Tax Audit Under Section 44AD: Decoding the 6%/8% Profit Myth for AY 2026-27

Overview

A deceptively simple question continues to trip up practitioners and assessees alike when dealing with presumptive taxation: if a business eligible under Section 44AD reports actual profit below the 6% or 8% presumptive benchmark, does a tax audit automatically become mandatory?

The short answer many professionals give is yes. But that answer, while arguably defensible under the pre-Finance Act, 2016 framework, deserves far more careful scrutiny under the Income Tax Act, 1961 as it stands for FY 2025-26 / AY 2026-27.

This analysis works through the relevant statutory provisions—Section 44AD, Section 44AB, and their interconnections—alongside the Finance Act, 2016 legislative history, CBDT Circular No. 3/2017, and the ICAI Guidance Note on Tax Audit, to arrive at a considered position on whether below-presumptive profit, standing alone, creates a tax audit obligation.

Important Scope Note: This discussion applies exclusively to FY 2025-26 / AY 2026-27 governed by the Income Tax Act, 1961. The Income-tax Act, 2025, which came into force from 1 April 2026, contains materially different drafting for Tax Year 2026-27 onwards and is addressed separately toward the end of this article.

The Practical Scenario Under Examination

Consider an assessee with the following facts:

The arithmetic is straightforward: Rs. 4,50,000 ÷ Rs. 96,00,000 = 4.69%, which is clearly below both the 6% rate applicable to qualifying digital/banking receipts and the 8% rate applicable to other receipts.

Had the presumptive scheme applied, the deemed profit on full turnover at 6% would be Rs. 5,76,000 and at 8% would be Rs. 7,68,000. The actual book profit is thus undeniably lower than the Section 44AD(1) benchmark.

The core question: Does this shortfall, by itself, make tax audit compulsory?

Understanding Section 44AD(1): The Deeming Provision

What the Provision Actually Says

Section 44AD(1) opens with a non-obstante clause — "Notwithstanding anything to the contrary contained in sections 28 to 43C…" — and proceeds to deem 8% of turnover/gross receipts (or 6% in respect of qualifying receipts, or any higher amount actually earned) as the profits and gains of the eligible business.

The provision does not expressly contain the words "if the assessee opts for this section." Its structure is that of a statutory deeming mechanism.

This creates genuine interpretational tension. A literal reading of Section 44AD(1) in isolation could suggest that once an assessee qualifies as an eligible assessee conducting an eligible business, the presumptive computation automatically applies — and any departure below that level should trigger consequences.

Why Isolation of Section 44AD(1) Is Insufficient

However, the question of how profits are computed under the presumptive scheme and the question of when tax audit is compulsory are two entirely separate inquiries.

Section 44AD(1) governs the deemed computation. It does not, by its own terms, prescribe a tax audit consequence. For that, one must turn to Section 44AB.

Furthermore, Section 44AD(4) itself uses language that contemplates a prior declaration under the presumptive scheme followed by a subsequent departure — strongly suggesting that the scheme can be adopted or not adopted, rather than being automatically and irrevocably applicable to every eligible assessee in every year.

The Government's own explanatory materials, including the Income Tax Department's tutorial on presumptive taxation (as updated pursuant to the Finance Act, 2025), explicitly distinguish between normal computation on the basis of books and computation applicable to a person adopting the presumptive taxation scheme of Section 44AD. This language of adoption is significant.

Section 44AB(a): The Turnover-Based Audit Trigger

Before examining the Section 44AD-linked audit provision, it is worth disposing of the simpler question first.

Section 44AB(a) requires a tax audit where total sales, turnover or gross receipts from business exceed Rs. 1 crore. This threshold rises to Rs. 10 crore only where both of the following conditions are simultaneously satisfied:

• Aggregate cash receipts do not exceed 5% of total receipts; and
• Aggregate cash payments do not exceed 5% of total payments

(Non-account-payee cheques and bank drafts are treated as cash for this purpose.)

In the present scenario, turnover is Rs. 96,00,000 — below Rs. 1 crore. The question of whether the enhanced Rs. 10 crore threshold applies is therefore entirely academic.

Section 44AB(a) does not apply. There is no tax audit requirement on account of turnover alone.

Where Else Can the Audit Obligation Arise?

With Section 44AB(a) eliminated, the remaining candidate for creating a tax audit obligation is Section 44AB(e).

What Section 44AB(e) Actually Requires

Section 44AB(e) applies to a person carrying on business where:

"the provisions of sub-section (4) of section 44AD are applicable in his case" — and — his income exceeds the maximum amount not chargeable to income-tax.

This is a critical textual point. Section 44AB(e) does not say:

• "where an eligible assessee reports profits below 8% or 6%"; or
• "where actual income is less than the deemed presumptive income"

Instead, the clause is expressly conditional upon Section 44AD(4) being applicable. Everything therefore turns on whether Section 44AD(4) is attracted.

Dissecting Section 44AD(4): The Prerequisite Prior Declaration

The Two-Step Statutory Sequence

Section 44AD(4) is structured around a prior event followed by a subsequent departure:

Step 1: The eligible assessee must have "declared profit for any previous year in accordance with the provisions of this section…"

Step 2: Thereafter, if the assessee declares profit in a specified succeeding assessment year not in accordance with Section 44AD(1), the five-year disqualification consequence is triggered.

The first step is not merely procedural — it is the jurisdictional foundation of the entire subsection. Without a prior year declaration under Section 44AD, the opening condition of subsection (4) is never satisfied.

This creates a legally meaningful distinction between: