OCTOBER 18, 2021

By CA Lukose Joseph & CA Jobby George

SECTION 44AB of 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 for professionals (Persons engaged in profession as per section 44AA of Income Tax Act. 1961) is rupees fifty lakh.

However, law provides exemption from tax audit for persons carrying on business, if their turnover is less than rupees 10 crores and cash receipt and payment is less than 5 percent of gross receipts and payments respectively.

Earlier (upto AY 2017-18) by virtue of section 44 AD (5), an assessee (Resident individual, HUF or Partnership firm) who claims that his profits and gains from the eligible business is lower than 8 percent of Total Turnover/Gross Receipts or less than 6 percent of Total Turnover/Gross Receipts when turnover exclusively received through banking channels and income exceeds the maximum limit which is not chargeable to tax were liable to do tax audit.

Now too section 44AD (1) prescribes to declare profit of 8%/6% percent as the case may be, but lost the earlier serration due to changes (which are effective from AY 2017-18) in 44AD (4) and (5) which prescribes audit only when the assessee uses this option for presumptive taxation and once opt out in any of the 5 subsequent years after the assessee started opting the presumptive scheme. Then the assessee is obligated to maintain books of accounts and get it audited in harmony with Section 44AB in a case the total income exceeds the maximum limit which is not chargeable to tax. Also once opted out of the presumptive scheme, that eligible assessee is not entitled to opt in the scheme for a period of 5 years ensuing.

As it stands now, an assessee who started a new business is not at all liable to audit if his turnover is less than 1 crore irrespective of profit declared in accordance with Section 44AB(a).

However, still confusion to taxpayers regarding applicability of audit under above sections, so some analysis based on turnover in case of income from business (Kindly note that income from profession, person carrying business of plying, hiring or leasing goods carriages, business of exploration, etc., of mineral oils or foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects not covered below) .

Case 1 - Turnover above Rs. 10 Crores (All assessees)

Every person carrying on business whose turnover exceeds Rupees 10 crore is liable for tax audit irrespective the mode of receipt/payment or profit declared- by virtue of Section 44AB(a)

Case 2 - Turnover from 2 to 10 crores (All assessees)

If a person carrying on business has cash receipt and payment less than 5 percent of gross receipts and payments respectively such person is not liable for audit, else 44 AB audit is applicable. By virtue of proviso to Section 44AB (a)

Case 3 – Turnover Rs. 1 to 2 crore (Resident individual, HUF or Partnership firm)

An individual, HUF or Partnership firm can declare 6 percent of his receipts through banking channel and 8 percent of his receipts in cash as deemed income so that he could claim exemption from tax audit as per section 44AD(1)

As per section 44AD (4), if assessee declares profit under presumptive taxation and once opts out of presumptive taxation he will not be eligible for claiming presumptive taxation for next 5 years.

Again the section 44AD (5) prescribes that if he opts out as above and his total income (including income under all heads) exceeds taxable limit, he is liable for tax audit.

For an assessee having turnover between one and two crores has no relevance to that opt out option being hit by section 44AB (a) and liable for audit irrespective of income declared.

In short, persons referred above (individuals, HUFs or Partnership firms who are residents) with turnover between one and two crores if not declaring 8%/6% percent of turnover as profit, liable for audit with an exemption that if such person carrying on business has cash receipt and payment less than 5 percent of gross receipts and payments respectively such person is not liable for audit, else 44 AB audit is applicable by virtue of proviso to Section 44AB (a)

Case 4 - Turnover 1 to 2 crore (Assessees other than Resident Individual, HUF or Partnership firm)

They have no option but to go for tax audit irrespective of declared profit other than those covered under Case 2 (i.e. If a person carrying on business has cash receipt and payment less than 5 percent of gross receipts and payments respectively such person is not liable for audit)above by virtue of Section 44AB .

Case 5 - Turnover Up to one crore (Resident individual, HUF or Partnership firm)

Liable for audit if he had opted out of presumptive taxation in any of the 5 preceding years and his total income including income from all sources exceed taxable limit, he is liable for audit as per Section 44AB(e)

That means, for a firm if in a year with above turnover and ends in loss and opts out of presumptive scheme, then that firm is not liable for audit by virtue of section 44AD (4) and (5).

An assessee (Resident Individual, HUF or Partnership firm)if he never opted out of presumptive taxation in preceding 5 years is not liable for audit as of now if turnover less than 1 crore . Before amendment on section 44 AD(4) and (5) (which came into effect from 2017-18) if an assessee above referred was not declaring a profit at the rate of 8/6 % having his total income from all sources exceed taxable limit, he was liable for tax audit. That means before AY 17-18 if profit declared (deemed income) is less than 8% , that eligible assessee need to audit under section 44AB

Case 6 - Turnover Up to one crore (Other than Resident Individual, HUF or Partnership firm).

Not liable for tax audit as the section 44AB (a) gives exemption up to 1 crore.

Post Script:

Person carrying on business coming under  section 44AE (person carrying business of plying, hiring or leasing goods carriages)  or  section 44BB (business of exploration, etc., of mineral oils)  or section 44BBB (foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects.) and claiming profit not as per the said sections has to do Tax audit - Section 44AB(c).

[The views expressed are strictly personal]