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Applicability of provisions of Sections 44AA, 44AB and 44AD when turnover is up to Rs. 1 crore

CA.R.S.KALRA 
on 11 December 2020

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Broadly speaking, provisions of Section 44AD of the Act are applicable to Resident Individual or HUF or Partnership Firm engaged in the business other than specified (excluded) business whose total turnover/ gross receipts are Rs.2 Crores or less. Such an assessee is given an option to file presumptive income return. The assessee filing presumptive or higher income return would enjoy the relaxation of not getting its accounts audited u/s 44AB even if total sales / turnover / gross receipts exceed Rs. 1 Crore. If such an assessee files below presumptive income return, barring certain situations, it will have to get its accounts audited even if total sales / turnover/ gross receipts are / is Rs. 1 Crore or less. It is also to be noted that if an assessee does not opt for presumptive taxation system,then he is required to maintain books of accounts and get tax audit done u/s 44AB(a) of the Act if his turnover is exceeding 1 crore and if turnover is upto 1crore,he is required to maintain books of account and get tax audit done u/s 44AB(e) of the Act. But there are certain situations in which assessee is either not required to maintain books or get its audit done u/s 44AB of them.

1. A person who has started a new business

2. If an assessee who has never opted the provisions of44AD

3. If taxable income of the assessee is below exemptionlimit

Before discussing the above cases, first of all we must see the following sections of Income Tax Act, 1961.

44AA. (2) Every person carrying on business or profession [not being a profession referred to in sub-section (1)] shall,—

(i) if his income from business or profession exceeds one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds ten lakh rupees in any one of the three years immediately preceding the previous year;or

(ii) where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed ten lakh rupees, during such previous year;or

(iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AE or section 44BB or section 44BBB, as the case may be,and the assessee 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, during such previous year; or

(iv) where 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, keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act:

Applicability of provisions of Sections 44AA, 44AB and 44AD when turnover is up to Rs. 1 crore

ANALYSIS OF SEC44AA(2) OF THE ACT

Sec 44AA(2) requires persons carrying on business to maintain books of accounts in certain cases. If a person is carrying on business, he is required to maintain books if his turnover exceeds Rs. 10,00,000 or his profits from business exceeds Rs. 1,20,000 in any of the three preceding years. Either of the condition satisfied will require person to maintainbooksbecausetheword‗or‘isusedbetweentheconditions.Ifanyconditionis satisfied in one or more years out of the three years preceding the previous year shall be required to maintain thebooks.

In case a new business is started during the previous year, if the turnover is likely to exceed Rs. 10,00,000 or profit is likely to exceed Rs. 1,20,000 in such previous year, assessee is required to maintain books of accounts for that previous year.

If an assessee is declaring profits lower than the rate of profits specified in sec 44AE, or 44BB or 44BBB, then the assessee is required to maintain books.

In respect of sec 44AA(2)(iv) of the Act, w.e.f. AY 2017-18, the assessee shall keep/maintain such books of account & other documents, if the provisions of Sec. 44AD(4) are applicable {i.e. withdrawal of benefit u/s 44AD for next 5 A.Y.(s)} and his income exceeds the maximum amount which is not chargeable to income-tax. [as amended by Finance Act, 2016].

As per sec 44AD(4), the assessee has declared profits as per sec 44AD(1) in any previous year and in the next 5 years he has failed to opt sec 44AD, then the assessee is not allowed to opt sec 44AD in the subsequent 5 years after the year in which he failed to opt sec 44AD. The assessee will be required to maintain books if sec 44AD(4) is applicable and his income exceeds the basic exemption limit.

Sec 44AA(2)(iv) can be summarized as:

a) The assessee is not eligible for presumptive taxation u/s 44AD for subsequent 5 years, due to opting of presumptive taxation u/s 44AD in any previous year and not opting sec 44AD in any of subsequent 5 consecutive Assessmentyears.

b) His income exceeds the basic exemption limit.

Note: Limit of Rs.1,20,000/- for Total Income & Rs.10,00,000/- for total sale receipts enhanced to Rs.2,50,000/- & Rs.25,00,000/- respectively in respect of Individuals/ HUF

44AB(e) Every person 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

Analysis of Sec 44AB(e) of the Act

It is to be noted that u/s 44AB(e) an assessee is required to get his books of account audited who is carrying on the business and is not eligible to claim presumptive taxation under Section 44AD for 5 subsequent years due to opting for presumptive taxation in one tax year and not opting for presumptive tax for any of the subsequent 5 consecutive years provided his income exceeds maximum amount not chargeable to tax.

The two conditions for applicability of Sec 44AB(e) can be summarized as:

a) The assessee is not eligible for presumptive taxation u/s 44AD for subsequent 5 years , due to opting of presumptive taxation u/s 44AD in any previous year and not opting sec 44AD in any of subsequent 5 consecutive Assessment years.

b) His income exceeds the basic exemption limit.

Sec 44AD(4)

44AAD(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).

ANALYSIS of Sec 44AD(4) of the Act

The above provision postulates as the following:

a. The assessee should have declared profit as per section 44AD for any previous year; and

b. The assessee should have declared profit not in accordance with section 44AD in any of the five assessment years succeeding the previous year in which profit was declared as per section 44AD as per condition(a).

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 under section44AB.

Analysis of Sec 44AD(5) of the Act

Sub Section 5 will be applicable if following conditions are satisfied.

a. An eligible assessee to whom the provisions of sub-section (4) are applicable;and

b. The total income of that assessee has exceeded the maximum amount which is not chargeable toincome-tax.

In other words, sub-sections (4) and (5) are mutually inclusive. Provisions of sub-section

(4) shall not be applicable to an assessee who never opted for the scheme in any of the earlier previous years, as it provides that the eligible assessee should have declared profits as per section 44AD for any previous year. Under this situation, assessees who have never ever opted for the scheme till the AY 2016-17 can enjoy the benefits by showing lesser profits for the subsequent assessment years.

On combined analysis of 44AA(2)(iv), 44AB(e) and 44AD(4) we can interpret that u/s 44AB(e) those assessees are required to get their books audited whose

a. Total income exceeds basic exemptionlimit.

b. Earlier assessee has declared income u/s 44AD in any previousyear.

c. Even being eligible, assessee do not declare income as per sec 44AD in any of next 5 A.Ys in which he first declared income as per sec44AD.

A person who has started a new business

It is very interesting issue in which an assessee who has started a new business during the previous year and he is unable to decide whether to opt for sec 44AD of the Act or not. If he decides to avail the benefit of sec 44AD, then he has to declare profits at the rate of 8% or 6% of turnover or at higher rate as specified in sec 44AD. Then he shall neither be required to maintain books of account nor required to get them audited.

In case, he decides to not opt for sec 44AD, the situation will be entirely different.

 

He has not declared profits u/s 44AD in any of the preceding previous years. Further, he has not failed to declare profits in subsequent 5 years as per sec 44AD. 2 of the 3 conditions discussed above for audit u/s 44AB(e) are not satisfied. The assessee will not be required to get his books of account audited in first year of business if his turnover is below Rs. 1 crore and he not opts for sec 44AD in such previous year. However, he will be required to maintain books of accounts as per 44AA(2)(ii) if in case of individual/ HUF turnover is likely to exceed Rs. 25 Lakh or his profits are likely to exceed Rs. 2.5Lakh.

Therefore, assessee who has started a new business would not be required to get books of accounts audited even if he is declaring profits below 8% or 6% because the condition that in earlier previous year he has declared income as per sec 44AD is not satisfied. The income may be below taxable limit or higher thanthat.

Example: Mr. Vijay has started a new business in F.Y. 2019-20. He is not opting for sec 44AD

Turnover (Rs.)

Income/ Profits

Maintenance of Accounts

Audit of Books

20,00,000

1,50,000

No

No

20,00,000

3,00,000

Yes (profits exceeds Rs. 2.5 L)

No

50,00,000

3,25,000

Yes

No

50,00,000

1,75,000

Yes

No

From combined study of sec 44AA, 44AB and 44AD, we can conclude:

1. If an assessee who has never opted the provisions of44AD

In this case if an assessee who has never opted the provisions of sec 44AD of the Act will not be required to get his books of accounts audited if his turnover is below Rs. 1 crore even if his declaring profits below 8% or 6% of turnover because sec 44AD(4) is not applicable in his case. Two of the 3 conditions mentioned on combined analysis of sec 44AA(2), 44AB(e) and 44AD(4) are not satisfied in this case i.e. assessee has not declared income u/s 44AD in any previous year and assessee has not failed to opt sec 44AD in subsequent 5 years. It does not matter whether the income is below the basic exemption limit or higher than that.

This will be applicable for the person not only in the first year, rather in later years also. If in later years he has not declared income u/s 44AD even once, he would not be required to get books of accounts audited even his profits are below the rates provided in sec 44AD provided turnover is below Rs. 1crore.

Example:

A.Y.

Turnover (Rs.)

Income/ Profits

Maintenance of  Accounts

Audit of Books

2016-17

1,35,00,000

4,00,000

Yes

Yes 44AB(a)

2017-18

2,50,00,000

5,50,000

Yes

Yes 44AB(a)

2018-19

1,25,00,000

3,00,000

Yes

Yes 44AB(a)

2019-20

80,00,000

3,25,000

Yes 44AA(2)(i)

No

2020-21

50,00,000

1,75,000

Yes 44AA(2)(i)

No

2021-22

75,00,000

4,25,000

Yes 44AA(2)(i)

No

From the above table it is clear that under this situation, assessees who have never ever opted for the scheme till the AY 2016-17 can enjoy the benefits by showing lesser profits for the subsequent assessment year.

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2. No audit is required if turnover is up to Rs. 1 crore and taxable income is below exemption limit

From the reading of provisions of the sec 44AD(5), it is concluded that there are two conditions of sec 44AD(5) of the Act. The first is regarding applicability of provisions of sec 44AD(4) of the Act and the second is that the income of assessee is more than the basicexemptionlimit.Thesebothconditionsareconnectedwithword―and‖.Thesetwo conditions must be fulfilled simultaneously. If the assessee fails to fulfill any one condition or both, then the assessee is not required to maintain books of account and not to get the accountsaudited.

In other words, we can say that the assessee is bound to get the books of accounts audited, if the following two conditions are satisfied:-

a. Earlier assessee has declared income u/s 44AD in any previous year and assessee do not declare income as per sec 44AD in any of next 5 A.Ys in which he first declared income as per sec44AD.

b. The total income of the assessee exceeds the maximum amount which is not chargeable to incometax

To claim the benefit of above sec 44AD(5),firstly we have to see the meaning of total income. As per sec 2(45) of the Act,Total income means the total amount of income referred to in section 5 computed in the manner laid down in the Act. Thus total income for the purpose of Sec 44AD(5) would be determined as under :

i) Income from all heads of income be aggregated after adjusting for brought forward losses, unabsorbed depreciation, etc. and after excluding exemptincomes;

ii) From the resultant, amount eligible for deduction under Chapter VI-A will be deducted.

iii) Balance will be total income for the purposes of section44AD(5)

If the total income is below the maximum amount not chargeable to tax in the case of assessee then the assessee will not be required to maintain books and get them audited if he declares profit from eligible business lower than that deemed under section 44AD.

Further, if any individual/HUF has incurred loss, then also there is no need to maintain books and to get them audited.

It is to noted that above exemption can be claimed only by individual or HUF and not in case of partnership firm as partnership firm do not avail any basic exemption limit , hence ,Tax Audit u/s 44AB is applicable. These provisions can be presented in tabular form as under:

Income from Eligible business

Total Income Exceeds Basic Exemption Limit

Applicability of sec 44AD

Applicability of sec44AA

Applicability of sec44AB

> 8% of Turnover

Yes

Yes

No

No

= 8% of Turnover

Yes

Yes

No

No

< 8% of Turnover

Yes

No

Yes

Yes

< 8% of Turnover

No

No

No

No

Example: Mr. Fancy aged about 52 years runs a grocery shop. He sells goods on cash basis only. For the P.Y. 2019-20, he provides the following information. He has no income other than profits from his shop. Whether Mr. Fancy will be required to get books of accountaudited?

Case

Sale/Receipts

Net Profit

8% of Sale

Whether Audit Applicable?

1

Rs. 80,00,000

RS.4,00,000

Rs.6,40,000

Yes, because profit lower than 8% of sale and his total income exceeds basic exemption limit.

2

Rs. 60,00,000

Rs.2,25,000

Rs.4,80,000

No, because his total income is less than basic exemption limit of Rs.2,50,000 even though profits are less than 8% of sale.

3

Rs.1,40,00,000

Rs.1,75,000

Rs.11,20,000

Yes, because sale has exceeded Rs. 1 crore. therefore, this case is covered u/s 44AB(a) and not 44AB(e). It is to be noted that limit u/s 44AB(a) is Rs. 1 crore and not Rs.2 crore. However, if the assessee having turnover up to Rs. 2 crore opts for sec 44AD, then he will not be required to  get his books audited.

4

Rs. 70,00,000

Rs.9,00,000

Rs.5,60,000

No, as he has declared profits more than the 8%.

 

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