44ad loss - tax audit needed?

Tax queries 4496 views 5 replies

Anirudh Hegde

CA >> Practice

87 Points Joined June 2013

As per 44AD

"5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) 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."

So as per act it appears that if a 44AD return is claiming loss then it need to get it's books audited. Even ICAI Guidance notes on Tax audit say that if total income does not exceeded basic exemtion limit the books need not be audited.

However IT Dept is sending notice u/s 139(9) claiming that the returns filed in case of loss are defective because they are not audited u/s 44AB

So is tax audit requited for a firm which has claimed a loss (total income being less than basic exemtion of '0') in a return filed u/s 44AD?

Replies (5)

Shishir Nayak

(Expert)

369 Points Joined February 2015

Both ICAI guideline and IT dept are correct.

First of all there is no basic exemption limit for business income. So ICAI guideline is for individual to whom basic exemtion is applicable.

Next, 44AD is a business income, so if you are claiming loss than you need to have all the document and should be audited u/s 44AB

Anirudh Hegde

CA >> Practice

87 Points Joined June 2013

Actually act says "whose total income exceeds the maximum amount which is not chargeable to income-tax" which basically means that these should be income to charge tax on. In the case of firms that means that the total income should be greater than 0 and in case of individuals greater than basic exemption limit.

Otherwise there is no point to adding that clause right?

Rashi Bajaj

752 Points Joined January 2012

Agree with Anirudh Hgde Sir. Where there is no income at all, Tax audit won't be appicable even for the pupose of Sec 44AD.

Miss Rinkal

Student

1309 Points Joined January 2009

Actually what Shirish Nayak said is correct.

Originally posted by : Anirudh Hegde
	Actually act says "whose total income exceeds the maximum amount which is not chargeable to income-tax" which basically means that these should be income to charge tax on. In the case of firms that means that the total income should be greater than 0 and in case of individuals greater than basic exemption limit. Otherwise there is no point to adding that clause right?

Also what you said is true, nothing wrong in it.

But income includes loss also.

Coming to the section, in case of individual and huf, where gross receipts/ turnover are less than 8% AND total income exceeds basic exemption limit then only books of accounts are required to be maintained and the same are to be audited.

However in case of firms, there is no such basic exemption limit but it means total income should not be chargeable to tax.

Now in case where firm only has business income which is less than 8% of gross receipts/ turnover (including loss) then in such case books will be required to be maintained and get them audited.

And therefore if any business or sales or receipts have been made in a fy then definitely there will be some income (positive or negative) in actual. And 44AD income is 8% of turnover/ gross receipts and any income (positive or negative) less than 8% would make it mandatory for the books of accounts to be maintained and the same to be audited

D make.

Anirudh Hegde

CA >> Practice

87 Points Joined June 2013

Originally posted by : Rinkal
	Actually what Shirish Nayak said is correct. Originally posted by : Anirudh Hegde Actually act says "whose total income exceeds the maximum amount which is not chargeable to income-tax" which basically means that these should be income to charge tax on. In the case of firms that means that the total income should be greater than 0 and in case of individuals greater than basic exemption limit. Otherwise there is no point to adding that clause right? Also what you said is true, nothing wrong in it. But income includes loss also. Coming to the section, in case of individual and huf, where gross receipts/ turnover are less than 8% AND total income exceeds basic exemption limit then only books of accounts are required to be maintained and the same are to be audited. However in case of firms, there is no such basic exemption limit but it means total income should not be chargeable to tax. Now in case where firm only has business income which is less than 8% of gross receipts/ turnover (including loss) then in such case books will be required to be maintained and get them audited. And therefore if any business or sales or receipts have been made in a fy then definitely there will be some income (positive or negative) in actual. And 44AD income is 8% of turnover/ gross receipts and any income (positive or negative) less than 8% would make it mandatory for the books of accounts to be maintained and the same to be audited D make.

Is there any ruling that tackles this situation?

A simple interpretation of the section will conver firms as well. Income may include loss, however loss is not chargeable to tax. In any assessee save Individuals and HUF the question of levying tax only arives when income is greater than 0. Maximum amount which is not chargeable to tax in these cases would be zero itself since 'zero income' or loss is not chargeable to tax.

Moreover it is to be noted that the section does not distinguish the nature of the assessee. No specific mention of Individuals and HUF is done. So in such a case can we say that loss making firms need to get their books audited?