Section 44AD care required in view of retrospective amendment by insertion of sub-section (6).

[CA DEV KUMAR KOTHARI]

Section 44AD- a special provision for presumptive computation:

Section 44AD is a special provision providing for computation of income in a simple way on presumptive basis whereby certain percentage of turnover or gross receipt can be considered as income from eligible business. The section is supposed to help small business persons to deal with their tax issues in a simple way, however, we find that even such provision has faced amendment with retrospective effect also. The tax matters of such small traders and business persons are generally dealt with by general tax practioners and business person wholly rely on such practioners. The General Tax Practioners also need to be more careful while dealing with tax matters of small businessman. Care to read the so called simple section and understand its applicability and manner of applicability in different years in view of facts and circumstances is very important to avoid sudden shocks by tax authorities.

The section, as stands now is reproduced below with highlights marked in red color:

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

44AD. (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 inso 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—

           (i)  a person carrying on profession as referred to in sub-section (1) of section 44AA;

           (ii)  a person earning income in the nature of commission or brokerage; or

           (iii) a person carrying on any agency business.]

Explanation.— For the purposes of this section,—

(a) "eligible assessee" means,—

(i) 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

(ii) 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;    

(b) "eligible business" means,—

                (i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

                (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of one crore rupees. 

Analysis:

Besides analysis by way of highlights added above the following analysis is made for ease in understanding:

1. From this section we notice that   profit of eligible business can be computed @ 8% of turnover or gross receipts, subject to total turnover to be within prescribed limits..
2. Tax Audit: Profit lower than 8% and total income above basic exemption are two cumulative conditions to make audit compulsory.
3. Amendment by way of sub-section (6) inserted by FA 2012 w.r.e.f. 01.04.2011 (AY 2011-12 PYE 31.03.2011) is to disentitles professional , brokers, commission agent and other agency business from presumptive taxation. During course of discussions with some general tax practioners it was felt that many are still under impression that service charges, commission, professional fees etc. are still eligible because words used are gross receipts. However, this is not correct. One may not be surprised if tax authorities try to apply the amendment with further retrospective effect by treating it as an explanation and clarification.

Readers are requested to refer to the section and amendments from time to time to ascertain its applicability and various implications in different years.