Section 44ADA – Presumptive Taxation Scheme for Professionals

About: After the introduction of section 44AD of the Income Tax Act, section 44ADA was introduced from Financial Year 2016-17 to give relief to small professionals as well. Under this section, an assessee is neither required to main books of accounts U/S 44AA nor the audit of accounts U/S 44AB of the Income Tax Act.

Eligibility: Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head "Profits and gains of business or profession".

Eligible Professions: The professionals engaged in the following professions referred to in Sub-Section (1) of Section 44AA whose total gross receipts does not exceed Rs. 50 lakh in a previous year, can opt for this scheme:

1) Legal
2) Medical
3) Engineering

4) Architectural
5) Accountancy
6) Technical consultancy
7) Interior decoration
8) any other notified profession

  • Authorized representatives
  • Film Artists
  • Certain sports related persons
  • Company Secretaries and
  • Information technology

Eligible Assessees: The following resident assessees are eligible to avail the benefits u/s 44ADA:

  1. Individual
  2. Hindu undivided family
  3. Partnership firm (other than limited liability partnership)

Disallowances u/s 44ADA: Income computed as per section 44ADA will be considered as net income of the business thus any allowance under the provision of section 30 to 38 shall be deemed to have been already given the full effect and no further deduction under those sections shall be allowed.

The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation as per section 32 for each of the relevant assessment years.

Allowances u/s 44ADA:

  1. All the deductions under chapter VIA are allowed as deduction.
  2. Brought forward losses can be set off from income as per section 44ADA.

Effect of Discontinuation of Section 44ADA:

  1. If an assessee claims that his profits and gains from the profession are lower than the prescribed rate of 50% of the gross receipts and whose total income exceeds the basic exemption limit, then the relief u/s 44ADA will not be available and the assessee will have to maintain his Books of Accounts as per section 44AA and he will also have to get his books of accounts audited as per section 44AB.
  2. If any assessee opts for this scheme u/s 44ADA then he will have to continue to opt for this scheme for the next 5 years. If the assessee opts out of this scheme, he will not be able to avail the benefits of this scheme for the next 5 years subsequent to the year in which income is not declared as per Presumptive Taxation Scheme.

Provisions Relating to Payment of Advance Tax:

A person opting for this scheme u/s 44ADA is liable to pay advance tax on a quarterly basis.

Objectives of Section 44ADA:

Section 44ADA came with the following objectives:

  1. To simplify the taxation for professionals
  2. To facilitate ease of doing profession
  3. To bring parity between small businessmen (who enjoy presumptive taxation u/s 44AD) and small professionals
  4. To reduce compliance burden of small professionals

Points to be Considered for Opting of this Scheme U/S 44ADA (Author's Advice):

There is no hard & fast rule which could explain whether an assessee should opt for this scheme or not. It varies from case to case. But the following points must be taken care in this regard:

  1. Quantum of Actual profit: If the actual profit under normal circumstances is lower than 50% of the gross receipts, an assessee should not opt for the Presumptive Taxation Scheme u/s 44ADA.
  2. Quantum of Expenditure: As no deduction of section 30 to 38 is allowed u/s 44ADA, the assessee should not opt for this scheme if the quantum of expenditure is huge.

(Other suggestion & comments are most welcome)

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