The 6%/8% Myth: Does Low Profit Really Trigger a Tax Audit?

Section 44AD Low Profit Does Not Trigger Audit Without Prior Opt-Out: AY 2026-27

Summary: The supplied analysis examines whether an eligible business with turnover below ₹1 crore, regular books of account and actual profit below the 6%/8% presumptive benchmark is necessarily liable to tax audit for FY 2025-26/AY 2026-27 under the Income-tax Act, 1961, particularly where the assessee has never previously declared income under section 44AD. The analysis distinguishes the presumptive computation mechanism in section 44AD from the independent audit triggers in section 44AB. On the illustrative facts of ₹96 lakh turnover and ₹4.50 lakh book profit, it concludes that section 44AB(a) is not attracted because turnover does not exceed ₹1 crore, while section 44AB(e) expressly depends upon the applicability of section 44AD(4). The analysis emphasises that section 44AD(4) contemplates an earlier declaration of profit in accordance with section 44AD followed by a subsequent departure, and therefore considers the absence of any earlier section 44AD declaration material to the audit question. It contrasts the post-Finance Act, 2016 framework with the earlier direct lower-profit audit trigger, examines the Finance Act, 2016 legislative history, Finance Bill and Notes on Clauses, CBDT Circular No. 3/2017, the Finance Act, 2017 introduction of the 6% rate, the Finance Act, 2023 enhancement of the section 44AD turnover threshold, and the ICAI Guidance Note on Tax Audit. The analysis also distinguishes section 44AD from section 44ADA, where the legislation expressly contains a lower-than-presumptive-profit audit mechanism. On the stated facts, its considered view is that an assessee who has never previously declared income under section 44AD so as to attract section 44AD(4) should not become liable to tax audit merely because genuine book profit is below 6%/8%, subject to verification of the assessee’s history and absence of another independent audit trigger. It separately explains that, where section 44AD(4) is attracted, the operative audit provision is section 44AB(e), read with sections 44AD(4) and 44AD(5), and cautions that the Income-tax Act, 2025 contains materially different drafting for Tax Year 2026-27 onwards.

A Deep Dive into Sections 44AD, 44AD(4), 44AD(5) and 44AB(e) after the Finance Act, 2016
Position discussed: Income-tax Act, 1961, as applicable to FY 2025-26 / AY 2026-27

One of the more confusing questions around tax audit is surprisingly simple to state:
An assessee carries on an eligible business. His turnover is below ₹1 crore. He maintains regular books of account. His actual profit is less than 6%/8% of turnover. He has never offered income under section 44AD in the past. Is tax audit compulsory?

A commonly heard answer is:
“Yes. If the business is covered by section 44AD and profit is below 6%/8%, tax audit is compulsory.”

That answer would certainly have been much easier to defend under the law as it existed before the Finance Act, 2016.

Under the law applicable to AY 2026-27, however, the answer is not so straightforward.

The difficulty arises because section 44AD(1), read by itself, is a strong deeming provision. At the same time, sections 44AD(4), 44AD(5) and 44AB(e), as substituted/inserted by the Finance Act, 2016, appear to make the audit consequence dependent upon an assessee having first declared income under section 44AD and thereafter departing from that scheme.

This article attempts to reconcile these provisions, their legislative history, CBDT’s explanatory material and the ICAI Guidance Note.

1. An important scope clarification before we start

This discussion relates specifically to FY 2025-26, relevant to AY 2026-27, which continues to be governed by the Income-tax Act, 1961.

This is important because the Income-tax Act, 2025 came into force from 1 April 2026, but the Income Tax Department has expressly clarified that income earned during FY 2025-26 and its corresponding return/audit continue to be governed by the Income-tax Act, 1961.

The position under the Income-tax Act, 2025 for Tax Year 2026-27 onwards is discussed separately towards the end of this article and should not be mixed with the conclusion for AY 2026-27.

2. The practical case we are examining

Consider the following facts:

Particulars	Facts
Nature of activity	Trading business eligible for section 44AD
Turnover during FY 2025-26	Rs. 96,00,000
Net profit as per books	Rs. 4,50,000
Net profit percentage	4.69%
Regular books of account	Maintained
Cash transactions	More than the prescribed 5% threshold assumed for illustration
Earlier declaration under section 44AD	Never opted / never declared income under section 44AD
Assessment Year	AY 2026-27

The actual book profit works out to:

₹4,50,000 ÷ ₹96,00,000 = 4.69%

Even if the entire turnover qualified for the lower 6% presumptive rate, presumptive income would be ₹5.76 lakh. If the entire turnover attracted 8%, it would be ₹7.68 lakh. In a mixed-receipt case, the presumptive amount would be 6% of qualifying receipts plus 8% of the balance.

So there is no dispute that the actual ₹4.50 lakh profit is below the section 44AD presumptive benchmark.

The only question is:

Does that fact, by itself, create a tax-audit liability?

3. Start with section 44AD(1): the concern is genuine

Section 44AD(1) begins with a non-obstante clause:

“Notwithstanding anything to the contrary contained in sections 28 to 43C…”

and thereafter provides that 8% of turnover/gross receipts, or the prescribed 6% amount in respect of qualifying receipts, or a higher amount claimed to have been earned, “shall be deemed” to be the profits and gains of the eligible business.

The words are important. Section 44AD(1) does not, in its operative text, say:

“if the assessee opts for this section”.

It contains both:

1. an overriding provision vis-à-vis sections 28 to 43C; and

2. a statutory deeming fiction.

That point should not be brushed aside.

However, the question of computation under section 44AD and the question of compulsory tax audit under section 44AB are two different questions.

Section 44AD(1) tells us how profits are deemed when the presumptive scheme operates. It does not itself say that every eligible assessee declaring a lower actual profit must undergo tax audit.

For that consequence, we must find an operative audit provision.

And that takes us to section 44AB.

4. Is section 44AD really optional despite the wording of subsection (1)?

This is where the surrounding provisions and legislative material become important.

Section 44AD(4) itself contemplates a situation where an assessee first declares profit “in accordance with the provisions of this section” and subsequently declares profit “not in accordance with the provisions of sub-section (1)”.

Section 44AD(5) then prescribes consequences specifically for an assessee “to whom the provisions of sub-section (4) are applicable”.

More importantly, the Government has consistently described section 44AD as a scheme which an assessee may adopt or opt for.

The Finance Minister’s Budget Speech, 2016 stated that “if the taxpayer opts for the presumptive taxation scheme”, he would be subject to the five-year continuity consequence.

The Income Tax Department’s current tutorial, as amended by the Finance Act, 2025, separately discusses:

• normal computation of business income on the basis of books; and
• computation in the case of a person “adopting the presumptive taxation scheme of section 44AD”.

The tutorial further states that “in case of a person adopting the provisions of section 44AD”, income is computed at the presumptive rate rather than under the normal turnover-less-expenses method.

Therefore, while the language of section 44AD(1) is undoubtedly a deeming provision, the statutory scheme read as a whole and the Government’s own explanatory material recognise that an eligible assessee may either adopt the presumptive scheme or compute income under the normal provisions.

The better way to put the proposition is therefore:

Section 44AD(1) creates the deemed method of computation where income is being computed under the presumptive scheme. It does not by itself answer whether an assessee computing actual income under regular books is compulsorily liable to tax audit.

For tax audit, section 44AB must still be examined.

5. Section 44AB(a): the normal turnover test

For AY 2026-27, section 44AB(a) requires audit where total sales, turnover or gross receipts from business exceed ₹1 crore.

The threshold becomes ₹10 crore only where both of the following conditions are satisfied:

• aggregate cash receipts do not exceed 5% of aggregate amounts received; and
• aggregate cash payments do not exceed 5% of aggregate amounts paid.

A non-account-payee cheque or bank draft is deemed to be cash for this purpose.

This gives rise to an important practical point.

The statutory test is not simply “cash sales below 5% of turnover” and “cash purchases below 5% of turnover.”

For section 44AB(a):

cash receipts are compared with aggregate receipts, and
cash payments are compared with aggregate payments.

This is different from the separate 5% test used for the ₹3 crore eligibility threshold under section 44AD, which is based on cash receipts vis-à-vis turnover/gross receipts.

In our example, however, this distinction does not affect the result.

Turnover is only ₹96 lakh.

Since section 44AB(a) applies where turnover exceeds ₹1 crore, the ordinary ₹1 crore threshold itself has not been crossed.

Therefore:

Section 44AB(a) does not require tax audit.

Whether the assessee qualifies for the enhanced ₹10 crore limit is academic in a ₹96 lakh turnover case.

6. Then where can the audit requirement come from?

If section 44AB(a) does not apply, the obvious candidate is section 44AB(e).

Section 44AB(e) presently applies to a person carrying on business where:

“the provisions of sub-section (4) of section 44AD are applicable in his case”

and his income exceeds the maximum amount not chargeable to income-tax.

Notice what section 44AB(e) does not say.

It does not say:

“where an eligible assessee declares profit lower than 8%/6%”.

Instead, Parliament has made the clause conditional upon section 44AD(4) being applicable.

That distinction is at the heart of the controversy.

7. What exactly does section 44AD(4) require?

Section 44AD(4) starts with a prior event.

There must first be an eligible assessee who:

“declares profit for any previous year in accordance with the provisions of this section…”

Thereafter, if he declares profit in one of the specified succeeding assessment years not in accordance with section 44AD(1), the five-year disqualification consequence follows.

Thus, subsection (4) presupposes:

Step 1: declaration of income under section 44AD in an earlier year; and

Step 2: a subsequent departure from section 44AD within the statutory period.

If an assessee has never declared income under section 44AD, the first statutory event contemplated by subsection (4) has never occurred.

That is why the distinction between:

“never opted for section 44AD”

and

“opted for section 44AD and subsequently opted out”

is legally important.

8. Section 44AD(5) reinforces the same link

Section 44AD(5) does not independently say that an assessee declaring profit below 6%/8% must undergo audit.

Instead, it applies to:

an eligible assessee “to whom the provisions of sub-section (4) are applicable”

and whose total income exceeds the maximum amount not chargeable to income-tax.

Only such an assessee is specifically required by subsection (5) to maintain the prescribed books and get them audited and furnish the audit report as required under section 44AB.

The sequence is therefore:

Prior declaration under 44AD → subsequent departure → section 44AD(4) → section 44AD(5) → audit under section 44AB(e).

This is also mirrored in section 44AA(2)(iv), which links the special books-of-account requirement to a case where section 44AD(4) is applicable.

That coordination between sections 44AA, 44AB and 44AD is significant.

9. The Finance Act, 2016 legislative history is the strongest clue

The interpretation becomes considerably clearer when we compare the law before and after the Finance Act, 2016.

Position before the Finance Act, 2016

Before the substitution made with effect from AY 2017-18, section 44AD(5) directly provided that where an eligible assessee claimed profits lower than the presumptive profits specified in section 44AD(1), and his total income exceeded the maximum amount not chargeable to tax, he had to maintain books and obtain tax audit.

Correspondingly, the then section 44AB(d) directly dealt with a business whose profits were deemed under section 44AD and where the assessee claimed income lower than the deemed amount.

In other words, the old law effectively contained the straightforward trigger:

Profit below presumptive percentage + income above exemption threshold = audit.

The historical text of section 44AB shows this old clause (d) and, importantly, also records the subsequent insertion of clause (e) by the Finance Act, 2016.

10. What did the Finance Act, 2016 change?

The Finance Bill, 2016 made coordinated amendments to sections 44AA, 44AB and 44AD.

Clause 24 proposed the corresponding amendment to section 44AA.

Clause 25 reworked section 44AB: the direct lower-than-44AD formulation was no longer retained for section 44AD business cases, while section 44AB(d) was used for the newly introduced section 44ADA professional regime and a new clause 44AB(e) was inserted for cases where section 44AD(4) applies.

Clause 26 substituted sections 44AD(4) and 44AD(5) with the present lock-out structure.

The Notes on Clauses expressly explain that an assessee who had declared profit in accordance with section 44AD and subsequently failed to do so during the specified period would lose eligibility for the scheme, and that an assessee to whom subsection (4) applies would be required to maintain books and undergo audit where the income condition is satisfied.

This legislative substitution is difficult to treat as meaningless.

Parliament already had language which directly said:

“profits lower than the presumptive profits → audit.”

It replaced that language, for section 44AD business cases, with:

“where section 44AD(4) applies → audit.”

That change deserves to be given effect.

11. The Memorandum explaining Finance Bill, 2016 makes the policy clearer

The Memorandum explaining the Finance Bill, 2016 first described the then-existing section 44AD regime and then proposed the five-year continuity mechanism.

Importantly, it gave the following example:

An eligible assessee adopts section 44AD for AY 2017-18 and offers ₹8 lakh on turnover of ₹1 crore.

He continues under section 44AD for AY 2018-19 and AY 2019-20.

For AY 2020-21, however, he offers ₹4 lakh on turnover of ₹1 crore.

The consequence explained in the Memorandum is that, because he departed from section 44AD during the specified period, he becomes ineligible to claim section 44AD for the following five assessment years.

The example is important not merely for the numbers.

It shows the contemplated sequence:

first adopt section 44AD → thereafter depart from it.

That is precisely the sequence reflected in section 44AD(4).

12. CBDT Circular No. 3/2017 repeats the same interpretation

CBDT Circular No. 3/2017 dated 20 January 2017, containing the Explanatory Notes to the Finance Act, 2016, discusses the amendment in paragraph 40.

Paragraph 40.4 repeats substantially the same example:

• AY 2017-18: section 44AD adopted, ₹8 lakh declared on ₹1 crore turnover;
• AY 2018-19 and AY 2019-20: section 44AD continued;
• AY 2020-21: only ₹4 lakh declared on ₹1 crore turnover;
• consequence: section 44AD becomes unavailable for the succeeding five assessment years.

CBDT therefore also explains the amended provision as an entry into the presumptive scheme followed by a subsequent departure from it.

This circular is particularly useful because it is not merely private commentary. It is CBDT’s own explanatory note to the Finance Act, 2016.

13. The contrast with section 44ADA is revealing

Another useful way to test the interpretation is to compare section 44AD with section 44ADA.

For professionals covered by section 44ADA, Parliament has expressly provided that where the assessee claims professional profits lower than the presumptive amount and total income exceeds the maximum amount not chargeable to tax, books and tax audit are required.

Section 44AB(d) similarly uses direct “lower than the deemed profits” language for section 44ADA.

But section 44AB(e), dealing with section 44AD, uses completely different language.

It does not say:

“income below 6%/8%.”

It says:

“if the provisions of sub-section (4) of section 44AD are applicable.”

The Finance Bill, 2016 Notes on Clauses actually place these two formulations close together: the new section 44ADA expressly requires audit where professional profits are below the presumptive amount, while the substituted section 44AD(5) ties audit to subsection (4).

When Parliament uses two different formulations in closely connected presumptive provisions introduced/amended by the same Finance Act, the distinction is difficult to ignore.

14. What does the ICAI Guidance Note say?

The ICAI Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961, Revised 2025, issued by the Direct Taxes Committee, is the Tenth Edition of the Guidance Note.

In its summary of section 44AD, the Guidance Note describes the section 44AD(4) disqualification by first referring to:

an eligible assessee having declared profit under section 44AD(1) for any previous year

and thereafter declaring profit not in accordance with section 44AD(1) in the specified succeeding period.

The same Guidance Note summarises presumptive income under section 44AD as the prescribed 8%/6% amount or the higher amount claimed to have been earned.

Separately, while explaining section 44AB, the Guidance Note identifies clause (e) as applying where section 44AD(4) is applicable and the income condition is satisfied.

The Guidance Note does not, as far as I have located, contain an illustration with exactly the facts of ₹96 lakh turnover and a first-time/non-44AD assessee declaring less than 6%/8%.

Nevertheless, its description of section 44AD(4) is consistent with the statutory sequence discussed above.

15. What about the 6% rate? A small but important historical correction

The principal restructuring of sections 44AD(4), 44AD(5) and 44AB(e) was carried out by the Finance Act, 2016 with effect from AY 2017-18.

However, the 6% presumptive rate for qualifying banking/digital receipts was not introduced by the Finance Act, 2016.

It was introduced through the Finance Act, 2017, also with effect from AY 2017-18, as a measure to encourage digital payments. The 8% rate continued for other receipts.

Similarly, the enhanced section 44AD turnover threshold of ₹3 crore where cash receipts do not exceed 5% was introduced by the Finance Act, 2023, effective from AY 2024-25.

These amendments change the rates and eligibility limits; they do not alter the basic wording of section 44AD(4)/(5) introduced in 2016.

16. Applying the law to the ₹96 lakh / ₹4.50 lakh case

We can now apply each potential audit provision separately.

A. Section 44AB(a)

Turnover is ₹96 lakh.

The statutory threshold is turnover exceeding ₹1 crore.

Therefore:

Section 44AB(a) is not applicable.

The 5% cash test only determines whether the ₹1 crore threshold can be substituted by ₹10 crore. Since ₹96 lakh does not even exceed ₹1 crore, the enhanced threshold is not required to decide this case.

B. Section 44AD eligibility

Assuming the assessee is otherwise an eligible assessee carrying on an eligible business, turnover of ₹96 lakh is well within the section 44AD turnover ceiling.

Even if the enhanced ₹3 crore limit is unavailable because the statutory cash-receipt condition is not met, the ordinary ₹2 crore limit is still comfortably satisfied.

Therefore, the assessee could have adopted section 44AD.

But eligibility for a presumptive scheme and actual adoption of that scheme are not the same thing.

C. Section 44AD(4)

The assessee has never declared income under section 44AD in an earlier year.

Accordingly, there is no earlier previous year in which he:

“declares profit … in accordance with the provisions of this section”

which is the opening condition of section 44AD(4).

On a plain reading, therefore:

section 44AD(4) is not attracted.

D. Section 44AD(5)

Section 44AD(5) applies only to an eligible assessee to whom subsection (4) applies.

Since subsection (4) is not attracted:

section 44AD(5) does not independently create an audit requirement.

E. Section 44AB(e)

Section 44AB(e) expressly requires section 44AD(4) to be applicable.

Since it is not:

section 44AB(e) is not attracted.

Accordingly, in my considered view, under the Income-tax Act, 1961 as applicable to AY 2026-27:

An assessee having turnover of ₹96 lakh, maintaining regular books and declaring genuine book profit of ₹4.50 lakh, who has never previously declared income under section 44AD so as to attract section 44AD(4), is not liable to tax audit merely because the profit rate of 4.69% is below the presumptive 6%/8% benchmark.

This conclusion is, of course, subject to there being no other independent clause of section 44AB requiring audit.

17. If tax audit is applicable, under which section does it operate?

This is another point on which terminology often becomes loose.

Suppose an assessee had earlier declared profits in accordance with section 44AD and subsequently declares income not in accordance with section 44AD(1) so that section 44AD(4) applies.

If the relevant income condition is also satisfied, the provisions operate as follows:

Provision	Role
Section 44AD(4)	Trigger / five-year disqualification mechanism
Section 44AD(5)	Requires books and audit where subsection (4) applies and total income exceeds the applicable threshold
Section 44AB(e)	Operative clause requiring the tax audit
Section 44AA(2)(iv)	Corresponding special books-of-account requirement

Therefore, the technically correct description would be:

“Tax audit is applicable under section 44AB(e), read with sections 44AD(4) and 44AD(5) of the Income-tax Act, 1961.”

It would be less precise merely to say:

“audit under section 44AD”.

Section 44AD(5) creates the consequential requirement, but the tax-audit clause itself is section 44AB(e).

18. Section 44AB(a) and section 44AB(e) are independent triggers

This distinction is worth keeping in mind.

If turnover is ₹1.20 crore and the assessee does not satisfy the low-cash conditions for the ₹10 crore threshold, section 44AB(a) can independently require audit irrespective of whether section 44AD was ever adopted.

On the other hand, section 44AB(e) can potentially apply at turnover well below ₹1 crore if section 44AD(4) is applicable and the prescribed income condition is satisfied.

Therefore:

Situation	Relevant audit provision
Turnover exceeds ₹1 crore and enhanced ₹10 crore conditions are not satisfied	Section 44AB(a)
Turnover does not exceed ₹1 crore; assessee never earlier declared under 44AD; profit below 6%/8%	In my view, no audit merely for lower profit
Prior 44AD declaration followed by departure attracting section 44AD(4), with income condition satisfied	Section 44AB(e) read with 44AD(4)/(5)
Profession under 44ADA with profit below presumptive amount and income above applicable exemption	Section 44AB(d)
44AE/44BB/44BBB lower-income cases	Section 44AB(c), subject to the respective provisions

This is why saying simply “profit below presumptive rate means tax audit” can lead to the wrong conclusion.

19. Maintaining books and getting a tax audit are not the same requirement

Another common misconception is that if regular books have to be maintained, tax audit must automatically follow.

That is not correct.

Section 44AA determines the obligation to maintain books.

Section 44AB separately determines the obligation to obtain a tax audit.

An assessee can therefore be required to maintain proper books under the normal provisions of section 44AA while still not falling within any clause of section 44AB.

In our ₹96 lakh example, the fact that regular books are maintained supports computation of actual business results. It does not itself create an audit liability.

Similarly, absence of tax audit does not mean that the Assessing Officer must blindly accept the book profit. The books, purchases, expenses, stock records and other evidence remain open to examination under the normal assessment provisions.

“No compulsory tax audit” and “automatic acceptance of the returned profit” are two very different propositions.

20. The contrary view should not be ignored

There is a respectable argument on the other side.

Section 44AD(1), after all, says:

“shall be deemed”

and begins with:

“Notwithstanding anything to the contrary contained in sections 28 to 43C.”

A literal reading of subsection (1) in isolation may therefore suggest that once an assessee is an eligible assessee carrying on an eligible business, the statutory presumptive income necessarily follows.

There have also been secondary departmental educational materials which have, at different times, stated in broad terms that declaring income below the presumptive rate requires books and audit.

That is precisely why the issue should not be decided by reading section 44AD(1), or an FAQ/brochure, in isolation.

For AY 2026-27 we also have to explain:

• why section 44AD(4) specifically requires a prior declaration under section 44AD;
• why section 44AD(5) expressly applies only to an assessee to whom subsection (4) applies;
• why Parliament deleted the earlier direct lower-profit trigger;
• why section 44AB(e) was drafted by reference to section 44AD(4);
• why section 44AA(2)(iv) was correspondingly amended; and
• why section 44AB(d) still expressly uses a lower-than-presumptive trigger for section 44ADA while section 44AB(e) does not.

In my view, the combined statutory scheme and the Finance Act, 2016 history provide a stronger basis than an isolated reading of section 44AD(1).

The Income Tax Department’s more recent tutorial also expressly distinguishes normal computation from the computation applicable to a person adopting section 44AD.

21. Is there a binding judicial decision settling this exact question?

In researching this note, I have not located a reported Supreme Court or High Court decision squarely deciding the precise post-Finance Act, 2016 question:

whether an assessee who has never previously declared income under section 44AD, has turnover below the section 44AB(a) limit and declares genuine book profit below 6%/8%, must nevertheless undergo tax audit solely because of section 44AD.

For that reason, I would not present the conclusion as having been finally settled by judicial precedent.

The position stated in this article is primarily based upon:

the statutory text, the pre- and post-2016 comparison, Finance Bill/Notes on Clauses, CBDT Circular No. 3/2017 and the ICAI Guidance Note.

That is also why, in a professional file, it would be advisable to document the assessee’s section 44AD history before concluding that section 44AB(e) does not apply.

22. A practical working-paper test

For AY 2026-27, a practitioner dealing with a low-profit eligible business may proceed in this sequence:

First: determine whether section 44AB(a) independently applies based on turnover and the statutory cash-receipt/payment tests.

Second: establish whether the assessee is otherwise eligible for section 44AD.

Third: examine earlier returns and determine whether income was ever declared under section 44AD in a manner relevant to section 44AD(4).

Fourth: if section 44AD(4) is attracted, test the income condition in section 44AD(5) / section 44AB(e).

Fifth: independently examine section 44AA for maintenance of books.

This approach avoids the shortcut of asking only:

“Is profit below 8%?”

That question alone is no longer sufficient under the post-2016 wording of the Income-tax Act, 1961.

23. Important update: Income-tax Act, 2025 changes the drafting from Tax Year 2026-27

This article should not be applied mechanically to FY 2026-27 onwards.

The Income-tax Act, 2025 came into force on 1 April 2026 and applies to income earned from FY 2026-27 / Tax Year 2026-27 onwards.

The corresponding presumptive provision is now principally contained in section 58.

Section 58(2) contains the presumptive computation for eligible businesses.

More significantly, section 58(3) now expressly provides that an assessee covered by the presumptive table who claims that actual profits are lower than the profits computed under that table, and whose total income exceeds the maximum amount not chargeable to tax, shall maintain books and get the accounts audited under section 63.

At the same time, sections 58(7) and 58(8) separately retain the section 44AD-type continuity/lock-out mechanism.

Section 63, corresponding broadly to old section 44AB, also contains an express audit condition for a person carrying on a business/profession referred to in section 58(2) or the specified section 61 cases who claims profits lower than the deemed profits.

Therefore, whatever view one takes of the old Act controversy, the language of the Income-tax Act, 2025 is materially clearer on lower-than-presumptive income.

Accordingly:

The conclusion in this article is specifically for the Income-tax Act, 1961 and should not be carried forward to Tax Year 2026-27 under the Income-tax Act, 2025 without a fresh analysis of sections 58 and 63.

Whether the new drafting is characterised as a substantive change or as a clarification/consolidation of the intended policy is a separate interpretational question. For prospective compliance, the safer course is to follow the express language of the new Act.

24. Final conclusion

For FY 2025-26 / AY 2026-27, under the Income-tax Act, 1961, my considered view is as follows:

An eligible assessee carrying on an eligible business, whose turnover does not exceed the normal section 44AB(a) threshold and who has never previously declared income under section 44AD so as to attract section 44AD(4), should not become liable to tax audit merely because his genuine profit as per regular books is below the 6%/8% presumptive benchmark.

For the illustrative case of:

Turnover: ₹96 lakh

Book profit: ₹4.50 lakh

Profit rate: 4.69%

section 44AB(a) is not attracted because turnover does not exceed ₹1 crore.

If section 44AD was never adopted earlier, section 44AD(4) is also not attracted. Consequently, the specific condition contained in section 44AB(e) is not fulfilled.

Thus, tax audit should not be applicable merely on account of the lower profit percentage, subject to verification of the assessee’s earlier section 44AD history and absence of any other independent audit trigger.

Where section 44AD had earlier been adopted and a subsequent departure attracts section 44AD(4), the correct audit provision is:

Section 44AB(e) read with sections 44AD(4) and 44AD(5).

The most important lesson is perhaps a simple one:

Section 44AD tells us the presumptive computation. Section 44AB tells us when tax audit is compulsory. The two provisions have to be read together—not interchangeably.

References and Authorities

1. Income-tax Act, 1961 – Section 44AD
Special provision for computing profits and gains of business on presumptive basis; particularly subsections (1), (4) and (5), as applicable to AY 2026-27. Official Income Tax Department text.

2. Income-tax Act, 1961 – Section 44AB
Particularly clause (a), provisos thereto, clause (d) and clause (e), as applicable to AY 2026-27. Official Income Tax Department text.

3. Income-tax Act, 1961 – Section 44AA(2)(iv)
Corresponding books-of-account requirement where section 44AD(4) is applicable.

4. Section 44AD as it stood before the Finance Act, 2016
Old section 44AD(5) directly required books and audit where an eligible assessee claimed profits below the presumptive amount and total income exceeded the maximum amount not chargeable to tax.

5. Historical Section 44AB(d)
The pre-Finance Act, 2016 provision directly referred to an assessee carrying on business whose profits were deemed under section 44AD but who claimed lower income. The same official historical text records the subsequent insertion of section 44AB(e) by the Finance Act, 2016.

6. Finance Bill, 2016 – Clauses 24, 25, 26 and 27
Amendments to sections 44AA, 44AB and 44AD and insertion of section 44ADA.

7. Notes on Clauses to Finance Bill, 2016 – Clause 26, printed page 187
Explains substitution of sections 44AD(4) and (5), the five-year consequence and audit requirement where subsection (4) applies; also useful for comparison with the direct lower-profit audit mechanism introduced for section 44ADA.

8. Memorandum Explaining the Provisions in the Finance Bill, 2016 – “Increase in threshold limit for presumptive taxation scheme for persons having income from business”, printed pages 17-18
Contains the legislative explanation and the ₹1 crore turnover / ₹8 lakh → ₹4 lakh example demonstrating adoption followed by departure from section 44AD.

9. CBDT Circular No. 3/2017 dated 20 January 2017 – Explanatory Notes to the Provisions of the Finance Act, 2016, paragraph 40
Paragraph 40.4 contains CBDT’s corresponding section 44AD(4) example.

10. Union Budget 2016-17 – Finance Minister’s Budget Speech, paragraph 8.2
Describes the proposal in terms of a taxpayer who “opts for” the presumptive taxation scheme and the consequences of subsequently not offering income under the scheme.

11. Finance Bill / Memorandum, 2017 – Clause 21
Introduction of the 6% rate for qualifying digital/banking receipts, effective from AY 2017-18.

12. Finance Act, 2023 – Sections 15 and 16 / corresponding Memorandum
Enhanced section 44AD eligibility threshold from ₹2 crore to ₹3 crore where cash receipts do not exceed 5%, effective from AY 2024-25, and substituted the first proviso to section 44AB.

13. ICAI, Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2025), Tenth Edition, Direct Taxes Committee
Particularly para 24.11 and the tabular summary on printed pages 91-95 relating to sections 44AD, 44ADA and 44AE, and the discussion of section 44AB(e).

14. Income Tax Department – Tutorial on presumptive taxation, as amended by Finance Act, 2025
Distinguishes normal computation from computation by a person “adopting” section 44AD.

15. Income-tax Act, 2025 – Sections 58 and 63
Relevant for Tax Year 2026-27 onwards. Section 58(3) expressly deals with actual profits below the deemed amount and section 63 contains the corresponding tax-audit framework.

16. Income Tax Department – FAQs on transition to the Income-tax Act, 2025
Confirms that FY 2025-26 / AY 2026-27 continues to be governed entirely by the Income-tax Act, 1961 despite filing taking place after 1 April 2026.

*******

Disclaimer: This article represents an interpretation of the statutory provisions and legislative material referred to above and is intended for professional and academic discussion. The precise applicability of tax audit should be determined after considering the assessee’s constitution, nature of business, turnover, mode of receipts/payments, total income, past section 44AD declarations and all other relevant facts.