What are the Conditions for Applicability of Section 44AD?

Here are the conditions of Section 44AD for the applicability of Section 44AD:

• The taxpayer must be a resident of India.
• The taxpayer must be an individual, a Hindu Undivided Family (HUF), or a partnership firm other than a limited liability firm.
• The taxpayers must not have claimed deductions under section 10A, 10AA, 10B, 10BA, or 80HH to 80RRB in the relevant assessment year.

Up to AY 2016-17, a partnership firm can also claim deductions for a partner’s salary and interest (under Section 40(b)). But, from AY 2017-18, this is not allowed.

Which Business Can Claim Benefit Under Section 44AD?

Taxpayers can be engaged in any business, such as retail, wholesale, or construction, to avail the benefit under section 44AD except for the following persons:

• Professionals covered under Section 44AA(1)
• People earning through commission or broking
• People doing agency business
• People in the business of plying, hiring, or leasing goods carriages.

Turnover Limit for Section 44AD

• Up to Assessment Year 2023-24: Turnover should be up to Rs. 2 crore.

• From Assessment Year 2024-25: If the total receipts during previous years in cash/bearer or cross cheque/draft are not more than 5% of the total turnover or the gross receipts of the previous year, the turnover limit is Rs 3 Crore.
• In any other case, the limit is Rs. 2 crore.

How to Calculate Income Under Section 44AD?

• If the mentioned conditions are fulfilled, the income is estimated at 8% of your total turnover or gross receipts.
• You can also declare a higher income if you want.
• Under section 44AD, assessees are not allowed further deductions under sections 30 to 38, as the same is considered to have already been allowed. Any disallowance under Sections 40, 40A, and 43B is already considered while computing estimated income at 8%.

Advance Tax Payment

From the assessment year 2017-18, any person opting for the presumptive taxation scheme is required to pay advance tax. The regular taxpayers are required to pay in multiple instalments. However, under this scheme, the entire advance tax can be paid in one single payment on or before March 15 of the financial year. Before the assessment year 2017-18, taxpayers using the presumptive scheme were not required to pay advance tax at all.

Declaring Lower Income under Presumptive Taxation

Up to assessment year 2016-17: A taxpayer could declare income lower than the deemed profit and gains, but if total income was more than the exemption limit, they had to maintain books (Section 44AA) and get an audit (Section 44AB).

From assessment year 2017-18: If a taxpayer declares profit under Section 44AD at 8% of the turnover and declares a lower profit in any of the next five years, they cannot opt for the presumptive scheme under Section 44DA for the next five assessment years.

For example, if a taxpayer opts for Section 44AD in AY 2018-19 and declares 8% profit, continues the same for AY 2019-20 and 2020-21, but declares lower profit in AY 2021-22, then the Section 44AD benefit will not be available from AY 2022-23 to 2026-27. During these years, even if the taxpayer wants to declare 8% or more, the scheme cannot be used. Additionally, if the total income is more than the exemption limit, they must:

•  Maintain books as per Section 44AA, no matter how much income or turnover they have, and
• Get accounts audited under Section 44AB regardless of their income or turnover.

Key Things About Section 44AD

• If income declared under Section 44AD is more than 8% of total sales or receipts, the Assessing Officer cannot assess anything in excess of the returned income. This concept has been held in the case of Abhi Developers v. ITO [2007] 12 SOT 444 (Ahd.). Additionally, the disallowances under Sections 40, 40A, and 43B do not apply {(ITO v. Mark Construction [2012] 53 SOT 22 (Kol.)}.

• If there are mismatches in the books of account, no addition can be made just because the assessee could not explain them, as per the decision passed in the case of CIT v. Nitin Soni [2012] 207 Taxman 332 (All.).

• The assessee is not required to explain each cash deposit in the bank if it is part of gross receipts. CIT v. Surinder Pal Anand [2010] 192 Taxman 264 (Punj. & Har.)

• Section 44AD cannot be applied if the gross receipts are more than Rs 2 crore, even if that includes undisclosed income (CIT v. Sobti Construction).