DECEMBER 16, 2019

By Lukose Joseph, CA & Anil P Nair, CA

SECTION 44ABof the Income Tax Act 1961, read with Section 44AD prescribes audit for every person who carries on business and whose total turnover exceeds Rupees One Crore in a year. The threshold exemption is Rupees Fifty Lakhs for those persons carrying on professions. However persons namely individuals, HUF and partnership firms other than limited liability partnership are liable for audit even if their turnover is below the above mentioned limits when their total income exceeds the maximum amount not chargeable to tax.

However, the law provides exemption for such categories of persons if they have declared a profit of 8 percent of turnover or more and 6 percent of turnover or more which are exclusively through bank account receipts in case of business and declared income of at least 50 percent of turnover in the case of professions.

For persons namely AOP, Companies and Limited liability partnerships, Co-operative societies etc 44AB is applicable if turnover exceeds Rupees 1 Crore irrespective of income declared. Audit is not applicable to said persons if turnover is less than Rupees I Crore irrespective of income declared.

However there is still confusion to tax payers regarding applicability of audit under above sections for certain persons based on status, turnover and taxable income. We are trying here to analyze the applicability of audit under Section 44AB/AD with few examples.

Relevant extracts of said sections are reproduced below as note for reference.

Individuals:

Firms:

Companies:

Limited Companies do not come under purview of Section 44AD.

Continuity:

By virtue of Section 44AD (4), the benefits apparent by virtue of the Section can be claimed continuously without breaking the 8/6% rule. Once declared in a previous year in accordance with such section and if it is broken within five assessment years relevant to the previous year succeeding such previous year, such benefits cannot be claimed for the next five years.

Note: Relevant Extract from the Income Tax Act,1961

Section 44 AB

"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 ( Note 1 )

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

(c)  ……

(d)   …………

(e)   ………….

Section 44 AD

(1) 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" :

Provided  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  53 [or through such other electronic mode as may be prescribed ]  during the previous year or before the due date specified in sub-section (1) of  section 139  in respect of that previous year.

(2)   …….

(3)   …….

(4) 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 assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (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 sub-section (1).

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income (Note 2) 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 (Note 3)

(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to-

(i) a person carrying on profession as referred to in sub-section (1) of  section 44AA ;

(ii) a person earning income in the nature of commission or brokerage; or

(iii) a person carrying on any agency business.

Explanation. —For the purposes of this section,-

(a)   "eligible assessee" means,-

(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause ( n ) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and (Note 4)

(ii) who has not claimed deduction under any of the  sections 10A ,  10AA ,  10B ,  10BA  or deduction under any provisions of Chapter VIA under the heading  "C. - Deductions in respect of certain incomes " in the relevant assessment year;

 (b) "eligible business" means,-

   (i) any business except the business of plying, hiring or leasing goods carriages referred to in  section 44AE ; and

(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two Crore rupees . (Note 5)

(The views expressed are strictly personal.)