Special provision for computing profits and gains of business on a presumptive basis. Under section 44AD of Income tax Act, small taxpayers with less than Rs. 2 crore of turnover are not required to maintain books of accounts and their profits are presumed to be 8% or 6%, as the case may be, of their turnover.

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All aboutSection 44AD of the Income Tax Act
Specialprovisionfor computingprofitsand gains of
businesson a presumptivebasis
Author: CA Sana Baqai
Presumptive taxation scheme under section 44AD is there for small scale
business.It can be opted by a person who has a total turnover or gross receipts
of less than two crores rupees.If the person opts for presumptive taxation,then
he need not maintain his books of accounts,no tax audit is required, and there
is no requirement to pay advance tax in instalments. Let us discuss the
presumptive taxation scheme under section 44AD in detail.
❖ Who can opt for Section 44AD?
An individual, Hindu undivided family or a partnership firm (excluding
LLP) can opt for the presumptive taxation scheme under section 44AD.
Subject to the following conditions:
• The person must be resident in India.
• The person is not claiming any deduction under 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.
• The person is engaged in any business except the business of plying,
hiring or leasinggoods carriages referred to in section 44AE.
• The total turnover or gross receipts in the previous year does not exceed
Rs. 2 crores from such business.
❖ Who cannot opt for Section 44AD?
Followingpersons cannot opt for the presumptive schemeof taxation under
section 44AD:
• A company or a Limited liability partnership firm (LLP), AOP, BOI,
Society,Trust and Local Authority
• any non-residentperson
• a person earning a professional income

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• a person earning a commission or brokerage income
• a person carrying on any agency business
❖ Maintenance of Books of Account under Section 44AA
Where the assessee opts for section 44AD,he is not required to maintain the
books of account as required under section 44AA.
❖ Requirement of Tax Audit under Section 44AB
Where the assessee opts for section 44AD, he is not required to get his
accounts audited under section 44AB. The threshold limit for applicability
of section 44AB is Rs. 1 crore, however,the threshold limit for section 44AD
is Rs. 2 crores. Therefore, if a person is having a turnover of Rs. 1.5 crores
and opts for section 44AD, then he is not required to get his accounts
audited.
However, where a person claims a lower profit than 8%, then he has to get
his accounts audited. Applicability of section 44AD r.w.s. 44AB is not
automatic.It means the taxaudit under section 44ABis requiredonly where
the person earlier opted for section 44AD and later claimed a lower profit.
It implies that a person who never opted for section 44AD and declare
Business Income lesser than 8% of total turnover or gross receipts, then he
is not required to get his accounts audited.
❖ Block Period
As per section 44AD(4), where an assessee opts for presumptive taxation
scheme under section 44AD,then he shouldcontinuouslydo so for a period
of five assessment years.
If a person claims a lower profit than 8%, then he opts out of the scheme of
presumptive taxation under section 44AD. In case, the assessee opts out of
the scheme under section 44AD, before above-mentioned five assessment
years,then,he cannot opt for this scheme for the next five assessment years.
There is no exception to the case where the turnover of the assessee in
subsequent years exceeds Rs. 2 crores. The reason for opting out of section
44AD will remain irrelevant for the purpose of sub-section (4) of section
44AD.
For example, if a person opted for section 44AD in Assessment Year 2018-
19, 2019-20 and 2020-21. Later, in Assessment Year 2021-22, he opts out of

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the section 44AD. In this case, he cannot opt for section 44AD from
AssessmentYear 2022-23 to Assessment Year 2026-27.
For AssessmentYear 2021-22 to Assessment Year 2026-27, he is:
(i) required to get tax audit done under section 44AB
(ii) required to maintain books of account under section 44AA
if his total income exceeds the taxable limit.
❖ Quantum of Income
Where a person opts for presumptive taxation scheme under section 44AD,
then, 8% of total turnover or gross receipts shall be treatedas income under
the head “Profits and gains of business or profession”.
However, lower rate of 6% of total turnover or gross receipts shall apply
where the person receivedmoney byan account payee cheque or an account
payee bank draft or use of electronic clearing system through a bank
account during the previous year or before the due date of filing of return
of income, in respect of that previous year.
❖ Can a Person show Higher Profits under Section 44AD than
8%/ 6%?
A person who opts for section 44AD can declare higher profits under the
presumptive taxation scheme. In this case, there is no violation of section
44AD, i.e., even after declaring the higher profits than 8%, he can still claim
relaxation from payment of advance tax in instalments, maintenance of
accounts and tax audit requirements.
❖ Claiming of Expenses
A person cannot claim any expense under sections 28to 38 from the income
declared under section 44AD. All the expenses are deemed to be allowed.
Deduction of the partner’s salary or interest from the presumptive profit is
also not permitted.
WDV of assets shall be computed as if the depreciation as applicable has
been allowed.
Since,section 44AD has non-obstante clauseandoverrides section 28to 43C,
therefore, any disallowance on account of cash payment in excess of
Rs.10,000 under section 40A, disallowance in respect of non-payment of
leave encashment or bonus under section 43B, disallowance on account of
non-deduction of TDs on specified payments under section 40(a)(i)/
40(a)(ia) are deemed to have been adjusted.

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❖ Set-off of Losses and Unabsorbed Depreciation
Section 44AD overrides section 28 to 43C but does not override Chapter-VI.
Any unabsorbed depreciation or current year depreciation shall be deemed
to have been allowed since it is governed by section 32. However, any
current year loss or bought forward loss can be set-off against the
presumptive income computed under section 44AD.
❖ Can Deduction under Chapter VI-A be Claimed?
In the scheme of section 44AD, what is prohibited is claiming of income-
baseddeductions; however,expense baseddeduction can be claimedby the
person in his income tax return. A person who opts for presumptive
taxation scheme under section 44AD can claim deduction under section 80C
to 80GGC, 80TTA, 80TTB and 80U.
❖ Computation of Total Turnover or Gross Receipts
Method of Accounting: Section 44AD does not prescribe any specific
methodof accounting. Therefore,a person can follow either the mercantile
system or cash system of accounting. The turnover shall be determined on
the basis of method of accounting regularly followed by the person.
Export Turnover: Section 44AD can be applied to export turnover as well.
There is no specific provision which restrictsexport turnover to be included
in the total turnover.
GST, Excise Duty or Cess: For determining the total turnover or gross
receipts, GST, Excise duty or cess has to be excluded since it cannot
tantamount to the income of the person.
Sales Returns: Sales Returns should be reduced from the turnover.
Aggregate Turnover:
• Where more than one business is carried on by a person (if both are
eligible business) – Aggregate Turnover of both business should be
considered
• Where more than one business is carried on by a person (only one of
them is eligible business) – Turnover should be considered separately
for both the businesses.
• Where Business and profession is carried on by a person – Turnover of
business and profession needs to be considered separately.

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❖ Requirement to pay Advance Tax
Advance tax is required to be paid in four instalmentswhere the estimated
total tax liability exceeds Rs. 10,000 in the previous year. However, where a
person opts for section 44AD,is required to pay advance tax on his deemed
income,in one instalment,on or before 15th March of the previous year.
❖ Return of Income
Where the person opts for presumptive taxation, he has to file his return of
income under ITR-4 (Sugam) on or before the due date of filing of return
under section 139(1).
❖ Can a partner of the firm opt for presumptive taxation scheme?
A partner having salary and interest income from the firm can opt for
presumptive taxation scheme uder section 44AD.There is no prohibition in
law, on the partner to opt for presumptive taxation scheme.If a person opts
for the presumptive taxation scheme, he will be exempted from the
maintenance of books of accounts,payment of advance tax.
❖ Application of Section 44AD is not automatic
If a person choose to declare his income under presumptive taxationscheme
under section 44AD, then he is required to file the return opting for this
scheme.
A person cannot file his return of income under section 147 for the first time
opting for section 44AD. However, there is no prohibition on this.
❖ Can the application of section 68 and section 44AD is
simultaneous?
Section 44AD overrules section 28 to 43C but not section 68. Therefore,it is
possible that section 68can apply to the amount which is not covered under
the definition of turnover.