Dear Tax professionals and students, many times you might have faced this question- Whether a particular case is covered under tax audit under Section 44AB of the Income Tax Act or can we claim the benefit of Section 44AD and file the income tax return on presumptive taxation method without conducting tax audit? To answer this, we need a clear understanding of both these sections individually and also together.

Also, the Finance Bill 2020 has bought certain amendments to section 44AB which is very important to understand.

In this article I have tried to decode both the above referred sections of the Income Tax Act, also I have given some examples for better understanding of these sections. Let us start by understanding these sections individually. Let’s start with Section 44AD-

  • What is section 44AD of the Income Tax Act- It is a special provision of the Income Tax Act which allows calculation of Income on presumptive basis (i.e.) deemed basis without maintenance of books of accounts and audit thereof.
  • Who is eligible to avail the benefit of this section– This section is available to an eligible assessee carrying on eligible business.
  • Who is the Eligible Assessee– An Individual or HUF or a partnership firm (not LLP), resident in India, whose total turnover or gross receipts in the previous year does not exceed the amount of Rs.2 crores.
  • What is an Eligible Business– Eligible business is any business other than the following-

1. A Specified profession referred to in Section 44AA

2. Business of plying, hiring or leasing of goods carriages

iii. Commission or brokerage business

1. Agency business

Also, section 44AD shall not be applicable to a person who is availing deduction under section 10AA or deduction under section 80-IA to section 80RRB in the relevant assessment year.

  • What is the Presumptive or Deemed Income– A sum equal to 8% of the total turnover or gross receipts of the assessee from such business or such higher amount as declared by the assessee shall be the presumptive or deemed income of the assessee. In respect of the turnover or gross receipts received through banking channels, the above 8% shall be read as 6%.
  • Various deductions/ allowances are deemed to be allowed in calculating deemed income– It shall be deemed that following deductions/allowances have been allowed to compute the deemed income-
  • All the deductions allowable from section 30 to section 38
  • Deduction under section 40b available to a partnership firm in respect of Salary or commission or interest paid to a partner of a partnership firm.
  • Depreciation
  • No need to maintain books of accounts- ​If the assessee is covered under section 44AD and declares his profit in accordance with this section for an assessment year, then such assessee shall not be required to maintain books of accounts and shall not be required to conduct audit of books of accounts under section 44AB for that assessment year.
  • No flip flop between presumptive taxation and normal taxation (Clause 4 of Section 44AD)- If a person opts for presumptive taxation scheme then he is also required to follow the same scheme for next 5 assessment years. If he fails to do so, then presumptive taxation scheme will not be available for him for next 5 assessment years. For those 5 assessment years, he shall be required to maintain books of account and also liable for tax audit as per section 44AB provided his total income exceeds basic slab exemption.

Now, in brief let’s understand Section 44AB of the Income Tax Act-

  • Who is compulsorily required to conduct audit of books of accounts as per clause (a) of Section 44AB- A person whose total sale or turnover or gross receipts from the business exceed Rs. 1 crore in the previous year.
  • Who is compulsorily required to conduct audit of books of accounts as per clause (e) of Section 44AB- A person carrying on business, if Clause 4 of Section 44AD is applicable to that assessee. This case has been discussed in point 8 above-

If a person opts for presumptive taxation scheme then he is also required to follow the same scheme for next 5 assessment years. If he fails to do so, then presumptive taxation scheme will not be available for him for next 5 assessment years. For those 5 assessment years, he shall be required to maintain books of account and also liable for tax audit as per section 44AB provided his total income exceeds basic slab exemption.

  • Amendment bought in by Finance Bill 2020- It is proposed to increase the threshold limit under clause (a) of Section 44AB for conducting audit for a person carrying on business from one crore rupees to five crore rupees in cases where-

1. aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipt; and

2. aggregate of all payments in cash during the previous year does not exceed five per cent of such payment.

Now, after understanding the above provisions let’s take some examples. Let us assume that the assessee, Mr. A, a wholesale trader does all his transactions in cash. Now consider this example spread over 17 assessment years-

Year GTO Profit % Whether TI more than Basic exemption 44AD applicability 44AB applicability Remarks
1 1,50,00,000 9.0%  Yes Yes No The assessee is not required to maintain books and conduct audit u/s 44AD.
2 1,60,00,000 8.9%  Yes Yes No The assessee is not required to maintain books and conduct audit u/s 44AD.
3 90,00,000 4.0%  Yes No Yes The assessee has fallen u/s 44AD(4) and TI is more than basic exemption, he is required to get his accounts audited u/s 44AB(e). Now, Section 44AD shall not be available to the assessee for next 5 assessment years.
4 80,00,000 9.0%  Yes NA Yes The assessee has fallen u/s 44AD(4) and TI is more than basic exemption, therefore he is required to get his accounts audited u/s 44AB(e).
5 1,00,00,001 4.0%  No NA Yes The assessee has fallen u/s 44AB(a) and it is irrelevant that the Total Income is less than basic slab exemption, therefore he is required to get his accounts audited u/s 44AB(a).
6 99,99,999 4.0%  No NA No The assessee has fallen u/s 44AD(4) but TI is less than basic exemption, therefore he is not required to get his accounts audited u/s 44AB(e). Also, since his turnover is less than Rs. 1 Crore he shall not be covered u/s 44AB(a).
7 99,99,999 5.9%  Yes NA Yes The assessee has fallen u/s 44AD(4) and TI is more than basic exemption, therefore he is required to get his accounts audited u/s 44AB(e).
8 99,99,999 8.1%  Yes NA Yes The assessee has fallen u/s 44AD(4) and TI is more than basic exemption, therefore he is required to get his accounts audited u/s 44AB(e).
9 2,10,00,000 5.9%  Yes NA Yes Section 44AD is not applicable as GTO is more than Rs. 2 Crores and therefore he is required to get his accounts audited u/s 44AB(a).
10 1,90,00,000 5.9%  Yes No Yes The assessee has declared a profit of less than 8% of GTO and therefore has not opted for section 44AD. As per section 44AB(a) he is required to get his accounts audited.
11 1,80,00,000 8.5%  Yes Yes No The assessee is not required to maintain books and conduct audit u/s 44AD.
12 2,10,00,000 3.0%  No No Yes Section 44AD is not applicable as GTO is more than Rs. 2 Crores and therefore he is required to get his accounts audited u/s 44AB(a). Now, Section 44AD shall not be available to the assessee for next 5 assessment years.
13 50,00,000 9.0%  Yes NA Yes Assessee has fallen u/s 44AD(4) and TI is more than basic exemption, therefore he is required to get his accounts audited u/s 44AB(e).
14 60,00,000 5.9%  No NA No Assessee has fallen u/s 44AD(4) but TI is less than basic exemption, therefore he is not required to get his accounts audited u/s 44AB(e). Also, since his turnover is less than Rs. 1 Crore he shall not be covered u/s 44AB(a).
15 1,10,00,000 5.0%  Yes NA Yes Assessee has fallen u/s 44AD(4) and TI is more than basic exemption, therefore he is required to get his accounts audited u/s 44AB(e). He is required to conduct audit as per Section 44AB(a) also.
16 2,10,00,000 1.0%  No NA Yes Assessee has fallen u/s 44AB(a) and it is irrelevant that the Total Income is less than basic slab exemption, therefore he is required to get his accounts audited u/s 44AB(a).
17 Assessee closed business 0.0%  Yes NA No For applicability of Section 44AB(e) the assessee must be carrying on business. Since the assessee has closed business, he is not required to conduct audit u/s 44AB(e).

I hope that this article is useful and easy to understand for the readers and in case of any suggestions please feel free to write to me at shekharca89@gmail.com

Author Bio

Qualification: CA in Practice
Company: Vinay Sethi and Associates
Location: Delhi, New Delhi, IN
Member Since: 17 Apr 2018 | Total Posts: 5
Hello, CA. Shekar Shankar from New Delhi. A Practicing Chartered Accountant by profession, Partner in Vinay Sethi and Associates, and a teacher by passion. Teaching gives me happiness and I Wish to make a difference by sharing the power of knowledge by teaching in a simple manner and in the process View Full Profile

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4 Comments

  1. ck says:

    My F&O trading turnover is 12 Lakh in FY20 and lncurred loss of 40,000. Also I have salary income of 238000 yearly. I have no other income except salary in FY20. In FY19 I filed return with audit as have F&O turnover of 3 Cr. and Loss of 6,00,000. What Shoid I do this year? Please Guide.

  2. vijay says:

    An individual for 9 asst year upto 2018-19, sec 44ad opted and for 2019-20 turnover Rs2.5 cr, audit done and for asst year 2020-21 turnover less than 2 cr, can he opt for 44ad.

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