Whether tax audit is required when opting for section 44AD and simultaneously reporting separate commission income in P&L?

[Dipika Shetye]

I am an individual carrying on business and proposing to declare income under section 44AD.

My turnover/gross receipts during the year are approximately Rs. 1.37 crore. Cash receipts as well as cash payments exceed 5% of total receipts/payments. However, I am declaring presumptive income higher than the prescribed 6%/8% under section 44AD.

In addition, I have commission income of around Rs. 4 lakh, which I am showing separately in the Profit & Loss Account and not under the presumptive scheme.

While validating the return, the ITR utility is giving an error stating that since turnover is more than Rs. 1 crore and cash receipts/payments exceed 5%, tax audit under section 44AB is applicable.

Pls Guide me as per Income Tax Act. Whether tax audit is required

[Sanjeev Agarwal]

Summary

For an individual having business turnover of about Rs. 1.37 crore, section 44AD may still be available if the business is otherwise eligible. Section 44AD permits declaring profit higher than the prescribed 6%/8%, so declaring a higher presumptive income does not itself create an audit requirement.

However, section 44AB operates independently. The normal tax-audit threshold for business is Rs. 1 crore. The enhanced threshold of Rs. 10 crore is available only where both cash receipts and cash payments do not exceed 5% of the relevant aggregate amounts.

Since, on the stated facts, cash receipts and cash payments both exceed 5%, the Rs. 10 crore relaxation is unavailable. Therefore:

• Turnover: Rs. 1.37 crore
• Applicable section 44AB threshold: Rs. 1 crore
• Turnover exceeds threshold: Yes
• Tax audit under section 44AB(a): Applicable

Thus, declaring profit higher than 6%/8% under section 44AD does not eliminate the section 44AB audit requirement.

The Rs. 4 lakh commission income requires separate examination because commission/brokerage income is subject to specific restrictions under the 44AD framework. If it is genuinely a separate commission activity, showing it separately may be appropriate, but this does not alter the 44AB conclusion arising from the Rs. 1.37 crore business turnover.

The ICAI 2025 Guidance Note on Tax Audit under section 44AB is the relevant professional reference.

Conclusion: On the facts provided, the ITR utility's validation error requiring tax audit appears legally correct. The stronger argument that "higher presumptive income under 44AD avoids audit" is not sustainable where section 44AB(a)'s independent turnover test is triggered.

[Ryan Vaz]

Based on the Income Tax Act provisions, yes, tax audit under section 44AB is required in your case.

Analysis

1. Section 44AD Presumptive Taxation

You can declare income under Section 44AD at any amount (including higher than 6%/8%). However, if you declare less than the presumptive rate (6% or 8%) and your total income exceeds the maximum non-taxable limit, you must maintain books and get them audited. In your case, since you're declaring higher than the presumptive rate, this specific audit trigger does not apply.

2. section 44AB Audit Threshold

The audit requirement is triggered independently by business turnover:

- Normal threshold: Rs. 1 crore

- Enhanced threshold: Rs. 2 crore (available only if cash receipts 5% of total receipts and cash payments 5% of total payments)
Since your cash receipts and cash payments both exceed 5%, the enhanced threshold is unavailable. Therefore, the normal threshold of Rs. 1 crore applies.

Your turnover of Rs. 1.37 crore exceeds Rs. 1 crore, so tax audit under section 44AB(a) is mandatory.

3. Commission Income

The separate commission income of Rs. 4 lakh shown in P&L does not alter the audit consequence arising from your business turnover. The audit requirement is already triggered by the business turnover alone.

Conclusion

The ITR utility is correct. Tax audit under section 44AB is applicable because:

- Business turnover exceeds Rs. 1 crore

- Cash transactions exceed 5%, disqualifying the enhanced Rs. 2 crore threshold

You must get your books of account audited by a chartered accountant and file the audit report along with your ITR.

AI Summary

Tax audit remains mandatory where business turnover crosses the applicable threshold and cash transactions prevent enhanced threshold relief.
Tax audit under section 44AB operates independently of presumptive income declared under section 44AD. Declaring profit above the prescribed 6% or 8% rate does not remove the turnover-based audit requirement. Where turnover exceeds the normal threshold and cash receipts and cash payments each exceed 5%, the enhanced low-cash threshold is unavailable. On turnover of approximately Rs. 1.37 crore, tax audit is required. Separate commission income does not change this audit consequence, although its treatment under the presumptive-taxation framework requires separate examination.