is tax audit mandatory while opting out of 44AD.

[Manoj Yadav]

A partnership firm has opted for 44ad for first 3years of its incorporation while filing its itr. its turnover has never crossed 1 crore in any year. for 4th year onward it wants to opt out of 44AD. its turnover during the 4th year is 54 lacs. is audit mandatory under 44AD(4)/44AB or it can file its itr with books of account without audit.

[Sanjeev Agarwal]

Yes, tax audit would generally be mandatory, assuming this is governed by the Income-tax Act, 1961.

Analysis

The partnership firm:

• is an eligible assessee for section 44AD;
• has opted for section 44AD for the first 3 assessment years;
• wishes to opt out from the 4th year;
• has turnover of Rs. 54 lakh (below the threshold for section 44AD).

Under section 44AD(4), if an eligible assessee declares profits as per section 44AD for any assessment year and subsequently declares profits not in accordance with section 44AD for any of the next five assessment years, the assessee becomes ineligible to claim the benefit of section 44AD for those five years.

Further, section 44AD(5) provides that where section 44AD(4) applies, the assessee must:

• maintain books of account as prescribed under section 44AA; and
• get the accounts audited and furnish the audit report as required under section 44AB,

if the total income exceeds the maximum amount not chargeable to tax.

Impact for a Partnership Firm

For a partnership firm, there is no basic exemption limit; tax is payable from the first rupee of taxable income. Therefore, the "maximum amount not chargeable to tax" is effectively Nil. Consequently, if the firm has any taxable income, the condition under section 44AD(5) is satisfied.

Conclusion

Accordingly, if the firm opts out of section 44AD in the 4th year:

• it must maintain regular books of account; and
• tax audit under section 44AB becomes mandatory, notwithstanding that the turnover is only Rs. 54 lakh.

The turnover threshold under section 44AB does not override the specific requirement arising from sections 44AD(4) and 44AD(5).

Note: If your query is under the Income-tax Act, 2025, the conclusion may differ because the presumptive taxation provisions have been renumbered and modified. Please specify the relevant Assessment Year if you are referring to the new Act.

AI Summary

Presumptive taxation opt-out under section 44AD can trigger books and tax audit requirements for a partnership firm.
A partnership firm that has used section 44AD for the first three years and then opts out from the fourth year becomes subject to the withdrawal consequences in section 44AD(4). The firm must maintain books of account under section 44AA and, where section 44AD(5) applies, get its accounts audited under section 44AB. For a partnership firm, any taxable income triggers this compliance requirement, so audit can be mandatory even where turnover is below the ordinary audit threshold.