Let’s take an example to understand this. Mr. Mohan is running a partnership firm in the name of Shree Corporation. Gross receipts of his business for the previous year were Rs. 86 lakhs. He declared his income under the presumptive taxation scheme of Section 44AD. Net income was Rs. 688000 after computing at the rate of 8% of the gross receipts. He wanted to claim further deductions under Section 30 for the depreciation of his firm’s building. But, as per the provisions under Section 44AD, computed presumptive income (6% or 8% of gross receipts or turnover of the eligible business for the previous year) is considered as the net income for the business covered under the presumptive taxation scheme. Hence, assessee is not allowed to claim any deductions under Section 30 to 38 (including depreciation and unabsorbed depreciation) of the Income Tax Act. Hence, Mr. Mohan cannot claim any further deductions after the computation of net income.
Provisions for Eligible Partnership Firm
For example, let’s say Priyam Corporation is a partnership firm engaged in the business of manufacturing wooden photo frames. The firm has declared its income for the previous year as per the provisions of the presumptive taxation scheme under Section 44AD. After computation of income on basis of estimation i.e. at the rate of 8% on gross receipts, the firm wanted to claim further deductions on account of interest paid to its partners. In this case, Priyam Corporation can claim deductions for the interest paid to partners as deductions of interest paid to its partners and also the remuneration paid within the limit prescribed under Section 40 b) of IT Act are allowed as deduction under the presumptive taxation scheme.
Computing Written down Value (WDV) of depreciable assets:
Let’s understand this with an illustration. GT Corporation, a steel manufacturing firm has declared its income as per the provisions of the presumptive taxation scheme as under Section 44AD of the Income Tax Act. Presumptive income of GT Corporation was calculated at the prescribed rate i.e. 8% without deducting any depreciation as it is presumed that there is no deduction on account of depreciation is allowed under the provisions of presumptive taxation scheme. In this case, it is important to note that, even though the depreciation on the business asset is not available for deduction, it is necessary for the computation of the written value of the particular asset. Depreciation needs to be calculated and deducted.
Provisions relating to maintenance of books of account:
To understand this, let’s take an example. Mr. Mani is running a provision store. Turnover of his business for the previous year is Rs. 40 lakh. He declared his business income as per the provisions of presumptive taxation scheme of Section 44AD. In this case, Mr. Mani is not obliged to maintain the books of account relating to his business as per the provisions of Section 44AD. And also, he is not required to get his books audited as his business is not covered under Section 44AA and Section 44AB of the IT Act.
- Declaring Lower Income or Higher Income under the Presumptive Taxation Scheme:
In case, the actual income is more than the presumptive income scheme, this provision allows the assessee to declare the higher income at his option (higher than the prescribed rate of 8%). Lastly, presumptive taxation scheme under Section 44AD is a great relief to small and medium tax payers with regards to maintenance of books of account and getting it audited which is often quite very tedious job with high probability of errors.