Tax Audit under Income Tax Act is a big confusion for many people as to when they are required to get their books of accounts audited as per the Income Tax Act. Section 44AB of the Income Tax Act includes all the provision for conducting Tax audit under the Income Tax Act.
In our earlier post we had one clause by clause detailed analysis of Tax Audit provision under section 44AB of Income Tax Act. To read that post CLICK HERE: Who needs to get their Books of accounts audited under Income Tax Act | Tax audit under Income tax – Taxontips
In this post we shall discuss specifically about a case where, assessee is an Individual and is having a business turnover below Rs. 1 crore and a profit of Rs. 5 lakh i.e. profit below 8% or 6%. Many people believe that tax audit would be mandatory in such a situation but let’s check what is the actual provision in relation to Tax Audit.
Under the Income Tax Act, Section 44AB there are two provisions for conducting Tax audit.
First is clause (a) wherein it talks about conducting Tax audit if the turnover exceeds Rs. 1 crore or even 10 crore in some cases and
(b) audit under provision of sub-section 4 of section 44AD and where total income exceeds maximum amount not chargeable to tax.
In the above stated example we won’t fall within first case and hence let’s discuss the second situation i.e. provision of sub-section 4 of section 44AD.
Relevant extract of sub-section 4 of section 44AD is as under:
(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five 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).
Hence, the first condition mentioned above is that the assessee is an eligible assessee. Definition of eligible assessee is as under:
“(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and
(ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” in the relevant assessment year;”
Thus, all normal individual conducting their business would be an eligible assessee and hence we need to see the second condition i.e. the eligible assessee declares profit in any previous year in accordance with the provision of section 44AD and he declares profit for any of the five years subsequent to that year not in acoordance with section 44AD.
Hence, there is a twin condition:
(1) Assessee should have declared profit in previous year in accordance with 44AD provision and
(2) He has declared profit for any year out of 5 years years after that not in accordance with 44AD.
Thus, there is a trigger of opt out of provision of section 44AD and hence here the main condition which one needs to keep in mind is that the assessee has to first opt in and then opt of provision section 44AD.
Therefore, in our case where assessee never opted in for provision of section 44AD in earlier year and now declaring profit below 8% or 6% will not be liable for getting books of accounts audited under the Income Tax Act and hence can file normal Income tax return and can claim loss also if any.
Hence, it is not mandatory for an assessee to get books of accounts audited if he is showing profit below the prescribed limit under section 44AD.
Guidance on above article by:
CA Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: email@example.com | LinkedIn: Naman Maloo
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