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Section 44AD - Tax on Presumptive Basis
To give relief to small assessees, the Income-tax Law has incorporated a simple scheme known as Presumptive Taxation Scheme. There are two schemes, as the scheme of section 44AD and the scheme of section 44AE. An assessee adopting these provisions is not required to maintain the regular books of account and is also exempt from getting the books of account audited. In this post we will cover the provisions of the presumptive taxation scheme provided in section 44AD.
Eligibility :
1) Individual (Resident)
2)Hindu Undivided family (Resident)
3) Partnership firm (Resident) (LLP is not eligible)
4) any assessee who has claimed a deduction under sections 10A, 10AA, 10B, 10BA is not eligible for this.
5) Section 44AD is not applicable in case of plying, hiring or leasing of goods as these are covered under section 44AE.
Provision :
In case of an assessee who is willing to opt for these provisions income will be computed on an estimated basis. The rate of computation of income on an estimated basis is
8% of turnover or gross receipts of the eligible business for the previous year this is possible only if the total turnover of the assessee is less than
Rs. 1 Crore.
(This limit of Rs. 1 Crore has been increased to Rs. 2 Crore in Budget 2016. This revised limit would be applicable from Financial Year 2016-17 onwards.)
Deemed income - Deemed allowance :
1) If an assessee wants to opt for this presumptive taxation then he is not allowed to get deduction in respect of depreciation.
2)Once if you are choosing presumptive taxation then your are deemed to be allowed deduction in respect of all expenses under provisions of Section 30 to 38 , and depreciation.
Allowance in respect of remuneration and interest paid to partner in case of partnership firm :
Remuneration and interest paid to partners is allowed as deduction from the income computed under this section. Such deduction shall be subject to limits specified u/s 40(b).
Presumptive income :
8% of the total turnover or gross receipts of the assessee on account of such business or any higher amount voluntarily declared by the assessee shall be deemed to be his income chargeable to tax.Provisions of Chapter XVII C. This section talks about advance tax.
In case of multiple businesses by an assessee :
If an assessees is carrying more than one business in a financial year then the income from all the businesses should be taken in to consideration for computing the presumptive income u/s 44AD.
Examples
Example
Mr. Soham is running a provision shop. The turnover of the shop for the previous year 2012- 13is Rs. 99,00,000. Can he adopt the provisions of presumptive scheme of section 44AD in respect of this business?
Answer
The provisions of section 44AD can be adopted by the eligible assessee who is engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE and except by the assessee who is engaged in any profession as prescribed under section 44AA or is running agency business or is earning income in the nature of commission or brokerage).
Further, turnover or gross receipts from such business should not exceed the limit of audit prescribed under section 44AB (i.e.,Rs. 1,00,00,000 for the previous year 2012-13). In this case Mr. Soham is running a provision shop whose turnover is Rs. 99,00,000 during the previous year 2012-13. Thus, he satisfied both the criteria of the scheme and, hence, he can adopt the provisions of section 44AD for his business of provision shop.
Example
Mr. Shivam is a wholesale dealer of garments whose turnover during the previous year 2012-13 is Rs. 84,00,252. He wants to adopt the provisions of section 44AD in respect of this business. In this case what will be the income as per the provisions of section 44AD?
Answer
As per the provisions of section 44AD, income will be computed on an estimated basis @ 8% of turnover or gross receipts of the eligible business for the previous year. In the present case Mr. Shivam is engaged in the business of wholesale dealership of garments whose turnover is Rs. 84,00,252 and, hence, his income as per the provisions of section 44AD will come to Rs. 6,72,020 (i.e, Rs. 84,00,252 * 8%).
Example
SM Corporation, a partnership firm, engaged in the business of cement manufacturing declared income as per the provisions of section 44AD during the previous year 2012-13. After computing the income @ 8%, the partners of the firm were of the opinion that in computing the WDV of the factory building owned by them depreciation will not be deducted since no deduction on account of the same was claimed. Is the contention of partners correct?
Answer
As per the provisions of section 44AD, from the income computed as per the provisions of section 44AD, further deduction on account of depreciation is not available. However, the WDV of any asset used in the business covered under the scheme of section 44AD shall be calculated as if depreciation as per section 32 is claimed and allowed. Thus, the contention of the partners is not correct. Even though no depreciation is claimed by the firm, yet for purpose of computation of the WDV of the asset, depreciation will be deducted from the value of the block.
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