My client filed under s.44AD for two years and then declared below eight per cent in the third. What happens to him for the next five years, and does he now have to get audited?
By s.44AD(4), an eligible assessee who has declared profit in accordance with s.44AD and who, in any of the five assessment years relevant to the succeeding previous years, declares profit NOT in accordance with s.44AD(1), is shut out of s.44AD for the five assessment years subsequent to the assessment year in which he broke ranks. By s.44AD(5), that assessee must keep books under s.44AA(2) and get them audited and reported under s.44AB only if his total income exceeds the maximum amount which is not chargeable to income-tax — a condition that both the department and the assessee routinely read out of the sub-section.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2017-04-01, reported as Income-tax Act 1961, s.44AD(4) and s.44AD(5) as substituted, and s.44AD(6) as inserted, by the Finance Act 2016 (Act No. 28 of 2016) with effect from 1 April 2017; read with s.44AB clause (e). It bears on section 44AD, section 44AD(4), section 44AD(5), section 44AD(6), section 44AA, section 44AA(1), section 44AA(2), section 44AB, section 271A, section 271B of the Income Tax Act 1961, in Presumptive Taxation & Audit, Penalty and How Tax Law Is Read matters.
This is the trap in the whole scheme and it works in both directions. Against the assessee: opting out for a single year does not cost him only that year, it costs him the next five assessment years as well, and once s.44AD(4) applies, s.44AB(e) independently requires an audit — the audit obligation is not routed through the turnover limit in s.44AB(a) at all. In favour of the assessee: s.44AD(5) applies only to an eligible assessee "whose total income exceeds the maximum amount which is not chargeable to income-tax", and s.44AB clause (e) carries the same condition in the words "and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year". A small assessee locked out by s.44AD(4) whose total income is below the exemption limit owes no books under s.44AA(2) and no audit under s.44AB, and a s.271B or s.271A penalty raised against him has no statutory foundation. That condition is the answer to a large number of penalty notices and it is the part of the sub-section that gets skipped. Note also what s.44AD(4) does not say: it is triggered by declaring profit not in accordance with s.44AD(1), which is a description of what the assessee himself declares in his return. It is not on its face triggered by the Assessing Officer assessing him at a lower figure, nor by the assessee simply ceasing to be eligible because his turnover crossed the ceiling. Sub-section (6) is a separate exclusion altogether: s.44AD does not apply at all to a person carrying on a profession referred to in s.44AA(1), a person earning income in the nature of commission or brokerage, or a person carrying on any agency business.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 44AD(4) provides that where an eligible assessee declares profit for any previous year in accordance with the provisions of the section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of the section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been so declared. Section 44AD(5) provides, notwithstanding anything in the foregoing provisions of the section, that an eligible assessee to whom sub-section (4) applies and whose total income exceeds the maximum amount which is not chargeable to income-tax shall be required to keep and maintain such books of account and other documents as required under s.44AA(2) and get them audited and furnish a report of such audit as required under s.44AB. Section 44AD(6) excludes from the section altogether a person carrying on a profession as referred to in s.44AA(1), a person earning income in the nature of commission or brokerage, and a person carrying on any agency business. On the audit side, s.44AB clause (e) brings within the audit obligation a person carrying on the business 'if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year'.
Not applicable — statutory provision. The operative rules are that a departure from s.44AD(1) within the five-year window disqualifies the assessee for the five assessment years subsequent to the year of departure; that the consequential duty to keep books under s.44AA(2) and to obtain a s.44AB audit arises only where total income exceeds the maximum amount not chargeable to income-tax; and that s.44AB(e) makes the audit obligation for such an assessee turn on the applicability of s.44AD(4) and that income condition, not on turnover.
Not applicable — statutory provision, and no decision applying either sub-section as a ground of decision was retrieved. What follows is this library's reading of the statutory words and is not authority. Sub-section (4) is worded around what the assessee 'declares', twice: the trigger is a declaration of profit not in accordance with sub-section (1), and the disqualification runs from 'the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1)'. Sub-section (5) opens 'Notwithstanding anything contained in the foregoing provisions of this section' and then imposes its obligation on a defined class — an eligible assessee 'to whom the provisions of sub-section (4) are applicable' — and qualifies that class further by the words 'and whose total income exceeds the maximum amount which is not chargeable to income-tax'. Both limbs must be satisfied before any books or audit duty arises, and s.44AB clause (e) repeats the same two limbs, so the two provisions are consistent and neither can be read to impose an audit on a locked-out assessee whose total income is below the exemption limit.
Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.
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Handle my notice → Ask a CA on WhatsAppBy s.44AD(4), an eligible assessee who has declared profit in accordance with s.44AD and who, in any of the five assessment years relevant to the succeeding previous years, declares profit NOT in accordance with s.44AD(1), is shut out of s.44AD for the five assessment years subsequent to the assessment year in which he broke ranks. By s.44AD(5), that assessee must keep books under s.44AA(2) and get them audited and reported under s.44AB only if his total income exceeds the maximum amount which is not chargeable to income-tax — a condition that both the department and the assessee routinely read out of the sub-section. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 44AD, section 44AD(4), section 44AD(5), section 44AD(6), section 44AA, section 44AA(1), section 44AA(2), section 44AB, section 271A, section 271B of the Income Tax Act 1961. It is reported as Income-tax Act 1961, s.44AD(4) and s.44AD(5) as substituted, and s.44AD(6) as inserted, by the Finance Act 2016 (Act No. 28 of 2016) with effect from 1 April 2017; read with s.44AB clause (e). This is the trap in the whole scheme and it works in both directions. Against the assessee: opting out for a single year does not cost him only that year, it costs him the next five assessment years as well, and once s.44AD(4) applies, s.44AB(e) independently requires an audit — the audit obligation is not routed through the turnover limit in s.44AB(a) at all. In favour of the assessee: s.44AD(5) applies only to an eligible assessee "whose total income exceeds the maximum amount which is not chargeable to income-tax", and s.44AB clause (e) carries the same condition in the words "and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year". A small assessee locked out by s.44AD(4) whose total income is below the exemption limit owes no books under s.44AA(2) and no audit under s.44AB, and a s.271B or s.271A penalty raised against him has no statutory foundation. That condition is the answer to a large number of penalty notices and it is the part of the sub-section that gets skipped. Note also what s.44AD(4) does not say: it is triggered by declaring profit not in accordance with s.44AD(1), which is a description of what the assessee himself declares in his return. It is not on its face triggered by the Assessing Officer assessing him at a lower figure, nor by the assessee simply ceasing to be eligible because his turnover crossed the ceiling. Sub-section (6) is a separate exclusion altogether: s.44AD does not apply at all to a person carrying on a profession referred to in s.44AA(1), a person earning income in the nature of commission or brokerage, or a person carrying on any agency business. If it applies to you, the first step is this: Draw the five-year map before advising a client to come off s.44AD: identify the first year declared under s.44AD(1), then the year of departure, then count five assessment years subsequent to that year of departure — that is the lock-out period.
Section 44AD(4) provides that where an eligible assessee declares profit for any previous year in accordance with the provisions of the section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of the section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been so declared. Section 44AD(5) provides, notwithstanding anything in the foregoing provisions of the section, that an eligible assessee to whom sub-section (4) applies and whose total income exceeds the maximum amount which is not chargeable to income-tax shall be required to keep and maintain such books of account and other documents as required under s.44AA(2) and get them audited and furnish a report of such audit as required under s.44AB. Section 44AD(6) excludes from the section altogether a person carrying on a profession as referred to in s.44AA(1), a person earning income in the nature of commission or brokerage, and a person carrying on any agency business. On the audit side, s.44AB clause (e) brings within the audit obligation a person carrying on the business 'if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year'. The matter was decided on 2017-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not applicable — statutory provision. The operative rules are that a departure from s.44AD(1) within the five-year window disqualifies the assessee for the five assessment years subsequent to the year of departure; that the consequential duty to keep books under s.44AA(2) and to obtain a s.44AB audit arises only where total income exceeds the maximum amount not chargeable to income-tax; and that s.44AB(e) makes the audit obligation for such an assessee turn on the applicability of s.44AD(4) and that income condition, not on turnover.
Not applicable — statutory provision, and no decision applying either sub-section as a ground of decision was retrieved. What follows is this library's reading of the statutory words and is not authority. Sub-section (4) is worded around what the assessee 'declares', twice: the trigger is a declaration of profit not in accordance with sub-section (1), and the disqualification runs from 'the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1)'. Sub-section (5) opens 'Notwithstanding anything contained in the foregoing provisions of this section' and then imposes its obligation on a defined class — an eligible assessee 'to whom the provisions of sub-section (4) are applicable' — and qualifies that class further by the words 'and whose total income exceeds the maximum amount which is not chargeable to income-tax'. Both limbs must be satisfied before any books or audit duty arises, and s.44AB clause (e) repeats the same two limbs, so the two provisions are consistent and neither can be read to impose an audit on a locked-out assessee whose total income is below the exemption limit. In the words reproduced by the source cited on this page: "Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB."
It was decided by the CBDT Circulars & Instructions on 2017-04-01 and is reported as Income-tax Act 1961, s.44AD(4) and s.44AD(5) as substituted, and s.44AD(6) as inserted, by the Finance Act 2016 (Act No. 28 of 2016) with effect from 1 April 2017; read with s.44AB clause (e). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 44AD, section 44AD(4), section 44AD(5), section 44AD(6), section 44AA, section 44AA(1), section 44AA(2), section 44AB, section 271A, section 271B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not applicable — statutory provision. The operative rules are that a departure from s.44AD(1) within the five-year window disqualifies the assessee for the five assessment years subsequent to the year of departure; that the consequential duty to keep books under s.44AA(2) and to obtain a s.44AB audit arises only where total income exceeds the maximum amount not chargeable to income-tax; and that s.44AB(e) makes the audit obligation for such an assessee turn on the applicability of s.44AD(4) and that income condition, not on turnover. It arises in Presumptive Taxation & Audit, Penalty and How Tax Law Is Read matters, on section 44AD, section 44AD(4), section 44AD(5), section 44AD(6), section 44AA, section 44AA(1), section 44AA(2), section 44AB, section 271A, section 271B of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. When a s.271B or s.271A notice arrives on the footing that s.44AD(4) applies, compute total income first. If it does not exceed the maximum amount not chargeable to tax, neither s.44AD(5) nor s.44AB(e) is engaged and there is no obligation to breach. Read s.44AB(e) alongside s.44AD(4): the audit trigger for a locked-out assessee is clause (e), which does not depend on turnover, and not clause (a). Check that the departure year is one of 'the five assessment years relevant to the previous year succeeding' the year of the s.44AD declaration — a departure outside that window is not within the sub-section as worded. Distinguish a s.44AD(4) case from a s.44AD(6) case in the reply: a commission agent, an agency business or a s.44AA(1) professional is outside the section from the start and never had a lock-out to trigger. Note the vintage: sub-sections (4) and (5) in their present form were substituted by the Finance Act 2016 with effect from 1 April 2017. The pre-2017 s.44AD(5) was a different provision, tied to the assessee claiming profits lower than eight per cent, so a decision on the old sub-section is not authority on the new one.
Still good law. This is the text as published by the Income Tax Department on its own section pages for s.44AD and s.44AB, each carrying its correct section heading and, for s.44AD, the stamp 'Year: 2025' and for s.44AB, 'Year: 2026'. It was read on 8 September 2026 and corroborated word for word against a second departmental page in each case and against three Tribunal orders reproducing s.44AD in full, the most recent dated 12 August 2026. I did not read the e-Gazette or the bare Finance Acts. I could locate no decision applying s.44AD(4) or s.44AD(5) as a ground of decision, so nothing here has been tested judicially — see NOTES-B69.md for the searches run. Nothing in this entry states any position under the Income-tax Act 2025. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This entry is statutory text, not a decision. It asserts no holding, no bench and no judge's words; every quoted string in it is statutory text. The value in decided_on, 1 April 2017, is the commencement date of the Finance Act 2016 substitution and is NOT a decision date. The current text of s.44AD(4), (5) and (6) was read on the Income Tax Department's page for s.44AD carrying the heading 'Special provision for computing profits and gains of business on presumptive basis' and the stamp 'Year: 2025'. It was corroborated word for word on the departmental page stamped 'Year: 2016', which additionally prints the prospective note 'Following sub-sections (4) and (5) shall be substituted for the existing sub-sections (4) and (5) of section 44AD by the Finance Act, 2016, w.e.f. 1-4-2017 :' — that is the source of the commencement date, and that archived page is used here only to date the amendment. Sub-sections (4) and (5) were further corroborated in identical words in three Tribunal orders that reproduce the section: Dinesh Chandra Das (ITAT Kolkata, 12 August 2026) at its paragraph 5, Masudan Tanti (ITAT Patna, 22 July 2024) at its paragraph 7, and Rashmi Subhash Jha (ITAT Mumbai, 14 March 2022) at its paragraph 12. The text of s.44AB clause (e) was read on two departmental pages, /w/section-44ab-43 stamped 'Year: 2026' and /w/section-44ab-38 stamped 'Year: 2024 (No. 1)', which print it in identical words. The two s.44AB pages print the section's first proviso in two different forms, which are the pre- and post-1 April 2024 texts and not a retrieval defect: s.15 of the Finance Act 2023 substituted that proviso with effect from 1 April 2024 — see the note in the companion entry on s.44AD(1) and (2). No wording of that proviso is quoted here. I searched indiankanoon for decisions applying s.44AD(4) or s.44AD(5) as a ground of decision and found none: the phrase search 'benefit of the provisions of this section for five assessment years' returned ten documents, all of which merely reproduce the sub-section. That absence is the reason this is entered as statutory text rather than as a case. A second search route not run on the original pass, on the s.44AB clause (e) wording "are applicable in his case and his income exceeds", returns ten further documents. One of them was sampled (Daya Bansal, ITAT Delhi, ITA Nos. 7802, 7804 and 7806/Del/2018, 11 February 2019) and reproduces s.44AB in a reassessment appeal rather than applying clause (e); the remaining nine were not read, so the absence of any decision applying s.44AD(4) or (5) is established on the searches run and is not proved. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not applicable — statutory provision. The operative rules are that a departure from s.44AD(1) within the five-year window disqualifies the assessee for the five assessment years subsequent to the year of departure; that the consequential duty to keep books under s.44AA(2) and to obtain a s.44AB audit arises only where total income exceeds the maximum amount not chargeable to income-tax; and that s.44AB(e) makes the audit obligation for such an assessee turn on the applicability of s.44AD(4) and that income condition, not on turnover.
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