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Section 44AD(5)

What the Income Tax Act, 1961 reads?
 
"Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) 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."
 
Our Analysis
 
This subsection talks of two cumulative conditions for applicability of 44AA and 44AB: –
i. The Income from eligible business is lower than 8% of Turnover or Gross Receipts,
   AND
ii. The “TOTAL INCOME” exceeds the maximum amount not chargeable to tax.
 
Example no. 1
 
Mr. A is having Turnover from Eligible Business of Rs. 30 Lakhs. He does not have any other income. His actual Income as per his records (books) is Rs. 125000/- and he wants to file Return declaring the said Income u/s 44AD of the Act. Comment in light of provisions of Section 44AD(5) of the Act.
 
Answer
As both the conditions of section 44AD(5) are not satisfied in case of the assessee, the provisions of section 44AA and 44AB are not applicable and the assessee is still covered by section 44AD and his Income u/s 44AD will be Rs. 125000/-.
 
It is only when his total income exceeds the maximum amount not chargeable to tax, that he will be covered by 44AA and 44AB of the Act, and normal provisions of computation of Income from Business and Profession will apply.
 
Example no. 2
 
What if there is Loss of Rs. 125000/- in the said example?
 
Answer
The situation will not change even in case of loss. The Return will be filed as per book results only.
 
Example no. 3
Let us assume that M/s. XYZ is a partnership firm. The relevant details are as under: –
–          Turnover from eligible business – Rs. 25 Lakhs
–          Net Profit as per books (before 40 b allowances) – Rs. 2 Lakhs
–          8% of Turnover – Rs. 2 Lakhs
Thus, Income u/s 44AD (1) is Rs. 2 Lakhs.
 
Comment in light of provisions of Section 44AD(5) of the Act in case the firm pays Partners Interest and Remuneration of Rs. 100000/- each. Thus the TOTAL INCOME is Rs. NIL.
 
Answer
 In the present case in situation 1, the firm is not covered by 44AA and 44AB because the first condition of 44AD (5) that the income should be lower than prescribed u/s 44AD (1), is not applicable as the Income of the firm before allowances u/s 40 b is Rs. 2 Lakhs which is not lower that 8% of Turnover.
 
Here it is pertinent to note that the words used in 44AD (5) is lower than prescribed u/s 44AD(1), which means, in case of partnership firm, Income before allowances u/s 40 b of the Act, because the allowances are governed by section 44AD (2).
 
Example no. 4
 
Continuing example no. 3, what if the Net Profit as per books (before 40 b allowances) is Rs. 1.5 Lakhs only and the firm pays Remuneration of Rs. 1.5 Lakhs, thereby reducing the TOTAL INCOME to Rs. NIL?
 
 
Answer
The firm is covered by first condition of 44AD (5), i.e. the income before 40 b allowances is lower than 8% of Turnover.
 
But, the TOTAL INCOME is Rs. NIL. Now the question arises for consideration is whether NIL amount is an amount and can it be considered as the maximum amount not chargeable to tax?
 
In Central Excise it is a trite law that NIL rate of duty is a specified rate of duty for all purposes of the Act and hence all provisions, notifications, etc. applicable to Exempted Goods are not applicable where the goods are chargeable at NIL rate of Tax. It implies that duty is leviable on goods at NIL rate.
 
Applying the same analogy here, one can say that NIL Income is the maximum amount not chargeable to tax in case of partnership firms and hence the second condition of 44AD (5), being not satisfied, the firm is not covered by 44AA and 44AB of the Act and is legally correct if it files NIL Return u/s 44AD of the Act. (The same logic can be extended to loss cases as well)
 
(However, the logic, though apparently correct, is highly technical in nature and may lead to furious litigation on the subject.)
 
Example no. 5
 
An eligible assessee is carrying on three eligible business, the turnover of which is as under :
–          Business A ( Manufacturing) Rs. 40 Lakhs
–          Business B ( Trading) Rs. 40 Lakhs
–          Business C ( Service) Rs. 40 Lakhs
Comment in view of provisions of section 44AB vis-à-vis section 44AD of the Act.
 
What if, in the same example, if the details are as follows: –
-           Business A ( Manufacturing) Rs. 90 Lakhs
-           Business B (covered by 44AE) Rs. 25 Lakhs.
 
Answer
If assessee is running multiple businesses, turnover of all those businesses shall be determined as per method of accounting regularly employed for respective businesses. Further the turnover so determined shall be clubbed to determine whether limit of Rs. 1 Crore gets exceeded. Thus section 44AB is applicable as it is Qua Assessee.
 
This view is based on ICAI’s Guidance Note on Tax Audit as well as the decision of Honourable High Courts in case of Bajrang Oil Mills (Raj.) 295 ITR 314 and in K. Satish Shetty (Kar.) 310 ITR 366.
 
(Now, the point that needs consideration is whether, even after applicability of section 44AB, can the assessee take advantage of section 44AD in respect of each business independently as the Turnover from each distinct business does not exceed Rs. 1 Crore?)
 
(The assessee in such a case will be required to get the Turnover or Gross Receipts audited u/s 44AB. This view is possible only if it can be successfully argued that the word used in Section 44AD  “eligible business” is Singular in nature and hence the section is qua business and thus the benefit of said section is available applying the ratio that while Plural includes  singular the vice versa is not always true.
 
However, in case of Vineetkumar 46 SOT 97 (Rajkot Bench), w.r.t. section 56(2) has held that “singular incudes the plural”.)
 
Thus in this case, assuming 44AD(5) is not applicable, both section 44AD and 44AE are applicable to the assessee.