What is the essence of section 44AD of the Income Tax Act? (commencing AY 2018-19)

The section 44AD is said to be the section of presumptive basis of income for business.

The businesses eligibility of 44AD has been increased from upto ₹ 1crore to upto ₹ 2 crore turnover or gross receipts from AY 2018-19.

The reason due to which people opt disclosing their income u/s 44 AD is that it offers the following benefits :-

1. The person need not to maintain books of accounts u/s 44AA.

2. Such person can disclose income at the rate of 8% of turnover or gross receipts and 6% in case of receipts through account payee cheque, account payee bank draft or Electronic Clearing System (ECS).

3. If return is filed under this section, no need to get audit done.

There is a common misconception among people that since it is a section on presumptive income, even on having higher actual profits it is allowed to disclose profits at prescribed rates, i.e., 6% or 8% as the case may be, but the section clearly mentions that, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business of profession". This means that if actual profits are higher than the prescribed limit then, actual profits will be taxable. Presumption is for those who can't calculate their profits due to non maintenance of books of accounts or complexity in calculating profits due to nature of trade.

While this section is applicable only to resident individuals, HUFs and firms other than LLP, the changes in the section has brought some other restrictions also on part of the assessees, which are as following :-

1. At least for five years return has to be filed under this scheme, otherwise for next five years return can not be filed under it, including the year in which such discontinuation is made.

2. When discontinuation to file return under this scheme is made, then for the next five years including the year of discontinuation, the assessee has to maintain books of accounts and get them audited.

#IncomeTaxact #44AD #financebill #ChangesinIncometaxact #AY #assessmentyear