Section 44AD Linkage with Tax Audit under section 44AB updated by Finance Act, 2020

Critical Analysis of interrelation between Provisions of Section 44AD & Section 44AB along with other ancillary aspects of Income Tax Act, 1961

The provisions of Section 44AD was introduced in the Chapter of Profits & Gains from Business or profession with an objective to reduce the compliance burden of resident small Tax payers. Undoubtedly throughout, the concept related to “Presumptive Taxation Schemes’’ has been very well achieve its objectives.

However, over the period of time these provisions had also gone through series of amendments by various Finance Acts.

Amendments passed by Finance Act, 2017 & Finance Act, 2020 with respect to Section 44AD & 44AB sometimes leads to many misconceptions specifically on those circumstances when Provisions of both sections interrelate to each other & also with the chapter of TDS.

This article is prepared to highlight those misconceptions along with their potential solution as per Existing Law & other ancillary relevant aspects of Income Tax Act, 1961.

Further to enhance the productivity of the article substantially I am going to present it in Frequently Asked Questions & Answer’s format.

Frequently Asked Questions & Answer on Section 44AD

Q 1. Is it mandatory for an “Eligible assessee” engaged in the “Eligible Business’’ whose turnover during the relevant Previous Year doesn’t exceeds the prescribed monetary Limits of Rs 200 Lacs to opt for Section 44AD i.e. Presumptive Taxation Scheme?

Ans – Section 44AD is facility i.e. option available to the assessee it is not mandatory for eligible assessee to opt for Section 44AD.

Q2. An Architect Professional who is covered under section 44AA(1) also engaged in the supply of Cement, concrete etc. & such business is run separately from Specified Profession u/s 44AA.

Can he claimed benefits of both section 44AD & 44ADA assume Gross Receipts from Profession doesn’t exceeds Rs 50 Lacs & Turnover of Cement business doesn’t exceeds Rs 200 Lacs?

Ans – As per Section 44AD (6) the provisions of Section 44AD shall not apply to a person who is a specified professional covered under Section 44AA(1). Th e Proposition that the cement business is runs separately will not altered the situation at all. Since as per Section 44AD(6) such person is ineligible for Section 44AD totally. In the given case the professional can claim the benefits of section 44ADA i.e. too restricted only for Professional Income.

Section 44AD(6) also applicable to the Persons who engaged in the business of agency or earning income which is in the nature of brokerage or Commission. Thus, Stock Broker, Life insurance agents are totally out of purview of Section 44AD. Hence persons covered by section 44AD(6) can’t opt for benefits of Section 44AD in any circumstances.

Q 3. A Partnership Firms engaged in the business of plying, hiring or leasing goods carriage & Turnover of such business doesn’t exceed Rs 2 Cr. Can he opt for benefits of Section 44AD?

Ans – To Claim the benefits of Section 44AD there are twin requirements which have to fulfilled by assessee firstly it must be an eligible & secondly who engaged in eligible business. If any one of the requirement is not fulfilled by the assessee he can’t claimed the benefits of section 44AD.

Explanation to Section 44AD specified the business of plying, hiring of goods etc. mentioned u/s 44AE as ineligible one. Hence despite of the fact that assessee is eligible one but in the given case since it runs ineligible business it can’t claim the benefits of Section 44AD.

Q 4. Assessee is Individual who claim the deductions u/s10A/10AA/10B/10BA or Part C of Chapter VI i.e. Section 80IA/80IB etc. & the turnover of such business doesn’t exceed the prescribed monetary limits of Rs 2 Crores. Can they claim the benefits of Section 44AD?

Ans – As per Explanation to Section 44AD such assessees who claims any of the aforementioned deductions are ineligible to claim the benefits of section 44AD

Q 5. A Firm engaged engage in the business of warehousing as mentioned u/s 35AD & total receipts doesn’t exceeds Rs 200 Lacs. Can he opt for Claim u/s 44AD?

Ans- Yes, the assessee who engaged in the business of warehousing u/s35AD can claim the benefits of Section 44AD. Since restrictions put via explanation to Section 44AD doesn’t apply to Section 35AD business. However, it is interesting to note that such person can’t claim the deductions u/s35AD since section 44AD overrides Section 35AD.

Q 6. Assessee engaged in the manufacturing business can he claims the benefits of Section 44AD provided all other conditions are satisfied?

Ans – Yes, he can claim since no such restrictions is made by Section 44AD.

Q 7. An eligible assessee engaged in the eligible business whose turnover during the previous year 2020-21 was Rs 140 Lacs. He claims the income to be taxed u/s44AD & report 8% of its income under the head PGBP as per Section 44AD(1) while filing the ROI. It is mandatory to gets his accounts audited u/s44AB since his turnover exceeds Rs 1 crore?

Ans – As per Section 44AB(e) so far as the eligible assessee engaged in the eligible business disclosed its profits in accordance with section 44AD(1) he is not under an obligation to gets his accounts audited even if his turnover exceeds by Rs 1 Cr.

Q 8. Individual who engaged in the business of Trading of Grocery items having a turnover of 2.5 crores during the PY ended on 31^st March 2021. He is having an opinion that since he is eligible assessee ha can shows profits up to 8% of his turnover & further he is not required to gets his accounts audited u/s44AB. Comment

Ans – In the given case the turnover of the individual exceeds Rs 2 Cr. It is totally out of purview of section 44AD & under an obligation to gets its accounts audited. Since relaxation of section 44AB(e) apply only when assessee declared its profits in accordance with section 44AD(1). In the given case since he can’t claim the benefits of section 44AD(1). He is under an obligation to gets his accounts audited u/s44AB(1).

Q 9. Partnership Firm engaged in the business of Trading of garments having turnover Rs 1.8 Cr during the Assessment Year ended on 31^st March 2022. Further firms while filing its ROI claims income more than 8%. Assessing officer while passing the assessment order u/s143(2) impose a penalty u/s271B on failure of gets its accounts audited. AO was in view that since firms claims profits in excess of 8% of its turnover which was not shown in accordance with Section 44AD(1) it had under an obligation to gets its accounts audited u/s44AB(1) because its turnover exceed Rs 1 Cr. Comment.

Ans – The action of the AO is not in accordance with Law. As per Section 44AD(1) a sum equals to 8% of the total turnover etc. or a sum higher than the aforementioned sums claimed to be earned by the eligible assessee shall be deemed to be profits of such business to be chargeable under the head business/profession.

In the given case since firms claims higher sums it means the profits were shown as per Section 44AD(1) & so far as the profits is declared in accordance with Section 44AD(1) relaxation from Tax Audit u/s44AB(e) will be available to assessee.

Q 10. Discuss in details the Provisions of Section 44AD(4) & Section 44AD(5) read with Section 44AB(a) & Section 44AB(e) after assuming the following:

*Assessee claims income lower than the prescribed 8%/6% of turnover in Assessment Year 2021-22

* During Assessment year 17-18 the profits of the firm declared in accordance with section 44AD(1) for the first time.

Ans –

• As per Section 44AD(4) amended vide Finance Act , 2017 where an eligible assessee who declares profits of any previous year in accordance with Section 44AD(1) then he must have to declare profit of next 5 assessment year succeeding such previous year in accordance with section 44AD(1) otherwise assessee is not eligible to opts for Section 44AD(1) for next 5 assessment years succeeding such assessment year in which profit has not been declared in accordance with Section 44AD(1)
• Further as per Section 44AD(5) where the case of the assessee falls under the provisions of Section 44AD(4) he is subject to Tax Audit in accordance with Section 44AB(e) provided his total income exceeds the maximum amount not chargeable to tax.
• It is to be noted that if the Turnover of the assessee who is subject to Section 44AD(4) & (5) exceeds the Prescribed monetary limits of Rs 1 Crores then he is liable for the Tax Audit u/s44AB(1) even if its total income doesn’t exceeds maximum amount not chargeable to tax.
• Finance Act, 2020 inserted two proviso i.e. Proviso (a) and Proviso (b) to section 44AB(1) which increased Tax Audit limits of Rs 1 Cr enhanced to Rs 5 Cr provided the total Receipt and Payment made via cash mode doesn’t exceeds % of total receipt & payments.
• Hence if an assessee who claims the Income lower than 8% i.e. Section 44AD(4) attracts & whose income doesn’t exceeds maximum amount not chargeable to tax & his turnover exceeds Rs 1 crores & less than 5 Crores but if he could be able to restricts its total receipts & payments both through cash mode upto 5% of total Receipt and payments then he is not liable for Tax Audit u/s44AB(1) since Limits of Rs 1 crore shall be read as Rs 5 crores in those circumstances.
• If the assessee is a Firm then maximum amount not chargeable to tax shall be Nil. If its case falls under 44AD(4) then firms is liable to Tax Audit u/s44AB(e) provided if it earned any positive income.
• However, in the case of losses the firm is not required to gets its accounts audited u/s44AB(e) assuming Turnover of firm is less than 1 Cr.
• If Turnover is more than 1 Cr then even in the case of loss the Firm is subject to Tax Audit u/s44AB(1) & the above limits shall be read as Rs 5 Crores provided other conditions laid down by Finance Act,2020 have been complied with.
• In Case of Individual/HUF the basic exemption limits is Rs 2,50,000/- & up to Rs 2,50,000/- no tax audit shall require u/s44AB(e) assuming turnover doesn’t exceed the Rs 1/Rs 5 crores as the case may be otherwise Tax Audit shall be required u/s44AB(1).
• We can make a conclusion with regards to firms that in case section 44AD(4) attracts they are always be subject to Tax Audit u/s44AB provided they earn positive income.
• Applying the rationale of above provisions following points should be worth noting:

*In the given case assessee opts for Section 44AD for the First time in assessment year 17-18. It means assessee have to declared profits in accordance with Section 44AD(1) i.e. 8% of the turnover or such higher sums for next 5 Assessment year i.e. From AY 2018-19 to AY 2022-23.

* Assessee declare Profits less than 8% i.e. not as per Section 44AD(1) in AY 2021-22 It means firm is not eligible to opts for Section 44AD for Next 5 Assessment Years i.e. From AY 2022-23 to AY 2026-27.

Q.11 An individual/HUF who was subject to Tax Audit u/s44AB(e) in AY 2020-21 since his Total income exceeds maximum amount not chargeable to Tax made the following payments during Assessment year 2021-22

* Rent of building to Mr X – Rs 7,20,000 p.a. (Rs 60,000/- monthly)

Determine the liability to deduct the TDS assuming Turnover of individual/HUF deductor AY 2020-21

* Case A – Rs 75,00,000/-

* Case B – Rs 1,25,00,000/-

Ans- In the Chapter of TDS, individual or HUF while making the payment to any person which is in the nature of Sections 194A/194C/194I/194H/194J are not under an obligation to deduct the TDS provided his turnover in the preceding Financial Year doesn’t exceeds Rs 1 Crores for Business or Rs 50 Lacs for profession. (Amended by Finance Act, 2020)

Hence while determining the liability to deduct TDS one shouldn’t concerned about the Tax Audit status of preceding Financial Year.

Further Section 194IB/194M applicable to only those individual/ HUF who were not under an obligation to deduct the TDS u/s194A/194C/194J/194H/194I & amount paid exceeds the monetary Limits which is Rs 50,000/- per month for Section 194IB.

Both the series of sections are mutually exclusive in nature. In case A since the turnover doesn’t exceed Rs 100 Lacs, Individual/HUF is not liable to deduct the TDS u/s194I. However, since monthly rental exceeds Rs 50,000/- the provisions of 194IB apply & TDS shall be deducted u/s194IB @ 5%.

In Case B since the turnover exceeds Rs 100 Lacs Individual/HUF is under an obligation to deduct the TDS @ 10% u/s194I & Provisions of 194IB will not apply.

Q 12. would the answer case A will change if Monthly rental paid towards Rent of building less than 50,000/- per month

Ans – In such a case no TDS shall require to deduct either u/s194IB and u/s194I since threshold limits of Rs 50,000/- hadn’t crossed.

Q 13. would the answer be change if in case A the rent of building is Rs 51,000/- per month which includes Rs 3,000/- per month towards the usage of furniture

Ans – In that case liability to deduct TDS u/s194IB shall not be attracted even if the total Payments towards the rent exceeds Rs 50,000/- per month. Since the definition of rent includes “Rent means rent towards the usage of Building’’. Composite rent is not contemplated by section 194IB

Q 14. would you answer be remain the same if the rental is paid towards the usage of Machinery in both cases instead of building.

Ans– Section 194IB doesn’t attract towards rental of Machinery. Hence in case A no TDS shall be attracted either u/s194I or u/s194IB. However, in case B since the turnover exceeds Rs 1 Crores individual/HUF is liable to deduct the TDS u/s194I itself only @ 2%.

Q 15. Suppose assessee is a firm whose turnover doesn’t exceeds Rs 1 Crores in AY 2020-21 made the payment of Rent exceeding Rs 50,000/- per month in AY 2021-22. Comment on TDS to be deducted.

Ans – The exemption for not deducting the TDS shall be applicable only for individual/HUF and not on the Firms. Hence, they are liable to deduct the TDS u/s194I provided other conditions of Section 194I apply.

Other Aspects of Section 44AD

• Since Section 44AD overrides Section 28 to Section 44C thus disallowances u/s40A(3), 40A(2) along with allowances u/s36, 37 etc. shall not be entertain.
• Held by the Panaji Tribunal in case of Good Luck kinetic vs ITO (2015) that Section 43B being a non-obstante clause have a wide & far amplitude as compare to overriding effect of Section 44AD. Hence, although section 44AD overrides Section 43B also still the scope of disallowances to be made u/s43B is available to revenue.
• Depreciation will not be allowed to the assessee claiming the benefits of Section 44AD & WDV shall be deemed to be reduced during the period covered by Section 44AD.
• Despite of the fact, all expenditures u/s28 to 43C shall be disallow still the provisions of Section 201 i.e. provisions for penalty for non- deduction of TDS will be equally applicable.
• Income from other head of income like Capital Gains, House Property shall be calculated normally & are not subject to limit of 8% or 6% as the case may be.
• Section 44AD overrides the chapter of PGBP. But Losses are dealt in accordance with Chapter VI which consists of section 70-80. Hence losses from other business head can be set off against income deemed u/s44AD.
• Assume Total turnover of Partnership Firm for AY 2021-22 is Rs 4 Crores. Out of which 70% sales made on credit basis. Balance 30% received through electronic mode. All the payment made during the previous year made using electronic mode. Analyze

* The Threshold Limits of Tax Audit u/s44AB(1) now enhance upto Rs 5 crores vide Finance Act, 2020 by inserting two provisos in Section 44AB(1)

* As per provisos to 44AB(1) if aggregate of all payments made including amount incurred for expenditures & aggregate of all amount received including amount received during the previous year for sales/turnover/Gross receipts doesn’t exceeds 5% of total payment using cash mode then threshold limits shall be substituted with Rs 5 Crores in place of Rs 1 Crores.

* Its nowhere mentioned that more than 95% of Total Sales & Payment should be made in electronic mode. It simply means, that whatever expenditure is paid in cash & Income is received in cash it shouldn’t exceeds 5% of total amount received and paid during the previous year.

* It means Credit sales and payment due but not paid shall not taken into account for the purpose of identifying the applicability of Proviso (a) & (b) to section 44AB(1)

I am presenting tabular illustrations with the objective to make comprehensive coverage on the applicability of provisions of Tax Audit u/s 44AB for the Assessee who was subject to Provisions of Section 44AD(4) in the Assessment Year 2021-22. Assessee was opted Section 44AD in AY 2020-21 & turnover of AY 2020-21 was Rs 1.80 crores & Profit was shown in accordance with Section 44AD(1) in AY 2020-21.

Observation from the above illustrations:

• Whereever the assessee was subject to Tax Audit solely on the ground of Section 44AB(e) & not in conjunction with Section 44AB(a) it could be observed that the Turnover in all those cases is less than 1 Crore.
• One fine conclusion that may be drawn that individual or HUF who was subjected to Tax Audit in the preceding Financial Year solely on the ground of Section 44AB(e) they are not under an obligation to deduct the Tax at sources while making the payment under Section 194C/194J/194A/194H/194I.
• As per above bullet we can also conclude that in such a circumstance the scope of applicability of Section 194IB & 194M will be open provided that other conditions laid down under those respective sections have been complied with.
• Finance Act, 2020 in order to encourage the Digital Payment systems introduce proviso in Section 44AB(a). However, limits will be increase to Rs 5 crores only when both receipt and payments made more than 95% using electronic modes. The dual requirement may make practically difficult for some organization to obtain the benefits of enhanced limits.
• Even if the Limits of Tax Audit enhanced for a particular individual/HUF to Rs 5 Crores since he fulfilled all the conditions laid down by Finance Act, 2020. Still for the purpose of TDS Provisions Limit of Rs 100 Lacs shall be taken. In 1^st Row of Table although the Tax Audit Limits increased to Rs 5 Crores but individual/HUF is not under an obligation to deduct the TDS in the next Assessment Year under Section 194C/194J/194A/194H/194I. 

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