Section 44AD (4): Consequences of Opting Out of Section 44AD(1) - Part V

• 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

Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and the declares profit for any of the 5 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).

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).

If above two conditions are satisfied, such assessee shall not be eligible to claim the benefits of Section 44AD for five assessment years subsequent to the assessment year in which profit was not declared as per section 44AD as given in condition (b) above.

It means that if a person has opted for a presumptive scheme of taxation u/s 44AD in any one year then he has to remain in the umbrella of section 44AD for the next 5 years. If he goes out of the umbrella of section 44AD in any one of the subsequent 5 years then such person cannot take the shelter in the umbrella of section 44AD for next 5 years thereafter (i.e., such person has to remain out of Section 44AD for 6 years in continuation).

Section 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 section 44AB.

It is to be noted that the basic exemption limit of Rs.2,50,000 is to be considered in case of an assessee who has not attained the age of 60 years during the previous year and Rs.3,00,000 is basic exemption limit for senior citizens and Rs.5,00,000 is for super senior citizens who are of 80 years or above. In this connection it is to be noted that rebate u/s 87 A is the tax rebate and it comes into play once the tax liability after the basic exemption limit is computed. Hence for the purposes of section 44AD(5) is of no relevance. Since the relevance of rebate u/s 87A will arise only when the total income of the assessee increased beyond Rs.2,50,000. If the case of the assessee is covered u/s 44AD(5) & his total income exceeds the maximum amount not chargeable to the Income Tax he is subject to Tax Audit.

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

1. An eligible assessee to whom the provisions of sub-section (4) are applicable; and
2. The total income of that assessee has exceeded the maximum amount which is not chargeable to income-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, assessee 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.

The working of the above provisions can be explained with the help of the following diagram:

Example: Mr. X commenced his business during FY 2019-20 relevant to AY 2020-21. He was engaged in a business of trading of goods. He reported total turnover of the business during the year as Rs.85 Lacss, entire sales were in cash. Mr. X computed profit from the aforesaid business to be Rs.2.30 Lacs which was his sole income during the year. Whether Mr. X is required to maintain books of accounts in accordance with provisions of section 44AA and whether he has to get his accounts audited u/s 44AB?

Firstly, Mr. X is not required to get his accounts audited u/s 44AB of the Act his total income for the FY 2019-20 is less than maximum amount not chargeable to tax even if he had claimed profit from business less than deemed income u/s 44AD i.e., actual income of Rs.2.30 Lacs is less than deemed income of Rs.6.8 Lacss (8% of 85 Lacs). (Section 44AD(5)]

However, Mr. X is required to maintain such books of account and other documents as may enable the AO to compute his total income in accordance with Second proviso to section 44AA(2) of I.T. Act, 1961 as his total turnover is more than limit of Rs.25 Lacs.

Example: Mr. X commenced his business during F.Y. 2019-20 relevant to AY 2020-21. He was engaged in a business of trading of goods. He reported total turnover of the business during the year as Rs.85 Lacss, the entire sales were made in cash. Mr. X computed profit from the aforesaid business to be Rs. 2.90 Lacs which was his sole income during the year. Whether Mr. X is required to maintain books of accounts in accordance with provisions of section 44AA and whether he has to get his accounts audited u/s 44AB?

Firstly, Mr. X is not required to get his accounts audited u/s 44AB of the Act as he had claimed profit from business less than deemed income u/s 44AD i.e. actual income of Rs.2.90 Lacs is less than deemed income of Rs.6.8 Lacs (8% of 85 Lacs). However the provision of section 44AD(4) shall not be applicable as this is his first year of business. [Section 44AD(4)]

Also, Mr. X is required to maintain such books of account and other documents as may enable the AO to compute his total income in accordance with the provisions of this Act, as his total turnover is more than limit of Rs.25 lacs prescribed under second proviso to section 44AA(2) of I.T. Act, 1961.

Example: Mr. X commenced his business during FY 2020-21 relevant to AY 2021-22. He was engaged in a business of trading of goods. He reported total turnover of the business during the year as Rs.95 Lacss, entire sales were made in cash. Mr. X computed loss from the aforesaid business to be Rs.3.90 Lacs which was his sole income during the year. Whether Mr. X is required to maintain books of accounts in accordance with provisions of section 44AA and whether he has to get his accounts audited u/s 44AB?

Firstly, Mr. X is not required to get his accounts audited u/s 44AB of the Act, he claimed profit from business less than deemed income u/s 44AD i.e. actual loss of Rs.3.90 Lacs is less than deemed income of Rs.7.6 Lacs (8% of 95 Lacs). However the provision of section 44AD(4) shall not be applicable as this is first year of business. [Section 44AD(4)]

Also, Mr. X is required to maintain such books of account and other documents as may enable the AO to compute his total income in accordance with the provisions of this Act, as his total turnover is more than limit of Rs.25 Lacs prescribed under second proviso to section 44AA(2).