Computation of Income under Section 44AD - Part IV

• Click here to read Part 1 - Presumptive Taxation Scheme u/s Section 44AD
• Click here to read Part 2 - Interplay of Section 43CA vs. Section 44AD
• Click here to read Part 3 - Can assessee opt for Sec. 44AD and Sec. 44AE together?

Benefit of the reduction of deemed profit rate under Section 44AD of the Income Tax Act, 1961 to taxpayers who will accept digital payments

Section 44AD of the Income Tax Act, 1961 provides that if a taxpayer is engaged in an eligible business and having a turnover of Rs. 2 crores or less, its profits are deemed to be 8% of the total turnover or gross receipts.

In order to achieve the government mission of moving towards a cashless economy and to provide incentive small traders/businesses to proactively accept payments by digital means, it has been decided to reduce the existing rate of deemed profit of 8 per cent under Section 44AD of the Act to 6 percent in respect of the amount of total turnover or gross receipts received through banking channels digital means.

However, the existing rate of deemed profit of 8 per cent referred to in Section 44AD of the Act, shall continue to apply in respect of the total turnover or gross receipts received in cash.

The benefit to traders and small businesses is explained in following different scenarios considering FY 2020-21:

From the above table, it is clear that if an assessee makes his transactions in cash on a turnover of Rs.1.90 crore, then his income under the presumptive scheme will be presumed to be Rs.15.20 Lacs at the rate of 8 per cent of turnover, his total Tax Liability under new tax regime will be Rs.2,01,240. However, if an assessee shifts to 100 percent digital transactions and his profit will be presumed to be Rs.11.40 Lacs at the rate of 6 per cent of turnover, his total Tax Liability under new tax regime will be Rs.107120. It is to be noted that by adopting digital system i.e. non cash system. He will save income tax of Rs.94,120

Lower Rate of Income in Different Scenarios

As per the proviso to 44AD(1), income can be declared as 6% of the turnover if the payment is received digitally or through a banking channel before the due date of return filing u/s 139(1). However, many times due date for return filing is extended or sometimes it may happen that the assessee files his return after the due date or he has filed a return earlier than the due date. We shall discuss here whether the assessee can claim 6% of turnover as his income under these scenarios.

Case 1- Due date of return filing is extended

The due date of return filing u/s 139(1) is extended by the Income Tax Department due to different reasons such as natural calamities, pandemic, technical glitches etc. The extended date becomes the due date u/s 139(1) of the Act for that assessment year. Therefore, any payment received through banking channel/digitally up to the extended due date u/s 139(1) of the Act shall be eligible for claiming 6% of turnover as income.

Example: Suppose the due date for filing return u/s 139(1) for the A.Y. 2020-21 has been extended to August 31, 2020. An eligible assessee who has received payment through account payee cheque, account payee draft, ECS through banking channel or other prescribed modes up to 31/08/2020 shall be eligible for declaring profits at the rate of 6% of turnover.

Case 2- If the assessee files his return after the due date of return

The proviso to sec 44AD(1) of the Act requires payment to be received up to due date of return filing. Any payment received even digitally/ through banking channel after the due date of return filing shall not be eligible for lower rate of income i.e. 8% of turnover or higher shall be assumed as income.

Example: Suppose the due date for filing return u/s 139(1) for the A.Y. 2020-21 is July 31, 2020 and the assessee files his return on Dec 26, 2020. Whether receipts through banking channel/ digitally up to Dec 26, 2020 will be eligible for claiming 6% of turnover as profits?

The receipts through banking channel/ digitally up to July 31, 2020 shall be eligible for claiming 6% of turnover as profits. The payments received after the due date i.e. 31/07/2020 shall not be eligible for lower rates and these payments received after the due date of filing return will not be given the benefit of 6% of turnover .

Case 3- If the assessee files his return before the due date of return

When the assessee files his return before the due date u/s 139(1) of the Act, he would have considered the facts on the date of filing of return and not assumed the facts beyond that date. The receipts through banking channel/ digitally up to date of return filing are considered for lower rate of income and the amount not received yet shall be considered for 8% of turnover as profits. The interesting issue here is what about the payments received through banking channel/ digitally after the date of return filing but before the due date of return filing. Whether these will be considered for 8 % of turnover or 6% of turnover as profits? If 6% is to be considered whether the return can be revised? Let us understand this with help of an example.

Example: Mr. X has a turnover of Rs.80 Lacs for the A.Y. 2020-21. The due date of return filing is July 31, 2020. He files his return on May 15, 2020. He has received the following payments by account payee cheque:

• Up to 31/03/2020 = Rs.50,00,000
• Up to 15/05/2020 = Rs.15,00,000
• From 16/05/2020 to 31/07/2020 =Rs.10,00,000
• Received after 31/07/2020 =Rs.5,00,000

Mr. X has filed return on 15/05/2020. Till that date, payments to the extent of Rs.65,00,000 has been received by account payee cheque. Mr. X can declare profit from business as:

• 6% of Rs.65,00,000 = Rs.3,90,000
• 8% of Rs.15,00,000 (80L - 65L) = Rs.1,20,000
• Total profits = Rs.5,10,000

Mr. X has received Rs.10,00,000 after date of return filing but before due date of return filing. Mr. X can claim 6% of Rs.10,00,000 as profits by revising the return. There is no doubt that the return can be revised u/s 139(5) before the end of assessment year or up to completion of assessment whichever is earlier. ITAT Delhi has held in the case of PAWA INDUSTRIES PVT LTD. VS. ITO, ITAT DELHI, 2017 it was held that if an assessee who was eligible for opting the scheme of presumption forgets to take the benefit of same can apply for revising the return to declare a lesser income and therefore file a revised return cannot be denied the benefit available to him.

The assessee has to maintain complete records about the receipts from customers, whether they are received in cash or through banking channel/ digitally and whether they are received up to due date of return filing or not. Further, the record maintenance is for two financial years. Maintenance of all these records is a cumbersome task for a small business person. It is also against the basic object of presumptive taxation which is to make the taxation system simple, easy and hassle-free for small taxpayers. There is a need to create a balance between the object of less-cash economy and creating ‘ease of doing’ business environment.

No further deduction would be allowed

Section 44AD (2)- All deductions allowable under sections 30 to 38 shall be deemed to have been allowed in full and no further deduction shall be allowed. However, Deduction u/s 80C to 80U will be given from GTI of the assessee even from the deemed income included in the GTI.

Illustration: Mr. X is running a Printing Press. His gross receipts from this business during year is Rs.85,00,000 and declared income as per the provisions of section 44AD. After computing the income @ 8% of such gross receipts, he wants to claim further deduction on account of depreciation on the press building. Can he do so as per the provisions of section 44AD?

As per the provisions of section 44AD, from the net income computed at the prescribed rate, i.e., 8% of sales or gross receipts from the eligible business during the previous year, an assessee is not permitted to claim any deduction or any business expense from such income. Thus, in this case Mr. Shan cannot claim any further deduction from the net income of Rs.6,80,000 i.e., @8% of gross receipts of Rs.85,00,000.

Written down value of asset: Section 44AD (3): The WDV of any asset of such business shall be deemed to have been calculated as if the assessee has claimed and had been actually allowed the deduction in respect of depreciation for each of the relevant assessment years.

It is to be noted that if an assessee who has opted for presumptive taxation system, then any deduction allowable under sections 30 to 38 shall be deemed to have been already given effect to and no further deduction under those sections shall be allowed. It is to be noted that deduction for depreciation which is allowed u/s 32 shall be deemed to be allowed. Therefore, current year depreciation as well as unabsorbed depreciation i.e. brought forward depreciation shall not be allowed. However, WDV of the block of assets shall be calculated as if the depreciation has been allowed.

Sec 44AD overrides sec 28 to 43C but does not override chapter VI. Therefore, current year losses & brought forward losses can be set off against deemed income. Unabsorbed depreciation cannot be adjusted u/s 32(2) from business profit computed u/s 44AD, however assessee is entitled to set off Brought Forward Business Loss u/s 72.

The same was held by ITAT, Pune in the case of DCIT v. Sunil M. Kankariya [2008].

Current year losses and brought forward losses can be set off against deemed income, because it’s under Sec72. It was held in this case. In this case, the assessee was Transporter and 44AE was applicable. He had claimed benefit of unabsorbed depreciation.

Held: Unabsorbed depreciation carry forward having been provided in Section 32(2) in different manner and Section 72 deals with losses other than losses due to depreciation.

The area of operation and the manner of carry forward of these two types of losses in these two provisions are different and distinct

Example: A partnership firm consisting of three partners X, Y and Z is engaged in the business of manufacturing and selling toys.

Turnover of the business for the year ended 31st March, 2021 amounts to Rs 95 lacs (received in cash). Bad debts written off in the books are Rs 75,000. Interest at 12% is provided to partner Z on his capital of Rs 6 lacs as authorized by the partnership deed.

The firm had business loss of Rs 50,000 and unabsorbed depreciation of Rs 1,50,000 carried forward from Assessment Year 2020-21. The firm did not pay tax under presumptive tax system in assessment year 2020-21. The firm opts for presumptive taxation under section 44AD for Assessment Year 2021-22.

Compute the income of the firm chargeable under the head ";Profits and gains of business or profession."

Answer:

Notes

(1) A partnership firm falls within the definition of ";eligible assessee" under section 44AD. The threshold limit of turnover for applicability of presumptive taxation scheme under section 44AD is Rs 200 lacs. In this case, since the turnover of the business of the firm is Rs 95 lacs, it falls within the definition of ";eligible business" and therefore, the firm is eligible to opt for presumptive taxation under section 44AD. 8% of the total turnover would be deemed to be the business income of the firm.

(2) As per section 44AD(2), all deductions allowable under sections 30 to 38 shall be deemed to have been allowed in full and no further deduction shall be allowed Accordingly, no deduction shall be allowed for bad debts since the same is deductible under section 36(1)(vii) and similarly unabsorbed depreciation is not deductible since the same is deductible under section 32(2).

(3) Further, business loss can be set-off against current year business income as per section 72.

Example

Mr. X has turnover of Rs.50,00,000 for the P.Y. 2019-20. He has declared profits at the rate of 8% amounting to Rs.4,00,000. He has bought machinery worth Rs.12,00,000 on 15/04/2019. He has loss from house property of Rs.75,000. Can he deduct depreciation of Rs.1,80,000 (15% of Rs.12,00,000) and set off loss from the above profit of Rs.4,00,000?

No, depreciation shall not be reduced from the above profits. It is deemed that depreciation has been already claimed and allowed. The closing WDV as on 31/03/2020 shall be Rs.10,20,000 (12,00,000 – 1,80,000).

Mr. X shall be allowed to set off the loss of Rs.75,000. The total income will be Rs.3,25,000 (4,00,000 – 75,000).

EXAMPLE

Mr. X is engaged in the business of Civil Construction undertakes small government projects. He received the following amounts by way of contract receipts:

Mr. X paid Rs.40,00,000 to labour in cash. He has brought forward loss and unabsorbed depreciation of the discontinued business Rs.55,000 and Rs.25,000 respectively. Compute income under the head ";PGBP" assuming that he opts for section 44AD.

Solution:

Notes

(1) As per para 31.1 of the circular no. 684 of CBDT dated 10-06-1994, gross receipts are the amount received from the clients for contract and will not include the value of material supplied by the client.

(2) Once assessee opts for section 44AD, deduction under section 30 to 38 shall be deemed to have been allowed. Therefore, question of disallowance in respect of labour payment of Rs.40,00,000 in cash under section 40 A(3) does not arise.

(3) Once assessee opts for section 44AD, deduction under section 30 to 38 shall be deemed to have been allowed. Since depreciation is governed by section 32(2), it cannot be adjusted while computing income under section 44AD of the Act. But brought forward business loss is governed by section 72, same shall be adjusted against presumptive income computed under section 44AD.

EXAMPLE: RSK & Co. a partnership firm engaged in the manufacturing business has a gross receipt of Rs.59,00,000 from such business. The partnership deed provides for payment of salary of Rs.20,000 p.m. to each of the partners i.e. C and K. The firm uses machinery for the purpose of its business and the WDV of the machinery as on 1.04.2019 is Rs.2,00,000. The machinery is eligible for depreciation @15%. Compute the profits from the business for the assessment year 2020-21, if firm opts for the scheme under section 44AD and has received the following amount by account payee cheques:

1. 25,00,000 till 31.3.2020
2. 6,00,000 between 01.04.2020 and 31.7.2020
3. 5,00,000 after 31.07.2020

Solution: As per section 44 AD the profits will be computed as under:

No deduction will be allowed on account of depreciation.

The WDV of the machinery for next year shall be taken as Rs 1,70,000 (2,00,000 – 15% of Rs 2,00,000) assuming as if depreciation has been allowed.