Section 44AB vs 44ADA of Income Tax Act, 1961

As Section 44AD is applicable on business (click here to read in detail), Section 44ADA applies on professionals.

It says that if an eligible assessee (professional) who declares 50% or more than that of his gross receipts as profit, then he is not required to get his accounts audited under the Income Tax Act, 1961.

But, this section has specified a limit on the gross receipts too. As per this section, the gross receipts should not be more than Rs. 50 lacs in order to avail the benefit of this section.

Meaning of eligible assesse:

• Engineering
• Legal
• Architectural profession
• Accountant
• Medical
• Technical consultant
• Interior business
• Other notified professionals such as authorized representatives, film artists, certain sports-related persons, company secretaries and information technology

Note: This is applicable only to a resident who is an Individual, HUF or Partnership but not a Limited Liability Partnership Firm.

Section 44AB: It says that every person carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees in any previous year is required to get his accounts audited under the Income Tax Act, 1961. In other words, audit is not required if gross receipts are less than Rs 50 lacs.

Illustration:

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?

•  Yes, as his gross receipts has exceeded the limit of Rs. 50 Lacs as specified under Section 44AB, he is require to get his accounts audited. 

You might be thinking that when 44AB and 44ADA both are saying that audit is not required when gross receipts are less than Rs. 50 lacs, then what was the need to introduce Section 44ADA?

• Don’t worry, keep on reading the article, your doubt will be resolved by the time you completely read it.

This was normal provision of 44AB for other professions. But,

44AB in context of 44ADA: For the professions as specified in 44ADA, audit is required in the following scenarios:

• Assessee has not declared 50% of his receipts as profit, and
• The profit so declared is more than the basic exemption limit.

(Irrespective of the fact that gross receipts are less than Rs. 50 lacs)

Also, Read section 44ab of income tax act.

Illustrations:

Z carries on profession (as specified under Section 44ADA) and his gross receipts from the profession is Rs. 48 lacs? He has declared a profit of  Rs. 25 lacs . Does he require to get his books audited under Income Tax Act?

• Now, understand the concept. Check for the conditions of Section 44ADA:
• Gross Receipts are less than (or equals to) Rs. 50 Lacs = Condition Fulfilled
• Profit declared is more than (or equals to) 50% of gross receipts = Condition Fulfilled

As, both the conditions are fulfilled, Z is not required to get his accounts audited.

A carries on profession (as specified under Section 44ADA) and his gross receipts from the profession is Rs. 48 lacs? He has declared a profit of  Rs. 22 lacs . Does he require to get his books audited under Income Tax Act?

• Again, Check for the conditions of Section 44ADA:

1. 1. Gross Receipts are less than (or equals to) Rs. 50 Lacs = Condition Fulfilled
   2. Profit declared is more than (or equals to) 50% of gross receipts = Condition Not Fulfilled

As both the conditions are not fulfilled, then it is an indicator that assesee is required to get his accounts audited

Now,

Here section 44AB will come in action.

• Section 44AB in context of 44ADA clearly says that audit is equired if Assessee has not declared 50% of his receipts as profit, and
• The profit so declared is more than the basic exemption limit.

(Irrespective of the fact that gross receipts are less than Rs. 50 lacs)

In the above case,  gross receipts of A are less than Rs. 50 lacs but he has not declared at least 50% of his receipts as profit + his income so declared is more than basic exemption limit, Therefore, A is required to get his accounts audited.

K carries on profession (as specified under Section 44ADA) and his gross receipts from the profession is Rs. 60 lacs? He has declared a profit of  Rs. 32 lacs . Does he require to get his books audited under Income Tax Act?

• Again, Check for the conditions of Section 44ADA:
  1. Gross Receipts are less than (or equals to) Rs. 50 Lacs = Condition Not Fulfilled
  2. Profit declared is more than (or equals to) 50% of gross receipts = Condition Fulfilled

As both the conditions are not fulfilled, then it in this case K is required to get his accounts audited

Major Doubt:

Section 44AB says audit is required only when gross receipts are more than Rs. 50 lacs but 44ADA says no audit required when gross receipts are not more than Rs. 50 lacs but assesee should declare 50% or more of his gross receipts as profit. Ultimately, both the sections are saying that No Tax Audit is required if the gross receipts are less than Rs. 50 lacs. So, When 44AB is already giving exemption from audit when receipts are below Rs. 5o lacs then why should assesse declare more than 50% of his receipts as profit under Section 44ADA?

• Now here you need to understand the motive behind the introduction of presumptive taxation scheme. This scheme was basically introduced to give relaxation to eligible assesses from maintaining detailed books of accounts. So, if an assesse is having gross receipts below Rs. 50 lacs and declaring profit of more than 50% of his gross receipts then along with the exemption of audit (which has been already given by Section 44AB), assesse gets additional exemption from maintaining books of accounts as per Section 44ADA.
• Further, here you need to be alert while reading 44AB as it says,
  • Audit is applicable when the receipts from profession (profession other than as specified in 44ADA) exceeds 50 lacs but
  • For the professions as specified in 44ADA, audit is applicable if the receipts are either less than or more than 50 lacs but assesse has not declared at least 50% of his receipts as profit and his declared profit is more than basic exemption limit.

Illustration:

S carries on profession (as specified under Section 44ADA) and his gross receipts from the profession is Rs. 48 lacs? He do not want to maintain detail books of accounts. As a tax professional, Kindly advise S.

• Being a tax professional, I will aware Mr. S about the provisions of Section 44ADA of the Income Tax Act, 1961 which says, that a professional whose gross receipts are less than Rs. 50 lacs is not required to maintain detailed books of accounts if he declares more than (or equals to) 50% of his gross receipts as profit. So, S should take the benefit of Section 44ADA by declaring minimum of Rs. 24 lacs as profit.

I hope your concepts are now more clear than before.

Stay tuned for further parts.

The author is a CA Final student and A Published Author of the Book “AN INSIGHT INTO TAX AUDIT”, publication of Young Global Publications, New Delhi. For any doubts, contact the author at atulkhurana9@gmail.com or whatsapp at 98888-55340