1. Tax Audit is mandatory if ‘business’ is having total sales, turnover or gross receipts more than Rs. 1 crore in any Previous Year (‘PY’). [Read clause (a) of Section 44AB of the Income Tax Act, 1961 (‘the IT Act’)].
2. However, the aforesaid limit of Rs. 1 crore shall be read as 5 crores in cases where the aggregate cash receipts and aggregate cash payments made during the year does not exceed 5% of total receipt and total payment respectively. [Read proviso to clause (a) of Section 44AB of the IT Act].
3. Tax Audit is also mandatory if ‘Profession’ is having total gross receipts more than Rs. 50 lakh in any PY. [Read clause (b) of Section 44AB of the IT Act].
4. Tax Audit is also mandatory if ‘Profession’ declared income lower than income prescribed under Section 44ADA of the IT Act and his income exceeds the maximum amount which is not chargeable to income tax in any PY. [Read clause (d) of Section 44AB of the IT Act].
5. Tax Audit is also mandatory if provisions of Section 44AD(4) of the IT Act is applicable on the ‘business’ and his income exceeds the maximum amount which is not chargeable to income tax in any PY. [Read clause (e) of Section 44AB of the IT Act].
6. The person has an option to compute the profits and gain of ‘business’ on ‘Presumptive Basis under Section 44AD of the IT Act. If the person choose the said option and declare his income as per Section 44AD(1) of the IT Act and his total sales, turnover or gross receipts, as the case may be, in business does not exceed Rs. 2 crores in PY, then in that case there is no need of Tax audit. [Read first proviso to Section 44AB of the IT Act and Section 44AD(1) of the IT Act].
7. The limit of Tax Audit under Section 44AB(a) of the IT Act is Rs. 1 crore (Rs. 5 crores in special case), whereas the limit provided under Section 44AD of the IT Act to get benefit of Presumptive Scheme is Rs. 2 crore. It is also important to note that Section 44AD of the IT Act overrides Section 44AB of the IT Act. [Read first proviso to Section 44AB of the IT Act and Section 44AD(1) of the IT Act].
8. Where the turnover exceeds Rs. 1 crore but not more than Rs. 2 crores and person may option to compute the profits and gain of ‘business’ on ‘Presumptive Basis under Section 44AD of the IT Act to take the benefit of not maintaining the books of accounts and not getting the account audited.
9. Where the turnover does not exceed Rs. 1 crore, there is no need for any Tax Audit under Section 44AB(a) of the IT Act, then it is also advisable not to choose the option to compute the profits and gain of ‘business’ on ‘Presumptive Basis under Section 44AD of the IT Act unless the threshold limit of maintaining the books of account under Section 44AB(2) of the IT Act is cross.
10. Where the person started a new business then he has to choose his income computation options very carefully, especially looking into their future plans. For instance, if in first year they choose not to declare income as per Section 44AD of the IT Act then they should maintain books of accounts as per Section 44AA of the IT Act but there will no mandate to get such accounts audited if working within the four corners of section 44AB of the IT Act. However, if the person has chosen the option provided by Section 44AD of the IT Act, then he should must file his ITR under presumptive scheme for at least 5 years in continuation, otherwise he has to keep the accounts and get the same audited.
11. If any person is going to opt the ‘Presumptive Scheme’, the person must file ITR under presumptive scheme for at least 5 years in continuation. Moreover, if person decide to show and file profits as per their regular business (not on Presumptive Basis) before the end of these 5 years, the person will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years. [Read sub-section (4) of Section 44AD of the IT Act].
12. In case of provision of sub-section (4) is applicable i.e. person chooses not to compute income under Section 44AD(1) of IT Act within 5 year in continuation, and his income exceeds the maximum amount not chargeable to tax in any PY, in that case he shall maintain books of accounts and get them audited, as required as required under section 44AA(2) and as required under section 44AB of the IT Act. [Read sub-section (5) of Section 44AD of the IT Act and also read clause (e) of Section 44AB of the IT Act and clause (iv) of sub section (2) of Section 44AA of the IT Act].
13. In case of turnover is less than Rs. 1 crore, person opts not to compute income in accordance with Section 44AD(1) of the IT Act within 5 year in continuation, total income is less than maximum amount which is not chargeable to tax in any PY, then audit will not be applicable. [Read Section 44AB(a) read with Section 44AB(e) of the IT Act].
14. If gross receipt of ‘Profession’ is less than Rs. 50 lakhs and total income is less than maximum amount which is not chargeable to tax in any PY, then audit will not be applicable. [Read Section 44AB(b) read with Section 44AB(d) of the IT Act].
15. Where the turnover exceeds Rs. 1 crore but not more than Rs. 2 crores and person opts not to compute income in accordance with Section 44AD(1) of the IT Act within 5 year in continuation, in that case question arises in which clause of Section 44AB of the IT Act, the person shall get his account audited. Whether he should go with clause (e) of Section 44AB or clause (a) of Section 44AB of the IT Act. It is noted that as person falls under both the conditions i.e. clause (e) of Section 44AB or clause (a) of Section 44AB of the IT Act, therefore, he is mandatory required to get audit of accounts.
But it is also noted that if in his first year, he chooses not to declare income as per Section 44AD of the IT Act, then he is mandatory required to get audit of accounts under clause (a) of Section 44AB of the IT Act.
16. Where the turnover does not exceed Rs. 1 crore and person opts not to compute income in accordance with Section 44AD(1) of the IT Act within 5 year in continuation, in that case he is mandatory required to get audit of accounts under clause (e) of Section 44AB of the IT Act.
17. Where the turnover exceeds Rs. 2 crores but not more than Rs. 5 crores, in this case the person has not any option not to compute income in accordance with Section 44AD(1) of the IT Act. However, whether is required tax audit under Section 44AB(A) of IT Act or not, will depend on proviso inserted by Finance Act, 2020 w.e.f. 01.04.2020. If the aggregate cash receipts and aggregate cash payments made during the year does not exceed 5% of total receipt and total payment respectively, he is not required to get audit of account and otherwise not. [Read proviso to clause (a) of Section 44AB of the IT Act].
18. We have seen above that if any person is going to opt the ‘Presumptive Scheme’, the person must file ITR under presumptive scheme for at least 5 years in continuation. Moreover, if person decide to show and file profits as per their regular business (not on Presumptive Basis) before the end of these 5 years, the person will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years.
Now question is arisen that in case the turnover of the business is increase more than Rs. 2 crore and the option to opt the ‘Presumptive Scheme’, is not available to the person due to cross the turnover limit of Rs. 2 crores. Whether, in this case, the person will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years.
NO, it is submitted that sub-section (4) of Section 44AD of the IT Act is applicable when the person chooses not to compute income under Section 44AD(1) of IT Act within 5 year in continuation and not in case of the turnover of the business is increase more than the threshold limit of Rs. 2 crores. In case of provision of sub-section (4) is applicable i.e. person chooses not to compute income under Section 44AD(1) of IT Act within 5 year in continuation, and his income exceeds the maximum amount not chargeable to tax in any PY, in that case he shall maintain books of accounts and get them audited, as required as required under section 44AA(2) and as required under section 44AB of the IT Act. [Read sub-section (5) of Section 44AD of the IT Act and also read clause (e) of Section 44AB of the IT Act and clause (iv) of sub section (2) of Section 44AA of the IT Act].
Remark: It is submitted that the government is discouraging taxpayers from misusing the scheme and constantly changing their option often. Therefore, if you opt for presumptive scheme continue for 5 years and if you want to opt out, you will be barred from resuming presumptive for a period of 5 years. However, the time limit of 5 years condition applies only to businesses.
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.
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What if a firm opted for 44AD in FY 18-19 and its turnover crosses 2cr in 19-20 and liable for tax audit. Can the provisions of presumptive taxation be applied in 20-21? Or benefits under this section disallowed for subsequent 5 years?
If in a case, A has started business in the year 20-21 and his T/o is 1.5 crores. He doesn’t have cash payments or receipts exceeding 5%. He is eligible for 44 AD. But he declares a profit of 5% on sales in the first year of operation. Is Tax Audit Applicable for him for PY 20-21 ?