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  • Click here to read Part 1 - Presumptive Taxation Scheme u/s Section 44AD
  • Click here to read Part 2 - Interplay of Section 43CA vs. Section 44AD
  • Click here to read Part 3 - Can assessee opt for Sec. 44AD and Sec. 44AE together?
  • Click here to read Part 4 - Computation of Income under Section 44AD
  • Click here to read Part 5 - Section 44AD (4): Consequences of Opting Out of Section 44AD(1)

From the perusal of the study of the above sections, we have noted that once an assessee fails to opt the provisions of presumptive taxation, then that assessee cannot opt for these provisions for the next five years and he has to maintain the books and get them audited. But there are certain cases in which the assessee fails to opt the provisions not by his own option but is not eligible to opt for presumptive taxation due to increase in turnover or receipt of any commission. It is to be noted that the word option means when a person has more than one choice. But in the following cases, the assessee has no option but only compulsion.

Exceptions to the provisions of Sec 44AD(4) and Sec 44AD(5) - Part VI

1. Assessee has not opted for presumptive taxation because of ineligible business

If a person has opted for presumptive taxation during previous years and due to increase in turnover  over 2 crores during the current year, he is ineligible to opt the provisions of sec 44AD(1) of the Act. His business is not eligible assessee u/s 44AD of the Act being total turnover is more than Rs.2 Crore. [Section 44AB(a) r.w.s. 44AD(1)] It is pertinent to note that person is not eligible to claim presumptive taxation for the year, he will not be covered by the provisions of section 44AD(4) and option to opt for presumptive taxation u/s 44AD(1) will be available in subsequent assessment years also.

Turnover of Mr. X for the F.Y. 2019-20 was Rs.74 Lacss. He has opted for Sec 44AD in that year. In the F.Y. 2020-21, his turnover was Rs.2.5 crores(in cash) He was required to maintain books of accounts and get them audited u/s 44AB. Now the question arises whether he can avail the benefit of Sec 44AD from F.Y. 2021-22?

Mr. X's turnover in the F.Y. 2020-21 was Rs.2.5 crores. He was required to get his books of accounts audited. Mr. X is required to get his accounts audited u/s 44AB(a) of the Act as he reported total turnover exceeds the limit of Rs.1 Crore as prescribed u/s 44AB{a) of the Act as he doesn't satisfy the condition of 95% of total receipts and expenses to be incurred in electronic mode. Whereas his business is not an eligible assessee u/s 44AD of the Act, as his total turnover is more than Rs.2 Crore. [Section 44AB(a) r.w.s. 44AD(1)]

It is pertinent to note that Mr. X was not eligible to claim presumptive taxation for the year, he will not be covered by the provisions of section 44AD(4) and option to opt for presumptive taxation u/s 44AD(1) will be available in subsequent assessment years. There was no option to MR. X to opt for the provisions of presumptive tax and he has to break the chain of sec 44AD by the operation of law and not  on his own will. The requirement for continuously declaring profits u/s 44AD is not violated. The link is not broken due to compulsory applicability of Sec 44AB(a). Therefore, he can avail the benefit of Sec 44AD from F.Y. 2021-22.

Example: Mr. A is engaged in a business of trading of goods. During FY 2019-20, he reported Total turnover of the business as Rs.2.25 Crore (50% of total sales were made in cash). Mr. A computed profit from the aforesaid business to be Rs.6.80 Lacs which was his sole income during the year. During FY 2017-18 and FY 2018-19, he opted for presumptive taxation scheme u/s 44AD. Whether Mr. A is required to get his accounts audited u/s 44AB for FY 2019-20?

 

Solution: Mr. A is required to get its accounts audited u/s 44AB(a) of the Act as assessee reported total turnover exceeds the limit of Rs.1 Crore as prescribed u/s 44AB(a) of the act as he doesn't satisfy the condition of 95% of total receipts and expenses to be incurred in electronic mode. Whereas his business is not an eligible assessee u/s 44AD of the act being total turnover is more than Rs.2 Crore. [Section 44AB(a) r.w.s. 44AD(1)] It is pertinent to note that being Mr. A was not eligible to claim presumptive taxation for the year, he will not be covered by the provisions of section 44AD(4) and option to opt for presumptive taxation u/s 44AD(1) will be available in subsequent assessment years.

Example: - Mr. A is engaged in a business of trading of goods. During FY 2019-20, he reported total turnover of the business as Rs.2.25 Crore (complete sales and payments were made in electronic mode). Mr. A computed profit from the aforesaid business to be Rs.6.80 Lacs which was his sole income during the year. During FY 2017-18 and FY 2018-19, he opted for presumptive taxation scheme u/s 44AD. Whether Mr. A is required to get his accounts audited u/s 44AB for FY 2019-20?

Solution: Mr. A is not required to get its accounts audited u/s 44AB of the Act as  he has reported total turnover is within limit of Rs.10 Crore as prescribed u/s 44AB(a) of the Act whereas his business is not an eligible assessee u/s 44AD of the Act being total turnover is more than Rs.2 Crore. [Section 44AB(a) r.w.s. 44AD(1)] It is pertinent to note that being Mr. A was not eligible to claim presumptive taxation for the year, he will not be covered by the provisions of section 44AD(4) and option to opt for presumptive taxation u/s 44AD(1) will be available in subsequent assessment years.

2. Assessee has not opted for presumptive taxation because of commission income

As per the provisions of sub section 6 of section 44AD, if an assessee has earned any income from specified activities such as commission, then provisions of section 44AD shall have no bearing on such assessee .In such a case, the assessee is not entitled to opt the provisions of sec 44AD.If ,in a year, the chain of sec 44AD is broken due to the receipt of commission ,that will not be considered as the assessee has gone out of the umbrella of sec 44AD.The asseessee is entitled to opt for sec 44AD in subsequent years.

It can be implied that where an assessee has turnover less that threshold specified u/s 44AB(a) and have earned any income as commission or brokerage, then he can file income with lower profits without getting its books of account audited.

Turnover of Mr. X for the F.Y. 2019-20 was Rs.74 Lacss. He has opted for Sec 44AD in that year. In the F.Y. 2020-21, his turnover was Rs.60 Lacss. Besides this turnover, his commission receipts were Rs. 5,000. He could not opt for Sec 44AD as per the provisions of Sec 44AD(6). Whether he can avail the benefit of Sec 44AD from F.Y. 2021-22?

Mr. X was having commission income in the F.Y. 2020-21 and was not eligible for Sec 44AD. As per the provisions of Sec 44AD(6), a person cannot opt for Sec 44AD, if he is having commission income.  He has not opted out of Sec 44AD on his own, rather he was not eligible by the operation of law. Hence he can opt for Sec 44AD in the F.Y. 2021-22.

Example:Mr. X a proprietorship Firm engaged in the business of wholesale of Grocery Items & having a turnover of Rs.0.70 Crores during the Previous Year 2018-19. During the Previous Year 2019-20, he started an agency business for  metro milk&earned a net commission of Rs.70 Lacs apart from the Gross Turnover of Rs.50 Lacs for his main business i.e. trading of grocery items. This contract was only for 1 Year. During the Previous Year 2020-21, the agency contract got over & the Gross Turnover from trading of grocery items was Rs.1.4 Crores. Can he opt for Section 44AD during the Previous Year 2020-21?

  • The restrictions that assessee couldn't opt for Section 44AD for the five years will be applicable only when he declares the profits lower than the 8%/6%.
  • If because of any other reasons, he couldn't be able to opt for Section 44AD, then restrictions of Section 44AD(4) shouldn't impose. Since 44AD(4) gives the reference of Section 44AD(1) only & it also uses the word ‘'Profit not as per Section 44AD(1)'' i.e. percentage of rate.
  • The assessee is not eligible to opt for section 44AD in the previous year 2019-20 since he is earning income like commission which is totally out of Section 44AD. Even for his trading business, he can't opt for Section 44AD.
  • But he can opt for section 44AD during the Previous Year 2020-21.

Controversial Issue - Needs CBDT Clarification

The amendment was brought by Finance Act, 2016 w.e.f 01/04/2017. The government is discouraging taxpayers from misusing the scheme and constantly changing their option often. If any assessee opts for presumptive taxation, he has to continue it for 5 years and if he wants to opt out, he will be barred from resuming presumptive taxation for a period of 5 years. 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 sectionmeans 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 are controversial and it would be in the interest of the masses if the CBDT clarifies it suitably.

For example, Mr. X claims to be taxed on presumptive basis under Section 44AD for AY 2019-20, he offersincome on basis of presumptive taxation scheme. However, for AY 2020-21,he did not opt for presumptive taxation Scheme. In this case, he will not beeligible to claim benefit of presumptive taxation scheme for next five Assessment years i.e. from AY 2021-22 to 2025-26.
Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme if his total income exceeds the maximum amount not chargeable to tax.

This can be explained with the help of following table.

Assessment Year

Turnover

Rate of Profit

Whether Total Income more than Basic exemption

Whether Section Applicable

Remarks

44AA

44AB

44AD

2018-19

3.00 Crore

7%

Yes

Yes

Yes

No

A

2019-20

1.20 Crore

9%

Yes

No

No

Yes

B

2020-21

85 Lacs

5%

Yes

Yes

Yes

No

C

2021-22

75 Lacs

10%

Yes

Yes

Yes

No

D

2022-23

1.20 Crore

2%

No

Yes

Yes

No

E

2023-24

1.5Crore

9%

Yes

Yes

Yes

No

F

2024-25

92 Lacs

6%

Yes

Yes

Yes

No

G

2025-26

95 Lacs

9%

Yes

Yes

Yes

No

H

2026-27

2.50 Crore

6%

Yes

Yes

Yes

No

I

Remarks

Explanation

A

 Turnover exceeding Rs.1 Crore and hence, he is liable to keep books of account & Audit 44AB(a).

B

Since, Mr. X opted 44AD,he is not required to maintain books and not required to get audited u/s 44AB

C

Since, Mr. X   fails to opt sec 44AD.The benefit of section 44AD shall not be available to the assessee for A.Y. 2021-22 to 2025-26. Therefore he is liable to keep books of account &  Audit u/s 44AB(e).

D

Mr. X is liable to keep books of account & Audit u/s 44AB(e).

E

Mr. X is liable to keep books of account & Audit u/s 44AB(a). If his cash receipts is up to 5% of total receipts and his cash payments is up to 5% of total payments, then he is not liable to audit under sec 44AB(a). Further, he is not liable to audit u/s 44AB(e), as his total income is less than the basic exemption limit.

F

Mr. X is liable to maintain books of account and required to get them audited u/s 44AB(e).If his cash receipts is up to 5% of total receipts and his cash payments is up to 5% of total payments, even then he is liable to audit under sec 44AB(e), as the proviso to Sec 44AB(a), which provides exemption from audit is applicable only to sec 44AB(a) and not Sec 44AB(e).

G

Mr. X is liable to keep books of account & Audit u/s 44AB(e).

H

Mr. X is liable to keep books of account & Audit u/s 44AB(e).

I

Mr. X is liable to keep books of account & Audit u/s 44AB(a).

 

From the perusal of the above table, it is clear that if in any Previous Year, Mr. X fails to opt the provisions of Section 44AD(4) of the Act, then for the next 5 Previous Years he will not be eligible to claim the benefit u/s 44AD of the Act. In such case, he will be required to maintain the books of account and he will also be liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme if his total income exceeds the maximum amount not chargeable to tax. From the above table, it can also be concluded that the period of five years shall be counted next to the year when assessee opts not to avail the benefits of sec 44AD of the Act. After the expiry of five years, this cycle again will start from the year in which he opts to adopt the provisions of sec 44AD of the Act.  Books of Accounts

An assessee having turnover upto Rs.2 crore and opting for sec 44AD is not required to maintain books of accounts. As provided in section (5) of 44AD the eligible assessee who claims to be taxed on presumptive basis is not required to maintain books of account as provided in section 44AA. If the turnover is below Rs.2 crores and opting for sec 44AD, audit u/s 44AB is not required. However, if the turnover is exceeding Rs.2 crores, the assessee is outside the ambit of section 44AD, as provided in section 44AD. It will be interesting to note that the presumption of income is to work on the basis of the turnover or gross receipts. The question would be if the books are not maintained how the turnover would be proved? Therefore, when the income is computed as per the provisions of section 44AD, it would be necessary to prove for the assessee the figure of turnover or gross receipts. Which records are to be maintained will depend upon the type of the business of the eligible assessee. Figures adopted under GST Act, 2017 provisions would be good evidence. Copies of invoices issued may also be maintained as evidence of turnover. If the correct turnover or gross receipts is not ascertainable from the records maintained, it is likely that the same may be estimated by the Assessing Officer in absence of proper records of turnover or gross receipts. Therefore it would be necessary for the eligible assessee to maintain such records with evidences so that the turnover or gross receipts can be conclusively proved.

While computing income of assessee u/s 44AD, the assessing officer does not have power to assesses anything in excess of returned income where returned income is either 8% or more than 8% on gross receipts / sale consideration.

  • Abhi Developers Vs. ITO (2007) 12 SOT 444 (Ahd.Trib).
  • CIT Vs. Nitin Soni(2012) 207 Taxman 332 (All.HC)
  • Mohan Kumar Agarwal Vs. ITO . ITA NO: 1750/Kol/2018. Order dated 08/05/2019.
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Category Income Tax, Other Articles by - CA.R.S.KALRA 



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