Income Tax--Current Issues

Practice Update

CA V.K. Subramani

UNCERTAINTIES IN OPT IN OR OPT OUT OF SECTIONS 44AD VIS A VIS 44AB

Section 44AD and section 44AB are closely inter-connected since a taxpayer engaged in business has to file his ITR by following either of the provisions except a few such as notified professions, commission agents and those engaged in agency business who fall outside the realm of section 44AD.

It is natural for tax counsels filing ITRs to follow the general advisory of the fraternity and an outsider making some innovative/innocent remarks prima facie look ignorable and at times could ignite some novel thoughts for the professionals to explore. Let us see two such views which deserve our attention.

Section 44AD(4): The section says an eligible assessee who admitted income under section 44AD(1) in a year and opts out for any of the 5 assessment years succeeding such assessment year, he cannot opt again the provisions of section 44AD for subsequent 5 assessment years, subsequent to the assessment year of opt out. For example, a taxpayer began business in PY 2018-19, opted for 44AD for that previous year which means assessment year 2019-20. In case, he opts out in any of the AYs2020-21 to 2024-25 (files by getting the books audited under section 44AB), he cannot re-enter and opt section 44AD for 5 assessment years after the opt out. If the assessee opts for 44AB in 2020-21, he cannot opt section 44AD for AYs 2021-22 to 2025-26.

Now, the question is, if opted out after 5 years then, is he debarred from opting section 44AD in the immediately succeeding assessment years? In other words, can a taxpayer who opted section 44AD for 6 continuous assessment years becomes free permanently from these time limitations contained in section 44AD(4)? Is such taxpayer shuffle between section 44AB and section 44AD back and forth without any conditions?

Section 44AB(e): The provisions meant for tax audit shall apply where a person carrying on the business to whom the provisions of section 44AD(4) are applicable in his case and his income exceeds the maximum amount which is not chargeable to income tax in that previous year. Here, when an assessee opts out of section 44AD, he is governed by section 44AB(e). His accounts are liable for audit, only where the income exceeds the maximum amount not chargeable to tax. In case, the assessee has suffered say, eligible business loss and opts out of 44AD, i.e., 44AD(4), he need not get the accounts audited under section 44AB(e). It is settled that having opted out of 44AD he cannot re-enter to avail the benefits of section 44AD for 5 subsequent assessment years. In case he incurs loss or his total income is always below taxable limit he need not get the books of account audited under section 44AB for any subsequent assessment year since he has opted out by virtue of section 44AD(4). Thus remaining in section 44AD and opting out gives that privilege for not getting the books of account audited with attendant cost thereon.