With times, the people search the loopholes in the laws and the lawmakers keep on plucking such loopholes. Such is also the fate of Tax Audit under the Income Tax Act in our country. The efforts of the government to maintain the right balance between the provisions make the tax compliances simple and inexpensive for small businesses and at the same time to make other businesses accountable to revenue authorities has landed us to a confusing integration of Sec 44AB and presumptive taxation of the act.

 This article is focused on the Sec 44AD of Presumptive taxation and other presumptive provisions like Sec 44ADA, 44BB,44AE, etc. are not in its scope.

Firstly, let us understand Sec 44AD. The very first thing we need to understand about Sec 44AD is that this is an option given to assessee and not a compulsion. So, it’s the assessee who will be the final authority deciding whether sec 44AD applicable in a particular year in the case. Sec 44AD gives assessee an option to deem net income at an Adhoc rate of 8% of sales (and 6% of sales in case of non-cash sales). Such net profit shall be deemed to be computed after debiting all expenses including depreciation and partners’ remuneration if any. Sec 44AD is allowed as an option only to

  • eligible assessee (i.e. resident Individual, HUF, partnership firm except for LLP) and also the assessee should neither be earning Commission/brokerage income nor doing any agency business or profession referred to Sec 44AA of the Act, AND
  • such assessee doing eligible business, i.e. any business (other than carriage business as per Sec 44AE) whose turnover during the year is up to Rs. 2 crores.

The provision is quite clear till here, the actual confusion comes with Subsection 4 and 5 of the Section which can be summarized as below:

  • Once presumptive tax option as per sec 44AD availed, then the assessee has a lock-in period for the next 5 years with Sec 44AD. In case, during that block of 5 years, the assessee wants to opt for tax audit or to declare profits not as per Sec 44AD, then the assessee can do so, but, the option for Sec 44AD will not be available for next five F.Y. of such opt-out.

Illustration

Year Ending Sec 44AD Opted Sec 44AD Allowed
31st March,2017 Yes Yes
31st March,2018 Yes Yes
31st March,2019 No Yes
31st March,2020 Not Allowed No
31st March,2021 Not Allowed No
31st March,2022 Not Allowed No
31st March,2023 Not Allowed No
31st March,2024 Not Allowed No
31st March,2025 Yes/No Yes
  • In case the window has been closed as per the above provision, then the assessee has to compulsory go for Tax Audit under Sec 44AB. The only exception to such a case is when the assessee has total income is below the taxable limit.

Now lets, understand Sec 44AB as well.  The section prescribes 5 cases when tax audit is compulsory-:

1. Business with total sales/receipt exceeds Rs. One Crore during the year;

2. The profession with total sales/receipt exceeds Rs. Fifty Lakhs during the year;

3. If assessee eligible for presumptive taxation u/s 44AE, 44BB, 44BBB but assessee wants to declare profit less than presumptive rates.

4. If assessee eligible for presumptive taxation u/s 44ADA but assessee wants to declare profit less than presumptive rates.

5. Assessee is doing business and Sec 44AD (4) is applicable to him and total income is not below the taxable limit.

Sec 44AB then gives exemption from Tax audit to the business availing option of Sec 44AD and their sales are up to Rs. 2 crores.

Now, the combined interpretation of various cases of opting in and out of Sec 44AD and its consequences of Tax Audit compulsions are tabulated below:

Case No Particulars Sec 44AD Option Tax Audit Compulsion
1. First-year of operation- 31.3.2019 and Sec 44AD availed Lock-in period with Sec 44AD for next 5 FY till 31.3.2024 If want to opt-out of sec 44AD before 31.3.2024, then compulsory tax audit for continuous six years
2. First-year of operation- 31.3.2019 and Tax Audit done Option of Sec 44AD open for next years till annual turnover less than 2 crores No compulsion of tax audit if turnover below 1 crore, or 2 crores if Sec 44AD opted
3. First-year of operation- 31.3.2019 and ITR-3 Filed without tax Audit Option of Sec 44AD open for next years till annual turnover less than 2 crores No compulsion of tax audit if turnover below 1 crore, or 2 crores if Sec 44AD opted
4. The seventh year of operation- 31.3.2019 and Sec 44AD availed first time in 31.3.2018 Lock in period for next five years till 31.3.2023 till annual turnover less than 2 crores If want to opt-out of sec 44AD before 31.3.2023, then compulsory tax audit for continuous six years
5. The seventh year of operation- 31.3.2019 and tax audit in 31.3.2018 Option of Sec 44AD open for next years till annual turnover less than 2 crores No compulsion of tax audit if turnover below 1 crore, or 2 crores if Sec 44AD opted
6. The seventh year of operation- 31.3.2019 and ITR-3 in 31.3.2018 without tax audit Option of Sec 44AD open for next years till annual turnover less than 2 crores No compulsion of tax audit if turnover below 1 crore, or 2 crores if Sec 44AD opted

I hope that all the possible doubts and scenarios has been discussed in this article and now the professionals will be able to guide their clients and other querists with utmost clarity and legal backings to their opinions.

Disclaimer: The information contained in this document is intended solely for the dissemination of information and doesn’t aim at soliciting work in any manner. Though meticulous care has been taken but the author assumes no liability in respect of any loss/damage incurred while acting on the basis of information provided. The above framework has been developed by the author after researching for a long time and proprietary intellectual property of the author. The author can be reached at [email protected] and can be called at +91-7011503210.

Author Bio

Qualification: CA in Practice
Company: akshay aggarwal & Co
Location: Central Delhi, New Delhi, IN
Member Since: 13 Apr 2019 | Total Posts: 4
I, CA AKSHAY AGGARWAL, am a Qualified and Practicing Chartered Account and having key interest and expertise in Direct and Indirect taxes. Apart from Chartered Accountancy, my interest in financial markets have persuaded me to persue and clear all the three levels of CFA (USA). I believe my expertis View Full Profile

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4 Comments

  1. Yash says:

    Sir the adhoc rates of 6% and 8% will be applicable on gross receipts and not on net income after deduction of all expenses as it is already assumed that business opting for presumptive taxation for them all the eligible expenses u/s 30 to 38 has been deemed to be allowed and the income so calculated on presumptive basis no deduction will be allowed .

  2. DEVENDRA SHARDA says:

    Consider this case
    Sale is more than 1 crore,44AD not opted, Taxable income is below 250000/-
    In my opinion Tax audit isn’t required, what is your View?

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