FCA AKSHAT MODI: SECTION 44AB vis a vis 44AD Queries Unfolded

Hello everyone

There was always a lot of confusion about applicability of income tax audit for certain class of person, those people who declare profit less than 6/8% of their turnover (6% in case of turnover done through banking channel and 8% in case of turnover done in cash mode) or in case of person declaring losses.

Currently also there is a lot of buzz about the same topic and this prevails in every tax audit season.

By this article I will try to unfold all the relevant provisions and hope by the end of this article everyone gets a bit more clarity relating to section 44AB/44AD .

I will draft this article in QNA pattern so that maximum doubts can be covered and that too in easy to understand language. In the end of the article will be sharing extremely easy flowchart to find out applicability of audit, so stay tuned and read till last.

Also for businesses having turnover above Rs 1 crore, there is not much ambiguity regarding applicability of audit. An analysis of cash transactions both receipt and payment would help in determining applicability of Tax audit. If cash transactions are less than 5% of total receipt AND payment, than even if your turnover is more than Rs 1 crore but upto Rs 10 crore tax audit is not required.(Applicable from assessment year 2021-2022)

So here goes the questions for businesses having turnover below Rs 1 crore :-

1.My turnover is less than Rs1 crore and Profit is less than Rs 2.5 lacs but Total income is more than Rs 2.5 lacs whether I need to get my books of account audited?

Ø The audit limit under section 44AB (a) of Rs 1 crore is not crossed, hence under section 44AB(a) audit is not applicable.

Now check whether in previous year you have opted to file return under section 44AD (irrespective of turnover).

If not opted for section 44AD, books of account maintained, income tax return filed with proper balance sheet and profit and loss account then no need for audit, prepare balance sheet and profit and loss account of current year and file return.

But if opted for section 44AD in previous year and this time opting out i.e. not showing 6/8% profit of the turnover then, you cannot opt for section 44AD for 5 successive year.(section 44AD(4)).

Now Section 44AD(5) comes into play which says, if Section 44AD(4) is applicable

“AND”

Total income is more than Rs 2.5 Lacs then you have to maintain books of account and get them audited.

In this case although profit is less than Rs 2.5 Lacs but Total income is more than Rs 2.5 Lacs audit under section 44AB(e) is applicable.

2. My Turnover is less than Rs 1 crore and Loss is Rs 5 lacs and I do not have any other income whether i need to get my books of account audited?

Ø The audit limit under section 44AB (a) of Rs 1 crore is not crossed, hence under section 44AB(a) audit is not applicable.

Now check whether in previous year you have opted to file return under section 44AD (irrespective of turnover).

But if opted for section 44AD in previous year and this time opting out i.e. not showing 6/8% profit of the turnover then, you cannot opt for section 44AD for 5 successive year.(section 44AD(4)).

Now Section 44AD(5) comes into play which says, if Section 44AD(4) is applicable

“AND”

Total income is more than Rs 2.5 Lacs then you have to maintain books of account and get them audited.

In this case since there is loss of Rs 5 Lacs so Total income is less than Rs 2.5 Lacs, hence audit under section 44AB(e) is not applicable.

3.My turnover is Rs 99 lacs all through banking channel and profit is 4 lacs whether i need to get my books of account audited?(since profit is less than 6%) I had opted for section 44AD in previous year.

Ø The audit limit under section 44AB (a) of Rs 1 crore is not crossed, hence under section 44AB(a) audit is not applicable.

Now check whether in previous year you have opted to file return under section 44AD (irrespective of turnover).

Yes opted 44AD in previous year and this time opting out i.e. not showing 6/8% profit of the turnover then, you cannot opt for section 44AD for 5 successive year.(section 44AD(4)).

Now Section 44AD(5) comes into play which says, if Section 44AD(4) is applicable

“AND”

Total income is more than Rs 2.5 Lacs then you have to maintain books of account and get them audited.

In this case since Total income is more than Rs 2.5 Lacs audit under section 44AB(e) is applicable.

The legislative intent behind this section, may be to act as deterrent for the assessee from misusing the provisions of presumptive taxation by frequently shifting from presumptive taxation to non-presumptive taxation and vice-versa.

Lets understand the legislative intent behind this clause by an example:-

In previous year Mr. Gupta had a business turnover of Rs. 90 lacs all through banking channel. He opted for section 44AD in that year and declared profit @ 6% of turnover which comes to Rs 5,40,000/-. After claiming the deductions under section 80C of Rs 50,000/-, his total income comes out to be Rs. 4,90,000/-. He does not have any other deduction under the income tax act. Thus after claiming rebate under section 87A(since Total income does not exceed Rs 5,00,000/- eligible for rebate), his tax liability was nil.

He has opted to file under old tax regime and not under section 115BAC.

Now in current year on Rs. 99 lacs turnover all through banking channel his

Net Profit (6% of Rs 99 lacs) is Rs 5,94,000/-

Gross Total income is Rs 5,94,000/-

Section 80 C deduction Rs 50,000/-

Total income is Rs 5,44,000/-

Income tax on above income is Rs 22,152/-

5% on Rs 2,50,000/- i.e. Rs 12,500/-

20% on Rs 44,000/- i.e. Rs 8,800/-

Total tax Rs 21,300/-

4% Cess on Rs 21,300/-i.e. Rs 852/-

Total tax including cess Rs 22,152/-

Now with an intention to evade tax worth Rs 22,152, Mr gupta wants to file return of income with balance sheet and profit and loss account so as to claim some dummy expenses worth Rs 45,000/- and ultimately reducing total income to Rs 4,99,000/- i.e below Rs 5,00,000/-. This will make him eligible for rebate under section 87A and thus in current year also his tax liability will be nil.

In order to curb these illegitimate switches between section 44AD and normal return filing with financial statements the government has enacted section 44AD(4) and 44AD(5).

4. I am opting for section 44AD since last 5 years, my turnover in previous financial year crossed Rs 2 crore so I got my books of account audited for that year. Now in current financial year my turnover is only Rs 1.90 crore, do I need to get my books of account audit for this year or I can opt for filing under section 44AD?

Ø As per section 44AD(4) if a person opts for section 44AD in previous year and this time opting out i.e. not showing 6/8% profit of the turnover then, you cannot opt for section 44AD for 5 successive year.

In previous financial year, you were mandatorily required to get books of account audited since turnover crossed Rs 2 crore and you do not have the option to opt for section 44 AD for return filing. Since you have not opted out voluntarily for illegitimate tax evasion but to comply with the law you can opt for section 44AD in current financial year and audit is not compulsory.

FEW IMPORTANT POINTS :-

1. Only Individuals, Huf And Partnership Firm excluding LLP Can Opt For Section 44AD.

2. A Person earning Commision Income Cannot Opt For Section 44AD.

3.A Person Can Opt For Section 44AD Only If Turnover Does Not Cross Rs 2 Crore In A Year.

Attaching herewith pdf of FAQ issued by income tax department which covers various queries relating to this topic.

https://www.incometaxindia.gov.in/Tutorials/13.%20Tax%20on%20presumptive%20basis%20in%20case%20of%20certain%20eligible%20businesses.pdf

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Disclaimer :- This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.