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Immunity from audit u/s 44AD is not available in the first year of Business even if income is below the basic exemption limit!
Presumptive taxation income under section 44AD of the Income Tax Act-1961
Section 44AD of the Income Tax Act-1961
Under section 44AD of the Income Tax Act-1961, following person can opt for presumptive taxation scheme:
- Individual being Resident in India
(Non Resident cannot opt for section 44AD)
- HUF being resident in India
- Partnership Firm
Only above categories of persons are eligible to opt for presumptive taxation u/s 44AD if their turnover is less than Rs. 2 Cr. In addition to above, person who is earning commission income or is enaged in the agency business cannot opt for section 44AD. For professionals, presumptive scheme u/s 44ADA is available and section 44AD is not available for specified professionals. Similarly, person in to the business of plying, hiring or leasing is covered by section 44AE and so option to file return u/s 44AD is not available for such person.
Further, it may be noted that the companies, LLP, Trust, AOP, BOI cannot opt for presumptive taxation scheme.
There is one important aspects that assessee covered by section 44AD need to note. Before this, first know the some provision in section 44ADA.
Section 44ADA provides that the specified professionals whose gross receipts doesn’t exceed can opt for presumptive taxation by offering 50% of their income for taxation. Unlike section 44AD, it is applicable to all classes of taxpayer and not restricted to Individual, HUF & Firms. Such Assessee offering income less than 50% is required to get the books of accounts audited.. However, there is a further provision under section 44ADA which provides that person offering income less than 50% is NOT required to get the books of accounts audited if their income is below the income not chargeable to tax. It means that if income is less than basic exemption limit (after chapter VIA deduction), then audit would not be mandatory.
Provision similar to above for non audit was available in section 44AD prior to amendment in section 44AD by the FA-2016.
After amendment in 2016, old sub section (4) was replaced by new sub section (4) which reads as under:
n 44AD(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).
It may be noted that section 44AB which provides for audit of books of accounts have 5 clauses which reads as under:
44AB. Every person,—
n (a) carrying on business… OR
n (b) carrying on profession..; or
n (c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or
n (d) carrying on the 52[profession] shall, if the profits and gains from the 52[profession] are deemed to be the profits and gains of such person under section 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year; or
n (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,
n get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed
It may be noted that 44AB, clause (e) refers to section 44AD(4) only. The said sub section (4) to section 44AD is applicable only if the assessee has opted for presumptive taxation scheme in the first year i.e., 44AD(4) comes in to play for 2nd year and onwards. If the assessee has opted for section 44AD in the first year and in 2nd & subsequent years wish to opt out of section 44AD then only section 44AD(4) would come in to play.
Unlike section 44ADA, there is no provision in section 44AD which provides immunity to the assessee in the first year from audit if their income is below the taxable limit.
In short, in the first year of business for eligible assessee covered by provision of section 44AD, audit is compulsory even if there is a loss or income is below the basic exemption limit.
Whenever a new amendment is introduced by the lawmaker, the law is drafted in such a way that the intended benefit stands withdrawn . Present amendment is a part of such drafting.