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Analysis of 44AD/ 44ADA/44AE

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The option of the presumptive scheme has always been an interesting as well as a confusing issue among the taxpayers. With the Budget 2016 coming into the effect from the FY 2016-17, there have been some significant additions / deletions to the scheme, which you should be aware of! The presumptive taxation scheme has been framed to give relief to small taxpayers from the tedious job of maintenance of books of account u/s 44AA and getting the accounts audited u/s 44AB.Under the said scheme, the taxpayer can declare income at a prescribed rate and avail the benefits u/s 44AD, 44ADA and 44AE. Section 44AD: It is designed to give relief to small taxpayers being resident individual, resident HUF and resident partnership firm (not LLP) engaged in any business who have not claimed deductions u/s 10A/10AA/10B/10BA or 80HH to 80RRB for the relevant year, but does not include the following businesses:

  1. Business of plying, hiring or leasing of goods carriages referred to in section 44AE;
  2. A person who is carrying on any agency business;
  3. A person who is earning income in the nature of commission or brokerage;
  4. A person who is engaged in any profession as prescribed u/s 44AA (1).
  • The presumptive taxation scheme of section 44AD can be exercised only if your total turnover or gross receipts from the business do not exceed Rs. 2 crores [Earlier, the same was Rs. 1 crore].
  • In case, you are adopting the provisions of section 44AD, your income will not be computed in the normal manner but will be computed @ 8% of the turnover or gross receipts of the eligible business for the year. The income computed under this scheme will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed even on account of depreciation. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.
  • Income at the higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%.
  • You can declare income at a lower rate (i.e., less than 8%), however, if you do so, and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.
  • Further, the whole amount of advance tax is payable on or before 15th March and no separate quarterly dates are specified [Earlier, no advance tax was payable by the taxpayers opting this scheme].
  • A discouraging provision has also been introduced with the Budget 2016 i.e. if you opt for this scheme then you are required to follow the same for the next 5 years and in case, you fail to do so, then presumptive taxation scheme will not be available to you for the next 5 years. In such a case, you will also be required to keep and maintain books of account and get your accounts audited.
  • For example, if you opt for this scheme in FY 2016-17, 2017-18 and 2018-19, but not in 2019-20, then you will not be eligible to claim the benefit of presumptive taxation scheme for the next five years i.e. from FY 2020-21 to 2024-25.

Section 44ADA [ A new section inserted vide Budget 2016 w.e.f. 01.04.2016]: Are you an engineer? a lawyer? an interior decorator? Or any other specified professional? Then, this new section 44ADA is for you! With the introduction of this new section, even the professionals are eligible for the presumptive taxation scheme. The highlights of this scheme are as follows :

The presumptive taxation scheme u/s 44ADA is designed to give relief to a person resident in India whose total gross receipts do not exceed Rs. 50 lakh and is engaged in specified profession being the following:

  1. Legal;
  2. Medical;
  3. Engineering or architectural;
  4. Accountancy;
  5. Technical consultancy;
  6. Interior decoration; and
  7. Any other profession as notified by CBDT.
  • In case, you are adopting the provisions of section 44ADA, your income will be computed @50% of the total gross receipts of the profession for the year and any further claim of deduction(s) is not admissible after declaring profit @ 50% though you can declare profit more than 50% too if you wish.
  • However, if you declare profit less than 50%, and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.
  • The income computed under this scheme will be the final taxable income of the profession covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed even on account of depreciation.
  • The provisions relating to advance tax, maintenance of books of account and audit of accounts are same as discussed above. Further, the provision of opting the scheme for continuous 5 years is not applicable to professionals.
  • For example, if your gross receipts for the year 2016-17 amounts to Rs. 4,80,000, then your presumptive income shall be Rs. 2,40,000 i.e. 50% of Rs. 4,80,000.

Section 44AE:The scheme u/s 44AE is designed to give relief to every person who is engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods carriage vehicles at any time during the relevant year.

  • One major difference as compared to Section 44AD is that “person” in this section includes every person i.e. an individual, HUF, firm, company, etc.
  • In case, you are adopting the provisions of section 44AE, your income will be computed @Rs. 7,500 per vehicle per month during which the vehicle is owned by you and where the part of the month would be considered as a full month.
  • And if the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can also be declared as per the wish of the taxpayer.
  • Further, you can declare income at a lower rate (i.e., at less than Rs. 7,500 per goods vehicle per month) but if you do so, and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.
  • The provisions relating to the admissibility of deductions, depreciation, written down value of the asset, advance tax, maintenance of books of account and audit of accounts are same as discussed above. Only a partnership firm can claim the further deduction on account of remuneration and interest paid to partners.
  • For example, if you are engaged in the business of plying, hiring or leasing of goods carriage and you own 7 vehicles throughout the year, then your income u/s 44AE shall amount to Rs. 6,30,000/- (i.e. Rs. 7500 x 7 vehicles x 12 months).

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