Section 44AA, 44AB, 44AD & 44ADA of Income Tax Act, 1961 are essential to be studied before setting up any business or profession.

Simplifying Section 44AA,44AB,44AD & 44ADA

Sec 44AA & 44AB & 44AD of Income Tax Act, 1961

Sec 44AA:- Maintenance Of Accounts By Certain Persons Carrying On Profession or Business

  • Prescribed Books1: –
    1. In case of Specified Profession2if Gross Receipts exceed Rs.1,50,000/- in any one of 3 years immediately preceding previous year or in case where profession has been newly setup if gross receipts are likely to exceed Rs.1,50,000/- during previous year.
    2. Assessees covered u/s Sec 44 ADA when two conditions are satisfied: –
      • Claim lower profit than presumed u/s 44ADA i.e. 50% of gross receipts &
      • his Total Income exceed basic exemption limit.
  • Any Books of Accounts3: –
    1. In case of Specified Profession if Gross Receipts are less than Rs. 1,50,000/- .
    2. In case of business or non-Specified Profession if Total income exceed Rs.1,20,000/- or Gross Receipts/sales/turnover exceed Rs .10,00,000/- in any of 3 years immediately preceding previous year or in case where the business or profession has been newly setup if it is likely to exceed total income of Rs. 1,20,000/- or gross receipts if Rs. 10,00,000/- during such previous year.
    3. Assessees covered u/s 44AD/44AE/44BB/44BBB if they claim that their income will be less than income presumed in respective section. e.g. u/s 44 AD income is presumed to be 8% of the gross receipts.
    4. Assessees opting for presumptive taxation u/s 44AD are required to maintain books if they are covered under sub section 4* of the said section and their total income exceeds basic threshold limit.
      • *As per Sub section 4 of Section 44AD, if the assessee, after declaring profit for any previous year u/s 44AD, declares profit for any of the five consecutive succeeding years which is not in accordance with the provisions of Section 44AD he shall not be eligible to claim the benefit of the provisions of this section for five subsequent years succeeding the year in which the profit has not been declared in accordance with the provisions of Section 44AD.
  • No Books: –In all other cases.1

All Books of accounts are required to be maintained for 6 Years from the end of relevant Assessment Year.

1Prescribed Books means: – Cash Book, Journal, Ledger, carbon copies of bill issued for amount exceeding Rs. 25/- etc. In case of Medical Profession, Daily Case registers in Form No. 3C and Stock Register are also to be maintained.
2Specified Profession includes: profession of Medical/ Legal/ Engineering/ Architect/ Accountancy/ Technical Consultancy/ Interior Decoration/ Authorized Representation/ Film Artist/ C.S etc.

3Any Books of Accounts means:-Books of accounts & documents which enables A.O. to compute Assessee’s Total Income in accordance with provisions of Income Tax Act.

Sec 44AB: – Audit Of Accounts Of Certain Persons Carrying On Business Or Profession 

  • Audit of books of accounts by a chartered accountant in practice is compulsory.
  1. In case of Business: –If Total Sales/ Gross Turnover exceeds Rs 1 Crore in any previous Year.

However, from the Assessment Year 2020-21 audit is not compulsory if the Total Sales/ Gross Turnover is upto Rs. 10 Crores & two conditions are met, i.e.

    • Aggregate of all amount received in cash (including cash sales) does not exceed 5% of said amount, and;
    • Aggregate of all payments made (including cash expense) does not exceed 5% of said amount.
  1. In case of Profession:– If Gross Receipts exceeds Rs 50 lakhs in any previous Year.
  2. Assessees covered u/s 44AD/44ADA/44AE/44BB/44BBB are also required to audit of accounts if they claim that their profit will be less than profit presumed in respective section. e.g. u/s 44ADA Audit of accounts is required when two conditions are met:-
    • Claim lower profit than presumed u/s 44ADA (profit @ 50% of gross receipts)
    • Total Income exceed basic exemption limit.
  1. Similarly, as discussed in Section 44AA assessee opting for presumptive taxation u/s 44AD are required to get their accounts audited if they are covered under sub section 4 and their total income exceeds basic threshold limit.
  • For calculation of turnover u/s 44AB, the turnover u/s 44AD/44AE shall be excluded. Above threshold limit is assessee wise and not business /profession wise e.g. If assessee has two business than turnover will be summed up.
  • Due date of filing Audit Report:-
  1. 30th September
  2. In case, if assessee has International transactions, 30th November
  • Audit Report Form:- Form 3CA if audit is also required under any other law otherwise in Form 3CB if audit only required under Income Tax.

Sec 44AD:- Special provision for computing profits and gains of business on presumptive basis.

  • Applicability: –
  1. Eligible Assessee means Resident:-Individual/HUF/Partnership Firm (excluding LLP).
  2. Eligible Business:-All types of business except business covered u/s 44AE/ Agency/ Commission or Brokerage.
  3. Turnover does not exceed Rs 2 Crore in Previous Year.

If all above conditions are satisfied then assessee can declare estimated income from business @ 8% of total turnover or more.

Provided, if amount of sale consideration is received by any other mode than cash (banking channel) income is presumed to be @ 6% of total turnover or higher as declared by assessee.

  • Non Applicability: –
  1. Non Resident:-Individual/HUF/Partnership firm
  2. Company/LLP/BOI /AOP
  3. Turnover exceeds Rs. 2 crores in Previous Year
  4. Professional
  5. Assessee who has claimed deductions u/s 10A/10AA/10B/10BA and deduction in respect of certain incomes under chapter VIA in relevant previous year.
  • If Assessee opts for Sec 44AD and declares his income as 8 % or 6% of total turnover or more he should consider following points:
  1. Assessee shall not allowed to claim any expenses or depreciation i.e. expenses covered u/s 30 to 38.
  2. Salary, Remuneration or Interest paid to partner u/s 40(b) shall not be allowed as deduction.
  3. Maintenance of books of accounts u/s 44AA and Audit u/s 44AB not required. However, if assessee wishes to declare his income lower than prescribed under this section & total income exceeds the basic exemption limit than maintenance of books & audit is required.
  4. Advance Tax rules will apply, however assessee may opt to pay advance tax by 15thMarch of Financial Year.
  5. Where an assessee declares profit for any previous year u/s 44AD and he declares profit for any of the five consecutive succeeding years not in accordance with the provisions of this section, he shall not be eligible to claim the benefit of the provisions of this section for five subsequent years succeeding the year in which the profit has not been declared in accordance with the provisions of Section 44AD.
  6. If there is disallowance of any expense it will be assumed that it has been already made in calculation of estimated profit.
  7. It is to be assumed that depreciation on assets used in the business has been claimed & written down value of asset shall have deemed to be calculated after giving effect to depreciation.

Sec 44ADA: – Special provision for computing profits and gains of profession on presumptive basis.

  • Applicability: –
  1. Eligible Assessee means Resident:-Individual/HUF/Partnership Firm (excluding LLP).
  2. Eligible Professions: Professions referred in Section 44AA of the Act viz. Medical/ Legal/ Engineering/ Architect/ Accountancy/ Technical Consultancy/ Interior Decoration/ Authorized Representation/ Film Artist/ Company Secretory etc.
  3. Total gross receipts does not exceed Rs 50 Lakhs in Previous Year.

If all above conditions are satisfied then assessee can declare estimated income from business @ 50% of total gross receipts or more.

  • Non Applicability: –
  1. Non Resident:-Individual/HUF/Partnership firm.
  2. Gross receipts exceed Rs. 50 Lakhs.
  3. Engaged in professional other than specified profession e.g. person engaged in the profession of teaching.
  • If Assessee opts for Sec 44ADA and declares his income as 50% of total gross receipts or more he should consider following points:
    1. Not allowed to claim any expenses or depreciation i.e. expenses covered u/s 30 to 38.
    2. Maintenance of books of accounts u/s 44AA and Audit u/s 44AB not required. However, if assessee wishes to declare his income lower than prescribed under this section & total income exceeds the basic exemption limit than maintenance of books & audit is required.
    3. Assessee required to pay advance tax on or before 15th march of Previous Year.

Example: Let us discuss applicability of above provisions to specific cases:

  1. Assessee having a single business or profession:
    • Business
Turnover (in Rs.) Section 44AA Section 44AB Section 44AD
190 Lakhs Not Applicable (Assesse may opt for Sec. 44AD) Not Applicable (Assesse may opt for Sec. 44AD) Applicable
300 Lakhs Applicable

(As turnover exceeds 10 Lakhs & also not covered u/s 44AD)

 Not applicable

(Subject to cash transaction not more than 5% as discussed above)

 Not Applicable

(As turnover exceeds 2 Crores)
1600 Lakhs Applicable Applicable

(irrespective of cash transaction)

 Not Applicable

 

    • Profession
Nature of Profession

Gross Receipts (in Rs.)

 Section 44AA Section 44AB Section 44ADA
Specified

40 Lakhs

 Not Applicable (Assesse may opt for Sec. 44ADA) Not Applicable (Assesse may opt for Sec. 44ADA) Applicable

(Gross receipts are less than 50 Lakhs)
Non-Specified

40 Lakhs

 Applicable

(As gross receipts are more than 10 Lakhs)

 Not Applicable

(As gross receipts are less than 50 Lakhs)

 Not applicable

(only applicable to specified profession)
Specified or non-specified

100 Lakhs

 Applicable Applicable Not Applicable

 

  1. Assessee has two Business

Turnover of all the business of the assessee is to be clubbed for determining the turnover limits for these sections.

a) Business I + Business II = Total
Turnover 110 Lakh + 30 Lakh = 140 Lakh

 

Section 44AA: Not Applicable (Assesse may opt for Sec. 44AD)

Section 44AB: Not Applicable (Assesse may opt for Sec. 44AD)

Section 44AD: Applicable (Aggregate Turnover is less than Rs. 2 Crores)

 

b) Business I + Business II = Total
Turnover 120 Lakh + 190 Lakh = 310 Lakh

 

Section 44AA: Applicable (As aggregate turnover exceeds 10 Lakhs & also not covered u/s 44AD)

Section 44AB: Not Applicable (Subject to cash transaction not more than 5% as discussed above)

Section 44AD: Applicable (Aggregate Turnover is more than Rs. 2 Crores)

 

  1. Assessee has Business & Profession

If assessee is having both business & profession, then the turnover/gross receipts of both are to be separately viewed for the purpose of above sections.

a) Business + Profession
Turnover/Gross Receipts 130 Lakh + 40 Lakh

 

Section 44AA: Not Applicable (Assesse may opt for Sec. 44AD for business income & Sec. 44ADA for profession income)

Section 44AB: Not Applicable (Assesse may opt for Sec. 44AD for business income & Sec. 44ADA for profession income)

Section 44AD: Applicable (Turnover of business is less than Rs. 2 Crores)

Section 44ADA: Applicable (Gross receipts from profession is less than Rs. 50 Lakhs)

 

 

 

 

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