Introduction
The presumptive income scheme under Sections 44AD and 44ADA of the Income Tax Act, 1961, simplifies how small businesses and professionals calculate their income. It allows eligible taxpayers to declare their income based on a fixed percentage of their gross receipts. However, it’s essential to know when a tax audit becomes mandatory under Section 44AB.
In this blog, we’ll break down the presumptive income scheme, its benefits, and when businesses and professionals are required to undergo a tax audit.
Overview of Section 44AD and Section 44ADA
Section 44AD: Business Income
Small businesses with a turnover of up to ₹3 crore (from AY 2024-25 onwards) can use Section 44AD. This scheme lets them declare 8% of their turnover as income if most payments are made electronically. If the payments are received in cash, the rate is 6%.
Key Conditions:
- The business’s turnover must not exceed ₹3 crore.
- A tax audit is required if the business declares an income lower than the prescribed percentage and doesn’t meet certain conditions.
Section 44ADA: Professional Income
Section 44ADA is available for professionals with gross receipts up to ₹75 lakh (from AY 2024-25 onwards). Professionals can declare 50% of their gross receipts as presumptive income. However, if they declare a lower income, they must maintain proper books of accounts and might be subject to a tax audit under Section 44AB.
When Is a Tax Audit Require
A tax audit under Section 44AB is mandatory if:
- The business’s turnover exceeds ₹10 crore.
- The declared income is lower than the prescribed percentage under Sections 44AD or 44ADA.
- The cash receipts or payments exceed 5% of the total turnover or receipts.
While the presumptive income scheme under Sections 44AD/44ADA generally exempts taxpayers from a tax audit, failing to meet these conditions could trigger the need for one. For instance, if a business with a turnover of ₹5 crore declares an income below 8% (or 6% for electronic payments), a tax audit becomes mandatory if cash transactions exceed the 5% threshold.
Key Case Laws and Judicial Interpretations
Several court rulings have clarified how the presumptive income scheme and tax audit requirements are applied:
- Madras High Court Ruling: The court ruled that if a taxpayer’s cash receipts exceed 5% of the total, a tax audit is required, even if income is declared under Section 44AD.
- ITAT Delhi Bench Ruling: The bench ruled that taxpayers engaged in non-eligible services, such as brokerage or commission, are not entitled to the presumptive scheme benefits. These taxpayers must comply with regular income tax provisions and could face a tax audit under Section 44AB if they fail to do so.
These rulings emphasize the importance of adhering to the eligibility criteria and understanding the implications of non-compliance.
Conclusion
The presumptive income scheme under Sections 44AD and 44ADA offers a simplified tax filing process for small businesses and professionals. However, it’s crucial to understand when a tax audit is required under Section 44AB. Non-compliance can lead to penalties and additional scrutiny.
If you’re unsure about your eligibility for the presumptive scheme or need assistance with your tax filing, our team at Efiletax is ready to help. Consult with our experts today to avoid any complications and ensure full compliance with tax laws.
Applicability of Sections 44AD, 44ADA, and Tax Audit Provisions under Section 44AB
| Different Situations | Turnover / Gross Receipts | Section 44AD/44ADA Applicable | Tax Audit Required under Section 44AB | Notes |
|---|---|---|---|---|
| Situation 1 (Section 44AD) | 0 – ₹1 crore | Yes | No | See Note 1: Lower income declaration requires tax audit if conditions aren’t met. |
| Situation 2 (Section 44AD) | ₹1 crore – ₹2 crore | Yes | Not required if income declared under 44AD(1) | See Note 2: Tax audit required if business income is lower than prescribed limits. |
| Situation 3 (Section 44AD) | ₹2 crore – ₹3 crore (from AY 2024-25 onwards) | Yes (if conditions met) | Not required if income declared under 44AD(1) | See Note 3: Specific conditions need to be satisfied. |
| Situation 4 (Section 44AD) | ₹3 crore – ₹10 crore | No | Not required (if conditions satisfied) | See Note 4: Assessee cannot opt for 44AD; tax audit may apply based on conditions. |
| Situation 5 (Section 44AD) | Above ₹10 crore | No | Required | See Note 5: Tax audit required as turnover exceeds ₹10 crore. |
| Situation 1 (Section 44ADA) | 0 – ₹50 lakh (for professionals) | Yes | No | See Note 1: Professionals declaring lower income may need to maintain books and undergo tax audit. |
| Situation 2 (Section 44ADA) | ₹50 lakh – ₹75 lakh (from AY 2024-25 onwards) | Yes (if conditions met) | Not required if income declared under 44ADA(1) | See Note 2: Presumptive scheme available only if certain conditions are met. |
| Situation 3 (Section 44ADA) | Above ₹50 lakh | No | Required | See Note 3: Tax audit required if income exceeds limits for professionals. |