APPLICABILITY OF AUDIT u/s 44AB

[Explanation along with decoding Sec. 44AA, 44AD, 44ADA & 44AE]

Every Tax Professionals are in a situation to determine the applicability of Tax Audit to a particular client. It depends upon the Turnover/ Gross Receipts of the client and various other factors.

Here, in this article I have made an attempt to solve the practical issues that are arising to the Tax Professionals in day to day practice (by decoding Income Tax Act Sec. 44AB along with 44AA, 44AD, 44ADA & 44AE).

This article mainly focuses on Individual & HUF assessees.

WHO ARE ALL REQUIRED TO AUDIT u/s44AB ?

For the convenience of understanding I have classified the applicability of Audit into 2 Types.

1) Normal Assessees (Type – 1)

(I) Sec. 44AB (a) – Only “T.O.”Criteria is to be satisfied.

(II) Sec. 44AB (b) – Only “Gross Receipts” Criteria is to be satisfied.

2) Special Assessees (Type – 2)

(A) Category A :

(i) Sec. 44AB (c) – Only “Declared Profit less than Deemed Profit” Criteria is to be satisfied

(ii) Sec. 44AB (d) – Both “Declared Profit less than Deemed Profit” Criteria as well as “Total Income above Basic Exemption Limit” Criteria are to be satisfied.

(B) Category B :

(i) Sec. 44AB (e) – Both “Opted Out” Criteria as well as “Total Income above Basic Exemption Limit” Criteria are to be satisfied.

REFERENCE WORDS

For easy understanding I have used some words / phrases in this article, which are not directly used in the Act anywhere and for reference I have given those words / phrases here.

(i) Opted : one who opted 44AD

(ii) Opted Out : One who opted 44AD in a F.Y and came out of 44AD before completion of Block Period – A.

(iii) Block Period – A : 5 Succeeding F.Ys after the F.Y. in which 44AD is opted = Total 5 F.Ys.

(iv) Block Period – B : F.Y. in which assessee came out of 44AD (+) 5 Succeeding F.Ys = Total 6 F.Ys.

(v) 5% Criteria : Persons whose Cash receipts are below 5% of Total Receipts and whose Cash Payments are below 5% of Total Payments

(vi) Total Income : Total Income referred in this article = Business Income (+) All Other Heads of Income (-) Chapter VI-A Deductions

(vii) Assessee : Assessees considered in this article are Resident Individuals with age of 30 and their Basic Exemption Limit is Rs. 2,50,000 at all times.

(viii) T.O. : Turnover / Sales / Gross Receipts from business.

(ix) Basic Exemption Limit : Maximum amount which is not chargeable to Income Tax.

(x) 8% Profit : For all 44AD cases in this article, 8% Profit is considered assuming all sales proceeds are in cash.

(xi) Specified Profession : Profession [specified u/s 44AA (1)]

(xii) Unspecified Profession : Profession [other than 44AA (1) Profession]

(iii) Books prescribed for Specified Profession :

I) In case of 1st Year of Profession – If their Gross Receipts exceeds Rs. 1,50,000 in that year

II) In any other case – If their Gross Receipts are more than Rs. 1,50,000 in any one or more of the 3 F.Ys. immediately preceding the F.Y. in which books are required to be maintained.

In both the above cases (I) & (II) assessee is required to maintain,

a) Books as per ruling Sec. 44AA (1) read with Income Tax Rule 6F.

b) Books specified under Income Tax Rule 6F (2)

III) Assessee who do not fit into above 2 cases (I) & (II) [ i.e. whose Gross Receipts are less than Rs. 1,50,000 in above 2 cases (I) & (II) ] – Required to maintain,

a) Books as per ruling Sec. 44AA (1)

b) Books and Other Documents which may enable the Assessing Officer to compute his Total Income in accordance with provisions of the Income Tax Act.

Applicability of Tax Audit under section 44AB

(xiv) Books prescribed for Business and Unspecified Profession : Assessee is required to maintain,

a) Books as per ruling Sec. 44AA (2) (i) & (ii) [ if T.O. is above Rs. *25 Lakhs (or) if Business / Profession Income is above **Rs. 2,50,000 ].

b) Books and Other Documents which may enable the Assessing Officer to compute his Total Income in accordance with provisions of the Income Tax Act.

[ It is not mandatory for Business Assessees (or) Unspecified Professionals to refer Income Tax Rule 6F ]

* Note 1 [ Sec. 44AA (2) (i) & (ii) ] :

  • Rs. 25 Lakhs mentioned above is the “T.O. / Gross Receipts Limit” fixed by the Sec. 44AA (2) (i) & (ii) for Individuals & HUF Assessees for maintaining books.
  • But for Assessees (other than Individual & HUF) – Rs. 10 Lakhs is the T.O. / Gross Receipts Limit fixed by Sec. 44AA (2) (i) & (ii) for maintaining books.
  • T.O. Limit (or) Gross Receipts Limit specified u/s 44AA (2) (i) & (ii) is applicable only for assessees who are engaged in Business (or) Unspecified Profession

** Note 2 [ Sec. 44AA (2) (i) & (ii) ] :

  • Rs. 2,50,000 mentioned above is the “Business / Profession Income Limit” fixed by the Sec. 44AA (2) (i) & (ii) for Individual & HUF Assessees for maintaining books.
  • We must note that, Rs. 2,50,000 mentioned in the Sec. 44AA (2) (i) & (ii), does not refer to the Basic Exemption Limit (or) Total Income Limit, but it refers only to, “Income under head Business / Profession”.
  • So, the assessee [(being Individual) Resident (or) Non-Resident ] may either be a Normal Citizen (upto Age 59) (or) a Senior Citizen (age from 60 & upto 79) (or) a Super Senior Citizen (age 80 & above) and if his “Income under head Business / Profession” is above Rs. 2,50,000 [ and not Basic Exemption Limit ], then he has to maintain books as per Sec. 44AA (2) (i) & (ii).
  • But for Assessees (other than Individual & HUF), Rs. 1,20,000 is the “Business / Profession Income Limit” fixed by Sec. 44AA (2) (i) & (ii) for maintaining books.
  • Business / Profession Income Limit” specified u/s 44AA (2) (i) & (ii) [ for maintaining books ] is applicable only for assessees who are engaged in Business (or) Unspecified Profession

Out of 2 Notes [ Note 1 – T.O. / Gross Receipts Limit & Note 2 – Business / Profession Income Limit ] given above, even if the assessees satisfy any one, they have to maintain books.

[Both these notes are not applicable for those who opt presumptive taxation u/s 44AD, 44ADA & 44AE (also 44BB & 44BBB) due to the relaxation provided by the respective sections in maintaining books of account]

NORMAL ASSESSEES (TYPE – 1)

(I) Section 44AB (a) :

“Every person carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds Rs. 1 Cr. in any P.Y”

Assessee Engaged in T.O. Profit % Audit applicability
Mr. A Business (Textile) Rs. 1.5 Cr. Any Profit %

(Whether less than 8%
or more than 8%)

Yes
Mr. B Business (Steel) Rs. 80 Lakhs No
Reason :

Audit is applicable for persons carrying on business & if their turnover exceeds Rs. 1 Crore in any P.Y.

Explanation for Mr. A’s case :

1) 44AB (a) says that, anyone who has T.O. of more than Rs. 1 Cr. has to do audit.

2) Anyone who has T.O. of more than Rs. 1 Cr. (but less than Rs. 2 Cr.), has 2 options :

A) Opt for 44AD – declare 8% / any higher % profit

(or)

B) Declare any profit percentage – do Audit, since T.O. is more than Rs. 1Cr.
[ 44AB (a) attracts here & mandates him to do audit ]

3) Anyone who has T.O. of more than Rs. 2 Cr. has no such options & so he has to do audit mandatorily.

[Just for this explanation purpose, let us not consider the 5% Criteria]

Explanation for Mr. B’s case :

  • If Mr. B had T.O. of more than Rs. 1 Cr. and if it is upto Rs. 2 Cr., then he would have had 2 options as seen above, so that is not a troubling point for us.
  • What troubles us then – What if the T.O is less then Rs. 1 Cr. and he is not declaring 8% profits ?

Example : 1

  • Let us assume that, this is Mr. B’s 1st Year of Business and his T.O. is Rs. 80 Lakhs, if he shows less than 8% profit, then no section in the Income Tax Act mandates him to do audit u/s 44AB.
  • Because, in this example, 44AD (4) is not at all applicable to him, since this is his 1st year of business, with which we can understand that, he wouldn’t have opted 44AD (1) in the preceding F.Y, as he wouldn’t have had any business in the preceding F.Y.
  • As per 44AD (5) & 44AB (e) [ Explained in detail, later in this article under heading “Special Assessee (Type – 2) – Category – B – 44AB (e)” ] :

only for a person who has opted for 44AD (1) in a F.Y. and opted out of 44AD (1) in any of the F.Y. during Block Period – A, then he has to do audit mandatorily for Block Period – B

  • If his T.O is less than Rs. 1 Cr. in current F.Y. and if he has not at all declared as per 44AD (1) in any of the Previous F.Ys, then he need not do tax audit, as no section in Income Tax Act mandates him to do audit [ since 44AD (4) is not at all applicable to him ]
  • In this Example, Mr. B did not satisfy any of the following conditions, to do audit mandatorily,

a) 44AB (a) – T.O. not more than Rs. 1 Cr.

b) 44AB (b) – He is not engaged in any profession.

c) 44AB (c) – He is not engaged in 44AE Business.

d) 44AB (d) – He is not engaged in 44ADA Profession.

e) 44AB (e) – 44AD (4) is not applicable to him, since this is his 1st year of business.

So, he did not satisfy any of the Income Tax Act Sections, mandating him to do audit.

Note :

i) Upto F.Y. 2015 – 2016, if T.O. is upto Rs. 1 Cr., then assessee has to mandatorily declare at least 8% Profit.

ii) In case, Assessee wants to declare less than 8% Profit and if his Total Income exceeds Basic Exemption Limit,

    • he has to do audit mandatorily as per Sec. 44AB (d) & 44AD (5) [read these sections prior to Finance Act, 2016] and
    • he has to maintain books as per Sec. 44AA (2) (iv) & 44AD (5) [read these sections prior to Finance Act, 2016]

iii) But, if assessee (with T.O. upto Rs. 1 Cr.) declares less than 8% Profit and if his Total Income does not exceed Basic Exemption Limit, then he need not do audit [ as per 44AB (d) prior to Finance Act, 2016 ]

iv) Only in Finance Act, 2016, the conditions used through reference words such as “Opted 44AD” ; “Opted Out of 44AD” ; “Block Period – A” & “Block Period – B” have been introduced.

v) Also Finance Act, 2016 removed the condition of mandatory audit for assessees who have T.O. of upto Rs. 1 Cr. and who do not show at least 8% Profit [ Read Sec. 44AB (e) & 44AD (5) after Finance Act, 2016 ].

vi) Up to F.Y. 2015 – 2016, Firms opting 44AD can claim Interest on Capital & Partner’s Salary as deduction from Deemed Profit (i.e. from 8% Profit).

But after Amendment in Finance Act, 2016, this benefit has been removed and it is deemed as allowed.

vii) Even after the amendment in Finance Act, 2016, everyone is following the condition specified in Note : (ii) above till date, which has actually been replaced with the conditions specified in Note : (iv) above in Finance Act, 2016.

viii) Please compare Sec. 44AB (d) ; 44AB (e) ; 44AA (2) (iv) and 44AD (4) & (5) before Finance Act, 2016 and after Finance Act, 2016 for more clarity.

Example : 2 (Alternative Scenario for Mr. B)

  • Mr. B starts his business in the F.Y. 16 – 17 and his T.O. details are given below for 5 F.Ys.
F.Y. T.O.
(Rs.)
Audit Applicability Business / Profession
Income (Rs.)
Whether Mr. B
did Audit ?
Reason
16 – 17 75 Lakhs No 5% – 3.75 Lakhs No T.O. Less than Rs. 1Cr. :
44AB (a) not satisfied
17 – 18 1.25 Cr. Yes 5% – 6.25 Lakhs Yes T.O. More than Rs. 1Cr. :
44AB (a) satisfied
18 – 19 80 Lakhs No 5% – 4 Lakhs No T.O. Less than Rs. 1Cr. :
44AB (a) not satisfied
19 – 20 1.5 Cr. Yes 5% – 7.5 Lakhs Yes T.O. More than Rs. 1Cr. :
44AB (a) satisfied
20 – 21 90 Lakhs No 5% – 4.5 Lakhs No T.O. Less than Rs. 1Cr. :
44AB (a) not satisfied
  • In this case, Mr. B starts business in the F.Y. 16 – 17 and he did not opt 44AD [ & didn’t declare 8% Profit ] for any of the F.Ys from F.Y. 16 – 17 to F.Y. 20 – 21.
  • Sec. 44AB (e), Sec. 44AD (4) & (5) speaks only about Opted Out assessees, but in this case, Mr. B did not even opt for 44AD in any of the above F.Ys.
  • So, only if he opts in for 44AD, question regarding Opt Out arises [ that too, only if he opts out ].
  • Only when question regarding Opt Out arises, we have to consider the applicability of Sec. 44AB (e) or 44AD (4) or 44AD (5).
  • When the Sec. 44AB (e), 44AD (4) & (5) is not at all applicable to an assessee [ whose T.O. is below Rs. 1 Cr. ], from where, the condition of mandatory audit comes from [ if he doesn’t declare at least 8% Profit ] ?
  • But in all the F.Ys mentioned above, Mr. B has to maintain books [ Refer Note 1 & Note 2 given above, under heading “Reference Words – (xiv)” ].

Based on these 2 Examples, we can come to a conclusion that,

  • If his T.O. is less than Rs. 1 Cr. and if he declares less than 8% profit, no section in the Income Tax Act mandates him to do audit as per 44AB [ unless he has opted out of 44AD in any of the previous F.Ys. ]
  • So, if his T.O. is less than Rs. 1 Cr. and if he maintains books [ since 44AA (2) (i) & (ii) specifies to maintain books ], he can show any profit percentage, since no section in Income Tax Act specifies about mandatory audit.
  • Audit as per 44AB (e) is applicable only for persons who opted out from 44AD, but for assessees who never opted 44AD so for [ with T.O. below Rs. 1 Cr. (so 44AB (a) is also not applicable to them) ], audit is not mandatory as per Sec. 44AB (e).

NORMAL ASSESSEES (TYPE – 1)

(II) Section 44AB (b) :

“Every person carrying on profession shall, if his gross receipts in profession exceed Rs. 50 Lakhs in any P.Y”

(a) When an Assessee engaged in Unspecified Profession :

Assessee Engaged in Gross Receipts Audit applicability
Mr. D Unspecified Profession Rs. 65 Lakhs Yes
Mr. E Rs. 45 Lakhs No
Reason :

Audit is applicable for persons carrying on profession & if their gross receipts exceeds Rs. 50 Lakhs in any P.Y.

Note :

  • Profession referred in Sec. 44AB (b) = Every Profession [which includes specified profession ].
  • Assessee who is engaged in Unspecified Profession, should maintain books if their Gross Receipts (or) Professional Income are more than the limits specified in Sec. 44AA (2) (i) & (ii).
  • Assessee who is engaged in Unspecified Profession, shall not be eligible to opt Sec. 44ADA, because Sec. 44ADA is applicable only for Specified Professionals.
  • Assessee who is engaged in Unspecified Profession, shall not be eligible to opt Sec. 44AD also, because Sec. 44AD is applicable only for Business Assessees.
  • So, if Gross Receipts of an Unspecified Professional exceeds Rs. 50 Lakhs in a F.Y., they have to mandatorily undergo Audit as per 44AB (b) and maintain books as per Sec. 44AA (2) (i) & (ii).
  • But if the Gross Receipts of an Unspecified Professional are upto Rs. 50 Lakhs, then
    • they need not go for Audit.
    • they are not eligible to Opt 44ADA.
    • but they have to maintain books [provided, if they satisfy Sec. 44AA (2) (i) & (ii)]

(b) When an Assessee engaged in 44AA (1) Profession :

Assessee Engaged in Gross Receipts Audit applicability
Mr. F Specified Profession

[List of Specified Profession is
given later in this article under
heading “Special Assessee – Category A – 44AB (d).”]

Rs. 65 Lakhs Yes
Mr. G Rs. 45 Lakhs No

[if 44ADA is opted (i.e. declared at least 50% Gross Receipts as Profits)]

Mr. H Rs. 45 Lakhs Yes*

[if 44ADA not opted (i.e. declaring less than 50% of Gross Receipts as Profits) & if his Total Income exceeds Basic Exemption Limit]

Reason :

Audit is applicable for persons carrying on profession & if their gross receipts exceeds Rs. 50 Lakhs in any P.Y.

* Note:

  • Profession referred in Sec. 44AB (b) = Every Profession [ which includes specified profession ]
  • 44AB (b) should be read along with 44AA (1) & (2), 44AB (d) & 44ADA (1) & (4) to determine the tax audit liability of Specified Professionals.
  • Assessees who are engaged in Profession specified u/s 44AA (1), should do audit and maintain books only if both the following conditions are satisfied,
    • if they declare their profits from profession less than 50% of their Gross Receipts and
    • if their Total Income (not Professional Income) exceeds Basic Exemption Limit.
  • What if the assessees declares that,
    • their Profits from Profession are less than 50% of his Gross Receipts and
    • their Total Income is also less than the Basic Exemption Limit ?
  • In such a scenario,
    • assessees will not be required to do audit – Ruling Sec. 44AB (d) & 44ADA (4) and
    • assessees are not under the purview of Sec. 44ADA (4) to maintain books
    • but assessees are under the purview of Sec. 44AA (1) [ read with Income Tax Rule 6F ] to maintain books.
  • This is explained in detail, later in this article under heading “Special Assessee – Category A – 44AB (d).”

SPECIAL ASSESSEES (TYPE – 2)

CATEGORY – A

(i) Section 44AB (c) :

“Every person carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under Sec. 44AE or Sec. 44BB or Sec. 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any P.Y.”

Assessee Engaged in Vehicle Type Deemed Profit Limit
Fixed by Sec. 44AE
Amount earned
by Assessee
Audit
applicability
Mr. I Plying, Hiring or
Leasing Goods
Carriages Business(upto 10 Vehicle at
any time during a F.Y)
Heavy Goods Rs. 1,000*

per Ton
per Month
(including part of the month)
per Vehicle

Rs. 750

per Ton per Month
per Vehicle

Yes***
Vehicle
Mr. J (weight of which
exceeds 12 tons)
Rs. 1,500

per Ton per Month
per Vehicle

No
Reason :

Audit is applicable for persons carrying on Business specified u/s 44AE (also 44BB & 44BBB) and

who claims that their profits are lower than the profits specified u/s 44AE (also 44BB & 44BBB)

* Note:

  • Profits to be shown for 1 Vehicle = Rs. 1,000 x No. of Tons x No. of Months the assessee had held such assets in his name in that F.Y
  • If the vehicle has carried any goods in a month – then gross vehicle weight is to be considered (for calculating no. of tones)
  • Gross Vehicle Weight = Weight of the Vehicle (without load) (+) Weight of the Load (+) Weight of all equipments ordinarily used (without considering the weight of the driver or attender)
  • If the vehicle has not carried any goods in a month – then unladen weight is to be considered (for calculating no. of tones)
  • Unladen Weight = Weight of the Vehicle (without load) (+) Weight of all equipments ordinarily used (without considering the weight of the driver or attender)
Assessee Engaged in Vehicle Type Deemed Profit Limit
Fixed by Sec. 44AE
Amount earned
by Assessee
Audit
applicability
Mr. K Plying, Hiring or
Leasing Goods
Carriages Business(upto 10 Vehicle at
any time during a F.Y)
Other than Rs. 7,500**

per Month
per Vehicle

Rs. 5,000

per Month
per Vehicle

Yes***
Heavy Goods
Mr. L Vehicle

(weight of which is
upto12 tons)

Rs. 10,000

per Month
per Vehicle

No
Reason :

Audit is applicable for persons carrying on Business specified u/s 44AE (also 44BB & 44BBB) and

who claims that their profits are lower than the profits specified u/s 44AE (also 44BB & 44BBB)

** Note:

  • Profits to be shown for 1 Vehicle =

Rs. 7,500 x No. of Months the assessee had held such assets in his name in that F.Y.

*** Note:

  • Here, Audit is applicable irrespective of the “Total Income” of the assessee in a F.Y.
  • Mr. I’s (or) Mr. K’s “Total Income” may either be,
    • less than the basic exemption limit

(or)

    • more than the basic exemption limit.
  • Because, in Sec. 44AB (c), “Total Income” criteria is not considered for determining the audit liability.
  • But only, “Business Profit below Deemed Profit Limit fixed by Sec. 44AE”, criteria is considered, both
    • in Sec. 44AB (c) & 44AE (7) for determining the audit liability and
    • in Sec. 44AA (2) (iii) & 44AE (7) for determining liability for maintaining books.
  • Also, here “T.O. Limit specified u/s 44AB (a)” (or) “Business Income Limit specified u/s 44AA (2) (i) & (ii)” (or)
    Total Income” are not considered for determining either audit liability (or) liability to maintain books.
  • So, if amount claimed by the assessee as business profits are less than the deemed profit limit fixed by the Sec. 44AE, then he has to do audit as per 44AB (c) & 44AE (7) and maintain books as per 44AA (2) (iii) & 44AE (7), irrespective of his “Total Income” (or) “Business Income” (or) T.O.

For Example :

F.Y. Deemed Profit Limit
Fixed by Sec. 44AE
Income Earned by the Assessee
per ton per month per Vehicle
Total Income
(Rs.)
Audit / Opt 44AE
18 – 19 Rs. 1,000*

per Ton per Month
(including part of the month) per Vehicle

Rs.1,200 5 Lakhs Opt 44AE
19 – 20 Rs.600 5 Lakhs Must Audit
20 – 21 Rs.1,000 2 Lakhs Opt 44AE
21 – 22 Rs.800 2 Lakhs Must Audit
22 – 23 Rs.1,500 2 Lakhs Opt 44AE
  • But for 44AE (also for 44BB & 44BBB) there is no lock in period [ i.e. Block Period – A (or) Block Period – B ] as in 44AD (4)

For Example :

F.Y. Deemed Profit
Limit Fixed
by Sec. 44AE
Income Earned
by the Assessee
per month per Vehicle
Audit / Opt 44AE Lock in Period
18 – 19 Rs. 7,500 per Month per Vehicle Rs. 5,000 Must Audit No Lock in Period as in 44AD (4).

In any F.Y., if they want to show less than the deemed profit limit specified u/s 44AE, they can show and do audit & maintain books.

and

In any F.Y., if they want to show as per the deemed profit limit (or) more than the deemed profit limit specified u/s 44AE, they can show and need not do audit & not maintain books.

19 – 20 Rs. 8,000 Opt 44AE
20 – 21 Rs. 6,000 Must Audit
21 – 22 Rs. 7,000 Must Audit
22 – 23 Rs. 7,500 Opt 44AE

SPECIAL ASSESSEES (TYPE – 2)

CATEGORY – A

(ii) Section 44AB (d) :

“Every person carrying on the profession shall, if the profits and gains from the profession are deemed to be the profits and gains of such person under Sec. 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any P.Y.”

Assessee Engaged inProfessions
specified u/s 44AA (1)
Gross
Receipts
Deemed Profits
to be shown as
per 44ADA (1)
Profits shown by
the Assessee
Audit applicability
Mr. M CA Rs. 30 Lakhs Rs. 15 Lakhs

[i.e. 50% of Gross
Receipts to be
shown as Profits]

Rs. 10 Lakhs Yes*
Mr. N CA Rs. 20 Lakhs No
Reason :
Audit is applicable for persons carrying on 44AA (1) Profession as specified u/s 44ADA and who claims that their professional profits are lower than the profits specified u/s 44ADA[provided their total income (not Professional Income) exceeds Basic Exemption Limit]
  • Note for understanding difference between profession referred in 44AB (b) & (d) :
  • Profession referred in Sec. 44AB (b) = Every Profession [ which includes specified profession ]
  • Profession referred in Sec. 44AB (d) = Only Specified Profession
  • So, with this we can understand that, Sec. 44AB (d) is only applicable for Specified Professionals and not applicable for Unspecified Professionals.
  • By which we can understand that, Presumptive Taxation u/s 44ADA is applicable only for Specified Professionals, so Unspecified Professionals cannot opt for 44ADA Presumptive Taxation.
  • Profession specified u/s 44AA (1) – Persons carrying on following professions,

(i) Legal – Advocates

(ii) Medical – Doctors

(iii) Engineering – Engineers

(iv) Architectural Profession – Architects

(v) Profession of Accountancy – CA

(vi) Technical Consultancy

(vii) Interior Decoration

(viii) Other Profession (Authorized Representative & Film Artist) [ Refer Income Tax Rule 6F (1) ].

* Note:

a) Here, Audit is applicable only if the “Total Income” (not Professional Income) of the assessee is more than the basic exemption limit in a F.Y.

b) Mr. M’s “Total Income” (not Professional Income) should be more than the basic exemption limit for doing audit, because “Total Income” criteria is considered here for determining the audit liability.

c) If amount claimed by the assessee as profits from profession are less than 50% of their Gross Receipts [ i.e. Deemed Profit Limit fixed by the Sec. 44ADA ], then he has to do audit as per 44AB (d) & maintain books as per 44AA (1), only if his “Total Income” (not Professional Income) exceeds basic exemption limit in that F.Y.

d) Example : For Mr. M,

F.Y. Gross Receipts
(Rs.)
[ Received
by the Assessee ]
Deemed Profit Limit
Fixed by Sec. 44ADA (Rs.)
[50% of Gross Receipts]
Professional
Income (Rs.)
Total Income
(Rs.)
Audit / Opt 44ADA
18 – 19 10 Lakhs 5 Lakhs 4 Lakhs 2.4 Lakhs No Audit
19 – 20 10 Lakhs 5 Lakhs 4 Lakhs 2.6 Lakhs Must Audit
20 – 21 10 Lakhs 5 Lakhs 5 Lakhs 2.4 Lakhs Opt 44ADA
21 – 22 10 Lakhs 5 Lakhs 5 Lakhs 2.6 Lakhs Opt 44ADA
22 – 23 8 Lakhs 4 Lakhs 4.4 Lakhs 2.4 Lakhs Opt 44ADA
23 – 24 8 Lakhs 4 Lakhs 4.6 Lakhs 2.6 Lakhs Opt 44ADA

In this Example :

  • In F.Y. 18 – 19,
    • audit is not applicable to him [ as per 44AB (d) & 44ADA (4) ] because,
    • assessee has declared his Professional Income below 50% of his Gross Receipts and
    • also, his Total Income is below Basic Exemption Limit.
    • Both “Professional Income below 50% of Gross Receipts” criteria and “Total Income below Basic Exemption Limit” criteria should be satisfied for non applicability of audit
  • Also in F.Y. 18 – 19,
    • He is not under the purview of Sec. 44ADA (4) to maintain books.
    • But, he is under the purview of Sec. 44AA (1) [ read with Income Tax Rule 6F ] to maintain books prescribed for Specified Professionals.
    • So, Specified Professionals who do not fit into Sec. 44AB (d) & Sec. 4ADA (4) and also who do not show their profits as per Presumptive Taxation 44ADA, has to maintain books prescribed for Specified Professionals.
    • 44AA (1) mandates the Specified Professionals to maintain books irrespective of their Gross Receipts Limit :

i) but only for those who opt 44ADA, a relaxation is given to them in maintaining books and

ii) those who do audit as per 44AB (d), has to mandatorily maintain books for audit purposes.

iii) Also those who do not cover under both (i) & (ii) above, has to maintain books prescribed for Specified Professionals.

  • In F.Y. 19 – 20,
    • assessee has declared his Professional Income below 50% of his Gross Receipts and
    • his Total Income is above Basic Exemption Limit
    • so audit is applicable for him as per Sec. 44AB (d) & 44ADA (4) and also he is required to maintain books as per Sec. 44ADA (4).
    • Both “Professional Income below 50% of Gross Receipts” criteria and “Total Income above Basic Exemption Limit” criteria should be satisfied for applicability of audit
  • In F.Y. 22 – 23 & F.Y. 23 – 24, assessee declared his Professional Income above 50% of his Gross Receipts –

and

  • In F.Y. 20 – 21 & F.Y. 21 – 22, assessee declared his Professional Income equal to 50% of his Gross Receipts –

i) So for all these 4 F.Ys his Total Income may either be above or below or equal to Basic Exemption Limit, it does not matter, because assessee has declared at least 50% of Gross Receipts.

ii) with which, he can opt 44ADA and get relaxation from doing Tax Audit.

iii) At the same time, it is only a relaxation for him in maintaining books, if he opts 44ADA.

iv) He may either maintain or may not maintain books as he wish, if he opts 44ADA.

e) But for 44ADA there is no lock in period [ i.e. Block Period – A (or) Block Period – B ] as in 44AD (4).

f) For Example :

F.Y. Gross
Receipts
(Rs.)
Deemed Profit
Limit Fixed by
Sec. 44ADA
(Rs.)
Professional Income (Rs.) Total
Income
(Rs.)
Audit /
Opt 44ADA
Lock in Period
18 – 19 10 Lakhs 5 Lakhs 5 Lakhs 2.4 Lakhs Opt 44ADA No Lock in Period as in 44AD (4).

In any F.Y., if they want to show less than the deemed profit limit specified u/s 44ADA, they can show and do audit & maintain books.

and

In any F.Y., if they want to show as per the deemed profit limit (or) more than the deemed profit limit specified u/s 44ADA, they can show and need not do audit & not maintain books.

19 – 20 10 Lakhs 5 Lakhs 4 Lakhs 2.6 Lakhs Must Audit
20 – 21 10 Lakhs 5 Lakhs 5 Lakhs 2.6 Lakhs Opt 44ADA
21 – 22 10 Lakhs 5 Lakhs 4 Lakhs 2.4 Lakhs No Audit
22 – 23 8 Lakhs 4 Lakhs 4.6 Lakhs 2.6 Lakhs Opt 44ADA

SPECIAL ASSESSEES (TYPE – 2)

CATEGORY – B

(i) Section 44AB (e) :

“Every Person carrying on the business shall, if the provisions of Sec. 44AD (4) are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any P.Y”

This is what mentioned in Sec. 44AD (5) also.

Section 44AD (5) :

“Notwithstanding anything contained in the foregoing provisions of Sec. 44AD, an eligible assessee to whom the provisions of Sec. 44AD (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required u/s 44AA (2) and get them audited and furnish a report of such audit as required u/s 44AB.”

So, as per 44AB (e) & 44AD (5) :

Tax Audit is mandatory for an assessee only if he satisfies both the following conditions :

1) Provisions of Sec. 44AD (4) should be applicable to him [ i.e. assessee must be a opted out assessee ].

&

2) His Total Income should be more than the Basic Exemption Limit.

1) What is contained in Sec. 44AD (4) ?

“Where an eligible assessee declares profit for any P.Y. in accordance with the provisions of 44AD (1) and he declares profit for any of the 5 A.Ys relevant to the P.Y. succeeding such P.Y. not in accordance with the provisions of Sec. 44AD (1), he shall not be eligible to claim the benefit of the provisions of the Sec. 44AD for 5 A.Ys subsequent to the A.Y. relevant to the P.Y. in which the profit has not been declared in accordance with the provisions of Sec. 44AD (1)”

To understand this, we can first break the wordings of this 44AD (4) and then we will get to know about this.

  • Where an eligible assessee
  • declares profit for any P.Y. in accordance with the provisions of 44AD (1) and
  • he declares profit for any of the 5 A.Ys relevant to the P.Y. succeeding such P.Y.
  • not in accordance with the provisions of Sec. 44AD (1) [ i.e. declaring less than 6% (or) 8% profit ],
  • he shall not be eligible to claim the benefit of the provisions of Sec. 44AD
  • for 5 A.Ys subsequent to the A.Y. relevant to the P.Y.
  • in which the profit has not been declared in accordance with the provisions of Sec. 44AD (1)

From this we can understand that,

i) Eligible Assessee – Individual, HUF & Partnership Firm (not LLP)

ii) Declares 8% Profit in a F.Y. [ Eg: F.Y. 16 – 17 ]

iii) Has to continue declaring 8% Profit for Block Period – A [ F.Y. 17 – 18 to F.Y. 21 – 22 ]

iv) In any of the F.Y. in Block Period – A, if he didn’t declare 8% (and if declares a lower percentage) then, it is considered that he has opted out of 44AD in the F.Y. in which he declares lower percentage.

v) For eg. let us say that, he has opted out of 44AD in F.Y. 19 – 20 (has to do audit in that F.Y.), then he cannot opt in 44AD for immediate 5 succeeding F.Ys, after the F.Y. in which he opted out.

[ (F.Y. 20 – 21 to F.Y. 24 – 25), for this period he cannot opt for 44AD again (i.e. Block Period – B) ]

vi) So, in this case, from Y. 19 – 20 to F.Y. 24 – 25, for 6 F.Ys (i.e. Block Period – B),

a) he has to do audit mandatorily as per Sec. 44AB (e) & Sec. 44AD (5) and

b) he has to maintain books mandatorily as per Sec. 44AA (2) (iv) & Sec. 44AD (5)

only for that F.Y. out of these 6 F.Ys (i.e. Block Period – B) in which his “Total Income” (not business income) exceeds Basic Exemption Limit (irrespective of the T.O. limit).

Note :

I) Assessee who has opted out from 44AD,

a) Should do audit – Ruling Sec. 44AB (e) & 44AD (5)

b) Should maintain books – Ruling Sec. 44AA (2) (iv) & 44AD (5)

For both (a) & (b) mentioned above, condition ofTotal Income [ not Business Income ] exceeding Basic Exemption Limitshould be satisfied.

II) Assessee who has opted out from 44AD,

a) Should not refer Sec. 44AA (2) (i) & (ii) – For Maintaining Books [ irrespective of the T.O. Limit (or) Business Income Limit Specified u/s 44AA (2) (i) & (ii) ]

b) Should not refer Sec. 44AB (a) – For Doing Audit
[ irrespective of the T.O. Limit specified u/s 44AB (a) ]

2) What is the meaning of the condition, His Total Income should be more than Basic Exemption Limit?

i) For these 6 F.Ys of Block Period – B [ i.e. from F.Y. 19 – 20 to F.Y. 24 – 25 in the above case ], he has to do tax audit only in those F.Ys in which his total income exceeds basic exemption limit.

ii) In any of the F.Y. [ say for Eg : In F.Y. 23 – 24 (during Block Period – B) ], if his Total Income is Rs. 2 Lakhs, he need not do audit for that F.Y. alone, because in that F.Y. his Total Income does not exceed the Basic Exemption Limit (i.e. Rs. 2,50,000).

iii) He does not necessarily do audit for all those 6 F.Ys (Block Period – B) just because he came out of 44AD in F.Y. 19 – 20, but his Total Income should be more than the Basic Exemption Limit to do tax audit[ i.e. whenever his Total Income exceeds Basic Exemption Limit in the Block Period – B, he has to do audit, otherwise not required to do audit ].

iv) Please note that, Sec. 44AB (e) & Sec. 44AD (5), talks only aboutTotal Income more than Basic Exemption Limit” Criteria and not about “Business Income”

Let us discuss with various examples

Example 1 :

Eligible Assessee F.Y. T.O. (Rs.) Profits Declared (Rs.) Opted 44AD Audit Applicability
Mr. P 16 – 17 1.4 Cr. 8% – 11.2 Lakhs Yes No

F.Y. T.O. (Rs.) Profits Declared (Rs.) Opted 44AD Audit Applicability
17 – 18 1.5 Cr. 8% – 12 Lakhs Yes No
18 – 19 1.6 Cr. 8% – 12.8 Lakhs Yes No
19 – 20 1.7 Cr. 5% – 8.5 Lakhs No Yes

F.Y. T.O. (Rs.) Profits Declared (Rs.) Can he Opt 44AD ? Audit Applicability
20 – 21* 1.5 Cr. 5% – 7.5 Lakhs No Yes
21 – 22* 90 Lakhs 8% – 7.2 Lakhs No Yes
22 – 23* 1.2 Cr. 5% – 6 Lakhs No Yes
23 – 24 No Business No **
24 – 25* 80 Lakhs 10% – 8 Lakhs No Yes

* Note : [ From F.Y. 19 – 20 to F.Y. 22 – 23 & for F.Y. 24 – 25 ] :

If we consider that Mr. P has no other heads of income and no investments for Chapter VI-A deductions, then Profit declared by him is his Total Income and which is more than the basic exemption limit (Rs. 2,50,000), so Tax Audit is applicable to him in all the 5 F.Ys [ From F.Y. 19 – 20 to F.Y. 22 – 23 & for F.Y. 24 – 25 ].

a) For F.Y. 21 – 22 & F.Y. 24 – 25, even though his T.O. is less than Rs. 1 Cr. he has to do audit as per Sec. 44AB (e).

b) He cannot say that, “since my T.O. is less than Rs. 1 Cr., 44AB (a) is not applicable to me and hence I will not do Tax Audit”

c) Because, for both these F.Ys 21 – 22 & 24 – 25, he is not under the purview of 44AB (a) for doing tax audit, But he is under the purview of 44AB (e) and 44AD (5) for doing tax audit.

d) Likewise, for all the 5 F.Ys [ From F.Y. 19 – 20 to F.Y. 22 – 23 & for F.Y. 24 – 25 ], he has to maintain books as per Sec. 44AA (2) (iv) & Sec. 44AD (5) [ irrespective of T.O. (or) Business Income Limit specified u/s 44AA (2) (i) & (ii) ].

** Note : [ For F.Y. 23 – 24 ] :

Let us consider 2 different scenarios (A) & (B),

A) If we consider Mr. A has only “Income from Other Sources” = Rs. 2 Lakhs [ No Chapter VI-A Deductions ]

    • His “Income from Other Sources” (Rs. 2 Lakhs) is considered asTotal Income”, because we know that in F.Y. 23 – 24, there is no business for him and also no investments for Chapter VI-A Deductions.
    • Conditions for mandatory audit for an Opted Out Assessee :
      [ all the following conditions should be satisfied ]

i) He must have Opted Out from 44AD during Block Period – A
(i.e. 44AD (4) must be applicable to him)

ii) Assessee must carry on business in a F.Y. during Block Period – B, because 44AB (e) states that,

“Every Person, carrying on the business shall, if the provisions of Sec. 44AD (4) are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year”

iii) His Total Income must be more than Basic Exemption Limit.

    • He did not satisfy conditions (ii) & (iii) specified here [ i.e. he did not carry any Business in the F.Y. 23 – 24 and also his Total Income is less than the Basic Exemption Limit ]
    • So, audit is not applicable to him as per Sec. 44AB (e) & 44AD (5), as well as he is not required to maintain books as per Sec. 44AA (2) (iv) & 44AD (5).

B) If we consider Mr. A has only “Income from Other Sources” = Rs. 3 Lakhs [ No Chapter VI-A Deductions ]

    • His “Income of Other Sources” (Rs. 3 Lakhs) is considered as “Total Income”, because we know that in F.Y. 23 – 24, there is no business for him and also no investments for Chapter VI-A Deductions.
    • Conditions for mandatory audit for an Opted Out Assessee :
      [ all the following conditions should be satisfied ]

i) He must have Opted Out from 44AD during Block Period – A
(i.e. 44AD (4) must be applicable to him)

ii) Assessee must carry on business in a F.Y. during Block Period – B, because 44AB (e) states that,

“Every Person, carrying on the business shall, if the provisions of Sec. 44AD (4) are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year”

iii) His “Total Income must be more than Basic Exemption Limit.

    • He did not satisfy condition (ii) specified here [ i.e. His Total Income is above Basic Exemption Limit, but he did not carry any Business in the F.Y. 23 – 24 ]
    • So, audit is not applicable to him as per Sec. 44AB (e) & 44AD (5), as well as he is not required to maintain books as per Sec. 44AA (2) (iv) & 44AD (5).

In both these scenarios (A) & (B) above,

  • audit is applicable only in any F.Y. during Block Period – B in which he is having Business,
  • but in case in any F.Y. during Block Period – B, if he does not have any Business, then assessee would not have any Business Income for that F.Y.,
  • then he need not do audit for that F.Y. during Block Period – B in which he does not have any Business, because 44AB (e) is applicable only in a F.Y. in which assessee has Business.
  • But for Next F.Y. [ i.e. F.Y. 24 – 25 comes within Block Period – B ], he is required to do audit, because in that F.Y. he carries on a business.

Example 2 :

Eligible Assessee F.Y. T.O. (Rs.) Profits Declared (Rs.) Opted 44AD Audit Applicability
Mr. Q 16 – 17 1.4 Cr. 8% – 11.2 Lakhs Yes No

F.Y. T.O. (Rs.) Profits Declared (Rs.) Opted 44AD Audit Applicability
17 – 18 1.5 Cr. 8% – 12 Lakhs Yes No
18 – 19 1.6 Cr. 8% – 12.8 Lakhs Yes No
19 – 20 1.7 Cr. 5% – 8.5 Lakhs No Yes

F.Y. T.O.
(Rs.)
Profits Declared
(Rs.)
Can he Opt 44AD ? Total Income
(Rs.)
Audit Applicability
20-  21 1.6 Cr. 5% – 8 Lakhs No 6 Lakhs Yes
21-  22 1.4 Cr. 3% – 4.2 Lakhs No 5 Lakhs Yes
22-  23 1.2 Cr. 4% – 4.8 Lakhs No 2.2 Lakhs No
23-  24 80 Lakhs 5% – 4 Lakhs No 2 Lakhs No
24-  25 60 Lakhs 9% – 5.4 Lakhs No 3.5 Lakhs Yes

In this Example :

  • For F.Y. 22 – 23 & F.Y. 23 – 24,

audit is not applicable for him as per Sec. 44AB (e) & Sec. 44AD (5) and

also he is not required to maintain books as per Sec. 44AA (2) (iv) & Sec. 44AD (5),

because his Total Income does not exceed Basic Exemption Limit in the respective F.Ys.

  • At the same time, he should not opt for 44AD also in both these F.Ys.
  • To understand this, 44AB (e) should be read along with 44AA (2) (iv), 44AD (4) & 44AD (5) [as explained above under heading “Special Assessee (Type – 2) – Category B – Sec. 44AB (e)” ]
  • For F.Ys 20 – 21, 21 – 22 & 24 – 25,

he has to do audit as per Sec. 44AB (e) & Sec. 44AD (5) and

he has to maintain books as per Sec. 44AA (2) (iv) & Sec. 44AD (5),

[ irrespective of his T.O. (or) Business Income Limit specified u/s 44AA (2) (i) & (ii) ].

Conclusion [ Based on Individual / HUF Assessees ]

Assessee
engaged in
T.O. / Gross Receipts (Declared by Assessee)
(Rs.)
Deemed Profit Limit [specified by Respective
Sections ] (Rs.)
Business / Profession
Income (Declared by
Assessee) (Rs.)
Total Income
(Rs.)
Audit
Books
Specified
Professionals
[ u/s 44AA (1) ]
(Opting 44ADA)
4 Lakhs
2 Lakhs
3 Lakhs
2 Lakhs
No
As per 44AB (d) & 44ADA
No
As per 44ADA
3 Lakhs
No
As per 44AB (d) & 44ADA
No
As per 44ADA
Specified
Professionals
[ u/s 44AA (1) ]
(Not Opting 44ADA)
30 Lakhs
15 Lakhs
4 Lakhs
2 Lakhs
No
As per 44AB (d) & 44ADA (4)
Yes
As per 44AA (1)
& IT Rule 6F
No
as per
44ADA (4)
3 Lakhs
Yes
As per 44AB (d) & 44ADA (4)
Yes As per 44ADA (4) and
44AA (1) & IT Rule 6F
Specified
Professionals
[ u/s 44AA (1) ]
(Can’t Opt 44ADA)
60 Lakhs
4 Lakhs
2 Lakhs
Yes
As per 44AB (b)
Yes
As per 44AA (1) & IT Rule 6F
3 Lakhs
Yes
As per 44AB (b)
Yes
As per 44AA (1) & IT Rule 6F
30 Lakhs
25 Lakhs
Yes
As per 44AB (b)
Yes
As per 44AA (1) & IT Rule 6F
Un Specified
Professionals
[ other than
44AA (1) Profession ]
(Can’t Opt 44ADA)
15 Lakhs
2 Lakhs
2 Lakhs
No
As per 44AB (b)
No
As per 44AA (2) (i) & (ii)
3 Lakhs
No
As per 44AB (b)
No
As per 44AA (2) (i) & (ii)
3 Lakhs
2 Lakhs
No
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
4 Lakhs
No
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
Un Specified
Professionals
[ other than
44AA (1) Profession ]
(Can’t Opt 44ADA)
40 Lakhs
2 Lakhs
2 Lakhs
No
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
No
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
2 Lakhs
No
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
4 Lakhs
No
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
80 Lakhs
2 Lakhs
2 Lakhs
Yes
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
Yes
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
2 Lakhs
Yes
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
4 Lakhs
Yes
As per 44AB (b)
Yes
As per 44AA (2) (i) & (ii)
Normal
Business
* Can’t Opt 44AD +
[ Not Considering
5% Criteria ]
3 Cr.
2 Lakhs
2 Lakhs
Yes
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
Yes
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
2 Lakhs
Yes
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
4 Lakhs
Yes
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
Normal
Business
[ Not Opting 44AD ]
[ Not Considering
5% Criteria ]
1.5 Cr.
2 Lakhs
2 Lakhs
Yes
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
Yes
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
2 Lakhs
Yes
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
4 Lakhs
Yes
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
15 Lakhs
2 Lakhs
2 Lakhs
No
As per 44AB (a)
No
As per 44AA (2) (i) & (ii)
3 Lakhs
No
As per 44AB (a)
No
As per 44AA (2) (i) & (ii)
3 Lakhs
2 Lakhs
No
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
4 Lakhs
No
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
90 Lakhs
2 Lakhs
2 Lakhs
No
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
No
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
3 Lakhs
2 Lakhs
No
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
4 Lakhs
No
As per 44AB (a)
Yes
As per 44AA (2) (i) & (ii)
Opting 44AD
[ Declaring 8% Profits, considering all sale proceeds are in cash ]
25 Lakhs
2 Lakhs
3 Lakhs
2 Lakhs
No
As per 44AD
No
As per 44AD
4 Lakhs
No
As per 44AD
No
As per 44AD
50 Lakhs
4 Lakhs
5 Lakhs
2 Lakhs
No
As per 44AD
No
As per 44AD
4 Lakhs
No
As per 44AD
No
As per 44AD
1.5 Cr.
12 Lakhs
13 Lakhs
10 Lakhs
No
As per 44AD
No
As per 44AD
Opted Out
from 44AD
[ during Block
Period – B ]
1.5 Cr.
15 Lakhs
10 Lakhs
Yes
As per 44AB (e) & 44AD (5)
Yes
As per 44AA (2) (iv) & 44AD (5)
5 Lakh
2 Lakhs
No
As per 44AB (e) & 44AD (5)
No
As per 44AA (2) (iv) & 44AD (5)
4 Lakhs
Yes
As per 44AB (e) & 44AD (5)
Yes
As per 44AA (2) (iv) & 44AD (5)
Opted Out
from 44AD
[ during Block
Period – B ]
50 Lakhs
5 Lakhs
2 Lakhs
No
As per 44AB (e) & 44AD (5)
No
As per 44AA (2) (iv) & 44AD (5)
4 Lakhs
Yes
As per 44AB (e) & 44AD (5)
Yes
As per 44AA (2) (iv) & 44AD (5)
2 Lakhs
2 Lakhs
No
As per 44AB (e) & 44AD (5)
No
As per 44AA (2) (iv) & 44AD (5)
4 Lakhs
Yes
As per 44AB (e) & 44AD (5)
Yes
As per 44AA (2) (iv) & 44AD (5)
44AE
Business
[ upto 10 Goods
Carriages at any
time in a F.Y. ]
Heavy Goods
Vehicle
Rs. 1,000
per ton
per month
per vehicle
500
per ton
per month
per vehicle
2 Lakhs
Yes
As per 44AB (c) & 44AE (7)
Yes
As per 44AA (2) (iii) & 44AE (7)
4 Lakhs
Yes
As per 44AB (c) & 44AE (7)
Yes
As per 44AA (2) (iii) & 44AE (7)
1,500
per ton
per month
per vehicle
2 Lakhs
No
As per 44AB (c) & 44AE
No
As per 44AA (2) (iii) & 44AE
4 Lakhs
No
As per 44AB (c) & 44AE
No
As per 44AA (2) (iii) & 44AE
Other Vehicle
Rs. 7,500
per month
per vehicle
5,000
per month
per vehicle
2 Lakhs
Yes
As per 44AB (c) & 44AE (7)
Yes
As per 44AA (2) (iii) & 44AE (7)
4 Lakhs
Yes
As per 44AB (c) & 44AE (7)
Yes
As per 44AA (2) (iii) & 44AE (7)
10,000
per month
per vehicle
2 Lakhs
No
As per 44AB (c) & 44AE
No
As per 44AA (2) (iii) & 44AE
4 Lakhs
No
As per 44AB (c) & 44AE
No
As per 44AA (2) (iii) & 44AE

RECAPITULATION

BASIC EXEMPTION LIMIT AND AUDIT

1. Assessees doing business (Other than 44AE, 44BB & 44BBB) having Turnover more than Rs. 1 Cr. never opted 44AD earlier [ (or) opted 44AD earlier and completed Block Period – A (or) Opted Out from 44AD and Completed Block Period – B ], shall do Audit, even if his Total Income is below Basic Exemption Limit.

2. Assessees doing business of Plying, Hiring or Leasing good carriages, not opting 44AE, shall go for audit even his Total Income is below Basic Exemption Limit (Assessees having upto 10 Goods Carriage in a F.Y. at any point of time).

3. Specified Professionals, if profits declared by them are below 50% of Gross Receipts and if their Total Income is below basic exemption limit, then they need not do audit, but they should maintain books as per IT Rule 6F.

4. Opted out persons from 44AD has to undergo Audit and maintain books only if their Total Income is above Basic Exemption Limit.

BLOCK PERIOD AND AUDIT

1. Persons who are doing business of Plying, Hiring or Leasing Goods Carriages, do not have Block Period – A (or) Block Period – B. They can show Profit below the Deemed Profit specified in 44AE and do Audit in one year and they can show the Profit as specified in 44AE in another year and avoid Audit in that year.

2. Specified Professionals, can declare their profit below 50 % of their gross receipts and go for Audit in one year and Declare profit at 50% of their gross receipts in another year and avoid Audit. Specified Professionals do not have Block Period – A (or) Block Period – B.

3. Persons opting 44AD in a F.Y., shall remain there for Block Period – A, but if they have opted out from 44AD in any of the F.Y. during Block Period – A, then they have to undergo Audit & maintain books for 6 F.Ys (Block Period – B) if their Total Income is above Basic Exemption Limit.

PROFIT DECLARED BELOW DEEMED PROFIT LIMIT AND AUDIT

1. Persons doing business of plying, hiring or leasing goods carriages (with upto 10 Goods carriages in a F.Y. at any time) have to do Audit, if they declare their profits below the deemed profit limits specified u/s 44AE.

2. Persons doing Professions specified u/s 44AA (1) (with Gross Receipts upto Rs. 50 Lakhs) has to do Audit, if they declare their profit below 50% of their Gross Receipts (provided their Total Income exceeds Basic Exemption Limit)

GROSS RECEIPTS / TURNOVER LIMIT AND AUDIT

1. Persons not Opting 44AD = Above Rs. 1 Cr.

2. Persons not Opting 44AD and having 5% Criteria = Above 10 Crore

3. Specified and Unspecified Professionals = Above Rs. 50 Lakhs

4. Business of plying, hiring or leasing goods carriages, if they own more than 10 Vehicles = Rs. 1Cr. / Rs. 10 Cr. [ Refer 1 & 2 above ] [assumed to be covered u/s 44AB (a) ]

Note:

ICAI’s guidance note 5.21 on Tax Audit u/s 44AB.

If the assessee having multiple business : It may, however, be noted that in cases where the assessee carries on more than one business activity, the results of all business activities should be clubbed together. In other words, the aggregate sales, turnover and/or gross receipts of all businesses carried on by an assessee would be taken into consideration in determining whether the prescribed limit as laid down in section 44AB has been exceeded or not.

where the business is covered by section 44AD or 44AE and the assessee opts to be assessed under the respective sections on presumptive basis, the turnover thereof shall be excluded.

5% CRETERIA AND AUDIT

1. 5% Criteria is applicable only for Business and not applicable for any Profession.

2. If persons in business satisfy 5% criteria their Audit limit is Rs. 10 Cr, if do not satisfy, then their limit is Rs. 1 Cr.

3. 5% criteria is not applicable to persons who opt presumptive taxation u/s 44AD (or) 44ADA (or) 44AE (also 44BB & 44BBB).

4. Also not applicable for Assessees who Opted Out from 44AD through their own will (Our View)

5. If a person declares as per 44AD in a F.Y., but if he becomes ineligible to Opt 44AD in any of the F.Y. during Block Period – A because of the operation of law (say he could not declare as per 44AD in any of the F.Y. during Block Period – A because of T.O. becoming more than Rs. 2 Cr.), then he cannot be considered as Opted Out from 44AD and result of which he can claim the benefits of 5% Criteria.

BOOKS AND AUDIT

1. Persons doing business have to maintain books, if the limits of Income/Turnover specified in Sec. 44AA (2) (i) & (ii) exceeds.

2. There is no obligation to maintain books, for persons opting 44AD, 44ADA & 44AE (also 44BB & 44BBB) and those who are not opting 44AD, 44ADA & 44AE (also 44BB & 44BBB) has to follow Sec. 44AA (2) regarding maintenance of books.

3. Persons who opted out from 44AD has to maintain booksas per Sec. 44AA (2) (iv), irrespective of the Income / Turnover limits specified in Sec. 44AA (2) (i) & (ii), if their Total Income exceeds Basic Exemption Limit.

SECTION 44AD, 44ADA & 44AE AND SET OFF (B/F BUSINESS LOSS & DEPRECIATION LOSS)

Since Sec. 44AD, 44ADA & 44AE overrides Section 32, unabsorbed depreciation [ (Sec. 32 (2) if any unclaimed in Previous F.Ys in which Presumptive Taxation is not opted ] cannot be set off against profits declared under Sec. 44AD, 44ADA & 44AE, because as per these sections it is deemed that unabsorbed depreciation is already allowed.

However, carry forward & set off of business loss is governed by Section 72. Accordingly brought forward business loss can be set off against profits declared under Section 44AD.

ASSESSEES GOVERNED BY SEC. 44AB AUDIT CLAUSES

1. Assessees having business, never opted 44AD and not having 5% Criteria = 44AB (a)

2. Assessees having business, never opted 44AD and having 5% Criteria = 44AB (a)

3. Assessees who successfully completed Block period – A and not opting 44AD again = 44AB (a)

4. Assessees who opted out and successfully completed block period – B and not opting 44AD again = 44AB (a)

5. Assessees specified in Sec.44AE and having more than 10 Vehicles = 44AB (a)

6. Assessees having profession (Specified / Unspecified) and gross receipts exceeding Rs. 50 Lakhs = 44AB (b)

7. Assessees having business specified u/s 44AE ( and not declaring profit as specified u/s 44AE) = 44AB (c)

8. Specified Professionals having gross receipts upto Rs. 50 Lakhs and not declaring profit as specified u/s 44ADA = 44AB (d)

9. Assessees who are opted out 44AD in Block Period – A = 44AB (e)

MAINTENANCE OF BOOKS OF ACCOUNTS

Professionals carrying on Specified Professions (Individuals) :

Professionals carrying on the above mentioned specified professions are required to maintain books of accounts in accordance with Rule 6F of the Income tax Rules. Such professionals will be required to maintain accounting records if gross receipts exceeds Rs. 1.5 Lakhs in any of the 3 immediately preceding years. In case he has started off with his profession in a particular year and his receipts exceed Rs 1.5 Lakhs for that year, he is again supposed to maintain accounting records for that year.

These are the accounting records that have been prescribed under Rule 6F for Specified Professionals :

i) Cash Book – A book to record all the cash receipts and payments which helps you know your cash balance at the end of the day or end of the month.

ii) Journal – You have to maintain a log of all your day to day transactions . In accounting terms, you have to record all the debits and credits, when you are following the mercantile system of accounting.

iii) Ledger – A book where all your entries flow from journal, has details of all the accounts and simplifies the preparation of your financial statements at the end of a year

iv) You have to maintain Carbon Copies of all the bills or receipts if the value is more than Rs. 25

v) Lastly, you have to maintain the original bills or receipts for expenses, if the value is more than Rs. 50.

If you are into the medical professions, you must maintain these additional records too :

vi) Daily case register in Form No. 3C with details of patients, fees received, services provided and date of receipt

vii) Stock details of the medicines and other consumable items on the First and Last Day of the P.Y.

Professionals carrying on Unspecified Professions (Individuals) :

If you are carrying on any profession other than those discussed above, you would need to maintain such books of accounts so as to enable an assessing officer to calculate your taxable income as per Income tax laws. However, this mandate would arise only when income, if you are an individual, exceeds Rs. 2.5 Lakhs or gross receipts are more than Rs. 25 Lakhs in any one of the immediately 3 preceding years and in case of First Year of Profession, then Rs. 25 Lakhs in that year.

ELIGIBLE PERSON

44AD : Resident Individuals, Resident HUFs, Resident Partnership Firms (not LLP).

44ADA : Resident Individuals, Resident Firms (not LLP).

44AE : Resident or Non Resident Individual, HUF, AOP, BOI, Firm, Company, Co-op Society or any other person.

PARTNERSHIP FIRM AND AUDIT

A) FIRM HAVING BUSINESS (OTHER THAN BUSINESS SPECIFIED IN SEC. 44AE) :

1. If Turnover is below 1 Crore – No need of Audit

2. If Turnover is above 1 Crore – Need Audit

2. If Opted 44AD – No need of Audit

3. If Opted out – Need Audit

Note:

If Firm opting 44AD, Firm cannot claim Interest on Capital and Partner Salary from Deemed Profit.

B) FIRM HAVING SPECIFIED PROFESSION

1. If Gross Receipts above 50 Lakhs = Need Audit

2. If Gross Receipts below 50 Lakhs and not declaring 50% profit = Need Audit

Note:

If Firm Opting Sec. 44ADA, Firm cannot claim Interest on Capital and Partner Salary from Deemed Profit.

C) FIRM HAVING UNSPECIFIED PROFESSION

1. If Gross Receipts above 50 Lakhs = Need Audit

2. If Gross Receipts below 50 Lakhs = No need of Audit

Note:

Firm carrying Unspecified Profession cannot Opt 44ADA, & so it can claim Interest on Capital and Partner Salary.

D) FIRM HAVING BUSINESS OF PLYING, HIRING OR LEASING GOODS CARRIAGES

1. If Firm having upto 10 vehicles and opting Sec. 44AE = No Audit

2. If Firm having upto 10 vehicles and not opting Sec. 44AE = Audit

3. If Firm having more than 10 Vehicles and its T.O is more than Rs. 1 Cr. / Rs. 10 Cr. (considering 5% Criteria) = Audit

4. If Firm having more than 10 Vehicles & its T.O is upto Rs. 1 Cr. / Rs. 10 Cr. (considering 5% Criteria) = No Audit

Note:

If Firm opting 44AE, Firm can claim Interest on Capital and Partner Salary from Deemed Profit.

RELATED INFORMATION

1. Persons who opted 44AD & completed Block Period – A [ by declaring profits as perSec. 44AD (1) for Block Period – A ] will not be further attracted by clutches of Sec. 44AD (4) & (5), & they will return back to Normal Assessee (Type-1) – (I).

2. Persons who opted out of 44AD & completed Block Period – B, will return back to Normal Assessee (Type-1) – (I) [i.e. they will not be further attracted by the clutches of Sec. 44AD (4) & (5) ].

3. If the Opted Out Person’s (being Individual / HUF) Total Income is below Basic Exemption Limit in any of the F.Y. in the Block Period – B, then he need not do audit for that F.Y. alone.

In our view, if an Opted Out Person (being Firm) whose Basic Exemption Limit is “0”, need not do audit, if it has any loss (i.e. when Total Income of Firm is Negative) in any of the F.Y. during Block Period – B. In that case, it has to file ITR [ as per Sec. 139 (1) third proviso ] in that F.Y., to carry forward that loss (the return shall be furnished within the due date of that F.Y.).

But if a firm has profit (i.e. when Total Income of Firm is Positive) in any of the F.Y. during Block Period – B, then it has to do audit.

4. Persons engaged in business of Plying, Hiring or Leasing goods carriages are not eligible to opt Sec. 44AE, if the number of vehicles in their business is more than 10 at any point of time in a F.Y.

5. Sec.28 to Sec. 43C is not applicable to the persons opting Sec. 44AD, Sec. 44ADA & Sec. 44AE.

6. For persons opting 44AD, they shall deduct TDS for their expenses if their preceding previous year’s T.O is more than Rs. 1 Cr.

7. If a person who is supposed to maintain but not maintaining books of accounts and other documents as per Sec.44AA and Rule 6F, then he shall be liable for a penalty of Rs.25,000 (Sec. 271A).

8. For persons opting 44AD, If the payments for sale proceeds are received in Bank mode till due date of filing of return, they can declare 6% instead of 8% to the extent of total bank mode receipts.

9. If the Firms opting 44AD, Interest on Capital and Partners remuneration shall not be deducted from the deemed Profit Declared.

10. If the Firms opting 44AE, Interest on Capital and Partners Remuneration can be deducted from the Deemed Profit declared.

11. If the Firms opting 44ADA, Interest on Capital and Partners Remuneration cannot be deducted from the Deemed Profit declared.

12. Depreciation & Brought Forward Unabsorbed Depreciation is deemed allowed for those opting 44AD, 44ADA & 44AE.

13. Assessees covered under Category “Normal Assessees (Type – 1) – (I)” :

a) Who never opted 44AD

b) Opted 44AD in a F.Y. and Completed Block Period – A

c) Opted 44AD in a F.Y. & Opted out of 44AD during Block Period – A & Completed mandatory audit under

Block Period – B

d) Whose T.O. is less than Rs. 1 Cr. (No need Audit)

e) Whose T.O. is more than Rs. 1 Cr. (not opting 44AD and also not satisfying 5% Criteria)

f) Whose T.O. is more than Rs. 10 Cr. (Satisfying 5% Criteria)

14. Assessees covered under Category “Normal Assessees (Type – 1) – (II)” :

a) Specified Professionals whose Gross Receipts are more than Rs. 50 Lakhs

b) Unspecified Professionals whose Gross Receipts are more than Rs. 50 Lakhs

15. Assessees who are covered under Category “Special Assessees (Type – 2)” :

a) Assessees who Opted out of 44AD [ 44AB (e) ]

b) who are supposed to opt 44ADA but are not opting 44ADA [ 44AB (c) ]

c) who are supposed to opt 44AE but are not opting 44AE [ 44AB (d) ]

16. Audit for Normal Assessees : u/s 44AB (a) & (b)

17. Audit for Special Assessees : u/s 44AB (c), 44AB (d) & 44AB (e)

18. In case of Business Loss in any of the F.Y. during Block Period – B, then assessee has to do audit if his “Total Income” is above Basic Exemption Limit

19. In case of Business Loss in any of the F.Y. during Block Period – B, then assessee need not do audit if his “Total Income” is below Basic Exemption Limit

20. Persons opting presumptive taxation is given relaxation regarding maintenance of books of accounts, but Explanation (f) of Sec. 139 (9) mandates to provide Turnover, Gross Receipt, Gross Profit, expenses and net profit of the business or profession and the basis on which such amounts have been computed, and also disclosing the amounts of total sundry debtors, sundry creditors, stock in trade and cash balance as at the end of the previous year along with return.

21. Section 44AD shall not apply to

(i) Specified Profession

(ii) Commission or Brokerage Business

(iii) Agency Business

(iv) Those who claimed deduction under any of the sections 10A, 10AA, 10BA or deduction under any provision of Chapter VI-A under the heading “C – deductions in respect of certain incomes” in the relevant A.Y.

22. For persons opting presumptive taxation u/s 44AD, 44ADA or 44AE, provisions of sec. 28 to sec. 43C are not applicable because these sections overrides the provisions of sec. 28 to sec. 43C.

23. For persons opting presumptive taxation, No restrictions for payments for revenue expenditures above Rs.10,000 [ (Sec. 40A (3) ] in cash and No disallowances for non deduction of TDS [ (Sec. 40 (a) (ia) ] as Sec. 28 to 43C not applicable.

24. But, for a Business Assessee (opting 44AD), if his preceding P.Y. T.O is more than Rs. 1 Cr. and if TDS was not deducted by him, then he will be considered as assessee in default u/s 201(1) and he has to face other consequences related to non-remittance of TDS and non Filing of TDS Returns.

25. Clause (a) of Section 44AB talks about a person carrying on business, whereas clause (b) talks about a person carrying on a profession. The proviso to Section 44AB providing the enhanced turnover limit of Rs. 10 Cr. for the tax audit is placed below clause (a) to section 44AB. Thus, the persons engaged in the profession are not entitled to claim an enhanced turnover limit of Rs. 10 Cr. for the tax audit.

26. Books of Accounts and other documents have to be kept & maintained for a period of 6 years from the end of the relevant assessment year. If there is a reopen u/s 147 , books and documents to be kept and maintained till the completion of the assessment [ Rule 6F (5) ]

27. 44AE – “Ownership” of Vehicle is considered (held by the assessee) and “put to use” is not considered.

28. Advance tax, for taxpayers having opted for the presumptive scheme u/s 44AD & 44ADA, is to be paid by 15th March of the relevant financial year if you expect that your income tax liability will exceed Rs.10,000 in the financial year. But assessee who opts for presumptive taxation u/s 44AE has to pay all the 4 Quarter of Advance Tax.

29. Authorized representative means a person who represents another person for a fee before a tribunal or any authority constituted under any law. It does not include an employee of the person so represented or a person who is carrying on the profession of accountancy

30. 5% Criteria is not applicable for an Opted Out Assessee (even if his T.O. is more than Rs. 2 Cr.) in any of the F.Y. during Block Period – B.

Reason :

Opted outs are required to do mandatory audit, even if their T.O. is more than Rs. 2 Cr in Block Period – B [ and also if he satisfies 5% Criteria in any of the F.Y. during Block Period – B ]

Because, in Block Period – B he is not under the purview of 44AB (a) [ only this clause specifies about T.O. and 5 % Criteria ] to do audit.

But during Block Period – B, he is under the purview of Sec. 44AB (e) [ this clause does not specify any T.O. or 5% Criteria ] to do audit.

Because 44AB (e) asks opted out assessees to do mandatory audit without considering any T.O. or 5% Limit.

31. But, those who did mandatory audit u/s 44AB (e) and completed Block Period – B, is eligible to avail 5% Criteria.

32. After declaring as per 44AD in a F.Y, assessee has no Business in a F.Y. during Block Period – A, whether in this scenario he is considered as Opted Out (since he does not declare as per 44AD in the year in which he does not have any Business Income) or not ?

Our View is that, he is not to be considered as Opted Out, as he does not have any Business in a F.Y. during Block Period – A, so it is only the situation that forced him not to declare business income in accordance with 44AD because of no business in a F.Y. during Block Period – B.

Words contained in Sec. 44AD (1) – “in the case of an eligible assessee engaged in an eligible business,”

Words contained in Sec. 44AD (4) – “Where an eligible assessee declares”

So, when we compare these 2 sub – sections of Sec. 44AD, another view could also be raised that, even if the assessee does not have any business in any F.Y. during Block Period – A, then he wouldn’t have any Business Income for that F.Y., so obviously he would not have opted for 44AD in that F.Y., which make us interpret that, this scenario can be considered as opted out.

Because 44AD (4) contains words, “eligible assessee” only and does not contain words, “eligible assessee engaged in eligible business” as in Sec. 44AD (1), thereby this sub – section does not consider about, whether assessee is having any business / business income in the F.Y. or not.

If he does not declare as per 44AD in any F.Y. during Block Period – A, then he is considered as opted out as per 44AD (4)

Disclaimer :

This article is only for educative purposes and to gain knowledge about a subject through interpretation from author’s point of view [ or understanding of the subject ] and this article is not to influence anyone in their decisions related either to their profession or their practice or their education. Matters contained in this article are only author’s view or opinion regarding the subject and not to force anyone to follow as per this article while anyone refer this article.

Author Bio

Qualification: LL.B / Advocate
Company: N/A
Location: Erode, Tamil Nadu, India
Member Since: 14 Jan 2022 | Total Posts: 2
Myself Narayanan Murali, Born and Brought up in a village in Karur District, Tamil Nadu. Now practicing Taxation in Erode District, Tamil Nadu. View Full Profile

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7 Comments

  1. NAGARAJAN ADVOCATE KOMARAPALAYAM says:

    This Article contained 35 pages with detailed Analysis of under section 44AB (a), 44AB(b), 44AB(c), 44AB(d), 44AB(e) with keeping Books of accounts u/s 44AA (1), 44AA(2) (i) & (ii) Narrated with examples which is easily to understand any level of peoples. And Section 44AD, 44ADA, 44AE (44BB, 44BBB) explained clear manner also excellent with fine examples. This Articles Highlight is comparatives information with different scenario in difference situation so we can kept in mind strongly. This article will plan how to deal before preparing of ITR for current Year and calculating of Blocked period. The Complete solution for who can do audit or not.

  2. R.Srinivaasan. ITP says:

    The author has analysed the section exhaustively and explained the contents of the section in very easily understandable manner with necessary illustrations. I really thank the author for publishing the article in Tax Guru which is very useful for readers like me.

  3. R.Srinivaasan. ITP says:

    The author has analysed the section 44AB in detail and explained the applicability of tax audit with necessary illustrations. He has taken immense efforts in making it understandable very easy to the readers by explaining in more exhaustive manner. I feel that there is nothing beyond this to be covered in this section. I welcome his efforts for posting this article in tax guru which is very useful for reader like me. Thank You.

  4. Sundar Advocate says:

    The author explained all sections vide Chart, Tables, and examples is very useful. The comparative analysis is also good. Thanks to author and Taxguru.

  5. SANKAR S.K says:

    Excellant analysis, knowing, below 1 Crore and above 1 crore turnover, which place tax audit 44 ab. applicable, simply and detailed explanation with exemple. keep it sir.

  6. A.Babu says:

    Super sir. First congrats to Murali sir. Here you have given clear and broad explanations for 44AB , 44AA, 44AD, 44ADA & 44AE. It is very helpful to Tax practitioners to get clear knowledge about said Act. I proud of you sir. Thank you.
    A.Babu.Auditor. Bhavani. Joint secretary. Erode Namakkal Tax practitioners Association.

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