When there is annual turnover in previous year exceeds 1 CR you need to be done with Audit as per section 44AB of Income tax Act 1961, Except when you have opted for Section 44AD (When turnover for the previous year up to 2CR)

From above lines the provisions looks very clear but the confusion part is given below:

Suppose my turnover in previous year is less than 1CR or say between 1CR to 2CR, Is it mandatory to show minimum profit of 8% and whether it’s mandatory to keep books of accounts elsewhere you need to be done with Tax Audit as per Section 44AB?

First let’s see given below statutory provisions of Section 44AA, 44AB & Section 44 AD of Income Tax Act 1961 what they actually said.

Presumptive Taxation-Scheme section 44AD

Section 44AD

To reduce the tax burden and to provide relief from tedious work to small tax Assessees, the government of India has incorporated a scheme of presumptive taxation. Businesses adopting the presumptive taxation scheme are not required to maintain regular books of account. They can declare the income at a prescribed rate.

Person adopting presumptive taxation schemes are exempt from getting their books of account audited.

1. Eligibility Criteria

Below are types of Assesses who can adopt the provision of presumption taxation scheme as per section 44AD (6ai)

  • Resident individual tax payer
  • Hindu Undivided Families
  • Resident Partnership Firm (Except LLP OR LIMITED LIABILITY PARTNERSHIP FIRM)

2. Condition to be satisfied

  • The firm or Individual’s gross receipt or annual turnover in the previous year should not have exceeded Rs 2 Cr ( From FY 2016-17 ,Budget 2016) as per section 44AD(6b)
  • Any firm or person who has not claimed deduction under the section 10A,10AA,10B,10BA During the Assessment year can adopt for this section . Same applies for individual or firms who has not claimed deduction under Section 80HH to 80 RRB.
  • Individual or firms engaged in the business of plying and hiring goods carriages cannot adopt these provisions as per section 44AD(6b)
  • A Person who earning income like Commission & Brokerage cannot adopt as per section 44AD (6)

3. Features of Presumtive Taxation Under 4AD Scheme

As per provision under section 44AD ,Presumptive income is following % of Turnover .

  • 6%- In case of Digital Transaction ( From FY 17-18)
  • 8%- Non Digital Transaction

It is considered as Net Income hence Assessee is not allowed to claim deduction under section 30 to 38 of Income Tax Act 1961.As per Section 44AD (2)

Example : Gross Receipt 56 Lakhs . So income for the previous year minimum @8% of 56 Lakhs -4.48 Lakh ( Assuming Assessee covered under non digital Transaction.)

So here 4.48 Lakh is net income .No other deduction is allowed for the Assessee

4. Provisions for Eligible Partnership Firm

  • Eligible partnership firm cannot claim deduction of Interest, Salary & Remuneration paid to partners as per section 40b.
  • Firm is not eligible any deduction under section 40, 40A, 43B after computation of income at applicable rate.

5. Provisions relating to maintenance of books of accounts:

  • The intent of the scheme is to relieve the small taxpayers from the tiresome work of maintaining books of accounts.
  • Assessee who adopts the provision of said presumptive taxation scheme not required to maintain any books of accounts

6. Analysis & Key Takeaways

  • Its mandatory to Minimum profit @8% or 6% as the case may be.
  • In the case if Assessee showing lower than that of presumptive income taxation scheme , then there is no relief on maintaining of books of accounts as per scheme. He required to maintain books of accounts as per section 44AA and to get books Audited as per provision of section 44AB AS per Section 44AD (5)
  • Though deduction on account of depreciation & unabsorbed depreciation are not available, it is necessary to calculate the depreciation for purpose of written down value of an Asset used as per Section 44AD (3).
  • Assessee can anytime adopt for Presumptive taxation scheme & he can also withdrawn himself from that scheme anytime but there is Restriction to Re Entry for next Five Assessment years if Assessee is not completed at least Five continues year in the presumptive taxation scheme before he withdrawn himself from the scheme as per section 44AD (4)
  • If Assessee is already competed 5 Continuous year under said scheme. He left scheme for the particular year or years and again wishes to Re Enter to into scheme, then there is no bar to such Re Entry.

SECTION 44AA & 44AB IN

CONCERN WITH SECTION 44AD

44AAMaintenance of accounts by certain person carrying on profession or business

  •  where the provisions of sub-section (4) of Section 44AD are applicable in case of Assessee and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year, keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act as per Section 44AA(2)

44AB- Audit of accounts of certain persons carrying on business or profession.

  • This section is not apply when :-

Assessee who declares the profit & gains for the previous year in accordance with the provision of sub Section 44AD(1) and his total sales ,turnover or gross receipts ,as the case may be , in business does not exceed 2CR in such previous year .

  • This section is apply when :-

Carrying on the business shall ,if the provisions of sub section (4) of section 44AD are applicable in his case & his income exceeds maximum amount which is not chargeable to income tax in any previous year as per then as per section 44AB(e) Assessee who opted for presumptive taxation need to get his accounts of such previous year Audited as per prescribed method.

Analysis & Key Takeways-:

Its utterly explicit picture from above provisions that if person showing less profit than Profit Prescribe as per Section 44AD and his income exceeds maximum amount which is Not chargeable to income tax for such a previous year then both provisions of Section 44AA (2) & 44AB (e) gets Attracted and which repercussion into:

  • Maintenance of books of Accounts
  • Get his Account audited for such a Previous Year

PART OF CONCLUSION

With respect to above introduction matter :-

Suppose my turnover in previous year is less than 1CR or say between 1CR to 2CR is it mandatory to show minimum profit of 8% and whether it’s mandatory to keep books of accounts elsewhere you need to be done with Tax Audit as per Section 44AB?

  • When your turnover is less than 1CR and Assessee Maintaining regular books of Accounts then you can show Profit less than percentage (%) prescribe in section 44 AD
  • When turnover of Assessee for the previous year in between 1CR TO 2CR you have option to show profit as per provision contains in Section 44AD or another option is to get your books of accounts Audited as mentioned is Section 44AB.
  • In case of non offering of Income as per Section 44AD for 5 Consecutive years ,Eligible Assessee cannot opt for Section 44AD for next 5 Assessments year after the AY of First non Option
  • Following Table Showing Interrelation between section 44AD ,44AA,44AB:-
Income from Eligible Business Total Income Applicability of Section 44AD Applicability of section 44AA Applicability of section 44AB
More than 8% of turnover Exceeds basic Exemption Limit YES NO NO
Less than 8% of Turnover Exceeds basic Exemption Limit NO YES YES
Less than 8% of Turnover Dose not Exceeds basic Exemption Limit NO NO NO
Equal to 8% of Turnover Exceeds basic Exemption Limit YES NO NO

Certain Definitions 

TOTAL TURNOVER OR GROSS RECEIPT -:

  • Total Turnover/Gross Receipts are amount received/receivable from clients in respect of sale of Previous Year.
  • Section 145 relating to Method of Accounting’ applicable to Section 44AD As per this
    section the assessee’s have an option to choose either Mercantile or cash method.
  • Gross Receipts are the amounts received from’ clients for the services provided or to be provided and does not include the value of material supplied by the client.

RECEIPTS WHICH FORMS PART OF TURNOVER -:

  • Sales Tax, Excise Duty, Cess and other levy (NOW GST).
  • Sales of unusable empties and packages.
  • Service charges charged for delivery.

RECEIPTS WHICH DO NOT FORM PART OF THE TURNOVER -:

  • Sale of Property, Plant and Equipments
  • Advance received from customers, deposits’ received or retention money.
  • Any security, retention or other deposit obtained’ from employees.
  • Interest income or other similar receipts.
  • Value of inventory.

 (Above article was written on 5th April, 2019. Views expressed are strictly personal.)

Author Bio

Qualification: CA in Job / Business
Company: TECH MAHINDRA LTD
Location: PUNE, Maharashtra, IN
Member Since: 06 Apr 2019 | Total Posts: 2

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3 Comments

  1. Vaibhav says:

    I think Mr Mahesh you are interpreting the amended 44AD wrongly. What you have written in your article is, was the scenario in the pre amendment period.
    Now with amendment audit requirements and maintenance of books will be required only if the block of 5 years is violated and not if you show your net profit at less than 8/ 6 percent.

    1. Mayu says:

      With respect to above your comment
      Actually I am not misinterpreted the provisions .it was not amended but only Substitution which is as following !!

      { as per 44AD [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).}

      My interpretation –
      So critical reading from above amendment it was interpreted as when we not following provisions of 44AD for five continued years as per requirements [By showing profit 6 or 8% } then following consequences

      { As per 44AD [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.}

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