Loss in Business? U / s 44AD or 44ADA Audit Applicable or Not?
Many of us assumed that those assessees with business losses and turnover less than Rs . 2 crore are needed to get their accounts audited U / s 44AB r / w section 44AD or those assesses that have career losses and professional receipts less than Rs 50 lakhs are needed to get their accounts audited u / s 44AB r / w section 44ADA, but that is not the case.
In section 44AD, Sub Section (1) reads as follows:
(1) Notwithstanding anything to the contrary found in sections 28 to 43C, in the case of a qualified assessee engaged in a qualified undertaking, in the case of an eligible assessee, a sum equal to eight per cent of the assessee 's overall turnover or gross receipts in the preceding year on account of that undertaking, or, as the case may be, a sum greater than the amount stated to have been received by the eligible assessee,
Given that this sub-section has effect as though the words 'eight percent' had been substituted by 'six percent' with respect to the amount of net turnover or gross receipts earned by the payee's account cheque or the payee's account bank draught or the use of the electronic clearing system through the bank account or by some other electronic mode as may be prescribed during the time of payment.
Section 44AD, Sub section (4) reads as follows:
(4) If an eligible assessor declares income for any preceding year in accordance with the provisions of this section and declares income for any of the five years of assessment applicable to the preceding year following the preceding year not in accordance with the provisions of subsection ( 1), he shall not be eligible to benefit from the provisions of this section for the five years of assessment in accordance with the provisions of sub-section ( 1).
In section 44AD, sub section (5) reads as follows:
(5) Notwithstanding everything contained in the foregoing provisions of this section, a qualifying assessor to whom the provisions of sub-section ( 4) apply and whose total income exceeds the maximum sum not paid for income tax shall be obliged, as provided by sub-section ( 2) of section 44AA, to preserve and retain certain account books and other records and to obtain them for audit.
In section 44ADA, Sub Section (1) reads as follows:
(1) Notwithstanding any of the provisions of sections 28 to 43C, in the case of an assessee residing in India who is engaged in a career referred to in subsection (1 ) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in the preceding year, the balance of the assessee 's total gross receipts in the preceding year shall be equal to fifty per cent of the assessee 's total gross receipts in respect of that professional in the preceding year.
In section 44ADA, Sub Section (4) reads as follows:
(4) Notwithstanding everything found in the foregoing provisions of this section, an assessor who argues that his profits and profits from the profession are lower than the profits and profits referred to in subsection (1) and whose gross income is greater than the maximum sum not subject to income tax shall be obliged to retain and maintain such account books and other records as may be necessary.
The following points are brought to light by the simultaneous reading of sub-sections (1), (4) and (5) of Section 44AD and sub-sections (1) and (4) of Section 44ADA:
The income of an assessee engaged in qualifying business under the head of 'Income and profits from business and profession shall be deemed to be equal to 8 percent or 6 percent or 50 percent of the total turnover or gross professional receipts as per the assessee 's case or the higher sum as the assessee may say.
Questions: What if the earnings of an assessee engaged in qualifying business are currently less than 8% or 6% or 50% of the business or profession's turnover or gross receipts?
Answer: If an assessee argues that his profits and profits from qualifying undertakings are less than 8% or 6% or 50% of the total turnover or gross receipts and that the total income of the assessee exceeds the maximum sum not taxable, the assessee shall keep the account books as prescribed in U / S 44AA and have them audited in compliance with section 44AB of the Act.
The catch here lies in the words 'and whose gross income exceeds the maximum amount not paid to income tax'
Therefore, because the terms begin with 'and' all the requirements must be met for an assessee to be eligible to have his accounts audited u/s 44AB.
Questions: What are the criteria to compel the assessee to read the audited accounts u / s 44AB with section 44AD or Section 44ADA if the turnover is less than Rs. 2 crore or Gross receipts from qualifying company or occupation are less than 50 Lakhs?
Answer: 1) The assessee should hold the account books as prescribed under 44AA and the income claimed under such account books are less than 8% or 6% or 50% of the company / profession's gross receipts or turnover.
The second condition for mandating the tax audit u / s 44AB is that the gross income of the assessee under the Income Tax Act'1961 should surpass the permissible amount not taxable.
Let us now consider the case of a partnership firm that is engaged in qualifying business as per section 44AD and whose turnover in the preceding financial year 2020-21 is said to be Rs. 80 lacs and which shows a net loss of Rs. 50,000/- from business.
Is it appropriate for this firm to read the accounts audited under Section 44AB under Section 44AD of the Income Tax Act'1961?
The response is 'No' because the audit is needed if we read section 44AD carefully when profits are less than 8 percent or 6 percent of gross receipts or turnover and the income reaches the maximum sum that is not taxable.
Because the corporation is taxed on income beginning from Rs . 1, the maximum amount that is not taxable is also zero.
Therefore, in the case of losses, as there is no revenue, the maximum sum not taxable is not exceeded and so the second requirement mandating tax audit u / s 44AB r / w section 44AD is not fulfilled and therefore the assessee is not required to audit the accounts u / s 44AB.
Therefore, in the case of assessees other than companies, professionals, assessees with agency company (those for whom section 44AD/ 44ADA is not applicable) with revenue less than Rs.2 crore or company receipts less than 50 lakhs and showing business losses, U / s 44AB audited accounts shall not be needed if they have no other income other than income from qualifying business income.
Accordingly, such assessors can file a return on income without an audit report by 31 July of the Assessment Year, as the loss would not be carried forward due to the late filing of the return on income tax after the due date.