Is Tax Audit Necessary in every case where Section 44AD is applicable but Net Profit is less than 8% / 6%

Introduction: The Section 44AD of the Income Tax Act contains special provisions for computing profits and gains of a business on presumptive basis. According to this section the profits and gains from eligible businesses carried by an eligible assessee are required to be computed at least at the rate of 8% / 6% of the total turnover / gross receipts.

However, sub section (5) of section 44AD gives an option to the assessee to declare profit  lower than 8% / 6%, by maintaining books of account etc. as required under section 44AA and by furnishing audit report as required under Section 44AB.

Also Read-An Analysis of 5 Year Restriction under Section 44AD of Income Tax Act, 1961

SUB SECTION (5) OF SECTION 44AD :

The sub section (5) of section 44AD is as under :

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) 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 sub section has been substituted by new sub-section (5) by the Finance Act, 2016, w.e.f. 1-4-2017 i.e., from Assessment Year 2017-18.

The new sub section (5) is as under :

(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.]

After substitution of sub section (5), the legal position regarding requirement of maintaining books of account and furnishing audit report has changed significantly.

DIFFERENCE BETWEEN PROVISIONS UNDER OLD SUB SECTION (5) AND NEW SUB SECTION (5) :

The basic difference between the old sub section (5) and new sub section (5) is that, in the earlier sub section, the requirements for books of account and audit were there when :

(a) the net profit was lower than 8% / 6% ; and

(b) the total income of the assessee was more than the basic exemption limit.

Whereas, as per the provisions of new sub section (5), the requirement for books of account and audit is there when :

(a) the provisions of sub section (4) are applicable to the assessee ; and

(b) the total income of the assessee is more than the basic exemption limit. 

IMPORTANT POINT : Thus,  now the general requirement for books of account and audit in each and every case where the net profit is lower than 8% / 6% (total income above basic exemption limit) is no more. After amendment, the same is restricted only to the cases where sub section (4) of section 44AD is applicable (total income above basic exemption limit).

Now, let us see that what are the provisions of sub section (4) and when they are applicable.

SUB SECTION (4) OF SECTION 44AD :

The sub section (4) of section 44AD is as under :

 [(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).

SUB SECTION (4) IS APPLICABLE TO WHOM :

It is applicable only in the cases where the assessee has adopted presumptive basis for computation of net profit at the rate of 8% / 6% but has not followed the same continuously for the next 5 years i.e., before completion of 6 years has declared lower profits. Thus, mandatory liability for books of account and audit is only in such cases. In other type of cases there is no liability for books of account and audit even if the net profit is lower than 8% / 6%. (Note : – The provisions of sub section (4) have been explained in detail in a separate article of the author earlier published on “TAX GURU” .)

INSTANCES WHERE SUB SECTION (4) MAY NOT BE APPLICABLE :

Some of the instances where the net profit is lower than 8% / 6% but sub section (4) is not applicable may be :

(a) The business is newly started during the year .

(b)The assessee and / or business has become  eligible for section 44AD during the year.

(c) The assessee has left section 44AD only after completing required continuous period of 6 years.

(d) The provision of sub section (4) were applicable but the 5 year’s period of restriction has elapsed.

(e) The eligible assessee in eligible business had not adopted presumptive basis for the Assessment Year 2016-17 (i.e, whether or not by maintaining books of account and furnishing audit report as per his liability under earlier sub section (5)).

(f) The eligible assessee in eligible business has not adopted presumptive basis in any of the previous 6 assessment years (after Assessment Year 2016-17 scenario).

AN ANALYSIS OF REQUIREMENT FOR BOOKS OF ACCOUNT AND AUDIT AFTER AMENDMENT :

Thus, after amendment, the liability for books of account and audit will arise only if the two conditions are met :

Ist Condition :- The provisions of sub section (4) are applicable.

IInd Condition :- His total income for the present year is more than Basic Exemption Limit.

Both of the above conditions must met. If only one is met or both are not met then there will be no liability for accounts and audit.

CASE – 1 :     Sub section (4) is not applicable :

The assessee can offer less than 8% / 6% without account and audit liability whether his total income is below exemption limit or more than basic exemption limit.

CASE – 2 :     Sub section (4) is applicable :

(a) If total income is less than Basic Exemption Limit :

The assessee can claim less than 8% / 6% net profit without audit and accounts liability.

(b) If total income is more than Basic Exemption Limit :

The assessee can claim less than 8% / 6% net profit with audit and accounts liability.

RELEVANT PROVISIONS IN SECTION 44AA AND IN 44AD ARE ALSO SIMILAR :

Here it is mentionable that not only section 44AD but Section 44AA and Section 44AB also says that the liability for books of account and audit in the case of lower profits will arise only when the above two conditions will met.

The relevant provisions of Section 44AA are as under :

 [(iv) where 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,]

The relevant provisions of Section 44AB are as under :

 [(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,]

DISCLAIMER : The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author do not owns any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.