Declaring Less Than 6% Profit Under Section 58: Does It Force Tax Audit Under the Income-tax Act, 2025?

The Income-tax Act, 2025 has carried forward the presumptive taxation framework that existed under Section 44AD, Section 44AA and Section 44AB of the Income-tax Act 1961, but now through Section 58, Section 62 and Section 63.

On a broad view, the scheme looks familiar. However, the wording of Section 58(3) has raised a serious interpretational issue:

• Does an assessee opting not to declare the presumptive profit (say 6% of turnover) merely step out of the presumptive scheme and fall back on the ordinary provisions of Section 62 and Section 63?
• Or does Section 58(3) itself impose a compulsory obligation to maintain books of account and undergo tax audit, irrespective of the turnover limits and conditions built into Section 62 and Section 63?

For ease of analysis, it is assumed that the entire turnover is received through banking/digital modes and that presumptive income is computed at 6% of turnover. The same reasoning equally holds where the presumptive rate is 8%.

While the examples here focus on small business assessees, the interpretational principles would, with suitable modifications, also apply to eligible professionals falling under Section 58.

1. Core Issue: What Exactly Does Section 58(3) Require?

Section 58(3) states that where an eligible assessee declares income below the prescribed presumptive rate and his total income exceeds the basic exemption limit, he:

“shall maintain books of account as required under Section 62 and get his accounts audited as required under Section 63.”

The controversy arises from the qualifying phrases:

• “as required under Section 62”
• “as required under Section 63”

Two rival interpretations emerge:

Interpretation 1 – Harmonious/Integrated View

• Section 58(3) does not create a new standalone obligation.
• It simply says: once you go below the presumptive rate, you are governed by Section 62 and Section 63 just like any other assessee.
• All turnover limits, exemptions, and thresholds in Section 62 (books of account) and Section 63 (tax audit) continue to apply.

Interpretation 2 – Literal/Independent Obligation View

• Section 58(3) by itself makes it compulsory for every eligible assessee (whose income exceeds basic exemption) to:
  • maintain books, and
  • get accounts audited
• This obligation would apply even if the assessee’s turnover is far below the limits that would otherwise apply under Section 62 and Section 63.

This distinction is not a mere drafting nuance; it determines whether a micro business—say, a trader with turnover of ₹20 lakh—may be pushed into tax audit simply for declaring a genuine profit rate of 4% instead of presumptive 6%.

2. Old vs New: Has the Basic Scheme Actually Changed?

Under the Income-tax Act 1961, the mechanics were clear:

• Section 44AD allowed eligible businesses to declare income at a presumptive rate on turnover, thereby avoiding detailed books and scrutiny of actual profit.
• Section 44AA generally exempted very small businesses (with turnover up to ₹25 lakh) from maintaining books of account.
• Section 44AB prescribed tax audit based primarily on turnover thresholds.

Fundamentally:

• Audit depended on turnover, not on the profit percentage.
• If an assessee chose to declare actual lower profit instead of presumptive profit:
  • he lost only the presumptive benefit; and
  • he became subject to the ordinary law of Section 44AA and Section 44AB—including all their thresholds and conditions.

In the 2025 Act:

• Section 58 now replaces Section 44AD (presumptive scheme),
• Section 62 replaces Section 44AA (books of account), and
• Section 63 replaces Section 44AB (tax audit).

At first glance, these provisions largely preserve the earlier structure. The twist lies in the express wording of Section 58(3) linking a below-presumptive declaration to compliance “as required under Section 62” and “as required under Section 63”.

Whether this is merely a cross-reference or a new compliance trigger is the heart of the debate.

Comparative Snapshot