Audited Books vs Income Estimation: Section 44AD Dispute Explained
In a recent Income Tax Appellate Tribunal (ITAT) ruling, the bench sided with the taxpayer whose audited financial statements were being questioned under Section 44AD presumptive taxation.
This is a huge relief for small business owners and professionals who follow due accounting norms.
What is Section 44AD of the Income-tax Act?
Section 44AD is a presumptive taxation scheme for small businesses with turnover up to ₹2 crore (increased to ₹3 crore under certain conditions from FY 2023–24). Under this:
- Income is presumed at 8% of turnover (6% for digital receipts)
- No need to maintain books of accounts
- Applicable to individuals, HUFs, and partnership firms (not LLPs)
ITAT Ruling: Key Highlights
📌 Case Name: [Assessee vs. Income Tax Officer, May 2024 – Tax Management India]
📌 Dispute: AO rejected audited accounts, estimated income under 44AD
📌 Finding: Assessee had proper audited books, tax audit under Section 44AB was complied
📌 Verdict: Income estimation under Section 44AD was invalid
Legal Standpoint: What the ITAT Said
- No defects or discrepancies were found in current year audit
- AO’s action of overriding audited books without proper reasoning was unjustified
This aligns with judicial precedents like:
- CIT v. S.K. Traders (Rajasthan HC)
- Anil Kumar v. ITO (ITAT Delhi)
Practical Insight for Small Taxpayers
If your turnover exceeds the 44AD threshold or you opt out of presumptive tax, get your accounts audited under Section 44AB. It strengthens your defence in case of scrutiny.
When Can the AO Estimate Income Under 44AD?
Only in these situations:
- Books not maintained
- Books are incomplete or unreliable
Efiletax Tip: Stay Compliant, Stay Confident
- Maintain digital records
- Don’t skip audit if turnover crosses limits
- Upload tax audit reports on time
- Use Section 44AD only when conditions fully apply
Need help with your tax audit or facing a similar dispute?
👉 Connect with our experts at Efiletax
Summary
ITAT rules in favour of taxpayer, rejecting AO’s 44AD estimation. Audited books upheld. Key win for small businesses maintaining proper records.
FAQs
Q1. Can AO apply Section 44AD against my will?
A: Only if you haven’t maintained books. If you have valid audited accounts, they must consider those.
Q2. Is 44AD mandatory for small businesses?
A: No, it’s optional. If you don’t opt for it, maintain books and get them audited.
Q3. What is the turnover limit for 44AD from FY 2023–24?
A: ₹3 crore, provided cash receipts do not exceed 5% of turnover.