Tax Publishers

Finance Bill, 2021

Raising Tax Audit Limit in Certain Cases Where Assessees Carrying on Business

 CA. Manoj Gupta 

 

 

 

 

 

 

 

The learned author explains the new provisions relating to tax audit in a lucid manner with the help of apt illustrations.

 

 

 

 

 

 

 

 

Section 44AB of the Act, requires an assessee, carrying on business or profession, to get his accounts audited before specified date and furnish by that date the report of audit in case his gross sales or receipts from such business or profession exceed the specified amount.

1. Persons carrying on business required to get his accounts audited on compulsory basis

Persons carrying on business required to get his accounts audited on compulsory basis in the following cases :

(i) Person carrying on business

If his total sales, turnover or gross receipts in the business exceeds ` 1 crore in any previous year.

The Finance Act, 2020 has amended section 44AB from the assessment year 2020-21 itself so as to provide that in case of a person carrying on business the monetary limit to get accounts audited shall be ` 5 crore provided that :

(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 per cent of the said amount; and

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

Therefore, from assessment year 2020-21 a person carrying on business shall get his accounts audited if the total sales, turnover or gross receipts of business exceed ` 5 crore in the previous year 2019-20 provided both the following conditions are satisfied:

(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 per cent of the said amount; and

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

(ii) Person covered under section 44AE, 44BB or 44BBB

If such person claims that the profits and gains from the business are lower than the profits and gains computed under these sections, irrespective of his turnover.

(iii) Person covered by section 44AD

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.

By virtue of first proviso to section 44AB, this section shall not apply to the person, who declares profits and gains for the previous year in accordance with the provisions of section 44AD(1) and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year

In other words it can be said that for the person opting for presumptive income scheme under section 44AD, the limit for tax audit shall be ` 2 crore instead of ` 1 crore.

(iv) Non-residents

Every non-resident would be required to get its accounts audited and furnish report of such audit if the turnover of his business exceed the limits specified under section 44AB. However, the audit would be confined to Indian operation of the non-resident, reason being that the non-resident is chargeable to tax in India only in respect of income accruing or arising or deemed to be accruing or arising in India.

2. Option to declare income as per section 44AD to be exercised continuously, audit requirements and requirements as to maintenance of books

The Finance Act, 2017 has amended the section 44AB effective from the assessment year 2017-18 to exclude the eligible person, who declares profits for the previous year in accordance with the provisions of sub-section (1) of section 44AD and his total sales, total turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year, from requirement of audit of books of accounts under section 44AB.

Section 44AD(1) provides that notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent, of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession.

Proviso to section 44AD(1) from assessment year 2017-18 provides that this sub-section shall have effect as if for the words eight per cent the words six per cent had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.

The Finance Act, 2016 has substituted sub-section (4) of section 44AD from the assessment year 2017-18 so as to provide that where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five consecutive assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of section 44AD(1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of section 44AD(1).

The Finance Act, 2016 has substituted sub-section (5) of section 44AD from the assessment year 2017-18 so as to provide that notwithstanding anything contained in the foregoing provisions of section 44AD, an eligible assessee to whom the provisions of sub-section (4) of section 44AD 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.

Accordingly, if the assessee does follow mandate of section 44AD(1) providing for declaration of presumptive income @ 8 per cent [6 per cent in certain cases] of gross receipts or higher income then he will be covered by section 44AD(4) and will accordingly be liable to declare income as per mandate of section 44AD(1) for subsequent five assessment years and if he does not do so then he shall not be eligible to claim the benefit of the provisions of section 44AD(1) for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of section 44AD(1).

So if a person is covered by section 44AD(1) and declares income as per the scheme of section 44AD(1) then he will not be required to get accounts audited if the total turnover of the business does not exceed ` 2 crore.

3. Effective limits for person carrying on business [For the assessment year 2020-21]

Person

Requirement to get accounts audited

Person carrying on business other than those declaring profits in terms of section 44AD(1)

(a) ` 1 crore if any of the following conditions are not satisfied:

(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 per cent of the said amount; or

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

 

(b) ` 5 crore if both the following conditions are satisfied:

(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 per cent of the said amount; and

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

Person covered under section 44AE, 44BB or 44BBB

If such person claims that the profits and gains from the business are lower than the profits and gains computed under these sections, irrespective of his turnover.

Person 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.

` 2 crore provided he declares profits in terms of section 44AD(1). Such persons can avoid tax audit if they declare profits in terms of section 44AD even if they do not meet 5% cash expenses criteria.

4. Proposed amendment

The Finance Bill, 2021 proposes to amend section 44AB from the assessment year 2021-22 itself so as to provide that in case of a person carrying on business the monetary limit to get accounts audited shall be ` 10 crore provided that :

(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 per cent of the said amount; and

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

Therefore, from assessment year 2021-22 a person carrying on business shall get his accounts audited if the total sales, turnover or gross receipts of business exceed ` 10 crore in the previous year 2020-21 provided both the following conditions are satisfied:

(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 per cent of the said amount; and

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

5. Effective limits for person carrying on business [From the assessment year 2021-22]

Person

Requirement to get accounts audited

Person carrying on business other than those declaring profits in terms of section 44AD(1)

(a) ` 1 crore if any of the following conditions are not satisfied:

(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 per cent of the said amount; or

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

 

(b) ` 10 crore if both the following conditions are satisfied:

(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 per cent of the said amount; and

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

Person covered under section 44AE, 44BB or 44BBB

If such person claims that the profits and gains from the business are lower than the profits and gains computed under these sections, irrespective of his turnover.

Person 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.

` 2 crore provided he declares profits in terms of section 44AD(1). Such persons can avoid tax audit if they declare profits in terms of section 44AD even if they do not meet 5% cash expenses criteria.

A person carrying on business having turnover exceeding ` 2 crore but not exceeding ` 10 crore can avoid tax audit and also the requirement to report profits as per section 44AD(1) if he satisfies both the following conditions :

(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 per cent of the said amount; and

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

6. Inclusions/Exclusions in receipts/expenditure

Following receipts/payments to be considered for 5% limit :

n Amount received from sale of fixed assets/amount incurred towards purchase of fixed assets

n Collection from debtors/payments made to creditors

n Loans taken/repaid

n Advances received/repaid

n Capital introduced/withdrawals made by partners

7. Different situations identified

Person

Liability to get accounts audited

(a) Carrying on business having turnover upto ` 2 crore

Must declare profit at 6%/8% of turnover else go for audit under section 44AB if income exceeds maximum amount not chargeable to tax.

(b) Carrying on business having turnover exceeding ` 2 crore but upto ` 10 crore

(a) Can avoid tax audit if both the following conditions are satisfied :

(i) aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash,

 

does not exceed five per cent of the said amount; and

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

 

(b) Need not to declare profit @ 6%/8% of turnover as per scheme of section 44AD(1). In fact the provisions of section 44AD will not apply to the assessee.

(c) Carrying on business having turnover exceeding ` 10 crore.

Must go for tax audit.

8. Provisions illustrated

1. A Ltd. , carrying on business, has gross receipts of business of ` 8 crore for the financial year 2020-21. The company has cash sales of `6.40 crore. Total expenses being `6.70 crore are paid by bank system.

5% of total receipts is `40 lakhs but cash sales is ` 6.40 crore hence A Ltd. required to get accounts audited because cash receipts exceed 5% of total receipts. Further, the assessee cannot opt for section 44AD because it is a company and even if it is an eligible assessee thereunder cannot opt for section 44AD since turnover exceeds Rs. 2 crores.

2. Suppose in (1) above, A Ltd. has got a bank loan of `6 crore during the year 2020-21.

Now total receipts of A Ltd. is fourteen crore (`8 crore sales plus loan of 6 crore). 5% of total receipts is `70 lakhs but cash receipts (`6.40 crore) exceed this amount hence A Ltd. required to get accounts audited.

3. Suppose in (2) above, A Ltd. has cash sales of `40 lakhs only.

Now total receipts of A Ltd. is fourteen crore (`8 crore sales plus loan of 6 crore). 5% of total receipts is `70 lakhs but cash receipts but cash receipts (`40 lakhs) do not exceed this amount hence A Ltd. is not required to get accounts audited under section 44AB.

4. KLR enterprises has gross receipts of `9 crore which is through banking system. The assessee incurs expenses of ` 7 crore. Expenses incurred in cash are as under:

 

(a) `1.5 crore.

(a) Since aggregate of all expenses in cash exceeds ` 45,00,000 being 5% of `9 crore hence tax audit required.

(b) `40 lakhs and also payments for household expenses debited to capital account as drawing `6,00,000 in cash.

(b) Since aggregate of all expenses in cash including household expenses exceeds `45,00,000 being 5% of ` 9 crore hence tax audit required.

(c) `10 lakhs and household expenses of ` 6,00,000 are also paid by banking system.

(c) Since aggregate of all expenses in cash does not exceed `45,00,000 being 5% of `9 crore hence not liable to get accounts audited.

5. ABC enterprises has following receipts and payments

 

(a) ` 7 crore out of which cash receipts ` 10,00,000

5% of total receipts ` 35,00,000 and 5% of total expenses `25,00,000.

(b) ` 5 crore out of which cash payments ` 35,00,000

Since more than 5% of aggregate payments is in cash hence tax audit required.

6. ABC enterprises has following receipts and payments

5% of total receipts is ` 20,00,000 and 5% of total expenses is ` 15,00,000. Since more than 5% of aggregate receipts is in cash hence tax audit required.

(a) Receipts of ` 4 crore out of which cash receipts ` 30,00,000

(b) Payments of ` 3 crore out of which cash payments ` 10,00,000

 

7. Suppose in (6) above cash receipts are `10,00,000. Rest all data is same.

5% of total receipts is `20,00,000 and 5% of total expenses is `15,00,000. Since not more than 5% of aggregate receipts and aggregate payment is in cash hence tax audit not required.