sec 44ad and sec 44ab inter change

[giri gattupalli]

respected sir,

one of my client filed ITR S for ay 2023-24,2024-25, 2025-26 under SEC 44AB .(audited). now for AY 2026-27 his gross receipts are well below one crore. i want to file the itr for ay 2026-27 under SEC 44AD. please tell me is there any future consequences, if turnover for next year exceeds two crores and again need to file under Sec 44AB.

and as the new income tax act is coming in to force from ay 2027-28, the next year, what would be the consequences.

thanking you

[Sanjeev Agarwal]

AY 2026-27 - 44AD can be adopted

If the assessee is otherwise eligible for presumptive taxation and the AY 2026-27 turnover is below the prescribed limit, there is no requirement to continue tax audit merely because tax audit was carried out in AYs 2023-24, 2024-25 and 2025-26.

Accordingly, you may file AY 2026-27 under section 44AD, subject to satisfying all conditions of section 44AD of the Income-tax Act, 1961.

What if next year's turnover increases?

There is an important distinction:

1. Turnover crosses the 44AD eligibility limit

If, in the following year, turnover exceeds the applicable 44AD limit and consequently the assessee becomes statutorily ineligible for 44AD, he can compute income under the normal provisions and obtain tax audit under section 44AB, if section 44AB applies.

This statutory exit from 44AD should not, by itself, be treated as a voluntary withdrawal from 44AD triggering the five-year restriction.

2. Turnover is still within 44AD limit but assessee voluntarily declares lower actual profit

This is different. Section 44AD(4)/(5) can trigger the five-year restriction where the assessee, while otherwise eligible, declares income contrary to the presumptive provisions.

One important correction

For AY 2026-27, don't treat Rs. 2 crore as the absolute 44AD ceiling.

The enhanced limit is Rs. 3 crore where cash receipts do not exceed 5% of total turnover/gross receipts. Therefore:

• Rs. 2.50 crore turnover + cash receipts 5% 44AD may still apply.
• Rs. 2.50 crore + cash receipts >5% examine normal provisions/audit.
• Rs. 3 crore 44AD not available.

Also, 44AD eligibility and 44AB audit liability are separate tests.

Effect of Income-tax Act, 2025

From Tax Year 2026-27, the corresponding presumptive provision is section 58 of the Income-tax Act, 2025. The transition provisions preserve the effect of options exercised under the Income-tax Act, 1961.

Importantly, the five-year restriction has also been retained under section 58. Therefore, the change of legislation does not provide a fresh opportunity to bypass that restriction.

My recommendation

I would file AY 2026-27 under 44AD, provided all eligibility conditions are satisfied.

Maintain a working-paper note that the change from 44AB to 44AD is because the assessee is currently eligible for presumptive taxation, not because of any attempt to avoid audit.

If the next year exceeds the 44AD limit, reassess 44AB independently based on that year's turnover and cash-receipt/payment conditions.

[giri gattupalli]

thank you sir. for your detailed reply. my doubts answered .

giri

AI Summary

Presumptive taxation eligibility permits transition from tax audit, while turnover-based statutory exit remains distinct from voluntary withdrawal restrictions.
Section 44AD may be adopted where its eligibility conditions and turnover threshold are satisfied, notwithstanding tax audits in earlier years. Section 44AD eligibility and section 44AB audit liability are separate tests. If later turnover exceeds the presumptive-tax threshold, normal computation and audit may apply without that statutory exit itself attracting the five-year restriction. The restriction may apply where an otherwise eligible assessee declares profit below presumptive income. The corresponding provision under the Income-tax Act, 2025 retains this restriction.