MANDATORY AUDIT UNDER THE INCOME TAX ACT: An Article by CA Ashish Shah Junagadh

By C A Ashish Shah

Section 44AB of the Income Tax Act dealing with the provisions of mandatory audit of books of accounts has often been subject to amendments from time to time. It is important to review the limit of sales, turnover or gross receipts from business or profession from time to time, to keep the same in line with the inflation and other economic and government policies / changes.

In recent times, there has been a major push by the government towards non-cash or digital transaction, with a larger view to make our economy as cashless as possible. Keeping in view this policy of the government, there is a major amendment in Section 44AB of the Income Tax Act in the recent finance bill 2020.

First of All I would like to thank learned professional friend Sandeep Keshwani from Ahmedabad, CA. Sumit Singala and my partner CA. Prashant Lathigara for sharing their expert knowledge on the recent amendments on provisions of Section 44AB.

The existing provisions of Section 44AB provides as under:

“Every person,—

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year; or

(b) carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees in any previous year; or

(c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or

(d) carrying on the profession shall, if the profits and gains from the profession are deemed to be the profits and gains of such person under section 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year; or

(e) carrying on the business shall, 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,

get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed…..”

Thus, as per clause (a) of Section 44AB, the present limit of sales, turnover or gross receipts of business for compulsory audit of accounts is Rs. 1 crore, meaning thereby, if the sales, turnover or gross receipts from business exceeds Rs. 1 crore, books of accounts should be mandatorily audited.

In Finance Bill 2020, government introduced one more slab of turnover of Rs. 5 Crore for the person, whose aggregate of all amount received (including  sales / turnover / gross receipts) AND aggregate of all payments made (including expenditure), in Cash, in Previous year, does not exceeds 5% of such payments, and straightway exempted such category from Tax Audit.

In other words, the limit of sales, turnover or gross receipts from business (profession is not covered here) has been raised from Rs. 1 crore to Rs. 5 crore, subject to the conditions that

• cash receipts during the year does not exceed 5% of total receipts, and
• cash payments during the year does not exceed 5% of total payments.

The main difference of Turnover limit is explained as under:-

As we know that Tax audits are considered as per Section 44AB and Section 44AD for the assessee like Individual, H.U.F. & Partnership Firms [R] and for the other assessee Tax audits are conducted U/s. 44AB only and not Section 44AD.

Amended Section 44AB states as under:-

(a) aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five percent of the said amount;

(Here it should not exceed 5% 0f Amount received from sales, turnover, Gross Receipts So the receipt should be calculated in simple arithmetic way considering opening and closing debtors, cash received from sales and debtors of the total receipts.)

Example

and

(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five percent of the said payment,

(Here it should not exceed 5% 0f all amounts paid for expenditure which also includes purchase. So the payment should be calculated in simple arithmetic way considering opening and closing creditors, cash paid for purchase, expense and creditors of the total payments)

Example

On the basis of amended Section 44AB 5% cash receipts / payments is to be considered of total receipts and total payments respectively and not of total sales and total purchase. However the matter should be further clarified by the department.

Now let us consider the clause with examples *

* In all the above examples as per provisions of Section 44AD an assessee has to maintain 6.00 % / 8.00 % N.P. However for easy understanding we are considering only 8.00 % N.P. and not 6.00% N.P.

Example 1:-

• A has turnover of Rs. 90 Lacs
• Actual Net Profit Rs. 5,70,000
• Conditions of Cash Payment / Receipt – More than 5 %

Whether Tax Audit Applicable – Yes 

• Reason – N.P. to be maintained @ 8.00 % i.e. Rs. 7,20,000. As per Section 44AD N.P of 8% not maintained and his income exceeds the maximum amount which is not chargeable to income-tax. Audit is to be conducted U/s. 44AD.

Example 2:-

• B has turnover of Rs. 90 Lacs
• Actual Net Profit Rs. 7,50,000
• Conditions of Cash Payment / Receipt – More than 5 %

Whether Tax Audit Applicable – No

• Reason – N.P. need to be maintained here @ 8.00 % i.e. Rs. 7,20,000. As per Section 44AD N.P of 8% is maintained. The amended provisions of Section 44AB towards cash receipt & cash payment are not applicable as turnover is less than 1 crores. It makes no difference even if Cash Payment / Receipt is more than 5 % or less than 5%

Example 3:-

• C has turnover of Rs. 1.50 Crores
• Actual Net Profit Rs. 9,80,000
• Conditions of Cash Payment / Receipt – More than 5 %

Whether Tax Audit Applicable – Yes 

• Reason – As per Section 44AD N.P of 8% not maintained. N.P. is to be maintained @ 8.00 % i.e. Rs. 12,00,000. However audit is to be conducted U/s. 44AB so there is no need to verify the amended provisions U/s. 44AB for cash receipt & cash payment. The main reason to consider is that Mr. C is not declaring profit in accordance with Section 44AD then he will be barred to claim benefit of Section 44AD(1) for the said Assessment Year and for next five assessment year and compulsory audit U/s. 44AD when provision                   U/s. 44AD(4) is applicable. Audit need to be done U/s. 44AB (e).

Example 4:-

• D has turnover of Rs. 1.50 Crores
• Actual Net Profit Rs. 12,50,000
• Conditions of Cash Payment / Receipt – More than 5 %

Whether Tax Audit Applicable – No 

• Reason – N.P. need to be maintained here @ 8.00 % i.e. Rs. 12,00,000. The N.P. is more than 8.00 %. The assessee will get benefit of Section 44AD as the turnover of Mr. D is Rs. 1.50 crores and Section 44AD is applicable when turnover does not exceed an amount of Rs 2.00 crore.

Example 5:-

• E has turnover of Rs. 4 Crores
• Actual Net Profit Rs. 16 Lacs
• Cash sales are Rs. 15 Lacs.
• The assessee does not have opening and closing debtors and amount of total sale is received during the year. The total payments are within the        provision of 5%.

Whether Tax Audit Applicable – No

• Reason: – Section 44AD is applicable for turnover upto 2 crores. Section 44AB is applicable for turnover exceeding Rs. 5 crores. Hence N.P. maintenance in not applicable being turnover exceeding limits of      Section 44AD and below limit of Section 44AB. Total receipts are Rs. 4     Crores and cash receipts is Rs. 15 Lacs which is below 5%. U/s. 44AB cash           receipts and payments are below 5% so no audit required to be done.

Example 6:-

• F has turnover of Rs. 4 Crores
• Actual Net Profit Rs. 16 Lacs
• Cash sales are Rs. 25 Lacs.
• The assessee does not have opening and closing debtors and amount of total sale is received during the year. The total payments are within the        provision of 5%.

Whether Tax Audit Applicable – Yes

• Reason: – Section 44AD is applicable for turnover upto 2 crores. Section 44AB is applicable for turnover exceeding Rs. 5 crores. Hence N.P. maintenance in not applicable being turnover exceeding limits of Section   44AD and below limit of Section 44AB. Total receipts are Rs. 4 Crores and         cash receipts is Rs. 25 Lacs which is above 5%. U/s. 44AB cash receipts are         above 5% so audit required to be done.

Provisions of tax Audit discussed above is only with respect to an assessee carrying on business and are not applicable to assessee engaged in profession. No enigma exists with regard to applicability of tax Audit with respect to companies or other persons.

This glitch exists with respect audit provision since Section 44AD is applicable to entities having turnover upto Rs. 2 Crores and Section 44AB is applicable to entities have turnover more than Rs. 5 Crores. So if turnover is less than Rs. 5 Crores and if the conditions of cash receipt and cash payment below 5% is fulfilled than then there will be no audit for turnover between Rs. 2 Crores and Rs. 5 Crores irrespective of N.P. maintained. It’s also irrational and detrimental to small traders having turnover below Rs. 2 crores. A clarification solving the issue may be expected from the CBDT for lesser controversies and litigation.