Can You Switch from Audited Accounts to 44AD Presumptive Taxation in case of No or Less Income?

Question

Question:- The tax audit was conducted for the last 3 years, as profit was less than 8% of the turnover. However, This F.Y. I want to file return u/s 44 AD of the income tax act, as the Total Income is less than “maximum amount not chargeable to tax”. Will I still be covered under 5-year rule of sec 44AD? Can We Switch from Audited Accounts to 44AD Presumptive Taxation in case of No or Less Income?

Answer

Thank you for your Query in the above regard. Two of the major Sub Sections cover the applicability of Tax Audit in case of 44AD as per your Query. These subsections are 44AD (4) and 44AD(5). They are reproduced for your reference.

(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).

(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.

The Text has been copied from Income Tax India Website as on date 05/11/2020 and can be visited at https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx

What Section 44AD (4) Says :-

Let us break Sub-section 4 with an example and see what it actually says. The previous year is the Financial Year for which you would be filing the return. Assessment year is the Year next to the Previous Year in which your Assessment is performed.

You would be filing a return for the Previous Year 2019-2020(Assessment Year 2020-21).

As per Subsection (4) of 44AD Where an eligible assessee declares profit for any previous year (PY 2015-2016) in accordance with the provisions of 44AD and he declares profit for any of the five assessment years (AY 2017-2018 to AY 2021-2022) relevant to the previous year (PY 2016-2017) succeeding such previous year (PY 2015-2016) not under 44AD, he shall not be eligible to claim the benefit of 44AD for five assessment years (AY 2018-19 to AY 2022-23) subsequent to the assessment year (AY 2017-2018) relevant to the previous year (PY 2016-2017) in which the profit has not been declared in accordance with the provisions of sub-section (1).

Thus is it Clear that once you have opted out of 44AD Presumptive Taxation Scheme, You cannot Opt it back in for Next Five years

What Section 44AD(5) Says:-

(5) Notwithstanding anything contained in the foregoing provisions of 44AD, 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

In layman language, it means that if Subsection 4 is applicable to an Assessee and his income is more than Chargeable to tax then he shall be required to maintain accounts and get audited.

In your Case, Since your Income is not chargeable to tax, then You should not be required to Maintain Accounts or Get Audited. This is because the “Notwithstanding anything contained” words supersedes all the other subsections of 44AD.

However, this is applicable only in case you DO NOT have the Income maximum amount chargeable to Tax. Please note that the limit is 2,50,000/- at present for Individuals and HUF and Do not consider the rebate u/s 87A while considering the Maximum amount not chargeable to tax limit Also, it would be different for partnership firms. Even if your Tax payable is Zero your Income would not fall under “maximum amount not chargeable to tax”.

What Income Tax website FAQs Speak :-

There are FAQs mentioned on the Income Tax website and are reproduced here :-

The Link :- https://www.incometaxindia.gov.in/Pages/faqs.aspx?k=FAQs+on+Tax+on+Presumptive+Taxation+Scheme

FAQ:– If a person adopts the presumptive taxation scheme but he opts out from the scheme in any of the subsequent five years, then what are the consequences?

FAQ Answer:- ​​​​​​​​​If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years. [For example, an assessee claims to be taxed on presumptive basis under Section 44AD for AY 2019-20. For AY 2020-21 and 2021-22 also he offers income on basis of presumptive taxation scheme. However, for AY 2022-23, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2023-24 to 2027-28​.]

He is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]

Summary / Final Opinion

Since by the virtue of Section 44AD(5) you would not be required to maintain accounts or go for Audit since your maximum amount is not chargeable to tax. However, if you have maintained accounts then there is no harm getting them audited to stay on the safe side and avoid any future litigations with tax authorities. Moreover, You should have a basis to prove that your income is not chargeable to tax.

In case you decide not to go for an audit, it should be based on the Maximum penalty for not getting audited. You could get audit on a later date by an auditor in case you end up with litigation with Income Tax Department. If there is very less turnover as per GST/Books/ Any other way you justify then the Penalty would be very less as per the provision of tax. You could take a stand and continue with the same.