SERIES ON AUDITS- PUNE BRANCH OF
WIRC, ICAI
Tax Audit & Presumptive Taxation
By Kinjal Bhuta
06th September, 2023
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Relevant Legal Provisions
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History of Presumptive Taxes
• Presumptive taxation was introduced by Finance Act 1994 by way of
two sections – section 44AD and section 44AE- Circular no. 684
dated 10th June 1994.
• Started with Civil construction to retail businesses to all businesses
from 2009.
• Section 44ADA was inserted via Finance Act 2016 in the Act to provide
for estimating the income of an assessee who is engaged in any
profession referred to in sub-section (1) of section 44AA.
• The Intention - to provide relief to small tax payers from burden of
maintaining books of account, ease of doing business and saving
time, efforts and money of the small tax payers.
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Section 44AD- Provisions…..1
• Sub section (1) –
- Notwithstanding provisions from Section 28 to 43C
- Eligible Assessee having Eligible Business – 8% of profits on
total receipts from business.
- or a sum higher claimed to have been earned
- shall be deemed to be Profits and Gains from PGBP.
• Provision:
If the total T/O or gross receipts received by a/c payee cheque or
bank draft or use of ECS through a bank account during PY or
before 139(1) due date – 8% can be reduced to 6%.
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Section 44AD- Provisions…..2
• Sub section (2)
Deductions from sec 30- 38 – cannot be claimed further and
deemed to be allowed.
• Sub section (3)
The WDV to be deemed to be calculated and allowed for
respective years.
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Section 44AD- Provisions…..3
• Sub section (4):
Where an eligible assessee declares profit as per the provisions
and declares profit for any 5 succeeding assessment years not as
per provisions of SS.(1),
He shall not be eligible to claim the benefit of this section for 5 Ays
subsequent to the said AY.
• Sub section (5)
Notwithstanding anything above, an eligible assessee to whom
SS.(4) applies and total income exceeds maximum amount not
chargeable to tax,
shall be required to maintain books of account as per 44AA(2)
and get them audited u/s. 44AB
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Section 44AD- Provisions…..4
• Sub section (6):
Exceptions to the applicability of section:
(i) Person carrying on profession as per section 44AA(1)
(ii) Person earning commission or brokerage income.
(iii) Person carrying on any agency business.
• Explanations:
Eligible Assessee – Individual, HUF, Partnership Firms being
resident and who has not claimed deductions u/s. 10A, 10AA, 10B,
10BA or deductions under chapter VIA- Heading C.
Eligible Business - Any business except business of plying, hiring,
or leasing of goods carriages as per Sec 44AE and whose total
turnover in PY is 2 crores.
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Section 44AD- Provisions…..5
Provisions inserted after Explanation by Finance Act 2023
(w.e.f: AY 2024-2025):
First - where the amount or aggregate receipts during the PY in
cash, is less than 5 per cent of the total turnover or gross receipts
of such PY – 2 crores limit to get enhanced to 3 crores.
Second -for the purposes of the first proviso, the receipt of amount
by a non account payee cheque or bank draft, shall be deemed to
be the receipt in cash.
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Section 44AD- Business excluded (as per
CBDT E-filing validation rules)
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Section 44AD- Business excluded
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Section 44ADA- Provisions ….1
• Sub section (1):
- Nothwithstanding provisions from section 28 to 43C;
- in case of Resident Individual, Partnership Firm, LLP;
- engaged in professions referred in section 44AA(1) ;
- gross receipts is less than Rs. 50 lakhs in PY;
- 50% of such receipts to be deemed as profits or;
- a sum higher claimed to have been earned in PY
Proviso 1: where the amount or aggregate receipts during the PY
in cash, is less than 5 per cent of the total turnover or gross
receipts of such PY – 50 lakhs limit to get enhanced to 75 lakhs.
Proviso 2- the receipt of amount by a non account payee cheque
or bank draft, shall be deemed to be the receipt in cash (with
effect from AY: 2024-25). Kinjal Bhuta 11
Section 44ADA- Provisions…2
• Sub section (2):
Deductions u/s. 30 to 38 shall, for the purposes of sub-section (1),
be deemed to have been already given full effect to and no further
deduction under those sections shall be allowed.
• Sub section (3):
WDV of any asset -shall be deemed calculated- as if the assessee
had claimed and had been actually allowed the deduction
• Sub section (4):
An assessee claiming that his profits are lower than 50% and total
income exceeds the maximum amount – to maintain as per Sec.
44AA and get them audited u/s. 44AB
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Section 44ADA- Provisions…3
• Professions included:
o Legal
o Medical
o Engineering
o Architectural
o Accountancy
o Interior decoration
o Authorised Representative before any court of law
o Film Artist
o Company secretary,
o Information Technology;
o Any other profession so notified by govt.
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Section 44AA- Maintenance of Books of
Account
• Every person carrying on legal, medical, engineering or architectural
profession or any other profession as is notified by the Board in the
Official Gazette- shall keep and maintain such books of account.
• Every person carrying on business or profession [not being a
profession referred to in sub-section (1)] shall,—
If his income from B&P > 1,20,000or his total sales, turnover or
gross receipts > 10 lakh rupees in any one of the three years
immediately preceding the previous year; or
• the profits and gains from the business are deemed u/s.
44AE or 44BB or 44BBB - assessee has claimed his income to be
lower than the profits or gains.
• where the provisions of sub-section (4) of section 44AD are applicable
in his case and his income exceeds the maximum amount which is not
chargeable to income-tax in any previous year.
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Section 44AB- Audit of Accounts
(a) if his total sales, turnover or gross receipts, as the case may
be, in business exceed Rs. 1 crore- in any previous year.
Provision added:
Tax Audit limit u/s. 44AB increased from 1 crore to 10 crores
subject to following conditions:
- Aggregate of all receipts including amount received for sales,
turnover or gross receipts during the PY, in cash does not exceed
the 5% of the said amount.
- Aggregate of payments including amount incurred for expenditure
in cash during the PY does not exceed the 5 % of the said
payments.
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Section 44AB- Audit of Accounts
(b) carrying on profession shall, if his gross receipts in profession exceed
fifty lakh rupees in any previous year; or
(c) Carrying on business if the profits and gains deemed u/s. 44AE or
44BB or 44BBB, and claimed income lower than the deemed profits and
gains of his business in any previous year; or
(d) carrying on the profession shall, if the profits and gains deemed
to be u/s. 44ADA and claimed income to be lower than deemed to be
the profits and gains and his income exceeds the maximum amount
which is not chargeable to income-tax in PY; or
(e) carrying on the business shall, if the provisions of sub-section
(4) of section 44AD are applicable in his case and his income
exceeds the maximum amount which is not chargeable to income-
tax in any previous year, Kinjal Bhuta 16
Section 44AB- Audit of Accounts
Provisions:
First – Provided that this section shall not apply to a person, who declares
profits and gains for the previous year in accordance with the provisions of
sub-section (1) of section 44AD or sub-section (1) of section 44ADA (w.e.f
01.04.2024)
Second - Provided further that this section shall not apply to the person, who
derives income of the nature referred to in section 44B or section 44BBA, on and
from the 1st day of April, 1985 or, as the case may be, the date on which the
relevant section came into force, whichever is later;
Third - Provided also that in a case where such person is required by or under
any other law to get his accounts audited, it shall be sufficient compliance with the
provisions of this section if such person gets the accounts of such business or
profession audited under such law before the specified date and furnishes by that
date the report of the audit as required under such other law and a further report
by an accountant in the form prescribed under this section.
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ISSUES and CASE STUDIES
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What is Business and Profession?
• The term "business" is defined in section 2(13) of the Act, as
under: "Business" includes any trade, commerce, or
manufacture or any adventure or concern in the nature of
trade, commerce or manufacture.
• The word `business' is one of wide import and it means
activity carried on continuously and systematically by a
person by the application of his labour or skill with a view to
earning an income. The expression "business" does not
necessarily mean trade or manufacture only Barendra Prasad
Ray v ITO [1981] 129 ITR 295 (SC).
• Section 2(36) of the Act defines profession to include
vocation. Profession is a word of wide import and includes
"vocation" which is only a way of living. – Additional CIT v.
Ram Kripal Tripathi [1980] 125 ITR 408 (All).
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What is Turnover/ Gross receipts?
• The term "turnover" is a commercial term and it should be
construed in accordance with the method of accounting
regularly employed by the assessee - section 145(1).
• The Central Sales Tax Act, 1956 defines “Turnover” as
follows: “turnover” used in relation to any dealer liable to tax
under this Act means the aggregate of the sale prices
received and receivable by him in respect of sales of any
goods in the course of inter-State trade or commerce made
during any prescribed period and determined in accordance
with the provisions of this Act and rules made there under.
• Discounts and returns can be reduced from turnover.
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What is Turnover in case of Derivatives/ F & O?
• Tax Audit Guidance Note by ICAI of 2023, specifies it as
under:
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What is aggregate receipts and payments?
• All receipts and payments in relation to business of the
assessee.
• Will opening and closing balances be included?
• Contra entries to be excluded from calculation
• Whether advances received to be included ?
• Whether capital receipts and payments to be included?
• Loans received and paid to be included ?
• Total cash register and bank register needs to be considered.
• One needs to maintain a detailed record of receipts and
payments and cash transactions – Ironical ?
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Case Study No.1
• Ms. H is a Doctor by qualification and runs a clinic where she earns Rs. 40
lakh as consultancy income. She also sells medicines from the same clinic
and her turnover out of that is 1.20 crore. Whether she can show income
under section 44AD and 44ADA both ?
• Will answer change if the pharmacy sales is 4.5 lakh so overall income is
less than 50 lakh?
• Is section 44AD qua assessee or qua income ?
• Can He chose as which section is beneficial to him and offer income
accordingly?
• Will the answer differ if she is not a qualified Doctor but a B-pharm
graduate ? Kinjal Bhuta 23
Case Study No.2
Mr. I has business turnover of Rs. 1.8 crore. The cash turnover from above is Rs. 1
crore and rest is through banking channels. His actual profits after deducting
expenses is Rs. 1 crore. Can Mr. I offer profit of 8% and 6% respectively as per
section 44AD?
■ Are presumptive sections mandatory or optional to the assessee?
■ How will assessee know the profits are more than 8%/6% if not maintaining
books of account ?
■ Constitutionality of sections
■ In the above case, Mr.I has paid certain professional fees of Rs.40,000, is he
required to deduct tax at source?
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Case Study No.3
M/s. J is a partnership firm of architects having turnover of Rs.48 lakh and has
loss from F & O trading. Can the firm offer profits u/s. 44ADA?
■ What would be the scenario when the partnership firm is into some other
business but having only F & O loss during the year ?
■ In the second scenario, will the answer differ if assessee had only F & O
business ? Would audit become mandatory u/s. 44AB
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Case Study No.4
Ms. K is a practising Chartered Accountant and also teaches in colleges on
contract basis. She has received Rs.30 lakh from practice and teaching
fees of Rs.15 lakh.
■ Will the turnover of professional receipts u/s. 44ADA be Rs. 30 lakh or
Rs.45 lakh.
■ If she was a partner and received remuneration and interest of Rs.10
lakh, can that be included in the gross receipts calculation? (ITA No.
2135/Kol/2008, ITA No. 692/Kol/2012, CIT v. Ramniklal Kothari - 74
ITR 57 (SC), 168 Taxman 43).
■ Is the firm to be considered as doing profession or the partner ? 430
ITR 391 (Mad HC), 139 taxmann.com
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Case Study No. 5
Sub section (4), of section 44AD has mandated carrying out tax audit if the
presumptive tax is not opted for continuous 5 years.
Q1. Ms. L has opted for section 44AD in AY: 2019-20. In AY: 2020-21, her
business turnover is 3 crore, will she have to conduct tax audit u/s. 44AB(e) of
the Act.
Q2. If she has turnover of Rs. 90 lakh in AY: 2020-21, but she also has started
other business and has income from commission of Rs. 15 lakh, will she have
to do tax audit u/s. 44AB (e) ?
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Case Study No. 6
Mr. A has following income:
Eligible business u/s. 44AD – turnover Rs. 1 crore
Non eligible business – turnover Rs. 1.2 crores
Profession u/s. 44ADA – Rs. 45 lakhs
Profession other than u/s. 44ADA – Rs. 55 lakhs.
How will the tax audit be carried out in the above case of multiplicity of
businesses ?
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Different scenarios under the new T/O limit
• When the turnover is less than 1 crore – No Audit
• When the turnover is between 1 crore to 2 crore and
cash receipts and payments more than 5% but profit
offered more than 8% No Audit under any section.
• When the turnover is between 2/3 crore to 10 crore,
cash receipts and payments less than 5% but profit
offered at a rate lower than 6/8% - No Audit under
any section.
• When the turnover is less than 2 crore and profit
shown at rate lower than 6%/8% - Whether Tax
Audit required u/s. 44AB (e).
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THANK YOU !!!
CA Kinjal Bhuta
[email protected]
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