Section 44AB vs 44AD – Presumptive Taxation (With Examples)
We’ve just wrapped up the non-audit tax filing season, and now we’re entering the critical and often confusing period of Tax Audits. Why do I call it confusing? Despite over several years of writing about Tax Audits, including numerous articles and full-length books, I still receive the queries around the applicability of tax audit in certain cases. For clearing the doubts, I have tried explaining the same below with the help of basic and little complex illustrations on Section 44AB as well as 44AD and I believe these would help in better understanding of the provisions.
Applicability of Section 44AB: In case of business, tax audit is required if the turnover of eligible assessee from the business exceeds Rs. 1 crore in a financial year.
But if an assessee whose cash receipts and cash payments do not exceed 5% of the gross receipts/turnover and total payments respectively, then he is not required to conduct tax audit of his books if the turnover is upto 10 crores rupees.
In case of profession, tax audit is required if turnover exceeds Rs. 75 lacs in a financial year.
To avoid this confusion due to multiple limits, let’s understand these with the help of illustrations:
Illustrations:
Que: X carries on business and his total turnover from the business is Rs. 1.2 Cr? Do he require to get his books audited under Income Tax Act?
Ans: Yes, as his gross turnover has exceeded the limit of Rs. 1 Cr, he is require to get his accounts audited.
Que: Y carries on profession and his gross receipts from the profession is Rs. 52 lacs? Dohe require to get his books audited under Income Tax Act?
Ans: Yes, as his gross receipts has exceeded the limit of Rs. 50 Lacs, he is require to ge this accounts audited.
Que: Z carries on business and his total turnover from the business is Rs. 7.5 Cr? His cash receipts and cash payments do not exceed 5% of the gross receipts/turnover and payments respectively. Does he require to get his books audited under Income Tax Act?
Ans: No, as per the amended provisions of the Finance Act, 2023, any person whose cash receipts and cash payments do not exceed 5% of the gross receipts/turnover and payments, then he is not required to conduct tax audit of his books if the turnover is up to 10 crores rupees.
Que: Vipul carries a business whose total turnover for the financial year 2023-24 is Rs. 4.5 crore. His total cash receipts and cash payments are Rs. 15.75 lac and 11.25 lac respectively. Does he require to get his books audited under Income Tax Act?
Ans: As per the amended provisions of the Finance Act, 2023, any person whose cash receipts and cash payments do not exceed 5% of the gross receipts/turnover and payments respectively, then he is not required to conduct tax audit of his books if the turnover is upto 10 crore rupees. In this case, the turnover is less than 10 crore rupees, total cash receipts are 15.75 lac which are 3.5% of the turnover and the cash payments are 11.25 lac which we are assuming 2.5% of the total payments. Both the amounts are less than 5% of the respective limits individually, so no tax audit is required.
Que: Vikas carries a business whose total turnover for the financial year 2023-24 is Rs. 7.5 crore. His total cash receipts and cash payments are Rs. 95 lac and 35 lac respectively. Does he require to get his books audited under Income Tax Act?
Ans: As per the amended provisions of the Finance Act, 2023, any person whose cash receipts and cash payments do not exceed 5% of the gross receipts/turnover and payments respectively, then he is not required to conduct tax audit of his books if the turnover is up to 10 crore rupees. In this case, although the turnover is less than 10 crore rupees but total cash receipts are Rs. 95 lac which is 12.66% of the turnover and the cash payments are 35 lac which are assumed to be 2.5% of the total payments. As, one of the amounts is not satisfying the condition of less than 5% of the limit individually, so tax audit is required.
Que: Ankit carries a business whose total turnover for the financial year 2023-24 is Rs. 11 crores. His total cash receipts and cash payments are Rs. 15.75 lac and 11.25 lac respectively. Does he require to get his books audited under Income Tax Act?
Ans: Yes. As the turnover has exceeded 10 crore rupees then in any case, audit is required.
These were very simple. Now let’s mix up Section 44AD with it.
Applicability of Section 44AD:
Section 44AD: any eligible assessee who is deriving his income from eligible business (means business except business of plying, hiring or leasing goods carriages) whose total turnover from the eligible business do not exceeds Rs. 2 crores and who declare his profit at the rate of 8% of total turnover, he is not required to get his books audited.
Further, if an eligible assessee whose total turnover or gross receipts is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account then instead of declaring 8% of his turnover as profit, he just needs to declare 6% of his turnover as profit.
As per amendment given under Finance Act, 2023, the limit of Rs. 2 crores have been enhanced to Rs. 3 crores if 95% of the receipts are through online modes.
Illustrations:
Que: X carries on business and his total turnover from the business is Rs. 1.2 Cr? He opted for presumptive taxation scheme and declared profit of Rs. 10 lacs Do he require to get his books audited under Income Tax Act?
Ans: Now understand the concept, turnover of X has exceeded Rs 1 crore but he has opted for presumptive taxation scheme under section 44AD and declared income of Rs. 10 lacs which is more than 8% of his total turnover. Now as per the section 44AD,
The turnover should not exceed 2 crores = condition fulfilled
And
The declared profit should exceed 8% = condition fulfilled
As both the conditions are fulfilled, X is not required to get his books audited.
Que: A carries on business and his total turnover from the business is Rs. 2.96 Cr? He opted for presumptive taxation scheme and declared profit of Rs. 12.74 lacs. He derived his total turnover via account payee cheque. Do he require to get his books audited under Income Tax Act?
Ans: A has opted for presumptive taxation scheme under section 44AD, Check the conditions of Section 44AD:
The turnover should not exceed Rs. 2 crores rupees but in this case the turnover is higher than this amount bur before forming any conclusion, let’s check if assessee is eligible for the enhances limit of RS. 3 crores.
For availing the benefit of enhanced limit of Rs. 3 crores, more than 95% of the turnover must be derived electronically. In the given case, it is specifically mentioned that client has derived his total turnover via account payee cheque. Hence, he is eligible for the enhanced limit.
A fulfil the given conditions. Therefore, No Tax Audit required.
(Most common practical issue)
Que: M carries on business and his total turnover from the business is Rs. 96 lac? He opted for presumptive taxation scheme since the last 3 yrs and in the current year declared profit of Rs. 3.5 lac. Does he require to get his books audited under Income Tax Act?
Ans: M has opted for presumptive taxation scheme under section 44AD, Check the conditions of Section 44AD:
The turnover should not exceed 2 crore = condition fulfilled
And
The declared profit should exceed 8% = condition not fulfilled
Now the assessee says, although the declared profit is less than 8% but the turnover is also less than 1 crore. so, according to him he is not required to conduct tax audit as per section 44AB in the current year.
But here is a twist:
As per the provisions of 44AD(4) & (5), if an assessee has opted for this section then he has to maintain it for next continuous 5 years. In case he opt out from this section then he will not be allowed to opt this section again for the next 5 Assessment years and also for the next 5 assessment years he is required to maintain his books and get them audited if the profit is more than basic exemption limit of 2.5 lac/3 lac/5 lac irrespective of the turnover.
So, M has to declare the profit of minimum 8%. If not, he will not allowed to opt for this section again in subsequent 5 assessment years and he has to maintain books and get them audited for the next 5 years even if the turnover is less than 1 crore if his net profit is more than basic exemption.
Like here the profit is 3.5 lac which is more than 2.5 lac (basic exemption assuming assessee of 30 yrs of age). so, the audit has to be done. it does not matter that the turnover is less than 1 crore.
Que: Q carries on business and his total turnover from the business is Rs. 1.96 Cr? He opted for presumptive taxation scheme and declared profit of Rs. 10.76 lac but now he is thinking to avail the benefit of 10 crore limit. guide him.
Ans: Section 44AB(e) says that those assesses who has opted for presumptive taxation scheme under 44AD, the applicable turnover limit for them is Rs. 2 crore.
So, in crux. that benefit of 10 crore limit is not applicable to the assessees opting for presumptive taxation scheme of 44AD.
In the above question, assessee has opted for presumptive taxation scheme under 44AD but now his profit is less than 8% of the turnover and assessee is thinking to avail the benefit of 10 crore limit.
As per the provisons, The assessees who has opted for 44AD, they can’t take the benefit of 10 crore limit but Practically, the assessee is now out from 44AD which means now he is free from the limit of 2 crore. So, can’t he avail the benefit of 10 crore limit?
The answer is No because as it is explained in the previous illustration that Assessee who opt out of 44AD before completion of 5 years, he has to maintain books and get them audited irrespective of his turnover for the next 5 years. so, he can’t take the benefit of 10 crore limit of 44AB as he will continue to be bound by the provisions of 44AD for the next 5 years.
Some Other Issues:
1. How to calculate turnover in the case of multiple businesses?
Where an assessee is carrying on more than one business, sale turnover or gross receipts from all businesses shall be clubbed together. However, if the assessee is opting for the presumptive taxation scheme, the turnover of such businesses shall be excluded while determining his total sales turnover or gross receipts.
2. How to check the threshold limit if the assessee is carrying on business and profession at the same time?
The ICAI, in the guidance note on tax audit, provides that if an assessee is carrying on a business and a profession, then a tax audit is required if turnover/receipts from either business or profession exceed the prescribed threshold limit.
For example, the professional receipts of an assessee are Rs. 54 lakhs and the total turnover from the business is Rs. 72 lakhs. It will be necessary for him to get the accounts of the profession and business audited because the gross receipts from the profession exceed Rs. 50 Lakhs.
Similarly, if the professional receipts are Rs. 42 lakhs and total turnover from business are Rs. 86 lakh. In this circumstance, as the gross receipt or turnover from a profession or business does not exceed the limits specified in Section 44AB, there is no need to conduct a tax audit.
3. How to calculate turnover in case of Derivatives or Futures & Options transactions?
As per the guidance note on tax Audit by ICAI, it is mentioned that the total of favourable and unfavourable differences from the transactions are to be taken in absolute terms and aggregated to get the turnover of derivatives or futures and options.
Example:
S.No
Particulars
Net Gain/Loss
Absolute
1
FO transaction 30 April, 2023
-3,50,00,000
3,50,00,000
2
FO transaction 14 May, 2023
1,50,00,000
1,50,00,000
3
FO transaction 28 Oct, 2023
-2,54,500
2,54,500
4
FO transaction 2 Feb 2024
50,00,000
50,00,000
5
FO transaction 15 Mar 2024
-2,75,00,000
2,75,00,000
Total
-4,27,54,500
7,82,54,500
So, as mentioned above, the turnover in the above case is Rs. 7,82,54,500.
Conclusion: In summary, Tax Audits, particularly under Sections 44AB and 44AD, can be tricky due to the various limits and rules involved. This article has aimed to clear up these confusions with clear explanations and practical examples. By understanding the specific criteria, such as turnover limits, cash receipt rules, and the impact of choosing or leaving the presumptive taxation scheme, we can better handle our tax audit responsibilities. It’s important to fully grasp these rules and refer to the Bare Act to avoid common mistakes and stay compliant.
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Disclaimer: The information shared by the author is purely reflects his personal views. It is strictly advisable to refer the Bare Act provisions of Income Tax Act, 1961 before forming any legal opinion based on above article. The author will not be responsible in case of any damage from the legal opinion formed based on above article.
(Republished with amendments)
