This article is written by Jaya Vats and further updated by Arnisha Das. In this article, the author provides a detailed study of Section 44AD of the Income Tax Act, 1961. The article provides an in-depth analysis with respect to the 2024-25 Budget, covering the objective, calculation of tax, amendments, and limitations of Section 44AD, along with its relevance.

Introduction 

Income is the earnings that are achieved after deducting the expenses from the gross revenue in the whole year of an individual. The government then collects the data and charges that individual evenly with the income tax regulations on the total earnings or profit of the salaried person or business person. 

The taxes are then used for infrastructure development, defence, healthcare, subsidies, and other welfare reasons in the country. The methodology of taxation may often look burdensome to an individual; hence, there are methods to cut down this burden. A presumptive tax scheme lowers the tax burden even when the actual business expenses are minimal, reducing the percentage of tax on its income. 

The income tax authority under the aegis of the Income Tax Act, 1961, is a legislative framework that establishes the rules and regulations that regulate taxes in India. The Income Tax Act consists of 23 chapters and 298 sections, according to the official website of the Income Tax Department. Each part of the Act deals with different areas of taxes in the country. 

Thus, the levy on taxes varies for each department based on their annual turnovers. However, to maintain equilibrium and reduce the tax burden from owners or businessmen, several initiatives are taken by the government. Section 44AD, which allows small businesses to calculate their profits and gains on a presumptive basis, is one such initiative where taxpayers get a significant exemption in paying taxes without the hassle of maintaining any books of accounts or auditing expenses. 

Recently, the Union Budget 2024-25 has reaffirmed the grounds of presumptive taxation declared under Budget 2023 with many modifications of Section 44AD of the Act for the purpose of computing profits and gains of a business. Small or medium taxpayers can take exemplary benefits from this provision. It offers a streamlined approach for eligible taxpayers to obtain tax benefits while maintaining compliance with applicable tax laws. This article will provide a deeper insight for the taxpayers and practitioners alike to simplify the regulations outlined in the provision and reap its benefits in the existing tax regime.

Overview of Section 44AD : presumptive taxation

The Government of India included a simple process to minimise the tax load and provide relief to taxpayers from tax compliance requirements. Section 44AD of the Income Tax Act, 1961, establishes a mechanism of presumptive taxation. 

Businesses that use the presumptive taxation scheme are exempt from keeping normal books of accounts. This presumptive taxation exempts taxpayers from paying the taxes as per the regular provisions. But, in this process, the taxable income becomes greater than it is in this particular provision. In other words, the total expenses provided in normal provisions are less than they are in the presumptive provision. 

Thus, the taxable income is comparatively lower. The provision entails the computation of profits and gains of small businesses on a presumptive basis. Thus, the limit of gross receipts or turnover provided for small businesses under this provision is 2 crores, which is chargeable to tax as per the provision. After budget 2023, the limit was extended to 3 crores on condition that 95% or more of the transactions are made through online mode.  

The predetermined rate of tax on income remains 8% if the inflow of transactions is in cash, whereas the rate of tax remains 6% if it is made through online transactions. Overall, the tax system is based on an estimate of income rather than the actual income, allowing the taxpayers to pay taxes without maintaining extensive reporting. The deductions in this section remain for the taxpayer only in the condition that he has not already claimed any deductions under Sections 10A, 10AA, 10B, and 10BA, typically for tax incentives in certain sectors, and Sections 80HH to 80RRB under Chapter VI A for specific profit-related deductions.

Reasons for introducing the presumptive tax scheme

The main reasons for introducing Section 44AD of the Income Tax Act, 1961 are as follows:

• Simplifying tax compliance for small taxpayers while eliminating the need to maintain detailed books of accounts and undergo complex tax computations. 
• To encourage a large number of small businesses to come under the tax base, offering a streamlined approach.
• To incentivise the adoption of digital payment methods by offering a lower presumed income rate for taxpayers receiving a significant portion of their income digitally.
• To streamline the tax administration process for small taxpayers, reducing the workload of tax authorities. 

Eligibility criteria to opt for presumptive taxation under Section 44AD 

The special provisions of the presumptive taxation scheme (PTS) are delineated specifically under Sections 44AD, 44ADA, and 44AE, respectively. The gross receipts or total turnover of a business must be 2 crores (which has become 3 crores after the amendment of sub-clause (ii) of clause (b) of Section 44AD by the Finance Act, 2023). 

Now, after the new amendment, the taxable incomes are calculated with 8% on the receipts gained by cash in addition to 6% on the receipts gained from digital transactions. Thus, the total taxes would be levied, calculating both estimations as per the income tax slab rates. 

As an incentive to promote digital transactions, the government offered a lower presumptive income rate for small businesses generating better revenue digitally. However, it is provided that taxpayers can simplify tax compliance without the need to claim deductions and depreciation allowances under Sections 30-38 of the Act.

To qualify for the presumptive taxation scheme under Section 44AD, a taxpayer must meet the following conditions:

• To become a taxpayer under this provision, a taxpayer must be an individual or business registered in India.
• The eligible assessee is a Hindu undivided family (HUF). 
• Any partnership firm excluding limited liability partnership firms (as under clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008)
• Small businesses or professionals with a gross revenue of less than Rs 2 crores in the preceding fiscal year, i.e., any taxable income below 2 crores, are eligible for taxes under this section. Further, the limit is extended to 3 crores by the Finance Act, 2023, in case only 5% of the business transactions are made in cash mode. This initiative was taken to encourage the digital economy.   
• Any individual who claimed any deductions under Sections 10A, 10AA, 10B, 10BA, 80HH, or 80RRB of the Act during the tax year is not eligible.                                                                    

The following individuals and corporations are barred from tax deductions under the provision of Section 44AD:

• Any business entity carrying business except plying, hiring, or leasing goods carriages referred to in Section 44AE of the Act.
• People or businesses with a turnover of more than 2 crore rupees.
• Any non-resident or foreigner residing in India.
• Individuals who have previously filed for tax breaks under Sections 10A, 10AA, 10B, and 10BA during the assessment year. 

Computation of income and presumption rates under Section 44AD

If a person or organisation assesses tax by adopting a presumptive taxation scheme (PTS), he gets the benefits under the scheme. The tax is imposed on 8% of the income received through cash mode and 6% of the income received in digital mode without maintaining the books or accounts. In a normal scheme, the tax is levied on the total income, excluding the expenses incurred from the revenue. 

For example, if Vijay, an architect, earns 1 crore as his gross annual receipt, he is eligible to file taxes under the presumptive scheme. Now if he adopts normal provisions (like Section 44AA), he has to deduct his total expenses, along with accounting services, from the receipts to get the taxable income. However, if he adopts a presumptive taxation scheme, his total taxable income will be as follows:

Let’s say, Gross Receipts = Cash Payments + Digital Payments = 60 lakhs + 40 lakhs.

Now, the total income received from cash transactions is 8% of 60 lakhs = Rs. 4,80,000. 

Total income received from digital transactions is 6% of 40 lakhs = Rs. 2,40,000.

Total taxable income is = Rs. (4,80,000 + 2,40,000) = Rs. 7,20,000.

Thus, the total tax would be chargeable on Rs. 7,20,000 as per the income tax slab rate. Now, he has to fill out Form ITR-4 (SUGAM Form) to file his taxes at the prescribed rate without undergoing any compliance costs.

Features of Section 44AD of Income Tax Act, 1961

Following are the features of Section 44AD:

• The ‘eligible assessee’ has the edge of filing tax on a presumptive basis upon a specified percentage rate. The assessee’s tax under Section 44AD is determined at 8% of the cash transactions and 6% of the digital transactions (if any) on the individual’s gross turnover for the fiscal year. It should be reminded that it is only provided when his or her gross sales are less than Rs 1 crore. After the alterations of Budget 2024, the ceiling has been raised to Rs 2 crores and for transactions settling at 5% of the gross receipts in cash, 3 crores per year.
• The rate of 8% has been reduced to 6% in order to promote digital transactions and encourage companies to accept digital payments. As a result, assessees who take digital payments might regard their considered total revenue as 6%. This only applies if the amount of such turnover or gross revenues is received by account payee cheque or account payee bank draft, credit card, debit card, net banking, IMPS, UPI, RTGS, or NEFT.
• The assessees or taxpayers would be excused from keeping any books of accounts, thus saving a significant amount of costs.
• With the exception of those referred to in Section 44AE, the provisions of this section apply to any company or profession.
• Income determined under this section is liable to taxes in line with the slab rates provided under the Income Tax Act.
• The ITR-4 form would be filled out for tax returns by individuals, HUFs, and certain types of firms (not limited liability partnerships) in India.
• Assessees who claim deductions under this provision will not be able to claim any further expenditure or depreciation, with the exception of any interest or payments given to partners.
• The qualifying assessee must pay the entire amount of advance tax on or before March 15th.
• If an assessee chooses the presumptive scheme and declares profits in accordance with the scheme but does not disclose earnings for five consecutive assessment years, he will be ineligible to claim the benefit of the provisions for the next five assessment years, beginning with the year in which profits were not proclaimed in accordance with the scheme.

Presumptive income tax scheme

Presumptive taxation was introduced by the government to ease tax collection and engage eligible businesses in the growing economy. Section 44ADA of the Income Tax Act was introduced as part of the presumptive taxation scheme, which took effect on April 1, 2017. It was created to assist small firms and professionals in employing a simplified taxation system with a lower compliance load. 

Provisions 44AE and 44AD, which were established earlier, are the additional sections included in the presumptive taxation plan. Profits can be declared as a proportion of total turnover (sales) or gross revenues under presumptive taxation regimes. These disclosed gains are considered the assessee’s business income. A taxpayer who has chosen the program is not required to keep full records of accounts. Likewise, under Section 44ADA, small taxpayers are not required to keep books of accounts, and earnings are determined as a proportion of total sales.

According to the Income Tax Act, 1961, businessmen and professionals are required to keep regular books of accounts. In addition, they must have their finances audited and file income tax returns (ITRs). However, the presumptive taxation scheme (PTS) was created to provide assistance to small taxpayers.

PTS income is determined on a presumptive basis, as the acronym implies. Income is estimated on a presumptive basis for a person adopting Section 44AD (businessman) at the rate of 8% of the qualified business’s turnover or gross revenues for the year. Section 44AD, however, was changed with effect from the assessment year 2017-18 to state that income shall be computed at a rate of 6% instead of 8% where turnover/gross receipt is received by an account payee cheque or an account payee bank draft, or by use of an electronic clearing system through a bank account or by any other electronic channel.

Similarly, if a professional (as defined in Section 44ADA) wishes to adopt PTS, income will be estimated on a presumptive basis, i.e., at a rate of 50% of the profession’s total gross revenues. However, both entrepreneurs and professionals can voluntarily reveal more than the necessary proportion of their company or professional income and still file their returns under PTS.

Presumptive Tax Provision	Limit	Revised Limit (95% cashless transactions)
Section 44AD	2 Crores	3 Crores
Section 44ADA	50 Lakhs	75 Lakhs

Benefits of Section 44AD of the Income Tax Act, 1961

When a person claims tax deductions under Section 44AD, he or she gets a range of benefits, which can be listed as follows:

• No bookkeeping or audit in paying tax is an advantageous step, which saves a lot of time and effort. 
• Income is presumed at a fixed percentage on the gross receipts, which eliminates complicated computations in the actual profits.
• Less paperwork and formalities simplifies the overall compliance burden on the taxpayers.
• Generally, taxpayers need to pay advance tax every quarter of a year. In contrast, in the presumptive scheme, taxpayers can pay the total amount before March 15.

A tax audit report of return filing has to be submitted by the 31st of October of every assessment year. However, if one adopts a presumptive scheme, he doesn’t need to worry about the due date.

• If a person runs a partnership firm, they can deduct interest and salary paid to partners up to a certain amount, as long as the individual stays within the restrictions provided as under Section 40(b).
• Only residents or HUFs are eligible under this provision, and non-residents or LLPs cannot avail the benefits of the same.

Limitations of Section 44AD of Income Tax Act, 1961

There are also limitations under Section 44AD of the Income Tax Act, 1961. These are listed as below:

• Under this approach, income is calculated on a presumptive basis, which means it does not take into account the actual expenses or losses incurred in a business at a definite point in time for seeking deductions.
• Persons who adopt this section cannot get benefits of deductions under Sections 30–38 of the Act.
• The annual gross receipts in this section should be limited to 2 crores only.
• There are no disallowances mentioned in Sections 40, 40A, or 43B.
• Individuals are required to pay advance tax by the 15th of March or by the end of the fiscal year.
• The pay-as-you-earn model governs presumptive tax deductions, and businesses typically pay the Internal Revenue Service in instalments.
• The written-down value method of asset depreciation must be used for deductions made under this programme.
• Interest income, inventory value, customer advance payments, retention money, and property, plant, and equipment sales all contribute to gross receipts and are not considered.
• If an assessee chooses to pay tax under this section, he must continue to get the benefits for the next five years. Otherwise, if his income exceeds the limit of 2 crores in between this period, he shall be considered for auditing or bookkeeping onwards.

Significant case laws

In the case of M/s MD Yasin Construction Pvt. Ltd. vs. Acit Circle-2, Ranchi (2024), the Income Tax Appellate Tribunal regarding Assessment Year 2015-16 addressed an appeal where the Assessment Officer (AO) estimated the profit at 10% of the total turnover without any justification rejecting the audited accounts. As the disclosed net profit was already shown to be 3.98% and aligned with the previous years, the tribunal decided to allow the appeal for statistical reevaluation and compliance before the lower authorities. The tribunal held its decision in maintaining detailed accounts in the case of Abdul Atiq, Lucknow vs. Income Tax Officer (2019) that the existence of cash deposits in banks does not automatically imply that the income escaped the assessment, especially when the taxpayer has already declared income under the presumptive tax scheme. 

In the case of Kangiri Contractor vs. ITO (2011, 45 SOT 1 Jodh. URO), the facts of the case show that the assessee’s firm had a turnover of Rs. 6.21 crores and the assessee had kept good books of account, i.e., they were thoroughly audited and were devoid of any unfavourable remarks from the auditors.

The main issues before the Income Tax Appellate Tribunal in Jodhpur were that the profit rate of 8% under Section 44AD is to be applied where the assessee does not keep books of account and the turnover is less than Rs. 1 crore and that the provisions of Section 44AD were not applicable in the instant case.

The court held that the fact that the assessee destroyed the books of account, etc., after completing the scrutiny assessment and thus could not produce them before the Commissioner did not disprove the facts that those books of account were maintained and audited, were produced before the Assessing Officer, and were verified by the Assessing Officer. As a result, the commissioner’s decision to impose a net profit rate of 8% was not justified. It was also decided that if the assessee’s net profit rate of 8.15 percent covered all additions, any additional additions made by authorities below that rate must be erased.

Before getting into details of the next case, one must understand the concept of assessment of on-money. The assessment on money is proof of cash received that has been precisely recorded in diaries and records. It is frequently discovered and confiscated in situations involving builders and developers. 

The proof is usually deemed very strong if it includes particular facts such as the dates of receipt, the amount received in cash and by cheque, the property for which the money was received, and the people who made the payments, among other things. In most cases, the assessee additionally makes disclosures based on the results of the search and survey. Such searches and surveys are usually hailed as huge triumphs by the investigation wing, and assessments are conducted to tax the assessee’s on-money receipts as income.

In the case of Shivani Builders vs. The Income-Tax Officer (2005), the assessee firm signed a building deal on a fixed fee with two associations. It was entitled to recover the cost of any additional work done in the completed apartment(s). During a survey activity undertaken at the assessee’s premises, one of its partners acknowledged collecting on-money outside the usual book of accounts and guaranteed that the same would be reported as clear revenue in the assessee’s books. The assessee did not include the challenged amount in its gross receipts for the relevant assessment year; instead, it returned its income based on a presumptive rate of 8% on the increased turnover as opposed to its net profit as shown in its profit and loss statement.

The main issue before the court was that the assessment officer lacked the authority to determine if returned income exceeded 8% of gross revenues. The assessee submitted an income tax return pursuant to Section 44AD, stating a net profit of 9.56 percent of the entire transaction value. On the basis of the aforementioned declaration of partnership, the assessing officer added the full ‘on money’ to the assessee’s reported income.

The Income Tax Appellate Tribunal of Ahmedabad held that because there was no material with the department to make the ‘on money’ addition and the assessee had shown income of more than 8% of the total sale consideration, no addition of ‘on money’ to the assessee’s income could be made when working under Section 44AD. The court further ruled that when the law makes a concession for its purposes, the compliance and fulfilment of the qualifying criteria are assumed, and Section 44AD would not operate to limit the extent of Section 2(24) read with Section 5. As a result, when an assessee obtains a larger income, he or she is subject to be assessed on that basis, and Section 44 AD is inapplicable.

In the case of Abhi Developers vs. ITO (2006), the assessee was a partnership firm engaged in the civil construction sector. The company built flats and stores that were sold to various parties. During the course of the survey, two diaries were discovered, one of which belonged to the assessee. The receipt of ‘on money’ was documented in this journal. The turnover was Rs. 6.21 crores, and the assessee had kept proper books of account that had been audited and were devoid of any negative remarks from the auditors.

The main issue before the court was whether, while calculating an assessee’s income under Section 44AD, the Assessing Officer does not have the authority to assess anything in excess of returned income if return income exceeds 8% of total receipt/sale consideration.

The Income Tax Appellate Tribunal of Ahmedabad held that simply because the assessee destroyed the books of account, etc., after completing the scrutiny assessment and could not be produced before the Commissioner, would not disprove the facts that those books of account were maintained and audited, were produced before the Assessing Officer, and were verified by the Assessing Officer. As a result, the Commissioner’s decision to impose a net profit rate of 8% was not justified.

Conclusion

Businesses face various compliance requirements with the eventual growth in their profits. Thus, keeping track of profit and loss statements, books of accounts, invoices, receipts, the general ledger, and tax documentation are needed to determine tax liabilities. 

Usually, tax consultations, freelancers, or Chartered Accountants (CAs) aid companies to maintain their day-to-day business transactions to come to a definite amount of tax payment in the whole year. However, the implementation of presumptive taxation under Sections 44AD, 44ADA, and 44 ADE makes it suitable for the small taxpayers to overcome the tax burden. Excluding tax audits or reviewing books of payments from the regime, it empowers the taxpayers to get a simplified tax policy. 

The specified rate on the business transactions without the cost of carrying the burden of estimation of profits and calculating assortments of expenses makes the process optimised for small taxpayers. It provides the flexibility of earning income at a specified rate and reimbursing the taxes without any additional hassle, improving the taxation journey. Going to the Income Tax Department’s official website, it now gives a direct way to file taxes for the small to apply for Section 44AD tax method without hiring any third party for the same. It will stand as a unique assistance to the taxpayers, eventually relieving them from the unnecessary loads of tax payment, making the process easy-going and beneficial.

Frequently Asked Questions (FAQs)

What is turnover under Section 44AD of the Income Tax Act?

Individuals, HUFs, or partnership firms to be eligible for opting for presumptive income under Section 44AD of the Income Tax Act, 1961, should not have a turnover of more than Rs 2 crore.

Is it necessary for persons to keep books of account in accordance with Section 44AA if they use the presumptive taxation system of Section 44AD?

No. If a person adopts this section for presumptive tax payment as per the guidelines of the Income Tax Act, 1961, he does not need to keep any books of accounts or auditing documents of his expenses.

What are the benefits of Section 44ADA of the Income Tax Act, 1961?

Section 44ADA is a presumptive taxation scheme in the Income Tax Act, 1961, where persons involved in certain professions can avail the deductions by estimating 50% of the gross receipts as profits. 

If a professional uses the PTS, how should they calculate my taxable business income?

As a professional, if a person uses PTS, your taxable income will be 50% of your turnover or revenues. For example, if an individual receives Rs. 48 lakh in receipts or has a yearly turnover of Rs. 48 lakhs, they must disclose taxable profits equal to 50% of such turnover, i.e., Rs. 24 lakhs.

References

• https://www.incometax.gov.in/iec/foportal/help/e-filing-itr4-form-sugam-faq