Section 44AD begins with the wordings “Notwithstanding anything to the contrary contained in sections 28 to 43C”. This means that if there is anything which is contradicting the provisions of Section 44AD, then the provisions mentioned in the section 44AD will override those provisions and such provisions will not be applicable. In short, provisions of section 44AD have overriding effect over sections 28 to 43C unless and until mentioned otherwise.
Thus, any specific disallowance like that of specified under section 40(a)(ia) – TDS compliances, 40A(3) – Cash payment above Rs. 20,000/- will not be applicable in case of eligible assessee carrying on eligible business.
Similarly, any specific expenditure will not be separately allowed unless and until specified otherwise, e.g. contribution to National Laboratory will not qualify for deduction u/S.35 (2AA) and so on.Now let us understand who is an eligible assessee and which business is eligible for S.44AD.
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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);
(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
Thus, Limited liability partnerships, Company, AOP, BOI, AJP and a non resident firm does not qualify as eligible assessee for the purpose of S. 44AD.
Also, if we see, the assessee to be eligible for the purpose of S. 44AD, must not claim any exemption or deduction u/S 10A, 10AA, 10B, 10BA or under chapter VI-A of the Income Tax Act, 1961, as specified.
Eligible business means —
(i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE;
(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of sixty lakh rupees. Thus, any business, except for the business of transportation, whose turnover/gross receipts are 100 lakhs or below, is an eligible business for the section 44AD.
The business of transportation is specifically covered by the provisions of S. 44AE, thus it is excluded. Also, if we read it carefully, we can conclude that “the profession” is also excluded from the definition of eligible business for the purpose of S. 44AD. This is because, turnover limit for the purpose of tax audit of a profession is specified already as Rs.25 lakhs for AY 2013-14 Thus, the profession is out of the scope of S.44AD.All rest of the businesses fall under the purview of Eligible business criteria of S. 44AD.
How to calculate total turnover/ gross receipts of the eligible business
The wording of subject. (1) of S. 44AD is “the total turnover or gross receipts of the assessee in the previous year on account of such business”. It uses the word “SUCH Business”. This means, total turnover of all the eligible businesses taken together.
E.g. if an assessee is carrying on 3 businesses. Their respective turnovers are as below
Business 1 Rs. 40,00,000/-
Business 2 Rs. 15,00,000/-
Business 3 Rs. 20,00,000/-
Total turnover is Rs. 75,00,000/-. Thus, S. 44AD will not be applicable to this assessee.
Now if the assessee is carrying on two businesses as follows
Business 1 Rs. 45,00,000/-
Profession 1 Rs. 25,00,000/-
Though the total is Rs. 70, 00,000/-, since the business has got the turnover of Rs. 45 lakhs only, he is an eligible assessee and the business is also eligible for the purpose of S. 44AD.
What is meant by Income claimed to have been earned?
The wording used suggests that the assessee is not compelled to declare his actual profit/ gain from the eligible business if it is more than 8% of the turnover. The word “claimed” indicates that it is a right and not the obligation of the assessee to show more profit than 8% as specified. He may or may not exercise his right.
Case laws supporting this view:
– Samta Construction CO V. Pawan Kumar sharma(2000) 244 ITR 845 (MP)
– CIT V. ARVIND MIILS LTD(1992) 193 ITR 255(SC)
AC,BANGLORE VELLIAPA TEXTILES LIMITED AND ANOTHER (2003) ITR 560(SC)
First part of the subsection 2 of section 44AD is quite easy enough to understand. Since the profit percentage is already determined by the subsection 1, no further deduction under sections 30 to 38 will be allowed to the assessee.
However, there is a proviso stating that in case of partnership firm, the remuneration or salary and interest paid to the partners shall be allowed separately subject to provisions of S. 40(b).
Now here is a trap! The remuneration and interest to partners are allowed, but subject to provisions of section 40(b). Section 40(b) is basically a disallowing section. It requires that in order to be an eligible deduction, remuneration and interest must be permitted by the deed of partnership. It also gives the upper limit/ ceiling for the remuneration to the partners and interest paid to the partners. Interest paid to partners is restricted to 12% whereas remuneration is restricted as follows:
In case of loss or upto first 3 lakhs of profit Rs.1,50,000 or 90% of the profit whichever is higher
On the balance amount, if any 60% of the profit
The “Profit” is defined in explanation 3 to the section 40(b) as book profit as shown in the profit and loss account, computed as per the manner laid down in chapter IV-D of the Income Tax Act. Chapter IV-D means the Profit & Loss from business & profession. In that, Section 29 states how to compute profit from business/ profession. And it states that income from business/ profession shall be computed in accordance with the provisions contained in sections 30 to 43D.
Now, to calculate the limit/ restriction on remuneration u/S 40(b), for the purpose of section 44AD, which profit shall be considered, actual book profit or profit calculated on presumptive basis?
If we say actual profit, where are the books of accounts? Are they maintained? Does that mean, even if we are calculating income on presumptive basis, do we have to maintain books of accounts for the purpose of calculating remuneration to the partner?
Recall what we have discussed in earlier paragraphs. Section 44AD (1) starts with wordings “Notwithstanding anything contrary contained in S. 28 to 43C”. Clearly, Section 44AD will override the said sections and thus the profit to be taken for computation of limits of remuneration is the presumptive profit as computed under subsection (1) of section 44AD.
So, for example, turnover of the business is Rs.50,00,000.00
Profit @ 8% shall be Rs. 4,00,000.00
Remuneration as per deed is Rs . 1,50,000.00
Interest is Rs 1,00,000.00
The restriction will be cross checked taking Rs. 4,00,000.00 as the base
So, on first Rs.3,00,000/-, 90% i.e. Rs. 2,70,000.00
On balance Rs. 1,00,000/-, 60% i.e. Rs. 60,000.00
Total limit is Rs. 3,30,000.00
Actual remuneration paid is Rs. 1,50,000/- which is well within the limit, thus allowed.
The computation will be
Profit As Per S. 44AD Rs. 4,00,000.00
Less: Remuneration Rs. 1,50,000.00
Less: Interest Rs. 1,00,000.00
Net Profit (taxable) Rs. 1,50,000.00
Subsection (3) of S. 44AD states that written down value of an asset, for the purpose of an eligible business, shall be deemed to be calculated. Thus, at the time of disposal or sale of the asset, such written down value shall be considered. Let’s take an example.
Mr. X has a machinery having WDV Rs.1,00,000/- on 31-03-2011. For the AY 2011-2012 he opts for 44AD and declares profit @ 8% of his turnover. For the next 2 years, he continues with this practice and in the third year he sells of the said machinery. So, calculation of STCG will be as follows.
WDV on 31.03.2011 1,00,000.00
(-) Depreciation @ 15% 15,000.00
WDV on 31.03.2012 85,000.00
(-) Depreciation @ 15% 12,750.00
WDV on 31.03.2013 72,250.00
(-) Sold during the year 75,000.00
Computation of Short Term Capital Gain
Sale Consideration 75,000.00
(-) WDV as on 31.03.2013 72,250.00
This subsection says that the eligible assessee is not required to pay advance tax. However, second part of the provision is little tricky. The wording is “So far as it relates to eligible business”.
This means that if there is any other source of income than the eligible business, then the provisions of chapter XVII-C shall be applicable to that particular income.
Subsection (5) contains the most interesting provision in this whole section 44AD. It says that the eligible assessee can claim lower income than what is prescribed u/s 44AD (1). However, the assessee will have to maintain books of accounts as mentioned u/s 44AA and shall have to get those books audited u/s 44AB.
However, there is a twist in the provision. The provision says “and whose total income exceeds the maximum amount which is not chargeable to income-tax”. This means that if the TOTAL INCOME of the eligible assessee is less than the exemption limit i.e. Rs.160000/- for AY 2011-12, then even if he is showing lower profit than profit as per S. 44AD (1), he need not maintain the books or get the accounts audited. But the important thing to be kept in mind is “TOTAL Income” must not exceed the exemption limit. So, we have to consider all the sources of income to arrive at Total Income.
Carry forward & set off of losses from Eligible business
The loss from any eligible business can be set off against profit from another eligible business only. Also, if any loss is carried forward, then it shall be adjusted only against eligible business in the consequent year.
The possibility of loss in case of S. 44AD arises only in case of partnership firm as two separate deductions are allowed to be adjusted against the presumptive income.[/vc_column_text]
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