Does the Income Tax Act, 2025 Expand the Tax Audit Net? What S.58(3) Means for Businesses with Profits Below Presumptive Rates [Read Order]

The Income Tax Act, 2025 has always been projected as a large simplification exercise to the six-decade old Income Tax Act of 1961. The Finance Ministry and the Government has maintained that the new law reorganises and simplifies the Income Tax Act, 1961 without substantially changing the underlying tax policy.

But buried within the new presumptive taxation framework is a provision that has led to intense debate among tax professionals.

At the centre of the discussion is Section 58(3) of the Act of 2025.

At first glance, it appears harmless. Read closely, and a question emerges: could the new provision force thousands of small businesses and even salaried individuals engaged in Futures & Options (F&O) trading into tax audit compliance merely because their actual profits are lower than the presumptive rates as prescribed within the new Act?

The answer has a bit of uncertainty to it, which is precisely why Section 58(3) has become one of the most discussed provisions of the new Act.

The Quiet Change

The Income Tax Act, 2025 consolidates the presumptive taxation provisions that were previously scattered across Sections 44AD, 44ADA and 44AE in the 1961 Act.

Eligible businesses can continue to avail presumptive taxation where turnover does not exceed ₹2 crore, or ₹3 crore, and where the cash receipts remain within prescribed limits. Similarly, professionals covered by the presumptive regime can continue to declare income on a presumptive basis. The well-known deemed profit rates of 6% and 8% continue to exist, and so does the five-year lock-in mechanism.

Since the primary features of the provisions remain largely unchanged, many taxpayers assumed that no significant alterations had been made.

However, the debate surrounding Section 58(3) suggests that the compliance consequences may not be as straightforward as they appear at first glance.

What Section 58(3) Says

Section 58(3) provides that where an eligible assessee declares profits lower than the presumptive income prescribed under Section 58 and the total income exceeds the maximum amount not chargeable to tax, the taxpayer must maintain books of account and get the accounts audited.

On its face, the provision appears simple.

If a taxpayer reports profits below the deemed presumptive rate and taxable income crosses the exemption threshold, they are mandatorily required to maintain books of accounts and conduct tax audit.

This is where the controversy begins. Some tax professionals argue that the provision effectively creates a new audit trigger. According to this interpretation, audit is no longer linked to whether a taxpayer chooses to adopt presumptive taxation. Instead, audit becomes linked to the profit ultimately declared.

Under this view, a taxpayer declaring profits below 6% or 8% may face audit obligations regardless of whether the presumptive scheme was ever consciously adopted.

Section 58 is as follows:

Special provision for computing profits and gains of business or profession on presumptive basis in case of certain residents.

• The provisions of sections 26 to 54, to the extent contrary to this section, shall not apply to the manner of computation of profits and gains of the specified business or profession referred to in sub-section (2).
• The profits and gains of any specified business or profession mentioned below shall be deemed to be the profits and gains chargeable to tax under the head “Profits and gains of business or profession”:

S.No.	Specified Business or Profession	Assessee	Total turnover or, as the case may be, gross receipts of business or profession during tax year	Presumptive Income
3.	Specified profession as referred to in section 62(4).	Specified assessee	(a) Does not exceed fifty lakh rupees; or (b) does not exceed seventy-five lakh rupees, where the amount or aggregate of amounts received in cash does not exceed 5% of the gross receipts.	50% of the gross receipts or profit claimed to have been actually earned, whichever is higher.

3) Any assessee mentioned in column C of the Table in sub-section (2), who claims that—

(a) the profits or gains actually earned from the specified business or profession are lower than the profits or gains computed in the manner mentioned in column E of the said Table; and

(b) whose total income exceeds the maximum amount which is not chargeable to tax, shall be required to—

(i) keep and maintain such books of account and other documents as required under section 62; and

(ii) get the accounts audited and furnish a report of such audit as required under section 63.

How Low-Profit Businesses Could Be Affected

Consider a small trader with annual turnover of ₹80 lakh. Suppose the business operates on thin margins and earns an actual profit of only 4%, resulting in business income of approximately ₹3.2 lakh. If the Trader’s total income exceeds the basic exemption limit, Section 58(3) may become relevant.

Under one interpretation of Section 58(3), the trader faces a difficult choice:

The first option is to declare income at the presumptive rate and pay tax on a higher income figure than actually earned.

The second option is to declare the true profit and accept the obligation to maintain books and undergo a tax audit.

For businesses such as distributors, wholesalers, retailers and traders, operating in highly competitive sectors, profit margins often fluctuate significantly. A business may be perfectly genuine and yet fail to reach the presumptive benchmark.

This is the reason why some professionals believe the provision could significantly increase compliance costs for small and medium-sized businesses that operate on narrow profit margins.

Futures & Options Traders

The debate becomes even more interesting when applied to F&O traders.

Consider a salaried employee earning ₹25 lakh annually who also participates in F&O trading.

Assume the trader records an F&O turnover of ₹80 lakh but earns a modest profit of only ₹50,000.

The taxpayer is clearly not carrying on trading activity as a primary source of livelihood, yet the overall income comfortably exceeds the basic exemption limit because of salary income.

This example has become a focal point of the discussion surrounding Section 58(3).

If the provision is interpreted broadly, such taxpayers could potentially find themselves within the audit framework despite earning only nominal profits from their trading activities.

For a growing class of retail traders and salaried investors, the compliance implications could be significant.

Has the Tax Audit Net Really Been Expanded?

Not all agree that Section 58(3) has expanded the applicability of tax audit requirements.

Several professionals point out that Sections 58(7) and 58(8) continue the familiar five-year lock-in framework that existed under the earlier presumptive taxation regime. According to this view, reading Section 58(3) as an independent audit trigger for every eligible low-profit taxpayer dilutes the practical significance of the lock-in provisions, suggesting that the provision may not have been intended to operate as broadly as some professionals believe.

They also point to the Government's own FAQs issued during the transition to the Income Tax Act, 2025, specifically question 4.31 as below:

Q4.31 What is the requirement for tax audit under the Income-tax Act, 2025, and has the threshold changed?

Ans. Section 63 of the Income-tax Act, 2025 (corresponding to Section 44AB of the old Act) prescribes the requirement of audit of accounts. The thresholds for tax audit remain the same as were in the old Act:

(i) Business: Total sales, turnover, or gross receipts exceed Rs. 1 crore (Rs. 10 crore where cash transactions do not exceed 5% of total receipts and 5% of total payments);

(ii) Profession: Gross receipts exceed Rs. 50 lakhs;

(iii) Persons opting out of presumptive taxation and declaring income below the prescribed threshold.

The FAQs expressly states that tax audit thresholds remain the same as under the old Act.

Some professionals argue that if the Government actually intended to substantially widen the audit net, there would have been a much clearer indication of such a policy shift.

This countering interpretation states that Section 58(3) does not fundamentally alter the existing position. Instead, it largely reproduces the framework that existed under the 1961 Act, and the current controversy arises from the drafting language rather than any deliberate legislative expansion.

Professionals on X have initiated the discussion and at the time, both interpretations continue to find support.

Also Read:CBDT Releases Guidelines for Compulsory Selection of Returns for Complete Scrutiny FY 2026-27 [Read Circular]

What Should Taxpayers Do?

Until the CBDT issues a formal clarification, taxpayers would be well advised to proceed cautiously.

Businesses operating within the presumptive taxation limits but reporting profits below the prescribed presumptive rates should carefully evaluate their compliance obligations under the new Act. The same applies to partnership firms, small businesses and F&O traders whose total income exceeds the basic exemption threshold.

Whether Section 58(3) ultimately proves to be a drafting ambiguity or a genuine expansion of the tax audit net remains to be clarified.

The present issue remains one of the first interpretational debates surrounding the “simplified” tax legislation that came in the form of the Income Tax Act, 2025. And until that debate is settled, Section 58(3) will remain one of the most closely watched provisions in the new tax code.

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