CA Sharad Jain

CA Sharad JainTax Audit Liability With Reference To 5 Years’ Restriction Under Section 44AD

Introduction: The section 44AD of the Income Tax Act contains special provisions for computing profits and gains of a business on presumptive basis. It is applicable in respect of eligible business / (es) carried by an eligible assessee.

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. Whenever the business profits are computed in accordance with this section, the assessee is not required to mandatorily maintain books of accounts u/s. 44AA and also not to get them audited u/s. 44AB.

Recently this section has been amended w. e. f. 01/04/2017 i. e. , Assessment Year 2017-18. The old sub section (4) and (5) have been substituted by new sub section (4) and (5) respectively.

Through new sub section (4), a 5 years’ restriction has been put regarding applicability of this section. According to that if section 44AD is opted for any assessment year, then it is to be opted for the next 5 assessment years also (total 6 assessment years i. e. , initial year of opting + next 5 assessment years). If it is not opted for the continuous period of next 5 assessment years also then the assessee will not be eligible for opting Section 44AD for the further next 5 years. (For detailed discussion on this topic, please read the author’s another article on this subject i. e. , An Analysis of 5 Year Restriction under Section 44AD of Income Tax Act, 1961.

Similarly through new sub section (5), it has been provided that in case of applicability of sub section (4) i. e. , infringement of above 5 years’ restriction there will be liability for maintenance of books of accounts u/s. 44AA and audit thereof u/s. 44AB (in case the income exceeds basis exemption limit). (For detailed discussion on this topic, please read the author’s another article on this subject i. e. , Is Tax Audit Necessary in every case where Section 44AD is applicable but Net Profit is less than 8% / 6%.

Now in view of the amended provisions, it has became very complicated to determine the eligibility for opting section 44AD / liability for accounts and audit etc. In this article an attempt has been made to discuss the same in various types of situations.

TYPE – 1 CASES (No 44AB Audit / Other Ineligibility Cases) :

(Terms Used in Table are I-Individual, H-HUF, P-Partnership Firm, NR-Not Relevant, OI-Other Ineligibility)

Status
A. Y. 17-18
A. Y. 18-19
Eligibility For Sec. 44AD In A. Y. 19-20 (e. g. , due to agency business etc. reason) (Other than 5 Year Restriction)
Eligibility For Sec. 44AD In A. Y. 19-20 (Considering 5 Years Restriction)
Actual Option Taken In A. Y. 19-20
Net Profit 8%/6% Or More In A. Y. 19-20
Total Income Over Basic Exemption Limit In A. Y. 19-20
A/c & Audit Liability In A. Y. 19-20
Eligibility To Opt 44AD in A. Y.  20-21 (Considering 5 Year’s restriction criteria)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
I, H, P 44AD 44AD Yes Yes 44AD Yes NR No Yes
I, H 44AD 44AD Yes Yes No 44AD No Yes Yes No
I, H 44AD 44AD Yes Yes No 44AD No No No No
P 44AD 44AD Yes Yes No 44AD No NR (See Note -1) Yes No
I, H 44AD No 44AD Yes No No 44AD Yes / No Yes Yes No
I, H 44AD No 44AD Yes No No 44AD Yes / No No No No
P 44AD No 44AD Yes No No 44AD Yes / No NR (See Note -1) Yes No

Note 1:– The concept of basic exemption limit is attached only with individuals, HUFs etc. In case of partnership firm, there is no basic exemption limit. Therefore, the accounts and audit liability may arise in every case where there is infringement of 5 years’ restriction (single criteria) irrespective the fact that whether there is a profit or loss or no profit-no loss i. e. , zero profit.

However, there may be an another opinion in respect of partnership firms. One may claim that the accounts and audit liability should be in case of profit only and not in case of zero profit / loss. It may be on the basis that the words used in Sub section (5) are “maximum amount not chargeable to tax” i. e. , in case of Individuals and HUFs the audit liability will not arise until there will be a taxable income. In case of partnership firms, the levy of tax starts practically from one rupee income. It is not leviable on loss or zero income. Thus, practically claiming keeping of the partnership firms at par with individuals and HUFs, the above claim may be made.

However, in absence of any clarification from CBDT / guidance in the form of any judicial decision, the strict opinion i. e. , first opinion has been considered in various types of cases discussed in this article.

Note 2 :– Amendment to section 44AD (i.e., new sub section (4) and (5) are applicable w.e.f. 01/04/2017 i.e., from Assessment Year 2017-18. Therefore, it is presumed that the counting of continuous 6 assessment years for the purpose of sub section (4) may be done initially from the Assessment Year 2017-18 itself and the status of options exercised in the earlier years may not be taken in to consideration.

TYPE – 2 CASES (44AB Audit / Other Ineligibility Cases):

Status
A.Y. 17-18
A.Y.  18-19
Eligibility For Sec. 44AD In A.Y. 19-20 (e.g., due to agency business etc. reason) (Other  than  5 Year Restriction)
Eligibility For  Sec. 44AD In A.Y. 19-20 (Considering 5 Years Restriction)
Actual Option Taken In  A.Y. 19-20
Net Profit 8%/6% Or More In A.Y. 19-20
Total  Income  Over Basic Exem-ption Limit In A.Y. 19-20
A/c & Audit Liability In A.Y. 19-20
Eligibility To Opt 44AD in A.Y. 20-21 (Consi-dering  5 Year’s restriction criteria)
I,H,P

 

44AB /OI 44AB /OI 44AB /OI NR NR NR NR 44AB Audit / No Audit (OI) Yes
I,H,P 44AB /OI 44AB /OI Yes Yes 44AD Yes NR No Yes
I,H,P 44AB / OI 44AD 44AB / OI NR NR NR NR 44AB Audit / No Audit (OI)  

 

Yes (See Note-3)

I,H,P 44AD 44AB /OI 44AB/OI NR NR NR NR 44AB Audit / No Audit (OI) Yes
1,H,P 44AB /OI 44AD Yes Yes 44AD Yes NR No Yes
1,H 44AB /OI 44AD Yes Yes No 44AD No Yes Yes No
P 44AB /OI 44AD Yes Yes No 44AD No NR (See Note -1) Yes No
I,H,P 44AD 44AB /OI Yes Yes (See Note-3) 44AD Yes NR No Yes
I,H 44AD 44AB /OI Yes Yes No 44AD No Yes Yes No
I,H 44AD 44AB /OI Yes Yes No 44AD No No No No
P 44AD 44AB /OI Yes Yes No 44AD No NR (See Note-1) Yes No
I,H,P 44AD 44AD 44AB /OI NR NR NR NR 44AB Audit / No Audit (OI) Yes
I,H 44AD No 44AD despite eligibility 44AB / OI NR NR NR NR 44AB Audit / No Audit (OI) No

(See Note-4)

Note 3:– The author is of the opinion that the assessee will be debarred from opting section 44AD only if despite eligibility for section 44AD he does not follow section 44AD continuously for next 5 Assessment Years. He may not be debarred in those cases where he could not follow section 44AD continuously due to ineligibility caused by operation of law e.g., turnover exceeded Rs. 2 Crore etc.

Note 4 :– Perhaps this is the most complicated situation. In this case 5 years’ restriction has been violated in Assessment Year 18-19. Therefore, the assessee may not be eligible for opting section 44AD from A. Y. 2019-20 to 2024-25. Suppose in the immediately next Assessment Year, due to operation of law, the assessee becomes liable for audit u/s. 44AB due to turnover basis. Now the question arises that whether from the Assessment Year 2020-21 the case of the assessee will be seen afresh and the assessee will again became eligible for section 44AD from the Assessment Year 2020-21 or the ineligibility for the next 5 years as determined in Assessment Year 2019-20 will remain continue till Assessment Year 2024-25. The author is of the view that in absence of any clarification / guidance, the most prudent view may be taken i. e. , to get the audit done under sub section (5) for the Assessment Year 2020-21 and subsequent years. The same should have been got done even though if the net profit in the Assessment Year 2020-21 (& subsequent years) is / more than 8% / 6%.

TYPE -3 CASES (Some Not Practicable Cases) :-

Status
A. Y. 17-18
A. Y. 18-19
Eligibility For Sec. 44AD In A. Y. 19-20 (e. g. , due to agency business etc. reason) (Other than 5 Year Restriction)
Eligibility For Sec. 44AD In A. Y. 19-20 (Considering 5 Years Restriction)
Actual Option Taken In A. Y. 19-20
Net Profit 8%/6% Or More In A. Y. 19-20
Total Income Over Basic Exemption Limit In A. Y. 19-20
A/c & Audit Liability In A. Y. 19-20
Eligibility To Opt 44AD in A. Y. 20-21 (Considering 5 Year’s restriction criteria)
I, H No 44AD 44AD Yes Yes No 44AD No No No No

 

 

I, H No 44AD 44AD Yes Yes No 44AD No Yes Yes No

 

F No 44AD 44AD Yes Yes No 44AD No NR (See Note-1) Yes No

 

I, H, F No 44AD No 44AD Yes Yes 44AD Yes NR No Yes

 

I, H, F No 44AD No 44AD Yes Yes No 44AD No NR No (See Note – 5) Yes

 

I, H, F No 44AD 44AD Yes Yes 44AD Yes NR No Yes

 

I, H, P 44AB / OI 44AB/ OI Yes Yes No 44AD No NR No (See Note-5) Yes
(Note 5 :- The above cases are not practicable because they says that an eligible assessee has not followed Section 44AD in the first year of eligibility. If the assessee was eligible for S. 44AD in A. Y. 17-18 (or in any later year for the first time) then he had to mandatorily follow section 44AD for A. Y. 17-18 (or in that later year of first time eligibility). It is so because the alternative option of audit was not available in these cases. The same is available only on infringement of 5 Year’s restriction i. e. , the option of audit is available only when section 44AD is adopted first in any year and then it is not continuously followed for the next 5 years. It is not available in the first year of being eligible. It is available only in subsequent years.

NEED TO REMAIN CAREFUL :- That the eligibility for section 44AD and liability for audit is required to be determined logically and carefully taking in to consideration the facts of the case. It is most important in the present scenario because probably in the near future, the above eligibility / liability can be automatically determined by the departmental computer system while processing the return.

SUB SECTION (4) & (5) OF SECTION 44AD :

The provisions of sub section (4) & (5) are 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).

(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.

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.

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One Comment

  1. harendrakhira says:

    government think we all living in USA we all indian is USA citizen And our super computer is better than america and all villager’s thumb impressional men know how to oprate computer..and how to pay tax to india ….it is all

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