A recent ruling by the Income Tax Appellate Tribunal (ITAT), Surat, has clarified important aspects of Section 44AD compliance. According to reports from Mint, Zakir Patel, a fruit market trader from Surat, filed his ITR for FY 2016-17 under the presumptive taxation scheme of Section 44AD, declaring business income of ₹14.57 lakh without maintaining detailed books of accounts. However, his return was selected for scrutiny due to cash deposits during the demonetisation period, leading to an assessment of ₹5.09 crore by treating bank deposits and other credits as unexplained income.
As reported by Mint, Section 44AD allows eligible small business owners to declare income at a fixed percentage of turnover - 8% for general business receipts and 6% for receipts received through prescribed digital modes. The scheme is available to eligible resident individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding LLPs), but excludes businesses engaged in plying, hiring or leasing goods carriages, or agency and commission activities. According to Siddharth Maurya, Managing Director of Vibhavangal Anukulkara Pvt Ltd, taxpayers opting for Section 44AD do not need to maintain detailed books such as cash books, ledgers, purchase registers or sales registers, as the income is computed based on the presumptive tax system. The normal turnover ceiling is ₹2 crore, while where cash receipts do not exceed 5% of total turnover or gross receipts, the threshold can increase to ₹3 crore.
According to reports from Mint, under Section 44AD, taxpayers need to report their business turnover and presumptive income, while other sources of taxable income such as salary, rental income, interest, dividends, capital gains and income from other sources must be disclosed separately. Business expenses do not require separate reporting because they are already considered while calculating presumptive income. Maurya explained that business-related cash collections or deposits that form part of declared turnover do not require separate disclosure, but any receipts which do not relate to business, such as gifts, loans, sale of personal assets or other capital receipts must be reported appropriately. For AY 2026-27, the Department guidance allows qualifying long-term capital gain under Section 112A up to ₹1.25 lakh in ITR-4, subject to all other conditions, though short-term capital gains and gains above this limit make ITR-4 unavailable.
As highlighted by Mint, the ITAT ruling emphasizes that bank deposits cannot automatically be considered taxable income when taxpayers declare income under Section 44AD. The tribunal set aside the matter and allowed the taxpayer another opportunity to explain the transactions, noting that the actual cash deposits were ₹89.16 lakh and not ₹2.43 crore as initially assessed. Maurya advised taxpayers to keep business and personal transactions separate and ensure that reported turnover matches information available through GST returns, bank statements and other records. The ruling demonstrates that while Section 44AD reduces compliance requirements, accurate reporting and basic documentation remain important to avoid disputes during scrutiny. For AY 2026-27, the Department guidance shows the default new-regime slabs as up to ₹4 lakh Nil; ₹4 lakh to ₹8 lakh 5%; ₹8 lakh to ₹12 lakh 10%; ₹12 lakh to ₹16 lakh 15%; ₹16 lakh to ₹20 lakh 20%; ₹20 lakh to ₹24 lakh 25%; and above ₹24 lakh 30%, with a Section 87A rebate up to ₹60,000 for eligible resident individuals whose total income does not exceed ₹12 lakh.
