Relation between Presumptive Taxation Section 44AD and Tax Audit under Section 44AB
Section 44AD was introduced under the Chapter Profits & Gains from Business or profession with an objective to reduce the compliance burden of resident small Tax payers. The concept of “Presumptive Taxation Schemes’’ has been very well achieve its objectives. However, over the period of time these provisions had also gone through series of amendments by various Finance Acts.
On the other hand, Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity. Under section 44AB, every person who is engaged in business or profession is required to conduct tax audit and gets his books of accounts audited by a practing chartered accountant if during the previous the turnover or gross receipts of the assessee is more than Rs. 1 crore in case of business or Rs. 50 Lakhs in case of profession.
In case the person is covered under presumptive taxation scheme of Income tax act than the assessee is required to conduct tax audit if the income from business is less than 8% of the total turnover in case of business assessee or less than 50% of the total receipts in case of person carrying professions.
The Finance Act 2020, has made amendment under section 44AD and increased the turnover limit to Rs. 5 crore. In order to qualify for the limit the assesee is required to fulfill 2 conditions as follows:
a. total cash receipts during the previous year is less than 5% of the total receipts, and;
b. total cash payment during the previous year is less than 5% of the total payments.
Amendments passed by Finance Act, 2017 & Finance Act, 2020 with respect to Section 44AD & 44AB sometimes leads to many misunderstandings specifically on those circumstances when Provisions of both sections interrelate to each other & also with the chapter of TDS.
In this article we will highlight the various misconceptions along with their potential solution as per Existing Law & other ancillary relevant aspects of Income Tax Act, 1961.
Who is liable for Tax audit and Presumptive scheme?
a. Tax audit u/s 44AB:
Every person who who is engaged in business or profession is required to conduct tax audit and gets his books of accounts audited by a practing chartered accountant if during the previous the turnover or gross receipts or Income from business of the assessee has crossed the threshold limits mentioned in the provision.
b. Presumptive Scheme:
Presumptive scheme of taxation is applicable to all individual/ HUF and Partnership firms (Except Limited Liability partnership firms).
Are both provision of Tax audit and Presumptive scheme compulsory?
Section 44AD is an option available to assessee, where an “Eligible assessee” engaged in the “Eligible Business’’ whose turnover during the Previous Year does not exceed the prescribed Limits of Rs 2 crore than he has an option whether to opt for Section 44AD (i.e. Presumptive Taxation Scheme) or not.
Where as section 44AB is a compulsory applicable to assessee where an “Eligible assessee” engaged in the “Eligible Business’’ whose turnover during the Previous Year exceed the prescribed Limits then he is compulsorily required to conduct audit of his books of accounts.
Can assessee opt for both scheme of business and profession under presumptive scheme?
As per Section 44AD (6) the provisions of Section 44AD shall not apply to a person who is a specified professional covered under Section 44AA(1). Th e Proposition that the cement business is runs separately will not altered the situation at all. Since as per Section 44AD(6) such person is ineligible for Section 44AD totally.
For instance A Doctor who is covered under section 44AA(1) also engaged in the supply of Medicines, PPE kits etc. & such business is run separately from Specified Profession u/s 44AA. Then, he cannot claimed benefits of both section 44AD & 44ADA even if Gross Receipts from Profession doesn’t exceeds Rs 50 Lacs & Turnover of the business doesn’t exceeds Rs. 2 crore.
Will liability to deduct under Tax audit or Presumptive Scheme arises?
As per amendment made by Finance act 2020, the assessee whose turnover in the preceding Financial Year doesn’t exceeds Rs 1 Crores for Business or Rs 50 Lakh for profession is not required to deduct TDS.
In case of person who is eligible for tax audit u/s 44AB than he is liable deduct TDS from the payment made to other parties under various section of TDS like 194A, 194J, 194C etc. On other hand if the person is opting for presumptive income scheme and having turnover less than Rs 1 Crores for Business or Rs 50 Lakh for profession than he is not required to deduct TDS.
Other Aspects of Section 44AB – Tax audit:
1. Audit is required to be conducted by a practicing Chartered accountant.
2. Due date for tax audit for AY 2020-21 is 31st October 2020
3. If assessee fails to get his books of accounts audited under the law than a penalty higher of the below will be levied:
i. 0.5% of Turnover or gross receipts
ii. Rs. 1,50,000
Other Aspects of Section 44AD and ADA:
1. If section 44AD is applied then deduction of expenditure u/s 30 to 38 shall not be allowed.
2. Held under the Panaji Tribunal in case of Good Luck kinetic vs ITO (2015) that Section 43B being a non-obstante clause have a wide & far amplitude as compare to overriding effect of Section 44AD. Hence, although section 44AD overrides Section 43B also still the scope of disallowances to be made u/s 43B is available to revenue.
3. The assessee will not be allowed to claim the depreciation where the assessee is claiming the benefits of Section 44AD & WDV shall be deemed to be reduced during the period covered by Section 44AD.
4. Income from other head of income like Capital Gains, House Property shall be calculated normally & are not subject to limit of 8% or 6% as the case may be.
5. Section 44AD overrides the chapter of PGBP. But Losses are dealt in accordance with Chapter VI which consists of section 70-80. Hence losses from other business head can be set off against income deemed u/s 44AD.
6. If assessee declares income as per section 44AD and whose turnover is up to 2 crore then assessee is not required to maintain books of accounts and get it audited. 7. If assessee declares income for any previous year as per section 44AD and he does not declare income as per 44AD in any of the five consecutive previous year then he shall not be eligible to claim benefit of section 44AD for 5 years subsequent to the year in which the assessee not declare income as per section 44AD.