Section 44AD, 44ADA, and 44ADE Of Income Tax Act – Presumptive Taxation

In general terms, presumptive income means the income which is calculated on the presumptive basis. It is different from the actual income and the assessee has to pay tax on the basis of his presumptive income only. The concept of presumptive income taxation has been introduced to reduce the burden of maintaining books of accounts by the small assessee. They can simply declare their income at a prescribed rate on their turnover.

Sec 44AD, Sec 44ADA, and Sec 44AE define the presumptive income taxation under the Income Tax Act, 1961. So, let’s understand the provisions stated in these sections.

Section 44AD of Income Tax Act

Eligible Business

Presumptive Taxation scheme under sec 44AD covers all small businesses with total turnover / gross receipts of upto 200 Lakh (except the business of plying, hiring, and leasing goods carriages covered u/s 44AE).

Eligible Assessee

Sec 44AD covers –

• Resident Individuals
• HUF’s
• Partnership Firm (but not LLP)

The above persons must not have claimed deduction under any of the section 10AA or deduction under any of the provisions of Chapter VIA under the heading “C – Deductions in respect of certain incomes” in the relevant assessment year would be covered under this scheme.

Presumptive Rate of Scheme

The rate under sec 44AD would be prescribed as 8% of total turnover or gross receipts.

Although, Government has introduced the presumptive rate of 6% to motivate the payment digitally. Therefore the presumptive rate of 6% of total turnover or gross receipts will be applicable where the amount is paid by an account payee cheque or account payee bank draft, or use of electronic clearing system through a bank account.

Such payment shall be received during the previous year or before the due date of filing of return under Section 139(1) in respect of that Previous Year.

The assessee shall note that he/she has an option to declare in his return of income, an amount higher than the presumptive income so calculated, claimed to have been actually earned by him.

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Points to Remember

1. No Further Deduction u/s 30 to 38 –  After claiming income under Sec 44AD, assessee would not be allowed any further deduction allowable under sec 30 to 38.
2. Depreciation Deemed to be Allowed – While calculating the Income u/s 44AD, the Depreciation with Written Down Value Method shall be deemed to have been allowed and no further deduction for the same will be given.
3. Relief From the Maintenance of Books of Account – This section has been aimed to reduce the burden of the assessee from the maintenance of Books of Accounts. Such assessees are not required to maintain books of accounts u/s 44AA or get them audited u/s 44AB.
4. Threshold Limit for Non-Auditing Books of Accounts – Sec 44AB mandates every assessee to maintain books of accounts and get them audited for any previous year if his total sales or turnover exceeds 1 crore. However, Sec 44AD provide a relief to the person opts for presumptive taxation scheme not to get his books of accounts audited if the total turnover or gross receipts during the previous year does not exceed 2 crores.
5. Advance Tax by 15th March – The eligible assessee to whom the advance tax is applicable shall pay such by 15th March of the relevant Financial Year.

Persons Not Eligible for Presumptive Taxation Scheme –

Following Category of persons are specifically excluded to avail the benefit of Sec 44AD –

1. Persons carrying on a profession referred to in Sec 44AA(1) i.e. Architecture, Engineer, Medical, Legal, Accounting, Interior Decoration, Technical consultancy, Taxation Consultancy, or any other profession as notified by the Board.
2. Person earning income through Commission or Brokerage.
3. Person carrying on any agency business.

Restriction to Opt for Presumptive Taxation for 5 Assessment Years

Assessee can opt for presumptive taxation where the turnover or gross receipts is not exceeding the threshold limit given under sec 44AD.

So, where the assessee declares his profit and pay tax in any previous year with respect to the provisions of this section and he declares profit of any five consecutive 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 the 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).

In general terms, this section restricts the assessee to avail the benefit of Sec 44AD for five consecutive years if once he declared profit without Sec 44AD.

Required to Maintain Books of Accounts

An eligible assessee is required to maintain books of accounts u/s 44AA and also required to get them audited if his total turnover or gross receipts exceed the threshold limit given under this section.

Section 44ADA of Income Tax Act

Section 44AD does nocoverrs the scope of Profession. Hence, Govt. has introduced a new section i.e. Sec 44ADA which allows professionals also to take the benefit of presumptive taxation.

Eligible Assessee

Resident Person

Eligible Business

Sec 44ADA covers the income of an assessee who is engaged in –

Any profession referred to in Section 44AA(1) such as –

• Legal
• Medical
• Engineering
• Architectural Profession
• Profession of Accountancy or
• Technical Consultancy or
• Interior decoration or
• Any other profession as is notified by the Board in the Official Gazette

Threshold Limit

The assessee will be eligible to avail the benefit of Sec 44ADA only where his total income does not exceed Rs 50 Lakhs in a previous year.

Presumptive Rate

Under Sec 44ADA, the presumptive rate of income would be a sum equal to 50% of the gross receipts. Although, if the actual income is higher than presumptive income then assessee is liable to pay tax on his actual income.

Points to Remember

1. No Further Deduction – Once the assessee opts to file his return in reference to Sec 44ADA, all the deductions allowable in Sec 30 to 38 shall deemed to have been allowed. That means, no further deduction would be allowable from the income declared u/s 44ADA.
2. Depreciation Deemed to be Allowed – While calculating income u/s 44ADA, the assessee shall deemed to have been allowed depreciation from the written down value method.
3. Relief from Maintaining Books of Accounts – The assessee opting to file return with reference to Sec 44ADA, neither required to maintain Books of Accounts u/s 44AA nor get them audited u/s 44AB. This is the actual motto behind section 44ADA to reduce the burden of small assessee from maintaining books of Accounts.
4. Option to Claim Lower Profits – Where the assessee whose income is exceeding the basic exemption limit wants to declare profit lower than Sec 44ADA, he will be required to maintain books of accounts u/s 44AA and also get them audited u/s 44AB.
5. Advance Tax –  The assessee who are eligible to file their return with reference to Sec 44ADA and also comes under the category of Advance Tax Payers shall pay the whole advance tax till 15th March of the relevant Financial Year.

SEC 44AE

Section 44AD covers all the business people to pay tax on presumptive income basis but it excludes people who are engage in plying, hiring or leasing of such goods carriage because such people can file their return on the presumptive basis under this section.

SEC 44AE allows the assessees who owns not more than ten goods carriage at any time during the previous year and who is engaged in the business of plying, hiring, or leasing of the goods carriage.

The income from such business chargeable to tax under Sec 44AE shall be deemed to be an amount equal to Rs 7500/- for each goods carriage for every month or part of the month during which the goods carriage is owned by the assessee in the Previous Year or an amount actually earned by the assessee from the goods carriage, whichever is higher.

Carriage Taken on the Hire Purchase

Where the assessee is in possession of any goods carriage which has been taken on Hire Purchase or on installments and for which the whole or part of the amount is still due, shall be deemed to be the owner of such goods carriage.

Points to Remember

1. No Further Deduction – The assessee who opts to file his return with reference to section 44AE, shall be deemed to have been allowed all the deductions from Sec 30 to 38 and no further deduction will be allowed.
2. Relief from Maintaining Books of Accounts – The assessee opting Sec 44AE will not be required to maintain Books of Accounts u/s 44AA and also get them audited u/s 44AB.
3. Option to claim Lower Profit – Assessee who wish to declare profit lower than presumptive income stated in Sec 44AE, will required to maintain books of accounts u/s 44AA and also required to get them audited u/s 44AB where his total income exceeds the basic exemption limit.

In the above article, we have the discussed on the provisions of three major sections of Presumptive Taxation i.e. Sec 44AD, Sec 44ADA, and 44AE. We have shared with you the eligible business, assessee, presumptive rate of taxation and other relevant details.

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