Whether audit of accounts under clause (d) & (e) of section 44AB read with section 44AD & 44ADA of the IT Act is compulsory for an assessee?

It is pertinent to mention that out of the total 5 (Five) conditions of compulsory audit of accounts of certain persons carrying on business or profession, under section 44AB of Income Tax Act, 1961 (‘the IT Act’),  2 (two) conditions which mentioned in clause (d) & (e) of section 44AB of the IT Act, make the mandatory for an assessee to maintain the books of accounts and get them audited.

Tax audit

The said clause (d) of Section 44AB of the IT Act reads as under-

“carrying on the profession shall, if the profits or gains from the profession are deemed to be the profits and gains of such person under section 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 previous year;

Simultaneously, also read Sub Section (4) of section 44ADA of the IT Act as follows:

“Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) 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 (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

The said clause (e) of Section 44AB of the IT Act reads as under-

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

It is important to note that the aforesaid clause (e) applies only in case where the provisions of sub-section (4) of Section 44AD of the IT Act are applicable. Therefore, it is necessary to know first about the provisions of sub-section (4) of Section 44AD of the IT Act. It is notable that a new condition has been added to Presumptive Income by Finance Act, 2016, w.e.f. 01.04.2017 by substituting sub-section (4) of Section 44AD of the IT Act. Sub Section (4) of section 44AD of the IT Act was totally substituted with a new provision and accordingly where an eligible assessee declaring profit in accordance with Section 44AD of the IT Act and for next 5 assessment years succeeding such previous years declares profits not in accordance to Sub section (1) to Section 44AD of the IT Act shall not be eligible to avail the benefit of this section for another five assessment years subsequent to assessment year in which assessee declares not in accordance to Section 44AD of the IT Act.

The sub- section (4) of Section 44AD of the IT Act reads as under-

“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 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).”

It is pertinent to note that to synchronize provisions with the above amendment, sub-section (5) of Section 44AD of the IT Act also got amended. It now implies that when an eligible assessee declares profits & gains not in accordance with Section 44AD [i.e., provisions of Sub Section (4) of Section 44AD applies to such assessee] they are mandatorily required to maintain books of accounts as required under Sub Section (2) of Section 44AA of the IT Act and get them audited as required under Section 44AB of IT Act, if their total income exceeds the maximum amount not chargeable to tax.

The said sub- section (5) Section 44AD of the IT Act reads as under-

“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.”

More clearly, when assessee opts not to declare profit for any of the previous year in accordance with Section 44AD of the IT Act [but had declared income in accordance with Section 44AD in previous year] then for succeeding five assessment years relevant to such previous year, they shall maintain books of accounts and get them audit if their total income exceeds the maximum amount not chargeable to tax as per the requirements of Section 44AA and 44AB of the IT Act.

However, please note that it does not mean that assessee has to maintain books of accounts and get them audited without considering the provisions of Section 44AA and 44AB of the IT Act. Assessee has to maintain the books of accounts and get them audited when the assessee falls under the conditions as required under both sections i.e. 44AA and 44AB of the IT Act. Please note that corresponding changes by Finance Act, 2016, w.e.f. 01.04.2017 (see further) were also done in clause (iv) of sub section (2) of Section 44AA and clause (e) of section 44AB of the IT Act which makes the mandatory to maintain the books of accounts and get them audited.

Crux of aforesaid provisions: –

1. If assessee are going to opt the presumptive scheme, the assessee must file ITR under presumptive scheme for at least 5 years in continuation. [sub-section (4) of Section 44AD of the IT Act].

2. Moreover, if assessee decide to show and file profits as per their regular business (not presumptive basis) before the end of these 5 years, the assessee will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years. [sub-section (4) of Section 44AD of the IT Act].

3. Further, in case of

a) provision of sub-section (4) is applicable i.e. assessee chooses not to compute income under sub section (1) of section 44AD of IT Act, and

b) their income exceeds the maximum amount not chargeable to tax in any previous year

shall maintain books of accounts and get them audited, as required as required under sub-section (2) of section 44AA and as required under section 44AB of the IT Act. [sub-section (5) of Section 44AD of the IT Act].

Remark: It is submitted that the government is discouraging taxpayers from misusing the scheme and constantly changing their option often. Therefore, if you opt for presumptive scheme continue for 5 years and if you want to opt out, you will be barred from resuming presumptive for a period of 5 years. However, the time limit of 5 years condition applies only to businesses.

Whether audit of accounts under clause (d) & (e) of section 44AB read with section 44AD & 44ADA of the IT Act is compulsory for an assessee?

Now, it is most important to clarify herein that whether the assess is required to get audit of account under clause (d) & clause (e) of section 44AB read with section 44AD & 44ADA of the IT Act in each and every case or circumstances. The answer is NO. There is one situation wherein the assessee is not required to get audit of account under clause (d) & clause (e) of section 44AB read with section 44AD & 44ADA of the IT Act.

In Present, if an assessee claims that his profits and gains from ‘eligible business’ are less than 8% or 6% or 50% of the total turnover or gross receipts [as the case may be as per Section 44AD and 44ADA] and whose total income exceeds the maximum amount not chargeable to tax, the assessee shall maintain the books of account as prescribed under Section 44AA of the IT Act [as per u/s 44AA(iv) or Section 44ADA(4) as the case may be] and get them audited under section 44AB of the IT Act [as per u/s Section 44AB(d) or Section 44AB(e) as the case may be].

Please note that wording use as ‘and whose total income exceeds the maximum amount which is not chargeable to income-tax’ and since the word start with ‘and’ therefore both the conditions need to be fulfilled by assessee to be required to get his accounts audited under Section 44AB of the IT Act [as per u/s Section 44AB(d) or Section 44AB(e) as the case may be] and to maintain the books of account under 44AA of the IT Act [as per u/s 44AA(iv) or Section 44ADA(4) as the case may be].

Now, it is stated that the second condition, in order to mandate tax audit under section 44AB of the IT Act [as per u/s Section 44AB(d) or Section 44AB(e) as the case may be] and to keep the books of account under 44AA of the IT Act [as per u/s 44AA(iv) or Section 44ADA(4) as the case may be], is the total income of the assessee should exceed the maximum amount not chargeable to tax under the IT Act.

Therefore, in case the total income of the assessee is not exceeded the maximum amount not chargeable to tax under the IT Act or there is actual loss, there is no need to get audit under section 44AB of the IT Act [as per u/s Section 44AB(d) or Section 44AB(e) as the case may be] and to keep the books of account under 44AA of the IT Act [as per u/s 44AA(iv) or Section 44ADA(4) as the case may be],

Example:  Now let us take a case of a partnership firm which is engaged in eligible business as per section 44AD of the IT Act and whose turnover is say Rs. 90 lacs [less than Rs. 2 crores] in the preceding Financial Year 2019-20 and which shows net loss from business of Rs. 50,000/-. In this case, this firm is not required to get the accounts audited under section 44AB read with section 44AD of the IT Act, because if we read section 44AD carefully, the audit is required where profits are less than 8% or 6% of the gross receipts or turnover and the income exceeds maximum amount not chargeable to tax.

Since, the firm is taxed at an income starting from Rs. One, therefore the maximum amount not chargeable to tax is nil. In case of loss, since there is no income, therefore it does not exceed the maximum amount not chargeable to tax and so the second condition mandating tax audit under section 44AB read with section 44AD of the IT Act is not satisfied and therefore the assessee is not required to get the accounts audited under section 44AB of IT Act.

___________

Amendment in Section 44AA and 44AB of the IT Act by Finance Act, 2016, w.e.f. 01.04.2017.

Further, corresponding changes [i.e. due to change in Section 44AD of the IT Act] by Finance Act, 2016, w.e.f. 01.04.2017 were also done in clause (iv) of sub section (2) of Section 44AA and clause (e) of section 44AB of the IT Act.

The said clause (iv) of sub- section (2) of Section 44AA of the IT Act reads as under-

“where the provisions of sub-section (4) of section 44AD are applicable in his case, and his income exceeds the maximum amount which is not chargeable to income tax in any previous year.”

It means one more condition (as mentioned above) was added to keep and maintain the books of accounts by the assessee by the aforesaid amendment.

The said clause (e) of Section 44AB of the IT Act reads as under-

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

It means one more condition (as mentioned above) was added to get audited of accounts by the assessee by the aforesaid amendment.

Thus, in light of above amendments, an ‘eligible assessee’ carrying on ‘eligible business’, subject to other requirements of Section 44AD of the IT Act has following options while computing income chargeable to tax-

1. Where the turnover exceeds one crore rupees but not more than two crore rupees and assessee opts not to compute income in accordance with sub section (1) of section 44AD shall get their accounts audited under clause (a) of Section 44AB of the IT Act.

2. Where the turnover is below one crore rupees, assessee chooses not to compute income under sub section (1) of section 44AD, shall get their accounts audited by virtue of clause of (e) of Section 44AB of the IT Act.

It means “Audit to Karana Hi Padega whether in clause (a) or clause (e)” except his income does exceeds the maximum amount which is not chargeable to income tax in any previous year.

3. Where his income from business exceed Rs. 1,20,000 or turnover exceeds Rs. 10,00,000/- and assessee opts not to compute income in accordance with sub section (1) of section 44AD shall keep and maintain books of account virtue of clause of (i) of sub-section (2) of Section 44AA of the IT Act.

4. Where the income or turnover is below as mentioned in point 3, assessee chooses not to compute income under sub section (1) of section 44AD, shall keep and maintain books of account virtue of clause of (iv) of sub-section (2) of Section 44AA of the IT Act.

It means “Audit to Karana Hi Padega whether in clause (i) or clause (iv)” except his income does exceeds the maximum amount which is not chargeable to income tax in any previous year.

Remarks: Where assessee started a new business then they have to choose their income computation options very carefully, especially looking into their future plans. For instance, if in first year they choose not to declare income as per Section 44AD of the IT Act then they should maintain books of accounts but there will no mandate to get such accounts audited if working within the four corners of section 44AB of the IT Act. [Prior to A.Y. 2017-18 such option was not available and it was mandatory to maintain books of accounts and get them audited if income was declared below 8% of the turnover or receipts]

________

Special Provision for computing profits and gains of business on presumptive basis.

[Section 44AD was inserted by the Finance Act, 1994, w.e.f. 01-04-1994 and amended by Finance Act, 1997, w.r.e.f. 01-04-1994; by the Finance Act, 1997, w.e.f. 01-04-1997, by the Income Tax (Second Amendment) Act, 1998, w.r.e.f. 01-04-1997; by the Finance Act, 1999, w.r.e.f. 01-04-1998 and substituted by Finance (No. 2) Act, 2009, w.e.f. 01-04-2011.]

Section 44AD of the IT Act was introduced to ease the burden of small taxpayers, make them more tax compliant with minimal compliances and expand the tax base.

Now, for claiming the benefit of this section, broadly businesses should fulfil the criteria of an ‘Eligible Business’ and ‘Eligible Assessee’ as provided in the explanation to this section.

“Eligible Business” means-

(i) Any business except the business of playing, hiring or leasing goods carriages referred to in Section 44AE; and

(ii) Whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.

“Eligible Assessee” means-

(i) An individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of Section 2 of the Limited Liability Partnership Act, 2008; and

(ii) Who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C.-Deductions in respect of certain incomes” in the relevant assessment year.

As per Finance Act, 2016, businesses with turnover up to Rs 2 crores can opt for presumptive taxation scheme. Earlier this limit was Rs 1 crore. [The limit of Rs. 1 crore was increased by Finance Act, 2016 w.e.f. 01-04-2017. Earlier, Rs. 1 crore was substituted for Rs. 60 lakh by the Finance Act, 2012 w.e.f. 01-04-2013. Further, Rs. 60 lakh was substituted for Rs. 40 lakh by the Finance Act, 2010 w.e.f. 01-04-2011.]

It is notable that sub section (1) of Section 44AD of the IT Act, overrides Section 28 to 43C which infers that where this section is applicable, afore said provisions relating to dominance of profits and gains from business or profession are deemed to be have been overruled.

Proviso to sub-section (1) of Section 44AD of the IT Act provides that where amount of turnover or gross receipt is received through specified banking channels as mentioned therein, profits @ 6% of such turnover or receipt which is received through the specified banking channels shall be deemed to be the income under the head Profits and Gains from Business or Profession.

Feature of Presumptive Scheme:-

The features of this scheme are as under:

i) Turnover of the business must be less than Rs 2 crores.

ii) Net Income shall be considered as 8% of your turnover (6% in case of digital receipts).

iii) No need to maintain accounting records.

iv) No need to get accounting records audited.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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