to be.
‘The meaning of total turnover/ gross receipts has not been defined u/s 44AD of the Act. But if we
carefully read the provisions of sec 44AD(1), the words used are total turnover of such business. This
means the assessee has to take actual turnover or gross receipts’ and not the deemed turnover or
receipts. Further, the terms ‘total sales, turnover or gross receipts’ are fiscal facts and cannot include
deeming fiction created by section 43CA which categorically apply only ‘for the purpose of computing
profits and gains from transfer of asset’ and is meant for taxing sale of immovable assets held as stock in
trade where value adopted for stamp duty purposes by State Government authorities is more than 110%
of the consideration. Similarly, new provision of section 43CA should not apply in cases governed by
section 44AD for assessment of presumptive profits on sale of land/building.
Example: Mr. X is engaged in business of sale and purchase of property. He sells a property for
Rs.10,00,000. The stamp duty value of the same is Rs.15,00,000. His total turnover other than is property
is Rs.60,00,000. What will be his total turnover?
The stamp duty value of the property is more than 110% of consideration i.e. Rs.11,00,000 (110% of
10,00,000). If Mr. X opts for sec 44AD Rs.10,00,000 will be added in turnover as sec 43CA is not
applicable in case income is declared u/s 44AD. The total turnover will be Rs.70,00,000.
If Mr. X not opts for sec 44AD, Rs.15,00,000 will be added in turnover. His total turnover will be
considered as Rs.75,00,000.
In the case of an eligible assessee engaged in an eligible business
1) To claim the benefits of Section 44AD twin requirements must be satisfied. First, the assessee must be
an Eligible Assessee who runs the eligible business. If Assessee is eligible one but who runs the
business which is ineligible the benefits of Section 44AD couldn’t opt for such ineligible business.
2) The definition of the eligible business is given in explanation (ii) to Section 44AD. Which includes all
business whose total turnover/ gross receipts during the previous year doesn’t exceed Rs.2 Crores as an
eligible business except the business of Plying/hiring/ leasing goods carriages as referred to in Section
44AE
3) It means even if the turnover of Business of Plying/Hiring/Leasing of Goods carriage etc. is below Rs.2
Crores it will not cover U/s 44AD at any cost.
Meaning of Eligible assessee:
1) Resident Individual
2) Resident Hindu Undivided Family
3) Resident Partnership Firm (Except an Limited Liability Partnership Firm as defined under LLP Act,
2008)
Note: While explaining the meaning of eligible assessee, a rider also provided in Explanation (a) to Sec.
44AD for eligibility i.e.
Non Eligible Assessee under Sec.44AD of the Act
Explanation (a) to sec. 44AD provides the following are not covered under these provisions:
An Individual / HUF / Partnership Firm who is a resident and claiming deduction under chapter III of
the Act section10A, 10AA, 10B, 10BA relating to units
located in FREE Trade Zone, Hardware & Software Technology Park etc. OR
Claiming deduction under Chapter VI-A Part-C (deductions in respect of certain Incomes) i.e.
Sections80HH to 80RRB.
The following are not covered u/s 44AD
Individual /HUF who is not Resident
Association of Person
Firm having non-resident Status.
A local Authority
A co-operative Society
LLP both Indian as well as Foreign
Companies both Domestic and Foreign company
Every Artificial Juridical Person
Example: A Partnership Firm X & CO. is involving in manufacturing of leather and it is offering income u/s
44AD each year. Now, it converts its business to LLP. Whether it can continue to offer income u/s 44AD?
The Presumptive Taxation scheme of Section 44AD provides that it can be adopted only by Individual,
HUF and Partnership Firm and not LLP. So, it cannot offer presumptive income u/s 44AD since it has
converted into LLP.
Example: Mr. X an Individual, who is offering income u/s 44AD each year, became a non-resident in the
previous year 2018-19 relevant to assessment year 2019-20. Whether he can continue to offer
presumptive income u/s 44AD?
The Presumptive Income u/s 44AD will be applicable only to the resident individual. Non-Resident cannot
avail the benefit u/s.44AD.
Can income be offered under 44AD when one Partner is Non Resident?
As per Provision of Section 44AD, only a Resident Partnership Firm is an eligible assessee u/s 44AD
partnership firm is a resident in India if then control and management of its affairs wholly or partly
situated within India during the relevant previous year. Thus, the firm can opt for taxation u/s 44AD
provided control and management of its affairs wholly or partly situated within India during the
relevant previous year.
It is noteworthy that an assessee except resident individual/HUF/ Partnership Firm eligible u/s 44AD, such
as company or a LLP shall not be required to get its accounts audited u/s 44AB of the act, even if :
1. his gross receipts during the year do not exceed Rs.1 Crore.
2. he reports income lower than the deemed profit under the presumptive rate of tax at 6 per cent or 8 per
cent as the case may be, and
3. his taxable income exceeds maximum amount of taxable income not chargeable to tax.
Meaning of Eligible Business
The term has been defined under Explanation to subsection 6 of Section 44AD as under; “eligible
business” means,—
Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE;
and
Whose total turnover or gross receipts in the previous year does not exceed an amount of two crore
rupees.’
The presumptive taxation scheme under section 44AD covers all small businesses with total turnover/
gross receipts of up to 2crores (except the business of plying, hiring and leasing goods carriages covered
under section 44AE).
Restrictions to opt the provisions of presumptive taxation u/s 44AD (6) of the Act
The provisions of this section, notwithstanding anything contained in the foregoing provisions, Shall not
apply to—
(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;
(ii) a person earning income in the nature of commission or brokerage; or
(iii) a person carrying on any agency business.
As per the provisions of sub-section 6 of section 44AD, if an assessee has earned any income from
specified activities such as commission, then provisions of section 44AD shall have no bearing on such
assessee.
It is to be noted that meaning of words “Commission or brokerage” is same as given for the purpose of
section 194H of the Act. Commission or brokerage includes any payment received or receivable, directly
or indirectly, by a person acting on behalf of another person:
1. for services rendered (not being professional services), or
2. for any services in the course of buying or selling of goods, or
3.in relation to any transaction relating to any asset, valuable article or thing, not being securities.
Thus an assessee can’t opt the provisions of sec 44AD.
So Eligible Business includes:
Manufacturing
Trading
Wholesale
Retail
Job Work
Service business
Speculative/ Non speculative.
Assessee and Several Businesses
The provisions of Sec. 44AD of the Act apply to an ‘Assessee’. Hence when a person carries on several
businesses, viz. wholesale and/or retail and or manufacture, the turnover or gross receipts of all the
businesses are to be considered for the purposes of this section. Whether separate books or combined
books are maintained by the assessee is not material. Combined turnover or gross receipts of all the
businesses would form the basis for calculation of presumptive income.
Example: Mr. X A Resident individual, is carrying on three eligible businesses, the turnover of which is as
under –
Business A (Rs.145 Lac)
Business B (Rs.35 Lac)
Business C (Rs.25 Lac)
Whether he can opt for sec 44AD?
The Answer is NO because turnover of eligible business exceeds Rs.2 Crores. It is to be noted that when
we take when we take combined turnover of three businesses, it exceeds Rs.2 crore. Hence, the
assessee is not eligible for sec 44AD of the Act.
Example: A Person doing brokerage business who have received brokerage for Rs.90,00,000
and declaring income @ 5% of Rs.4,50,000. Should his books of Accounts be audit u/s 44AB since he is
offering income less than 8%?
Ans. Audit u/s 44AB is applicable if he is declaring income lower than thereafter specified u/s 44AD. But,
section 44AD is not applicable to Agency, Commission and Brokerage. Hence, he can declare income
less than 8%.
Example: An Eligible Assessee is engaged in trading business of goods both in his own name and also
as a consignee for another person. The Total Sales amount to Rs.1.30 Crores, Turnover Details are as
follows:
Own Business Turnover = Rs.90 Lacss
Consignment Sales Turnover = Rs.40 Lacss
Whether Assessee can opt for Presumptive income computation or not?
For computing Turnover for 44AD, the turnover of sale of goods on his own name should alone to be
considered i.e. Rs.90 Lacss. Here, the commission received on Consignment sales is liable for Tax Audit
only when such commission exceeds the limit of Rs.1 Crore. Consignment Commission can be offered at
any rate (Even below 8%), provisions of Sec.44AD will not govern the commission income.
Can assessee opt for Sec. 44AD and Sec. 44AE together?
Now a question arises that whether an assessee can take the benefit of sec 44AD and sec 44AE
together. To resolve this issue when we have to see the provisions of sec 44AD which reads –“…an
eligible assessee engaged in an eligible business… 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…”It clearly lays down
that sec 44AE is not eligible business and it does not make the assessee ineligible to take the benefit of
sec 44AD.The business covered under 44AE is not mentioned in 44AD(6), but only excluded from
definition of “Eligible Business”. So these two provisions can be claimed simultaneously
Example: Mr. X a Resident individual, is carrying on two businesses, the turnover of which is as under –
Business A (Eligible Business) Rs.70 Lacss
Business B (Transport u/s 44 AE) Rs.8 Lacss
Section 44AD and 44AE both are applicable. In the above said case, turnover of both the business shall
not be clubbed and both the business shall be chargeable to tax u/s 44AD and 44AE of the Act
respectively.
B) A sum equal to eight percent of the total turnover or gross receipts of the assessee in the
previous year on account of such business…
The minimum rate of the profit is 8% on Total Turnover or Gross Receipts of the Assessee. Now, the
question arises what does Total Turnover or Gross Receipts means?
For the calculation of Total Turnover or gross receipts reference of section 145 & Section 145A must be
given. Section 145 of the Income Tax Act, 1961 deals with the method of accounting to be followed by the
assessee. It gives an option to the assessee that while calculating the income under the head
Business/Profession assessee may opt for Cash system or accrual system of accounting. This is the
reason Section 44AD also gives reference to the word Gross Receipts with intent to cover those cases
where assessee follows the cash system of accounting. Gross Turnover means without including any
purchase cost & any other direct or indirect cost. It should be the Gross revenue which is received or to
be received by the assessee from the sale of goods or services.
Therefore where the Purchase of Goods or services & other expenditures are inclusive of taxes or not is
not a matter of concern for the assessee who is covered by Section 44AD. However, whether tax, duties,
cess, etc. which is collected by the Assessee covered u/s 44AD should be part of turnover or not is a
matter of consideration. As per Section 145A(ii), the valuation of goods or services shall be adjusted
including the amount of any tax, duty, cess, or fess by whatever name called….. It means
CGST/SGST/IGST etc. collected from the buyer by the assessee should also become part of the Gross
Turnover. There are divergent views on this point.
C). ….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”…
It is to be noted that in Section 44AD, the assessee must have to declare a minimum of 8% of the Gross
turnover or gross receipts as his deemed income. However, Section 44AD(1) further gives an option to
the assessee to claim more than 8% in his return of Income. It means it is the option given to the
assessee & not to the Revenue to presume higher income of the assessee while making an assessment.
Ms. SURBHI AGARWAL V. PRINCIPAL COMMISSIONER OF INCOME TAX-2 -Jaipur ITAT
The ld. A/R of the assessee has submitted that the case of the assessee is covered under section 44AD
of the Act as the turnover of the assessee is Rs.85 lacs which is not exceeding the limit provided under
section 44AD. The ld. A/R further submitted that the assessee has declared profit of Rs.7.64 lacs which is
8.99% of the turnover. Therefore, even if there is a payment in cash which is hit by the provisions of
section 40A(3), once the case of the assessee is covered under section 44AD and assessee has
declared more than 8% of profit on the said turnover, then no further disallowance is called for.
The ld. D/R has submitted that the assessee has not filed the return of income under section 44AD of the
Act but the income declared in the return of income as per the books of account maintained by the
assessee. Therefore, the assessee cannot take the plea of section 44AD even if the turnover of the
assessee is less than the limit provided under the said provision.
Tribunal held -Once the assessee has filed the return of income declaring the income based on the
business results shown in the books of account then the AO is required to examine the correctness of the
return of income and claim of the assessee in the context of business results shown as per the books of
account.
Merely because the turnover of the assessee for the year under consideration is less than the limit
provided under section 44AD, would not preclude the ld. PCIT to exercise his jurisdiction under section
263 regarding violation of provisions of section 40A(3) of the Act. Thus 44AD has to be ‘claimed’.
Once income declared as per books of accounts, assessee cannot claim that since turnover is within
limits of 44AD, therefore disallowances u/s 40A (or others) would not apply.
Meaning of words ‘claimed to have been earned by the eligible assessee’
The section has been amended for the benefit of the assessee and the words claimed to have been
earned by the eligible assessee. By the introduction of these words in section 44AD(1), the legislature
shows his intention to accept specified income as returned income even if higher sum is earned by
eligible assessee unless it is claimed by assessee in his Income Tax Return. The word “Claim” signifies
the right of assessee to the extent to opt between actual profits and presumptive profits. It is further to be
noted that to claim the profits upto presumptive rate is the right of the assessee and if the actual profits
are more than the presumptive profits then it is an obligation of assessee to declare the actual profits to
the department. In other words, the scheme of presumptive taxation provides both right- to the extent of
presumptive profits and obligation to the extent of actual profits. It cannot be said that if an assessee who
has opted for presumptive taxation is not liable to produce the evidence of the actual profits shown by
him. The distinction between Right and obligation is very necessary here. The language of section
44AD(1) requires claims to have been made by an assessee for returning higher income. If there is no
claim made by assessee in return for higher income, there is no higher income. The assessee, who has
opted presumptive taxation system, is under no obligation to explain individual entry of cash deposit in
bank unless such entry has no nexus with gross receipts
Example– Mr. Sham is carrying on business. The Turnover is Rs.90 Lacs. The profit as per his books or
calculation is Rs.9 Lacs. However, he opts to return the income under section 44AD @ 8% i.e. Rs.7.20
lacs. Now a question arises regarding the power of AO to assess the difference of Rs.1.8 lacs as
undisclosed income. In this case Mr. Sham has claimed the income of Rs.7.20 lac as in his return of
income as his claim. The assessee is free to exercise this option at his will. Legally he is given the option
by the statute and such an option cannot be equated with obligation cast upon the assessee. There is a
definite difference between OPTION and OBLIGATION and an Option granted to the assessee cannot be
construed to be his obligation when his actual income is more than 8% of Turnover. The AO cannot make
any addition on this count as there is no provision under the Act permitting to make such
addition. Further, the words used are “higher income claimed to have been earned by the assessee”. It
means that if the assessee has not made a claim in the return of Income regarding any higher income, it
implies there is no claim for higher Income made by assessee. AO cannot claim that the assessee has
earned higher income, because under the statue, he is not entitled to do so. Another pertinent point is
that if 8% of profits have been declared, then 92% of the receipts have been expended. This amount is
neither saved nor invested. AO can make addition if he is having sufficient evidence that the difference
between actual profits and presumptive profits have been invested. In other words, the assessee cannot
invest the difference between the actual profits and declared profits in any asset.
D). …….Provided that this sub-section shall affect as if for the words “eight percent”, the words
“six percent” had been substituted, in respect of the amount of total turnover or gross receipts
which is received by an account payee cheque or an account payee bank draft or use of electronic
clearing system through a bank account [or through such other electronic mode as may be
prescribed] during the previous year or before the due date specified in sub-section (1) of section
139 in respect of that previous year……….
The presumptive rate of income would be 8% of total turnover or gross receipts. However, Proviso to sub-
section (1) provides that the presumptive rate of 6% of total turnover or gross receipts will be applicable in
respect of amount which is received
By an account payee cheque or
By an account payee bank draft
By use of electronic clearing system through a bank account OR through such other electronic mode as
may be prescribed.
During the previous year or before the due date of filing of return under section 139(1) in respect of the
previous year. It is to be noted that the payment should have been received by an account payee cheque
or an account payee bank draft. The payment received by crossed cheque shall be treated as cash
payment received. In this connection it is to be noted that the difference between crossed cheque and
account payee cheque is that the crossed cheque is being endorsed in favour of a person other than the
drawee making it difficult to trace the constituent of the money. Keeping this idea in mind, the crossed
cheques are not being considered payment as other than cash. This payment will be treated as cash.
However the assessee can declare in his return an amount higher than presumptive income so
calculated, claimed to have been actually earned by him.Therefore here we can see that instead of
adopting the accrual method, we have to focus on actual receipt of the sum.
√ Other Electronic Prescribed by CBDT: The Central Board of Direct Taxes has prescribed other
electronic modes to provide for the followings as an acceptable electronic mode of payments-
(a) Credit Card;
(b) Debit Card;
(c) Net Banking;
(d) IMPS (Immediate Payment Service);
(e) UPI (Unified Payment Interface);
(f) RTGS (Real Time Gross Settlement);
(g) NEFT (National Electronic Funds Transfer), and
(h) BHIM (Bharat Interface for Money) Aadhaar Pay”͖
For this purpose, a new Rule 6ABBA with the heading ‘Other electronic modes’ is introduced in the
Income Tax Rules, 1962. This rule has been given a retrospective effect and will come into force from 01-
09-2019 even though the notification was issued on 29-01-2020.
This proviso to sub-section (1) has been inserted w.e.f. 01/04/2017 to promote digital transactions. The
government has offered incentive to the seller for accepting payment by banking channels or digital
means by allowing lower rate of income. This was particularly necessary to encourage digital transactions
after demonetization.
Assessee accepting payment through account payee cheque/ account payee draft or ECS through bank
or other electronic mode can declare income at 6 % of turnover/ sales or gross receipts. However, the
payment must be received before the due date of filing of return.
Example: M/s ABC, a partnership firm, is engaged in the trading business of readymade garments. Its
turnover for the previous year 2020-21 is Rs.1,10,00,000. It follows mercantile system of accounting. It
has received the amount of its turnover in the following manner
PARTICULAR AMOUNT
PARTICULAR AMOUNT
Benefit of the reduction of deemed profit rate under Section 44AD of the Income Tax Act, 1961 to
taxpayers who will accept digital payments
Section 44AD of the Income Tax Act, 1961 provides that if taxpayer is engaged in the any eligible
business and having a turnover of Rs.2 crore or less, its profits are deemed to be 8 per cent of the total
turnover or gross receipts.
In order to achieve the government mission of moving towards a cash-less economy and to provide
incentive small traders/businesses to proactively accept payments by digital means, it has been decided
to reduce the existing rate of deemed profit of 8 per cent under Section 44AD of the Act to 6 percent in
respect of the amount of total turnover or gross receipts received through banking channels digital
means.
However, the existing rate of deemed profit of 8 per cent referred to in Section 44AD of the Act, shall
continue to apply in respect of the total turnover or gross receipts received in cash.
The benefit to traders and small businesses is explained in following different scenarios considering FY
2020-21:
Presumptive income under section 44AD (8% of ₹ 95 lacs) [See Note 7,60,000
1]
Less: Brought forward business loss under section 72 [See Note 3] 50,000
Income of the firm chargeable under the head “Profits and Gains of 7,10,000
business or profession”
Notes: –
(1) A partnership firm falls within the definition of “eligible assessee” under section 44AD. The threshold
limit of turnover for applicability of presumptive taxation scheme under section 44AD is ₹ 200 lacs. In this
case, since the turnover of the business of the firm is ₹ 95 lacs, it falls within the definition of “eligible
business” and therefore, the firm is eligible to opt for presumptive taxation under section 44AD. 8% of the
total turnover would be deemed to be the business income of the firm.
(2) As per section 44AD(2), all deductions allowable under sections 30 to 38 shall be deemed to have
been allowed in full and no further deduction shall be allowed Accordingly, no deduction shall be allowed
for bad debts since the same is deductible under section 36(1)(vii) and similarly unabsorbed depreciation
is not deductible since the same is deductible under section 32(2).
(3) Further, business loss can be set-off against current year business income as per section 72.
Example:
Mr. X has turnover of Rs.50,00,000 for the P.Y. 2019-20. He has declared profits at the rate of 8%
amounting to Rs.4,00,000. He has bought machinery worth Rs.12,00,000 on 15/04/2019. He has loss
from house property of Rs.75,000. Can he deduct depreciation of Rs.1,80,000 (15% of Rs.12,00,000) and
set off loss from the above profit of Rs.4,00,000?
No, depreciation shall not be reduced from the above profits. It is deemed that depreciation has been
already claimed and allowed. The closing WDV as on 31/03/2020 shall be Rs.10,20,000 (12,00,000 –
1,80,000).
Mr. X shall be allowed to set off the loss of Rs.75,000. The total income will be Rs.3,25,000 (4,00,000 –
75,000).
EXAMPLE:
Mr. X is engaged in the business of Civil Construction undertakes small government projects. He received
the following amounts by way of contract receipts:
Particulars ₹
Particular ₹
i.e. the amount received till the due date of filing the return u/s
139(1)
TOTAL ₹4,10,000
No deduction will be allowed on account of depreciation.
The WDV of the machinery for next year shall be taken as ₹1,70,000 (2,00,000 – 15% of ₹2,00,000)
assuming as if depreciation has been allowed.
Section 44AD (4): Consequences of opting out of the section 44AD(1):
Where an eligible assessee declares profit for any previous year in accordance with the provisions
of this section and the declares profit for any of the 5 assessment years relevant to the previous year
succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be
eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the
assessment year relevant to the previous year in which the profit has not been declared in accordance
with the provisions of sub-section(1).
The above provision postulates as the following:
a. The assessee should have declared profit as per section 44AD for any previous year; and
b. The assessee should have declared profit not in accordance with section 44AD in any of the five
assessment years succeeding the previous year in which profit was declared as per section 44AD as per
condition (a).
If above two conditions are satisfied, such assessee shall not be eligible to claim the benefits of Section
44AD for five assessment years subsequent to the assessment year in which profit was not declared as
per section 44AD as given in condition (b) above.
It means that if a person has opted for a presumptive scheme of taxation u/s 44AD in any one year then
he has to remain in the umbrella of section 44AD for the next 5 years. If he goes out of the umbrella of
section 44AD in any one of the subsequent 5 years then such person cannot take the shelter in the
umbrella of section 44AD for next 5 years thereafter (i.e., such person has to remain out of Section 44AD
for 6 years in continuation).
Section 44AD (5):Notwithstanding anything contained in the foregoing provisions of this section, an
eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income
exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and
maintain such books of account and other documents as required under sub-section (2) of section
44AA and get them audited and furnish a report of such audit as required under section 44AB.
It is to be noted that the basic exemption limit of Rs.2,50,000 is to be considered in case of an assessee
who has not attained the age of 60 years during the previous year and Rs.3,00,000 is basic exemption
limit for senior citizens and Rs.5,00,000 is for super senior citizens who are of 80 years or above. In this
connection it is to be noted that rebate u/s 87 A is the tax rebate and it comes into play once the tax
liability after the basic exemption limit is computed. Hence for the purposes of section 44AD(5) is of
no relevance. Since the relevance of rebate u/s 87A will arise only when the total income of the assessee
increased beyond Rs.2,50,000. If the case of the assessee is covered u/s 44AD(5) & his total income
exceeds the maximum amount not chargeable to the Income Tax he is subject to Tax Audit.
Sub Section 5 will be applicable if following conditions are satisfied.
a. An eligible assessee to whom the provisions of sub-section (4) are applicable; and
b. The total income of that assessee has exceeded the maximum amount which is not chargeable to
income-tax.
In other words, sub-sections (4) and (5) are mutually inclusive. Provisions of sub-section (4) shall not be
applicable to an assessee who never opted for the scheme in any of the earlier previous years, as it
provides that the eligible assessee should have declared profits as per section 44AD for any previous
year. Under this situation, assessee who have never ever opted for the scheme till the AY 2016-17 can
enjoy the benefits by showing lesser profits for the subsequent assessment years.
The working of the above provisions can be explained with the help of the following diagram:
Example: Mr. X commenced his business during FY 2019-20 relevant to AY 2020-21. He was engaged
in a business of trading of goods. He reported total turnover of the business during the year as Rs.85
Lacss, entire sales were in cash. Mr. X computed profit from the aforesaid business to be Rs.2.30 Lacs
which was his sole income during the year. Whether Mr. X is required to maintain books of accounts in
accordance with provisions of section 44AA and whether he has to get his accounts audited u/s 44AB?
Firstly, Mr. X is not required to get his accounts audited u/s 44AB of the Act his total income for the FY
2019-20 is less than maximum amount not chargeable to tax even if he had claimed profit from business
less than deemed income u/s 44AD i.e., actual income of Rs.2.30 Lacs is less than deemed income of
Rs.6.8 Lacss (8% of 85 Lacs). (Section 44AD(5)]
However, Mr. X is required to maintain such books of account and other documents as may enable the
AO to compute his total income in accordance with Second proviso to section 44AA(2) of I.T. Act, 1961
as his total turnover is more than limit of Rs.25 Lacs.
Example: Mr. X commenced his business during F.Y. 2019-20 relevant to AY 2020-21. He was engaged
in a business of trading of goods. He reported total turnover of the business during the year as Rs.85
Lacss, the entire sales were made in cash. Mr. X computed profit from the aforesaid business to be Rs.
2.90 Lacs which was his sole income during the year. Whether Mr. X is required to maintain books of
accounts in accordance with provisions of section 44AA and whether he has to get his accounts audited
u/s 44AB?
Firstly, Mr. X is not required to get his accounts audited u/s 44AB of the Act as he had claimed profit from
business less than deemed income u/s 44AD i.e. actual income of Rs.2.90 Lacs is less than deemed
income of Rs.6.8 Lacs (8% of 85 Lacs). However the provision of section 44AD(4) shall not be applicable
as this is his first year of business. [Section 44AD(4)]
Also, Mr. X is required to maintain such books of account and other documents as may enable the AO to
compute his total income in accordance with the provisions of this Act, as his total turnover is more than
limit of Rs.25 lacs prescribed under second proviso to section 44AA(2) of I.T. Act, 1961.
Example: Mr. X commenced his business during FY 2020-21 relevant to AY 2021-22. He was engaged
in a business of trading of goods. He reported total turnover of the business during the year as Rs.95
Lacss, entire sales were made in cash. Mr. X computed loss from the aforesaid business to be Rs.3.90
Lacs which was his sole income during the year. Whether Mr. X is required to maintain books of accounts
in accordance with provisions of section 44AA and whether he has to get his accounts audited u/s 44AB?
Firstly, Mr. X is not required to get his accounts audited u/s 44AB of the Act, he claimed profit from
business less than deemed income u/s 44AD i.e. actual loss of Rs.3.90 Lacs is less than deemed income
of Rs.7.6 Lacs (8% of 95 Lacs). However the provision of section 44AD(4) shall not be applicable as this
is first year of business. [Section 44AD(4)]
Also, Mr. X is required to maintain such books of account and other documents as may enable the AO to
compute his total income in accordance with the provisions of this Act, as his total turnover is more than
limit of Rs.25 Lacs prescribed under second proviso to section 44AA(2).
Exceptions to the provisions of section 44AD(4) & Sec. 44AD(5)
From the perusal of the study of the above sections, we have noted that once an assessee fails to opt the
provisions of presumptive taxation, then that assessee cannot opt for these provisions for the next five
years and he has to maintain the books and get them audited. But there are certain cases in which the
assessee fails to opt the provisions not by his own option but is not eligible to opt for presumptive
taxation due to increase in turnover or receipt of any commission. It is to be noted that the word option
means when a person has more than one choice. But in the following cases, the assessee has no option
but only compulsion.
1. Assessee has not opted for presumptive taxation because of ineligible business
If a person has opted for presumptive taxation during previous years and due to increase in turnover over
2 crores during the current year, he is ineligible to opt the provisions of sec 44AD(1) of the Act. His
business is an not eligible assessee u/s 44AD of the Act being total turnover is more than Rs.2 Crore.
[Section 44AB(a) r.w.s. 44AD(1)] It is pertinent to note that person is not eligible to claim presumptive
taxation for the year, he will not be covered by the provisions of section 44AD(4) and option to opt for
presumptive taxation u/s 44AD(1) will be available in subsequent assessment years also.
Turnover of Mr. X for the F.Y. 2019-20 was Rs.74 Lacss. He has opted for Sec 44AD in that year. In the
F.Y. 2020-21, his turnover was Rs.2.5 crores(in cash) He was required to maintain books of accounts and
get them audited u/s 44AB. Now the question arises whether he can avail the benefit of Sec 44AD from
F.Y. 2021-22?
Mr. X’s turnover in the F.Y. 2020-21 was Rs.2.5 crores. He was required to get his books of accounts
audited. Mr. X is required to get his accounts audited u/s 44AB(a) of the Act as he reported total turnover
exceeds the limit of Rs.1 Crore as prescribed u/s 44AB{a) of the Act as he doesn’t satisfy the condition of
95% of total receipts and expenses to be incurred in electronic mode. Whereas his business is not an
eligible assessee u/s 44AD of the Act, as his total turnover is more than Rs.2 Crore. [Section 44AB(a)
r.w.s. 44AD(1)]
It is pertinent to note that Mr. X was not eligible to claim presumptive taxation for the year, he will not be
covered by the provisions of section 44AD(4) and option to opt for presumptive taxation u/s 44AD(1) will
be available in subsequent assessment years. There was no option to MR. X to opt for the provisions of
presumptive tax and he has to break the chain of sec 44AD by the operation of law and not on his own
will. The requirement for continuously declaring profits u/s 44AD is not violated. The link is not broken due
to compulsory applicability of Sec 44AB(a). Therefore, he can avail the benefit of Sec 44AD from F.Y.
2021-22.
Example:–Mr. A is engaged in a business of trading of goods. During FY 2019-20, he reported Total
turnover of the business as Rs.2.25 Crore (50% of total sales were made in cash). Mr. A computed profit
from the aforesaid business to be Rs.6.80 Lacs which was his sole income during the year. During FY
2017-18 and FY 2018-19, he opted for presumptive taxation scheme u/s 44AD. Whether Mr. A is required
to get his accounts audited u/s 44AB for FY 2019-20?
Solution: Mr. A is required to get its accounts audited u/s 44AB(a) of the Act as assessee reported total
turnover exceeds the limit of Rs.1 Crore as prescribed u/s 44AB(a) of the act as he doesn’t satisfy the
condition of 95% of total receipts and expenses to be incurred in electronic mode. Whereas his business
is not an eligible assessee u/s 44AD of the act being total turnover is more than Rs.2 Crore. [Section
44AB(a) r.w.s. 44AD(1)] It is pertinent to note that being Mr. A was not eligible to claim presumptive
taxation for the year, he will not be covered by the provisions of section 44AD(4) and option to opt for
presumptive taxation u/s 44AD(1) will be available in subsequent assessment years.
Example: – Mr. A is engaged in a business of trading of goods. During FY 2019-20, he reported total
turnover of the business as Rs.2.25 Crore (complete sales and payments were made in electronic mode).
Mr. A computed profit from the aforesaid business to be Rs.6.80 Lacs which was his sole income during
the year. During FY 2017-18 and FY 2018-19, he opted for presumptive taxation scheme u/s 44AD.
Whether Mr. A is required to get his accounts audited u/s 44AB for FY 2019-20?
Solution: Mr. A is not required to get its accounts audited u/s 44AB of the Act as he has reported total
turnover is within limit of Rs.10 Crore as prescribed u/s 44AB(a) of the Act whereas his business is not an
eligible assessee u/s 44AD of the Act being total turnover is more than Rs.2 Crore. [Section 44AB(a)
r.w.s. 44AD(1)] It is pertinent to note that being Mr. A was not eligible to claim presumptive taxation for the
year, he will not be covered by the provisions of section 44AD(4) and option to opt for presumptive
taxation u/s 44AD(1) will be available in subsequent assessment years.
2. Assessee has not opted for presumptive taxation because of commission income
As per the provisions of sub section 6 of section 44AD, if an assessee has earned any income from
specified activities such as commission, then provisions of section 44AD shall have no bearing on such
assessee .In such a case, the assessee is not entitled to opt the provisions of sec 44AD.If ,in a year, the
chain of sec 44AD is broken due to the receipt of commission ,that will not be considered as the assessee
has gone out of the umbrella of sec 44AD.The asseessee is entitled to opt for sec 44AD in subsequent
years.
It can be implied that where an assessee has turnover less that threshold specified u/s 44AB(a) and have
earned any income as commission or brokerage, then he can file income with lower profits without getting
its books of account audited.
Turnover of Mr. X for the F.Y. 2019-20 was Rs.74 Lacss. He has opted for Sec 44AD in that year. In the
F.Y. 2020-21, his turnover was Rs.60 Lacss. Besides this turnover, his commission receipts were Rs.
5,000. He could not opt for Sec 44AD as per the provisions of Sec 44AD(6). Whether he can avail the
benefit of Sec 44AD from F.Y. 2021-22?
Mr. X was having commission income in the F.Y. 2020-21 and was not eligible for Sec 44AD. As per the
provisions of Sec 44AD(6), a person cannot opt for Sec 44AD, if he is having commission income. He
has not opted out of Sec 44AD on his own, rather he was not eligible by the operation of law. Hence he
can opt for Sec 44AD in the F.Y. 2021-22.
Example: Mr. X a proprietorship Firm engaged in the business of wholesale of Grocery Items & having a
turnover of Rs.0.70 Crores during the Previous Year 2018-19. During the Previous Year 2019-20, he
started an agency business for metro milk& earned a net commission of Rs.70 Lacs apart from the Gross
Turnover of Rs.50 Lacs for his main business i.e. trading of grocery items. This contract was only for 1
Year. During the Previous Year 2020-21, the agency contract got over & the Gross Turnover from trading
of grocery items was Rs.1.4 Crores. Can he opt for Section 44AD during the Previous Year 2020-21?
The restrictions that assessee couldn’t opt for Section 44AD for the five years will be applicable only
when he declares the profits lower than the 8%/6%.
If because of any other reasons, he couldn’t be able to opt for Section 44AD, then restrictions of Section
44AD(4) shouldn’t impose. Since 44AD(4) gives the reference of Section 44AD(1) only & it also uses the
word ‘’Profit not as per Section 44AD(1)’’ i.e. percentage of rate.
The assessee is not eligible to opt for section 44AD in the previous year 2019-20 since he is earning
income like commission which is totally out of Section 44AD. Even for his trading business, he can’t opt
for Section 44AD.
But he can opt for section 44AD during the Previous Year 2020-21.
Controversial Issue – Needs CBDT Clarification
The amendment was brought by Finance Act, 2016 w.e.f 01/04/2017. The government is discouraging
taxpayers from misusing the scheme and constantly changing their option often. If any assessee opts for
presumptive taxation, he has to continue it for 5 years and if he wants to opt out, he will be barred from
resuming presumptive taxation for a period of 5 years. There is an important issue which emerges for
reckoning the period of 5 years. Amendment to section 44AD (i.e., new sub section (4) and (5) is
applicable from 01/04/2017 i.e., from Assessment Year 2017-18. Now, question arises regarding the
counting of the continuous 6 assessment years for the purpose of sub section (4). Will it be done initially
from the Assessment Year 2017-18 itself or even the options exercised in the earlier years can also be
counted?
Another important question is, if the person has continuously opted for 5 years period in the past then the
provision of 5 years restrictions will not be there as the sub section means that if a person has opted for
44AD for 5 years period continuously then no 5 years restrictions would be there if assessee decides to
opt out. The issues are controversial and it would be in the interest of the masses if the CBDT clarifies it
suitably.
For example, Mr. X claims to be taxed on presumptive basis under Section 44AD for AY 2019-20, he
offers income on basis of presumptive taxation scheme. However, for AY 2020-21, he did not opt for
presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation
scheme for next five Assessment years i.e. from AY 2021-22 to 2025-26.
Further, he is required to keep and maintain books of account and he is also liable for tax audit as per
section 44AB from the AY in which he opts out from the presumptive taxation scheme if his total income
exceeds the maximum amount not chargeable to tax.
This can be explained with the help of following table.
Remarks Explanation
A Turnover exceeding Rs.1 Crore and hence, he is liable to keep books of account
& Audit 44AB(a).
B Since, Mr. X opted 44AD,he is not required to maintain books and not required to
get audited u/s 44AB
C Since, Mr. X fails to opt sec 44AD.The benefit of section 44AD shall not be
available to the assessee for A.Y. 2021-22 to 2025-26. Therefore he is liable to
keep books of account & Audit u/s 44AB(e).
E Mr. X is liable to keep books of account & Audit u/s 44AB(a). If his cash receipts is
up to 5% of total receipts and his cash payments is up to 5% of total payments,
then he is not liable to audit under sec 44AB(a). Further, he is not liable to audit
u/s 44AB(e), as his total income is less than the basic exemption limit.
F Mr. X is liable to maintain books of account and required to get them audited u/s
44AB(e).If his cash receipts is up to 5% of total receipts and his cash payments is
up to 5% of total payments, even then he is liable to audit under sec 44AB(e), as
the proviso to Sec 44AB(a), which provides exemption from audit is applicable
only to sec 44AB(a) and not Sec 44AB(e).