Issue/Justification
Relevant provisions
The Finance Act, 2016 amended the provisions of section 44AD w.e.f. from 1.4.2017. The relevant extracts of the amended provisions of section 44AD are given hereunder:
“(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).
(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (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 under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB” [emphasis supplied]
As per the plain reading of the section 44AD, it is clear that in case the eligible assessee engaged in an eligible business, is declaring profits equal to 8% (or 6% as the case may be) of the total turnover or gross receipts or any sum higher than 8% (or 6% as the case may be), such sum will be treated as income under the head “Profit and gains of Business or profession”. Such assessee will not be required to maintain books of account or other documents as per the provisions of section 44AA and also will not be required to get the accounts audited under section 44AB of the Income tax Act. This situation remains the same as per the provisions of the erstwhile section 44AD.
Sub-section (4) of the amended section 44AD requires that the assessee who declares profit otherwise than as per the provisions of section 44AD(1) in any of the 5 AYs succeeding the PY in which the assessee has computed profits as per section 44AD, shall not be eligible to claim profit as per the provisions of section 44AD for the next 5 Assessment years.
Further, section 44AD(5) provides that such an assessee (to whom the provisions of sub-section (4) are applicable) and whose total income exceeds the maximum amount which is not chargeable to income tax will be required to maintain books of account or other documents as per the provisions of section 44AA and also will be required to get the accounts audited and furnish a report of such audit under section 44AB of the Income-tax Act, 1961.
Issue/ Concern
In effect, the eligible assessee carrying on an eligible business, who:
a) has declared profits less than 8% (or 6% as the case may be) of the total turnover or gross receipts in any of the five assessment years subsequent to the assessment year relevant to the previous year in which eligible assessee declares profit at 8% or more AND
b) has total income exceeding 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 under section 44AA and get them audited and furnish a report of such audit as required under section 44AB for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).
The amended provisions are applicable from 1.4.2017 ie AY 2017-18 (PY 2016-17). The provisions of the amended section 44AD provide for a situation wherein the assessee shall not be eligible to claim the benefit of the provisions of this section for five assessment years SUBSEQUENT to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1). The treatment in respect of a situation, where the eligible assessee has an eligible business with turnover LESS than 1 crore (say Rs. 50 Lakhs) and has declared profit LESS than 8% (or 6%, as the case may be), for the first time in the previous year 2016-17 or in the previous years 2016-17 and thereafter, has not been covered by the amended provisions.
The erstwhile section 44AD(5) required such assessees to maintain their books of account and other documents as per the provisions of section 44AD and also get the accounts audited and furnish a report of such audit under section 44AB of the Income-tax Act, 1961. Such eligible assessees are in a state of confusion as to whether or not they are required to get their books of account audited and furnish the same as per the provisions of section 44AB of the Act.
Suggestion
It is suggested that appropriate clarification be issued as to, whether or not, the eligible assessee carrying on an eligible business, who:
a) has NOT in any previous year declared profits in accordance with the provisions of section 44AD AND
b) has total income exceeding the maximum amount which is not chargeable to income-tax AND
c) has a turnover less than the limits prescribed under section 44AB AND
d) claims the profits from the eligible business to be less than 8% (or 6% as the case may be) of total turnover or gross receipts shall be required to get the books of accounts audited and furnish a report of such audit as required under section 44AB of the Income-tax Act, 1961.
Also, it may be clarified, whether or not, an assessee who has opted for presumptive provisions under section 44AD in the AY 2016-17, would be hit by the provisions of section 44AD(4) and 44AD(5) if he does not opt for presumptive tax provisions under section 44AD in the AY 2017-18.
