My client wants to file under s.44AD. What turnover can he have, what rate must he declare, and can the firm still deduct partners' salary and interest from the presumptive figure?
Eight per cent of turnover, or six per cent of so much of the turnover as is received by account payee cheque, account payee bank draft, electronic clearing system or other prescribed electronic mode during the previous year or before the s.139(1) due date. The eligible-business ceiling is two crore rupees, replaced by three crore rupees where cash receipts do not exceed five per cent of turnover (Finance Act 2023, from AY 2024-25) — and the proviso that once let a firm deduct partners' salary and interest from the s.44AD figure was omitted by the Finance Act 2016 with effect from 1 April 2017, so it is not available for AY 2017-18 or any later year.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2024-04-01, reported as Income-tax Act 1961, s.44AD(1), s.44AD(2) and the Explanation, as amended by the Finance Act 2016 (Act No. 28 of 2016) with effect from 1 April 2017 and by the Finance Act 2023 (Act No. 8 of 2023) with effect from 1 April 2024. It bears on section 44AD, section 44AD(1), section 44AD(2), section 44AB, section 44AE, section 40(b), section 139(1) of the Income Tax Act 1961, in Presumptive Taxation & Audit, How Tax Law Is Read and Cash Transaction Limits matters.
Three things go wrong in practice. First, the six per cent rate is not a rate for the whole turnover — it applies only to the banked or electronic portion, and only if that portion is received during the previous year or before the s.139(1) due date, so a receipt banked after that date falls back to eight per cent. Second, the three crore ceiling is not automatic: it depends on the five per cent cash test, and the second proviso deems a cheque or bank draft that is not account payee to be cash, which quietly disqualifies businesses that pay and receive by bearer or crossed-but-not-account-payee instruments. Third, and this is where old advice is still being repeated, the proviso to s.44AD(2) allowing a firm to deduct partners' salary and interest under s.40(b) was omitted from AY 2017-18. Any authority or note allowing that deduction under s.44AD for AY 2017-18 or later is wrong, and this library's entries on CIT v. Surinder Pal Anand and C. Eswara Reddy & Co. are already labelled superseded for that reason. Note that s.44AE kept its equivalent proviso: a transport firm assessed under s.44AE(1) and (2) may still deduct partners' salary and interest under the proviso to s.44AE(3). The two sections diverged in 2016 and have stayed diverged.
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Section 44AD(1) opens 'Notwithstanding anything to the contrary contained in sections 28 to 43C' and deems eight per cent of the total turnover or gross receipts of an eligible assessee engaged in an eligible business, or a higher sum claimed to have been earned, to be the profits and gains of that business chargeable under the head Profits and gains of business or profession. Its proviso substitutes six per cent for eight per cent in respect of the amount of turnover or gross receipts received by an account payee cheque, an account payee bank draft, use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, during the previous year or before the due date specified in s.139(1) for that previous year. Sub-section (2) provides that deductions allowable under ss.30 to 38 are deemed to have been given full effect to and no further deduction under those sections is allowed; the proviso that formerly allowed a firm to deduct salary and interest paid to its partners subject to s.40(b) was omitted with effect from 1 April 2017. Sub-section (3) deems the written down value of assets to have been computed as if depreciation had been claimed and allowed. The Explanation defines 'eligible assessee' as a resident individual, Hindu undivided family or partnership firm, but not a limited liability partnership as defined in s.2(1)(n) of the Limited Liability Partnership Act 2008, who has not claimed deduction under s.10A, s.10AA, s.10B or s.10BA or under any provision of Chapter VIA under the heading 'C.—Deductions in respect of certain incomes' in the relevant assessment year; and defines 'eligible business' as any business except the business of plying, hiring or leasing goods carriages referred to in s.44AE, whose total turnover or gross receipts in the previous year does not exceed two crore rupees, with a first proviso substituting three crore rupees where the amount or aggregate of amounts received during the previous year in cash does not exceed five per cent of turnover, and a second proviso deeming receipt by a cheque or bank draft which is not account payee to be receipt in cash.
Not applicable — statutory provision. The operative rules are that the presumptive rate is eight per cent, reduced to six per cent only on the banked or electronic portion of turnover received within the time the proviso fixes; that the eligible-business ceiling is two crore rupees, raised to three crore rupees only where cash receipts (including receipts by non-account-payee cheque or draft) do not exceed five per cent of turnover; and that no deduction under ss.30 to 38 survives sub-section (2), the partner's-salary-and-interest proviso having been omitted from AY 2017-18.
Not applicable — statutory provision. What follows is this library's reading of the statutory words and is not authority. The six per cent proviso operates 'in respect of the amount of total turnover or gross receipts which is received' in the specified modes, so it is amount-specific and not assessee-specific: it splits the turnover rather than re-rating it. The three crore substitution is expressed to have effect 'as if for the words "two crore rupees", the words "three crore rupees" had been substituted', and it is placed in Explanation (b)(ii), which defines eligible business — so failing the five per cent cash test does not merely raise the rate, it takes the assessee out of s.44AD altogether once turnover passes two crore rupees. The omission of the proviso to sub-section (2) leaves the main limb of that sub-section, which forecloses 'any deduction allowable under the provisions of sections 30 to 38', standing alone; s.40(b) is not within ss.30 to 38, but the deduction it permitted from a s.44AD figure existed only because the omitted proviso created it.
Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.
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Handle my notice → Ask a CA on WhatsAppEight per cent of turnover, or six per cent of so much of the turnover as is received by account payee cheque, account payee bank draft, electronic clearing system or other prescribed electronic mode during the previous year or before the s.139(1) due date. The eligible-business ceiling is two crore rupees, replaced by three crore rupees where cash receipts do not exceed five per cent of turnover (Finance Act 2023, from AY 2024-25) — and the proviso that once let a firm deduct partners' salary and interest from the s.44AD figure was omitted by the Finance Act 2016 with effect from 1 April 2017, so it is not available for AY 2017-18 or any later year. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 44AD, section 44AD(1), section 44AD(2), section 44AB, section 44AE, section 40(b), section 139(1) of the Income Tax Act 1961. It is reported as Income-tax Act 1961, s.44AD(1), s.44AD(2) and the Explanation, as amended by the Finance Act 2016 (Act No. 28 of 2016) with effect from 1 April 2017 and by the Finance Act 2023 (Act No. 8 of 2023) with effect from 1 April 2024. Three things go wrong in practice. First, the six per cent rate is not a rate for the whole turnover — it applies only to the banked or electronic portion, and only if that portion is received during the previous year or before the s.139(1) due date, so a receipt banked after that date falls back to eight per cent. Second, the three crore ceiling is not automatic: it depends on the five per cent cash test, and the second proviso deems a cheque or bank draft that is not account payee to be cash, which quietly disqualifies businesses that pay and receive by bearer or crossed-but-not-account-payee instruments. Third, and this is where old advice is still being repeated, the proviso to s.44AD(2) allowing a firm to deduct partners' salary and interest under s.40(b) was omitted from AY 2017-18. Any authority or note allowing that deduction under s.44AD for AY 2017-18 or later is wrong, and this library's entries on CIT v. Surinder Pal Anand and C. Eswara Reddy & Co. are already labelled superseded for that reason. Note that s.44AE kept its equivalent proviso: a transport firm assessed under s.44AE(1) and (2) may still deduct partners' salary and interest under the proviso to s.44AE(3). The two sections diverged in 2016 and have stayed diverged. If it applies to you, the first step is this: Split the turnover before you compute: the banked and electronic portion received in the previous year or before the s.139(1) due date at six per cent, the balance at eight per cent, and keep the working paper that shows the split.
Section 44AD(1) opens 'Notwithstanding anything to the contrary contained in sections 28 to 43C' and deems eight per cent of the total turnover or gross receipts of an eligible assessee engaged in an eligible business, or a higher sum claimed to have been earned, to be the profits and gains of that business chargeable under the head Profits and gains of business or profession. Its proviso substitutes six per cent for eight per cent in respect of the amount of turnover or gross receipts received by an account payee cheque, an account payee bank draft, use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, during the previous year or before the due date specified in s.139(1) for that previous year. Sub-section (2) provides that deductions allowable under ss.30 to 38 are deemed to have been given full effect to and no further deduction under those sections is allowed; the proviso that formerly allowed a firm to deduct salary and interest paid to its partners subject to s.40(b) was omitted with effect from 1 April 2017. Sub-section (3) deems the written down value of assets to have been computed as if depreciation had been claimed and allowed. The Explanation defines 'eligible assessee' as a resident individual, Hindu undivided family or partnership firm, but not a limited liability partnership as defined in s.2(1)(n) of the Limited Liability Partnership Act 2008, who has not claimed deduction under s.10A, s.10AA, s.10B or s.10BA or under any provision of Chapter VIA under the heading 'C.—Deductions in respect of certain incomes' in the relevant assessment year; and defines 'eligible business' as any business except the business of plying, hiring or leasing goods carriages referred to in s.44AE, whose total turnover or gross receipts in the previous year does not exceed two crore rupees, with a first proviso substituting three crore rupees where the amount or aggregate of amounts received during the previous year in cash does not exceed five per cent of turnover, and a second proviso deeming receipt by a cheque or bank draft which is not account payee to be receipt in cash. The matter was decided on 2024-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not applicable — statutory provision. The operative rules are that the presumptive rate is eight per cent, reduced to six per cent only on the banked or electronic portion of turnover received within the time the proviso fixes; that the eligible-business ceiling is two crore rupees, raised to three crore rupees only where cash receipts (including receipts by non-account-payee cheque or draft) do not exceed five per cent of turnover; and that no deduction under ss.30 to 38 survives sub-section (2), the partner's-salary-and-interest proviso having been omitted from AY 2017-18.
Not applicable — statutory provision. What follows is this library's reading of the statutory words and is not authority. The six per cent proviso operates 'in respect of the amount of total turnover or gross receipts which is received' in the specified modes, so it is amount-specific and not assessee-specific: it splits the turnover rather than re-rating it. The three crore substitution is expressed to have effect 'as if for the words "two crore rupees", the words "three crore rupees" had been substituted', and it is placed in Explanation (b)(ii), which defines eligible business — so failing the five per cent cash test does not merely raise the rate, it takes the assessee out of s.44AD altogether once turnover passes two crore rupees. The omission of the proviso to sub-section (2) leaves the main limb of that sub-section, which forecloses 'any deduction allowable under the provisions of sections 30 to 38', standing alone; s.40(b) is not within ss.30 to 38, but the deduction it permitted from a s.44AD figure existed only because the omitted proviso created it. In the words reproduced by the source cited on this page: "Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed."
It was decided by the CBDT Circulars & Instructions on 2024-04-01 and is reported as Income-tax Act 1961, s.44AD(1), s.44AD(2) and the Explanation, as amended by the Finance Act 2016 (Act No. 28 of 2016) with effect from 1 April 2017 and by the Finance Act 2023 (Act No. 8 of 2023) with effect from 1 April 2024. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 44AD, section 44AD(1), section 44AD(2), section 44AB, section 44AE, section 40(b), section 139(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not applicable — statutory provision. The operative rules are that the presumptive rate is eight per cent, reduced to six per cent only on the banked or electronic portion of turnover received within the time the proviso fixes; that the eligible-business ceiling is two crore rupees, raised to three crore rupees only where cash receipts (including receipts by non-account-payee cheque or draft) do not exceed five per cent of turnover; and that no deduction under ss.30 to 38 survives sub-section (2), the partner's-salary-and-interest proviso having been omitted from AY 2017-18. It arises in Presumptive Taxation & Audit, How Tax Law Is Read and Cash Transaction Limits matters, on section 44AD, section 44AD(1), section 44AD(2), section 44AB, section 44AE, section 40(b), section 139(1) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For the three crore ceiling, compute cash receipts as a percentage of total turnover and add to the cash side every cheque and bank draft that was not marked account payee — the second proviso deems those to be cash. Do not deduct partners' salary or interest from a s.44AD figure for AY 2017-18 or any later year; if a return already claims it, expect the adjustment and consider whether s.40(b) relief can be taken any other way. Check the year before you use any older decision on s.44AD: the ceiling was one crore rupees until the Finance Act 2016 substituted two crore rupees with effect from 1 April 2017. Remember that s.44AD is a computation provision, not a shelter: nothing in sub-sections (1) or (2) prevents the Assessing Officer from testing whether the declared turnover is the real turnover. If the firm carries on the business of plying, hiring or leasing goods carriages, s.44AD is not available at all — Explanation (b)(i) excludes it and sends it to s.44AE.
Still good law. This is the text of s.44AD as currently published, under the section heading 'Special provision for computing profits and gains of business on presumptive basis'. It was corroborated word for word against the edition as amended up to 2016 for sub-sections (4) to (6) and the Explanation, and against three Tribunal orders that reproduce the section, the most recent of which is dated 12 August 2026. Two limits on that. No Finance Act text has been read in the Gazette for this entry, and no check has been made for an amendment after the Finance Act 2023, so the label reflects the current published text and no further; read the section for the year in hand before filing. And nothing in this entry states any position under the Income-tax Act 2025, which s.536 of that Act saves the 1961 Act from for every tax year beginning before 1 April 2026. THE DATES ARE THE POINT OF THE ENTRY and they are the part most often got wrong. The proviso to sub- section (2), which let a firm deduct partners' salary and interest under s.40(b) from the presumptive figure, was omitted with effect from 1 April 2017, so it is unavailable for assessment year 2017-18 and every later year; any authority or note allowing that deduction for those years is superseded, and this library's entries on CIT v. Surinder Pal Anand and C. Eswara Reddy & Co. are labelled accordingly. The three crore ceiling operates only from assessment year 2024-25 and only where the five per cent cash test is satisfied. Note finally that s.44AE kept its equivalent proviso: a transport firm assessed under s.44AE(1) and (2) may still deduct partners' salary and interest under the proviso to s.44AE(3). The two sections diverged in 2016 and have stayed diverged. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This entry is statutory text, not a decision. It asserts no holding and no judge's words; every quoted string in it is statutory text, and the value in 'decided_on', 1 April 2024, is the commencement date of the Finance Act 2023 amendment that inserted the three crore proviso and is NOT a decision date. SOURCING. The current text was read on the published edition of s.44AD carrying the section heading 'Special provision for computing profits and gains of business on presumptive basis'. It was cross-read against the edition as amended up to 2016 and against three Tribunal orders that reproduce the section in full, all of which print sub-section (2) with no proviso and mark the gap where the omitted proviso stood. THE COMMENCEMENT DATES come from the amendment footnotes printed on the earlier editions, used here only to date amendments and not to state current law. On the edition as amended up to 2016: 'Proviso to sub-section (2) shall be omtt. by Act No. 28 of 2016 (w.e.f. 1-4-2017).' and 'Word "two" shall be sub. for "one" by Act No. 28 of 2016 (w.e.f. 1-4-2017).' On the edition as amended up to 2024: 'Ins. by the Act No. 8 of 2023, w.e.f. 1-4-2024.', with its marker immediately before the three crore proviso. Act No. 28 of 2016 is the Finance Act 2016 and Act No. 8 of 2023 is the Finance Act 2023. A NOTE ON THE PARALLEL FIRST PROVISO TO s.44AB, because both forms of it are in circulation and neither is an error. The edition of s.44AB as amended up to 2024 prints the first proviso in the form 'sub-section (1) of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year:', and prints below it the note that a substituted proviso takes effect from 1 April 2024, followed by 'Provided that this section shall not apply to a person, who declares profits and gains for the previous year in accordance with the provisions of sub-section (1) of section 44AD or sub-section (1) of section 44ADA:'. The current edition prints only the substituted proviso. Section 15 of the Finance Act 2023 substitutes those very words with effect from 1 April 2024. So the two-crore form is the law to assessment year 2023-24 and the s.44AD-or-s.44ADA form is the law from 2024-25. This library's entry on the s.44AB first proviso is right that the proviso takes a person declaring under s.44ADA(1) out of s.44AB; it needs only the date, which is 1 April 2024. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not applicable — statutory provision. The operative rules are that the presumptive rate is eight per cent, reduced to six per cent only on the banked or electronic portion of turnover received within the time the proviso fixes; that the eligible-business ceiling is two crore rupees, raised to three crore rupees only where cash receipts (including receipts by non-account-payee cheque or draft) do not exceed five per cent of turnover; and that no deduction under ss.30 to 38 survives sub-section (2), the partner's-salary-and-interest proviso having been omitted from AY 2017-18.
TaxSphere, “Statutory position — s.44AD(1) and (2): the eight and six per cent rates, the Rs 2 crore / Rs 3 crore ceiling, and the partner's-salary proviso that was omitted”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-44ad-1-and-2-eight-six-per-cent-and-the-three-crore-cash-test/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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My client's turnover was Rs 1.22 crore, above the s.44AB audit limit. He declared eight per cent under s.44AD and got no audit. The officer has levied s.271B. Is he liable?
My client runs six trucks, two of them well over twelve tonnes. What does he declare under s.44AE, and from which year did the per-tonne rate start?
My client's books have been rejected and the officer has estimated a per-vehicle profit. How does the Tribunal test whether that estimate is reasonable?
My client is assessed under s.44AE on his own trucks, but he also hired trucks from the market. The officer has disallowed all the running expenses. Is that right?
