The tax audit provisions are contained in section 44AB clause (a) to Clause (e). Section 44AD provides for beneficial provision of presumptive taxation of declaring net profit of 6%/8% of the turnover of the business and get out of the compulsory tax audit provisions under certain circumstances. This scheme of presumptive taxation, section 44AD(1, is purely an optional scheme and it is the exclusive prerogative of the assessee whether to opt for the beneficial scheme of preventive taxation or to go for the normal scheme of taxation u/s 44AB.If the assessee chooses to not opt for the beneficial presumptive scheme of taxation, there is nothing in the world which can compel the assessee to opt for this beneficial presumptive scheme of taxation. However, once the option is chosen by the assessee then he can’t get out of this scheme for next 5 years. If the assessee violates the provision of section 44AD(1), declaring net profit of less than 6%/8% of the turnover then he will be under compulsory audit u/s 44AD(e).
Section 44AD: Presumptive Taxation : Declaration of 6%/8% Net Profit
44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent. of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession.
(2) …………………………………………..
(3) ……………………………………………….
(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.]
The above provisions of section 44AD provide an alternative scheme of taxation for small businesses (i.e. turnover up to 2 crore only) for ease of doing business and for simplification of the taxation complexes. By using the word “Benefit of the provisions of this section” (Green highlighted portion) the law indicates that it is a beneficial provision for the small assessees running small businesses where turnover does not exceed Rs. 2 Crore. This is an alternative scheme of taxation for small businesses.
Alternative System of Taxation are always optional and the option rests with the assessee whether to exercise that option or not, the scheme of taxation for the small businesses as per section 44AD is also optional and it is for the assessee to take a call whether to exercise that option or not. The government can’t compel and/or impose on any assessee to use the given benefits of the provisions. Only liabilities can be imposed but benefits can’t be imposed and therefore it is the assessee’s prerogative whether to take the benefit of the given beneficial provisions or not. It means that such small businesses (where turnover does not exceed Rs. 2 crores) the assessees have been given alternate choices of taxation to choose from:-
a) If the turnover does not exceed Rs. 1 crore, he is not required to go for audit u/s 44AB(a). No conditions are attached.
b) If the turnover does not exceed Rs. 10 crore, again he is not required to go for audit u/s 44AB(a)Proviso with the condition that the cash receipts/ payments do not exceed 5% of the total receipts/payments.
c) If the turnover does not exceed Rs. 2 crores, he is entitled to opt for the beneficial provisions of section 44AD(1) by declaring 6%or8% of the turnover as net profit of the business and get exemption from audit u/s 44AB(a)/44AB(a)Proviso. The condition that the cash receipts/payments do not exceed 5% of the total receipts/payments does not apply in this case.
d) If the turnover exceeds Rs. 1 crores but does not exceed Rs. 2 Crore, the assessee may opt to be outside the tax audit provisions under 44AB(a) i.e. turnover not exceeding Rs. 1 Crore or under 44AB(a) Proviso (turnover not exceeding Rs. 10 crore, cash receipts/payments not exceeding 5% of the total receipts/payments) i.e. the beneficial provision.
Thus, it is clear that the scheme of taxation u/s 44ADA(1) is a beneficial provision for the assessee and it is for the assessee to decide whether to use this beneficial provision or not. However, if the assessee chooses to adopt this option, then sub-section (1) becomes mandatory in the sense that after exercising this option the assessee have no further choices except to declare income at 6%/8% of the turnover or face tax audit u/s 44ADA(5) r.w.s. 44AB(e). The department has not prescribed any form to be filed for exercising this option. By choosing ITR Form meant for presumptive taxation or filling the columns of the ITR meant for presumptive taxation, the assessee can be deemed to have exercised this option.
| Table of criteria for conducting Tax Audit | |||||||
| S.N. | Turnover | Net Profit | Cash Condition | Audit | Section | Comment | |
| 1 | Turnover More than Rs. 10 Cr. |
Not Applicable | Not Applicable | Always Yes | 44AB(a) | T/O more than 10 Cr | |
| 2 | Turnover Not More than Rs. 1 Cr |
Not Applicable | Not Applicable | Always No, subject to 44AD(1) Optionally | 44AB(a) | T/O not more than 1 Cr | |
| 3 | Turnover 2 Cr to 10 Cr |
Not Applicable | More than 5% | Yes | 44AB(a) Proviso | Cash Recp/Pay more than 5% | |
| Less than 5% | No | 44AB(a) Proviso | Cash Recp/Pay not more than 5% | ||||
| 4 | Turnover 1 Cr to 2 Cr |
More than 6% | More than 5% | No | 44AD(1) | Net Profit more than 6% | |
| Less than 5% | No | 44AD(1) | Net Profit more than 6% | ||||
| Less than 6% | More than 5% | Yes | 44AB(a) Proviso | Cash Recp/Pay more than 5% | |||
| Less than 5% | No | 44AB(a) Proviso | Cash Recp/Pay less than 5% | ||||
| 5 | Turnover from 1 to 1 Cr | More than 6% | More than 5% | No | 44AD(1) | Net Profit more than 6% | |
| Less than 5% | No | 44AD(1) | Net Profit more than 6% | ||||
| Less than 6% | More than 5% | No | 44AB(a) | T/O not more than 1 Cr | |||
| Less than 5% | No | 44AB(a) | T/O not more than 1 Cr | ||||
| Not Applicable | Not Applicable | No | 44AB(a) | T/O not more than 1 Cr | |||
| 6 | Option u/s 44AD(1) exercised for any previous year (Declared net profit more than 6%/8%) and declaring less than 6% for current year. | Less than 6% | More than 5% | Yes | 44AB(e) | Audit for next 5 years if total income exceeds the Exempt Limit | |
| Less than 5% | No | 44AB(e) | No Audit if the total income does not exceed the Exempt Limit | ||||
Notes:
|
1 |
If the turnover does not exceed Rs. 1 Crore then tax audit is not compulsory irrespective of percent of net profit declared or cash payment/receipts exceeding 5% |
| 2 | If the turnover exceeds Rs. 10 Crore then tax audit is compulsory irrespective of percent of net profit declared or cash payment/receipts exceeding 5% |
| 3 | If the turnover is from 0 to 2 crores then also tax audit will not be applicable if the assessee declares net profit 6%/8% u/s 44AD(1) |
| 4 | Tax audit u/s 44AB(e ) will be applicable earliest only from the 2nd year of business in which the condition of declaring 6%/8% is not followed. It can never apply from the very 1st year of business during which the assessee opts for beneficial provision of declaring net profit of 6% |
| 5 | The condition of net profit being more than 6% includes 8% also depending upon the mode of transaction |
Notes:
1) If the turnover does not exceed Rs. 1 Crore then tax audit is not compulsory irrespective of percent of net profit declared or cash payment/receipts exceeding 5%
2) If the turnover exceeds Rs. 10 Crore then tax audit is always compulsory irrespective of percent of net profit declared or cash payment/receipts exceeding 5%
3) If the turnover is from 0 to 2 crores then also tax audit will not be applicable if the assessee declares net profit 6% u/s 44AD(1)
4) Tax audit u/s 44AB(e ) will be applicable earliest only from the 2nd year of business in which the condition of declaring 6% is not followed. It can never apply from the very 1st year of business during which the assessee opts for beneficial provision of declaring net profit of 6%
5) Errors & Omissions, if any, are inadvertent and sincerely regretted.
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Sir, if an assessee opted for 44AD in AY 22-23 and in AY 23-24 opted to file ITR 3 by presenting full balance sheet and PL and his turnover is around 17 lakhs and is declaring income as (1) 2Lakhs ( 2) 4 Lakhs . Would he be liable to Audit in both cases?
real estate member receipt entry kevi rite kari sakay te samjavo
As per Sec 44AD(5), even though the TO is less than 1 Crore, if the net profit offered is less than 8% Tax Audit report is to be filed. Following is the Tutorial by IT Department regarding : TAX ON PRESUMPTIVE BASIS IN CASE OF CERTAIN ELIGIBLE
BUSINESSES OR PROFESSIONS
Provisions to be applied if a person does not opt for the presumptive taxation scheme of
section 44AD and declares income at a lower rate, i.e., at less than 8%
A person can declare income at lower rate (i.e., at less than 6% or 8%), however, if he does so,
and his income exceeds the maximum amount which is not chargeable to tax, then he is required
to maintain the books of account as per the provisions of section 44AA and has to get his
accounts audited as per section 44AB
It appears the Tutorial talks of a situation wherein the assessee, having declared 6% or more Net Profit in any year {(called the First year of availing the benefit of No Audit u/s 44AD(1) }, declares net profit lesser than 6% in any of the 5 years following the first year (Sec 44Ad(4)), then the Audit is compulsory u/s 44AB(e).
“44AB(e) 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”.
Section 44AB(e) refers to section 44AD(4) and this section applies only from the second(Next) year in which he declares net profit less than 6%.
44AD(4) says “…….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)”. This year may be called the “year of default” and section 44AD(5) applies to the year of default only and never to the First year in which the assessee can opt whether to avail the benefits of section 44AD(1) or get audited u/s 44AB(a).
“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” he will be audited u/s 44AB( e)
To reiterate and summarize, the tutorial is correct only to the extent of its application to second(next) year and not to the First year. The First Year is the year of exercising the option u/s 44AD(1) and this first year can never be the year of default.
THANKS A LOT FOR THE VALUABLE INFORMATION