Section 44AB vs 44AD – Presumptive Taxation (With Examples)

When we talk about Presumptive Taxation, then it automatically relates to Tax Audit under Income Tax Act, 1961.

At professional as well as student level, I have seen students getting confused in Sections 44AB & 44AD because 44AB says about the limit of Rs. 1 crore and 5 crore while Section 44AD says about the limit of Rs. 2 crore. Don’t worry; today your doubt is going to be resolved permanently.

Let’s begin:

Tax Audit comes under the purview of Section 44AB of the Act which specifies the persons who are required to get audit of their books of accounts.

This section specifies particularly that except for the persons coming under the purview of the sections mentioned in the text of Section 44AB, all other have to get their accounts audited under Section 44AB.

Analysis of Section 44AB:

Applicability:

This section is applicable to every person:

1) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year; or

1A) in the case of a person whose—

(a)  aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent of the said amount; and

(b)  aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent of the said payment

2) carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees in any previous year; or

3) carrying on business as specified under Section(s) 44AE, 44BB, 44BBB and declared profit less then as specified in the respective sections.

4) carrying on business/profession as specified under Section 44AD, 44ADA and income exceeds the limits as specified in the respective sections

5) Deriving income under Sections 44B, 44BBA and declared profit less than the limits specified

For clear understanding, we have some Illustrations on Section 44AB:

Que: X carries on business and his total turnover from the business is Rs. 1.2 Cr? Do he require to get his books audited under Income Tax Act? 

Ans: Yes, as his gross turnover has exceeded the limit of Rs. 1 Cr, he is require to get his accounts audited.

Que: Y carries on profession and his gross receipts from the profession is Rs. 52 lacs? Do he require to get his books audited under Income Tax Act? 

Ans: Yes, as his gross receipts has exceeded the limit of Rs. 50 Lacs, he is require to get his accounts audited.

Que: Z X carries on business and his total turnover from the business is Rs. 2.5 Cr? His cash receipts and cash payments do not exceed 5% of the gross receipts/tunover. Do he require to get his books audited under Income Tax Act? 

Ans: No, As per the amended provisions of the Finance Act, 2020, any person whose cash receipts and cash payments do not exceed 5% of the gross receipts/tunover, then he is not required to conduct tax audit of his books if the turnover is upto 5 crores rupees.

This was very simple. Now let us mix up Section 44AD with it.

Analysis of Section 44AD:

This section says that any eligible assesse who is deriving his income from eligible business (means business except business of plying, hiring or leasing goods carriages) whose total turnover from the eligible business do not exceeds Rs. 2 crore  and who declare his profit at the rate of 8% of total turnover, he is not required to get his books audited.

Further, if an eligible assesee whose total turnover or gross receipts is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account then instead of declaring 8% of his turnover as profit, he just needs to declare 6% of his turnover as profit.

Confused??? Let us understand this with the help of illustrations.

Illustration:

X carries on business and his total turnover from the business is Rs. 1.2 Cr? He opted for presumptive taxation scheme and declared profit of Rs. 10 lacs  Do he require to get his books audited under Income Tax Act?

– Now understand the concept, turnover of X has exceeded Rs 1 crore but he has opted for presumptive taxation scheme under section 44AD and declared income of Rs. 10 lacs which is more than 8% of his total turnover. Now as per the section 44AD,

• The turnover should not exceed 2 crore = condition fulfilled

And

• The declared profit should exceed 8% = condition fulfilled

As both the conditions are fulfilled, X is not required to get his books audited. So, for a point of time for the understanding purpose, you can say that 44AD has an overriding effect over 44AB.

Illustration:

Z carries on business and his total turnover from the business is Rs. 1.5 Cr? He opted for presumptive taxation scheme and declared profit of Rs. 10.5 lacs  Do he require to get his books audited under Income Tax Act?

– Z has opted for presumptive taxation scheme under section 44AD, Check the conditions of Section 44AD:

• The turnover should not exceed 2 crore = condition fulfilled

And

• The declared profit should exceed 8% = condition not fulfilled as he has declared profit less than 8%.

Now, this point will give you the clarity you need:

Z did not fulfill both of the given conditions. Now Section 44AB will come in action. Check for the limit of section 44AB.

Section 44AB says the turnover should not exceed Rs. 1 crore except if the person has opted for the Section 44AD and fulfill the conditions of the Section 44AD.

As Z has failed to fulfill the conditions of Section 44AD and his limit has exceeded as specified under Section 44AB that is Rs. 1 crore, he is required to get his books audited under the Income Tax Act.

Illustration:

M carries on business and his total turnover from the business is Rs. 2.10  Cr? He opted for presumptive taxation scheme and declared profit of Rs. 16.80 lacs . Do he require to get his books audited under Income Tax Act?

– M has opted for presumptive taxation scheme under section 44AD, Check the conditions of Section 44AD:

• The turnover should not exceed 2 crore = condition not fulfilled

And

• The declared profit should exceed 8% = condition fulfilled

M did not fulfill both of the given conditions. Now Section 44AB will come in action. Check for the limit of section 44AB.

Section 44AB says the turnover should not exceed Rs. 1 crore except if the person has opted for the Section 44AD and fulfill the conditions of the Section 44AD.

As M has failed to fulfill the conditions of Section 44AD and his limit has exceeded as specified under Section 44AB that is Rs. 1 crore, he is required to get his books audited under the Income Tax Act.

Illustration:

A carries on business and his total turnover from the business is Rs. 1.96  Cr? He opted for presumptive taxation scheme and declared profit of Rs. 12.74 lacs . He derived his total turnover via account payee cheque.  Do he require to get his books audited under Income Tax Act?

– A has opted for presumptive taxation scheme under section 44AD, Check the conditions of Section 44AD:

• The turnover should not exceed 2 crore = condition  fulfilled

And

• The declared profit should exceed 6%  (because turnover has been derived electronically) = condition fulfilled

M fulfill both of the given conditions. Therefore, No Tax Audit.

Illustration: (Most common practical issue)

A carries on business and his total turnover from the business is Rs. 96 lac? He opted for presumptive taxation scheme since the last 3 yrs and in the current year declared profit of Rs. 3.5 lac.  Do he require to get his books audited under Income Tax Act?

– A has opted for presumptive taxation scheme under section 44AD, Check the conditions of Section 44AD:

• The turnover should not exceed 2 crore = condition  fulfilled

And

• The declared profit should exceed 8%  = condition not fulfilled

Now the assessee says, although the declared profit is less than 8% but the turnover is also less than 1 crore. so, according to him he is not required to conduct tax audit as per section 44AB in the current year.

But here is a twist:

As per the provisions of 44AD(4) & (5), if an assessee has opted for this section then he has to maintain it for next continuous 5 years. In case he opt out from this section then he will not be allowed to opt this section again for the next 5 Assessment years and also for the next 5 years he is required to maintain his books and get them audited if the profit is more than basic exemption limit of 2.5 lac/3 lac/5 lac irrespective of the turnover.

So, M has to declare the profit of minimum 8%. If not he will not allowed to opt for this section again in next 5 subsequent assessment years and he has to maintain books and get them audited for the next 5 years even if the turnover is less than 1 crore if his net profit is more than basic exemption.

Like here the profit is 3.5 lac which is more tahn 2.5 lac (basic exemption assuming assessee of 30 yrs of age). so, the audit has to be done. it does  not matter that the turnovver is less tahn 1 crore.

Now, comes the amended part again:

Illustration:

Q carries on business and his total turnover from the business is Rs. 1.96  Cr? He opted for presumptive taxation scheme and declared profit of Rs. 10.76 lac but now he is thinking to avail the benefit of 5 crore limit. guide him.

Ans: Section 44AB(e) says that those assesses who has opted for presumptive taxation scheme under 44AD, the applicable turnover limit for them is Rs. 2 crore.

So, in crux. that benefit of 5 crore limit is not applicable to the assessees opting for presumptive taxation scheme of 44AD.

In the above question, assessee has opted for presumptive taxation scheme under 44AD but now his profit is less than 8% of the turnover  but now assessee is thinking to avail the benefit of 5 crore limit.

As per the provisons, The assessees who has opted for 44AD, they can’t take the benefit of 5 crore limit but  Practically, the assessee is now out from 44AD which means now he is free from the limit of 2 crore. So,can’t he avail the benefit of 5 crore limit?

It’s a confusing point.

The answer is No because as I have explained in the previous illustration that Assessee who opt out of 44AD before completion of 5 years, he has to maintain books and get them audited irrespective of his turnover for the next 5 years. so, he can’t take the benefit of 5 crore limit of 44AB as he will continue to be bound by the provisions of 44AD for the next 5 years.

Crux of Sections 44AB vs 44AD:

Follow the following steps You will never go wrong:

Step 1: Check whether the turnover has exceeded Rs. 1 crore?

If yes: Go to step 2.

If no:  No Tax Audit.

Step 2:  Check whether the assessee has opted for presumptive taxation scheme under Section 44AD?

If Yes: Check for the 2 conditions (both should be fulfilled):

Condition 1: Turnover should not exceed Rs. 2 crore and

Condition 2: Declared profit should be more than/equal to 8% or 6%  as the case may be.

Both the conditions are fulfilled: No Tax Audit

If No: He Requires Tax Audit

Points To Remember:

Eligible assessee means:

(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm.

(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 in-comes” in the relevant assessment year.

Non Applicability of Section 44AD:

(i) a person carrying on profession as referred to in sub-section (1) of section 44AA;

(ii) a person earning income in the nature of commission or brokerage; or

(iii) a person carrying on any agency business.

Illustration:

K is engaged in a business as a  commission agent and his total turnover from the business is Rs. 1.5 Cr? He opted for presumptive taxation scheme and declared profit of Rs. 13 lacs . Do he require to get his books audited under Income Tax Act?

– K has opted for presumptive taxation scheme under section 44AD, Check the conditions of Section 44AD:

• The turnover should not exceed 2 crore = condition fulfilled

And

• The declared profit should exceed 8% = condition fulfilled 

But, Section 44AD do not applies on Commissioning business. Therefore, K is not eligible for taking the benefit of presumptive taxation.

K does not comes under the purview of Section 44AD. Now Section 44AB will come in action. Check for the limit of section 44AB.

Section 44AB says the turnover should not exceed Rs. 1 crore except if the person has opted for the Section 44AD and fulfill the conditions of the Section 44AD.

As K has failed to fulfill the conditions of Section 44AD and his limit has exceeded as specified under Section 44AB that is Rs. 1 crore, he is required to get his books audited under the Income Tax Act.

About the Author:

For any doubts, contact the author ‘Atul Khurana” at atulkhurana9@gmail.com or whatsapp at 98888-55340.

Atul Khurana is an author of the book “An Insight Into Tax Audit” publications of Young Global Publications, New Delhi.