As per the new Section 44AD of the Income Tax Act applicable from A/Y 2011-12, a taxpayer can assume his income to be 8% of his total turnover and pay tax on the income so computed.
Prior to A/Y 2011-12, this section was only applicable to the business of civil construction. However, it is now applicable to all types of businesses (except those specified below). This type of taxation is also known as presumptive taxation as income is presumed to be a specified percentage of the total turnover.
The income so computed by applying presumptive taxation would be liable to tax as per the income tax slab rates.
- Recommended Read: Income Tax Slab Rates
Section 44AD: Income presumed to be 8% of turnover
Under Section 44AD, income would be presumed to be 8% of the total turnover of the assessee, only if the total turnover of the assessee is less than Rs. 1 Crore. In case the total turnover, of the assessee is more than Rs. 1 Crore, income would be computed as per the normal provisions of the Income Tax Act (i.e. Revenue –Expense-Depreciation) and the assessee would also be required to get his accounts audited under section 44AB.
Moreover, if an assessee is applying section 44AD and assuming his income to be 8% of total turnover, he won’t be allowed to claim any expense or depreciation. Any deduction allowed under provisions of Section 30 to 38 shall, for the purpose of income computed under this section be deemed to have been already given full effect and no further deduction shall be allowed under these sections.
However, remuneration or interest paid to partners shall be allowed as deduction from the income computed under this section. Such deduction shall be subject to conditions and limits specified u/s 40(b).
The provisions of Chapter XVII-C relating to Advance Tax would also not apply in cases where section 44AD is applied.
Applicability of Section 44AD
- Section 44AD applies to all businesses except the business of plying, hiring or leasing goods. Section 44AD won’t apply in case of plying, hiring or leasing of goods as these have already been covered under section 44AE.
- As Section 44AD specifically mentions the word business, therefore section cannot be applied in case of professionals.
- Section 44AD only applies in case of Individuals, Partnership & HUF provided they are Resident in India. This section does not apply in case of Limited Liability Partnerships as they have been specifically excluded from this section.
If the taxpayer opts for filing his income tax return under this scheme, he can opt for disclosing his income tax return at any percentage above 8%. The assessee may choose not to opt for the scheme and may declare an income lower than 8% of the gross receipts. However in such a case, the assessee shall have to keep and maintain books of accounts and get his accounts audited by a chartered accountant.
Computation of Turnover for the purpose of Section 44AD
The following would form a part of turnover and would be included in the computation of turnover for the purpose of section 44AD
- VAT, Excise Duty, Cess and other Levy
- Sales of unusable empties and supplies
- Service Charges charged for delivery
However, the following will not form a part of the total turnover for the purpose of section 44AD
- Advance or deposits received
- Consideration received on sale of fixed assets
- Cash or other discounts
Other Relevant Points regarding Section 44AD
- In case an assessee is carrying on more than 1 business, the total turnover of all the businesses should be taken into account.
- However, if the assessee is carrying on business as well as profession, Section 44AD can be applied on the income earned from business. Computation of Income earned from Profession would be computed as per the normal provisions of the Income Tax Act.
- An assessee declaring his income as per presumptive taxation under section 44AD can also claim tax benefit of deductions under chapter VI-A