5 Years of Rule for Tax Audit in section 44AD: CBDT need to clarify few issues

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5 Years of Rule for Tax Audit in section 44AD: CBDT need to clarify few issues

Law is not always logical. Though benefit is conferred by one section, it become penalizing by its clauses afterwards.

Section 44AD of the Income Tax Act is a provision which provide for computing profits and gains of a business on presumptive basis, in respect of eligible business carried by an eligible assessee.

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. However, this section has been adversely amended from Assessment Year 2017-18 with new sub section (4) and (5) in place of old 4 & 5 sub sections which reads 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. 

By new sub section (4),’ restriction of 5 years has been placed i.e., 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) and 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.

Now, new sub section (5), it is provided that in case of applicability of sub section (4) i.e., in case of 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).

There is an important issue which emerges for reckoning the period of 5 years. Amendment to section 44AD (i.e., new sub section (4) and (5) is applicable from 01/04/2017 i.e., from Assessment Year 2017-18. Now, question arises regarding the counting of the continuous 6 assessment years for the purpose of sub section (4). Will it be done initially from the Assessment Year 2017-18 itself or even the options exercised in the earlier years can also be counted? Another important question is, if the person has continuously opted for 5 years period in the past then the provision of 5 years restrictions will not be there as the sub section that

(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… 

 It means that if a person has opted for 44AD for 5 years period continuously then no 5 years restrictions would be there if assessee decides to opt out. 

 The issues is controversial and it would be in the internet of the masses if the CBDT clarifies it suitably.

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