Over a period of time many amendments have been made by various Finance Acts which creates confusion and leads to misconception.
This article is based on critical analysis of interrelation between section 44AD and section 44AB by citing various examples to gain conceptual understanding of these provisions.
Let’s first understand these provisions individually, then will understand linkage between them.
- To reduce compliance burden and to give relief to small and medium sized taxpayers
- Eligible assessee are not liable to maintain books of account regularly
- They can declare profit as per prescribed rates
- Also, they are not required to get their books of accounts audited
- Help in saving time of the assessee
Mr A has stationary shop having turnover of Rs. 70,00,000 for PY 2020-21.
He is eligible to opt for 44AD as his turnover is less than 2crore.
Presumptive income will be 70 lakh*8%= 5,60,000 (in case of cash receipts)
And 70 lakh*6%=4,20,000 (in case of receipts through banking channel) will be his deemed income.
Assessee is not required to maintain books of accounts u/s 44AA and not required to get books of account audited u/s44AB
Deduction u/s 30 to 38 cannot be availed.
In above example 1 if Mr.A has incurred total expenses of Rs1,50,000 including salary, rent, repairs, salary, etc. Then, he cannot claim deduction of these expenses.
No separate deduction for depreciation u/s 32 will be available.
Mr.C is engaged in electronics business having turnover of Rs50lakh. He opts for 44AD scheme. Opening WDV of furniture(fixed asset) is Rs2,00,000 and depreciation @10% =20,000
Now since he has opted for 44AD he cannot claim deduction of depreciation of Rs20,000. But for calculation of closing WDV of furniture, he will deduct Rs20000 from opening WDV.
Once the assesse opts out of 44AD, then he/she cannot avail benefit u/s 44AD for subsequent 5AY i.e. he/she needs to maintain books of accounts regularly and get them audited u/s 44AB.
If Mr.B opts for 44AD in AY 2018-19. He does not opt for 44AD in AY 2019-20.
Now, He becomes ineligible and cannot opt for 44AD for next 5AY i.e from AY 2020-21 to AY 2025-26
If 44AD(4) is applicable to assesee and total income exceeds basic exemption limit, he/she is required to maintain books of accounts and get the books of accounts audited u/s 44AB(e)
MrT, an individual has turnover Rs.60lakh during PY2020-21. He had declared profit as per 44AD in PY 2019-20. His income exceeds basic exemption limit in PY 2020-21.
Now he falls within the purview of 44AD(4) as he had opted for 44AD last year. He has to declare profit as per 44AD (6%/8%) in PY 2020-21. If he doesn’t then he will have to go for audit u/s 44AB.
If assesse has multiple businesses then aggregate limit of all businesses will be taken into account for calculating 2crore threshold limit.
There are various kind of audit conducted under different laws such as company law, cost audit, stock audit, etc. Tax Audit refers to examination or review of accounts of any business or profession carried out by taxpayers from income tax point of view
- Proper maintenance of books of accounts
- Detailed examination of books of accounts by tax auditor and reporting discrepancies and observations
- To report compliance of laws, provisions
- Verify depreciation calculation, deductions, exemptions claimed by assessee
An amendment was made in Finance Act, 2020 in which the threshold limit for audit u/s 44AB has been increased from 1crore to 5crore for all the business entities.
A person is not required to get books of accounts audited if below two conditions are satisfied-
- 95% of business transactions are done through banking channels (i.e, For both Cash receipts/payments do not exceed 5% of total receipts or payments – 5% limit is to be satisfied individually for payments and receipts)
- Total Turnover/Sales/Gross Receipts is up to 5crore
‘Aggregate of all receipts and aggregate of all payments’ includes-
Sales and purchases, Addition of capital Drawings, Payment of taxes, Repayment of loan, Purchase of fixed assets (including payments/receipts made in cash)
M/S ABC Associates, a Partnership firm has turnover of Mrs 7 crore for PY 2020-21
Then, it has to compulsorily get its books of accounts audited u/s 44AB as its turnover exceeds 5 crore (the answer will remain same in case of all assesse i.e whether the assesse is Individual, HUF, LLP or a company.
Mr. X , an Individual has turnover of Mrs 4 crore for PY 2020-21. The cash receipts is 7% of total receipts and the cash payments are 2% of total cash payments
Then, in this case Mr X will have to compulsorily get his books of accounts audited as one of the above condition is not satisfied i.e, cash receipts exceed 5% of aggregate cash receipts.
Mr. Z, and individual has turnover of Rs3 crore for PY 2020-21. The cash receipts are 4% of total receipts and rest 96% are received through digital mode. All payments are made by him in digital mode.
Then, in the given case since both the conditions are satisfied (i.e, turnover is below 5 crore and more than 95% of transactions are made in digital mode, Mr Z is not required to get the books of accounts audited.
**SECTION 44AB VIS-A-VIS SECTION 44AD**
MrE, and individual has turnover of Mrs 70lakh (all receipts are through banking channel) during PY 2020-21 and has opted for 44AD. And he declares profit >=6% of total turnover
Then, he is not required to get books of accounts audited as he has declared minimum 6% profit
MrQ, an individual has turnover of Rs1.5 crore during PY 2020-21 and he declares profit less than 6%/8% of total turnover (his income exceeds basic exemption limit)
In given example, 44AD will be applicable as turnover is upto 2crore. But since he doesn’t declare minimum 6%/8% of profit, he will have to mandatorily get books of accounts audited due to 44AD(4), irrespective of whether cash receipts and payments are less than 5% of total receipts/payment
The table given below summarizes linkage between 44AB and 44AD.
1st table is for companies and LLP and 2nd table is for Individual, HUF and Partnership Firm.
In the table given below-
"Yes" , "No" indicates that whether the condition stated in column no. 1 of the table is fulfilled or not.
"NA" means Not Applicable (i.e, the given condition does not apply to a particular case)
FOR COMPANIES AND LLP
FOR INDIVIDUAL, HUF AND PARTNERSHIP FIRM