Calculating Business Gain on Presumptive Basis under Section 44AD of the Income Tax Act: Deemed Income

As per section 44AD of the Income Tax Act, 1961 every eligible assessee undertaking eligible business can declare minimum 8% of total turnover or gross receipts as profit from such business and this deemed income provision is only applicable to business whose turnover is less than Rs. 60 Lakhs and profit and gain from such business has to be minimum of 8% of such Turnover/Gross Receipt which means assessee can declare higher income. In case assessee wants to declare lower amount than he is has to undergo tax audit.

Eligible assessee

Individual / Firm with resident status only (Not applicable for LLP’s)

Business

Any business (excluding the business of transport) having maximum gross turnover / gross receipt Rs. 100 Lakhs

Minimum deemed profit / gain:

Minimum 8% of such gross turnover or gross receipts (Profit lower than 8% can be claimed, but in that case Audit u/s 44 AB is compulsory)

Tax Audit Limits

For Business Turnover/Sales to Exceed

Assessment Year

Prior to Year 1.4.2011

1.4.2011 to 31.3.2013

For Year 2013-14

Amount Exceeding (In Rs.)

40 Lakhs

60 Lakhs

100 Lakhs

Compulsory Maintenance of Books of Accounts under Section 44AA of Income Tax Act

Reference: Section 44AD of the Income Tax Act, 1961

Special provision for computing profits and gains of business on presumptive basis

  1. Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.
  2. Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed :

    Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

  3. The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
  4. The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.
  5. Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.
  6. The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to—
    1. a person carrying on profession as referred to in sub-section (1)
      of section 44AA;
    2. a person earning income in the nature of commission or brokerage; or
    3. a person carrying on any agency business.

Explanation.—For the purposes of this section,—

  1. “eligible assessee” means,—
  • an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and
  • who has not claimed deduction under any of the 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;
  1. “eligible business” means,—
  • any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
  • whose total turnover or gross receipts in the previous year does not exceed an amount of sixty lakh rupees for AY 2012-13 and Rs 100 Lakhs for AY 2013-14 and onwards

Payment in excess of Rs. 20000/35000 in cash / cross cheque is disallowed under Section 40A (3) of Income Tax Act (11.8)

3 thoughts to “Calculating Business Gain on Presumptive Basis under Section 44AD of the Income Tax Act: Deemed Income”

  1. Hello,

    I recently started software service to US client and receives around $13K /mo i.e around Rs. 87L per year. I have around Rs.30K /mo expenses. My questions are:

    1. Do I come under taxation section 44AD?
    2. If not then which section is applicable?
    3. If yes, then do I have to pay on 8% of Rs.87L?

    I so far have maintained records but I believe it may not be needed if I come under 44AD.

    Thanks,
    Roy

  2. dear sir/ madam
    if an assessee has opt 44AD & capital gain in FY 2012-13 so under which ITR filled the return.

  3. My situation is similar to the earlier post. I am involved in research based software development for a client in US and I send them monthly invoices in USD. I have been given to understand that ITR-4S is the most suitable return for me. Could you please confirm which ITR should I file, ITR-4S or ITR-4? Thanks.

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