Filing ITR Under Section 44AD? Here’s What You Still Need To Disclose

For small business owners, Section 44AD can make income-tax compliance considerably simpler. Instead of working out profits after deducting individual business expenses, eligible taxpayers can declare income as a prescribed share of their turnover.

There is, however, a common misconception around the scheme. Choosing presumptive taxation does not mean that everything appearing in a taxpayer’s bank account automatically becomes business turnover. Nor does it mean that other sources of income can be left out of the income-tax return (ITR).

A recent Income Tax Appellate Tribunal (ITAT) case illustrates why that distinction matters.

Why The ITAT Case Matters

The case before the Surat bench of the ITAT involved a fruit trader who had opted for Section 44AD for FY 2016-17. He had shown business income of Rs 14.57 lakh.

During scrutiny, the income-tax department examined deposits and other credits in his bank accounts. The assessing officer ultimately assessed his income at Rs 5.09 crore, according to a recent report by Mint.

The taxpayer contested the additions. His argument included the claim that some transactions had not been considered correctly and that certain loans belonged to earlier periods.

The tribunal did not accept the proposition that bank deposits could simply be treated as taxable income because the taxpayer had filed his return under Section 44AD. It sent the matter back for fresh examination, giving him another chance to establish the nature of the transactions.

What Section 44AD Covers

The presumptive taxation scheme is available to eligible resident individuals, Hindu Undivided Families (HUFs) and partnership firms, other than Limited Liability Partnerships (LLPs), subject to the conditions laid down under the law.

Income is ordinarily presumed at eight per cent of turnover. The rate is six per cent for qualifying receipts received through prescribed banking or digital modes.

The usual turnover ceiling is Rs 2 crore. It can rise to Rs 3 crore where cash receipts are not more than five per cent of the total turnover or gross receipts.

Business expenses are not separately deducted once income is declared on the prescribed presumptive basis.

What Cannot Be Left Out

A person opting for Section 44AD still has to disclose income that does not form part of the business covered by the scheme.

Interest from bank deposits, dividends, rental income, capital gains and salary, wherever applicable, have to be reported under the appropriate heads.

There can also be bank credits that are not income at all, such as loans, gifts or money received from selling a personal asset. But the taxpayer may have to establish what those amounts represent if questioned by the tax department.

This is why basic documentation remains important even under presumptive taxation. Bank statements, invoices and records relating to loans or other sizeable transactions can prove useful if the return is selected for scrutiny.

FAQs

Who can opt for presumptive taxation under Section 44AD?

Eligible resident individuals, HUFs and partnership firms, excluding LLPs, can opt for Section 44AD if they meet the prescribed conditions.

Does Section 44AD cover all income earned by a taxpayer?

No. Income such as interest, dividends, rent, capital gains or salary must still be reported separately under the appropriate heads.

Are all bank deposits treated as business income under Section 44AD?

No. Loans, gifts or proceeds from selling personal assets may not be business income, but taxpayers should be able to explain such credits if questioned.