Audit not compulsory even if income offered for taxation is less than 8% or 6% u/s 44AD

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section 44AD

Section 44AD & section 44ADA requires taxpayer to carry out the audit of their books of accounts and submit audit report if the income offered for taxation is less than the prescribed percentage i.e., 8% for section 44AD (6% if payment received by digital mode) & 50% for section 44ADA.

Often, taxpayer have actual profit is below the specified percentage of 8%, 6% or 50% & their turnover is below regular audit limit u/s 44AB, in such cases they are left with no choice but either to offer the profit at specified percentage for taxation or to carry out the audit compulsorily.

Section 44AD & 44ADA reads as under:

Special provision for computing profits and gains of business on presumptive basis.

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession” :

[Provided that this sub-section shall have effect as if for the words “eight per cent”, the words “six per cent” had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.]

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

[(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 undersection 44AB.]

(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to—

 (i)  a person carrying on profession as referred to in sub-section (1) of section 44AA;

(ii)  a person earning income in the nature of commission or brokerage; or

(iii)  a person carrying on any agency business.

Explanation.—For the purposes of this section,—

(a)  “eligible assessee” means,—

 (i)  an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and

(ii)  who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” in the relevant assessment year;

(b)  “eligible business” means,—

 (i)  any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

(ii)  whose total turnover or gross receipts in the previous year does not exceed an amount of [two crore rupees].

Special provision for computing profits and gains of profession on presumptive basis.

44ADA. (1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession 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 (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.]

Readers would recall that the provision of section 44AD was earlier contained in section 44AF. Section 44AF was applicable to assessee engaged in “retail trade” only. After section 44AF was taken over by section 44AD, scope of applicability was stretched from “retail trade” to “Eligible business”. Scope of “Eligible business” is given as under:

 (b)  “eligible business” means,—

 (i)  any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

(ii)  whose total turnover or gross receipts in the previous year does not exceed an amount of [two crore rupees].

From “retail trade” earlier, scope of eligible business is stretched to almost everything which is taxable as business income. It means that transaction of shares & securities, future & options, commodity exchange transactions & other business transactions would be within the scope of section 44AD.

There are exceptions which many are not aware of. First of all, Section 44AD is not applicable to 3 classes of assessee, as under:

 (i)  a person carrying on profession as referred to in sub-section (1) of section 44AA. These persons are now covered by section 44ADA.

(ii)  a person earning income in the nature of commission or brokerage; or

(iii)  a person carrying on any agency business.

Exceptions in (ii) & (iii) as mentioned above means that

  1. if their turnover is below the limit of Rs. 1 Cr (& not Rs. 2 Cr as per section 44AB applicable for compulsory tax audit) and
  2. who are offering income for taxation at less than 8% or 6%

then the audit would not be compulsory.

Now, come to an interesting aspect. If a person incurs loss or have actual profit below the specified percentage of 8%/6% turnover then audit would be mandatory. This is despite the fact that the transaction is well supported by the documentary evidences like in the case of F & O and shares transactions.

However, there is one concession which gives relief from compulsory audit.  Sub section 5 to section 44AD & sub section 4 to section 44ADA, reads as under:

Section 44AD (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 undersection 44AB.]

Section 44ADA(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession 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 (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.]

The persons covered above “whose total income exceeds the maximum amount which is not chargeable to income-tax”, are only required to get the books of accounts audited. It conveys that the person whose total income is below the amount chargeable tot tax will not be covered by section 44AD and so will not be required to get the books of accounts audited.

Effectively, for individual whose “total income” is below the basic exemption limit may not be required to get the books of accounts audited even if the profit from business is less than specified 8% or 6%. It is only if the “total income” exceeds basic exemption limit when the audit would be mandatory. Total income is the income after deduction under Chapter VIA.

Person having loss from F & O Transactions, speculation loss in shares as such may not be covered by audit provision u/s 44AD or 44ADA if even after including their income from  all other sources” is below the basic exemption limit.  It may be noted that section 44AD refers to “whose total income exceeds the maximum amount which is not chargeable to income-tax” which means that, not only income from business transaction but income from all the sources would be relevant for section 44AD & 44ADA.

New assessee will not be able to avail the immunity in the first year under section 44AD of Income Tax Act 1961,even if income is below the basic exemption limit.

However in subsequent year if income is above basic exemption limit presumptive taxation scheme under section 44AD of Income Tax Act 1961 can be availed.

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