As per Section 44AB of the Income Tax Act, 1961, every person carrying on business is required to get his accounts audited , if his total sales, turnover or gross receipts in business exceeds Rs. 1 crore in the previous year. In case of a person carrying on profession, tax audit is required if his gross receipts in profession exceeds Rs. 50 lakhs in the previous year.
With effect from 01/04/2020, that is from assessment year 2020-21, this provision is amended as below:
The threshold limit has been revised to increase it for a person carrying on business from Rs. 1 crore to Rs. 5 crore if the following conditions are satisfied –
1] His aggregate of all receipts in cash during the previous year does not exceeds 5 % of such receipts.
2] His aggregate of all payments in cash during the previous year does not exceeds 5 % of such payments.
So because of such amendment there some strange situation may arise which CBDT should clarify.
Situation
A] If person carrying on business, his total total sales, turnover, gross receipts is Rs. 4 crores.
[ that above Rs. 1 crores but does not exceeds 5 crore ]
In this situation there are two possibilities as below:
1] If his aggregate of all receipts and aggregate of all payments does not exceeds 5 % of such receipts and payments
2] ] If his aggregate of all receipts and aggregate of all payments does exceeds 5 % of such receipts and payments .
So in first possibility, he satisfy both condition of cash receipts and payments [ does not exceeds 5 % of such receipts and payments ] , he is not require to get his books of account audited under section 44 AB[a] of the Income Tax Act, 1961.
Again his total sales, turnover or gross receipts is above Rs. 2 crore, provisions of Sec 44 AD [1] is not applicable to him. Because , Sec 44 AD [1] provisions applicable to eligible business. And as per explanation [b][i] to sec 44 AD [6], eligible business means
[i] ….
[ii] whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.
So if the provisions of sec 44 Ab and provisions of Sec 44 AD is not applicable to him, then there is not any limit regarding % of profit to Total Sales. Etc. It means in above case, if person shows his profit below 8 % of 6 % of his total sales etc, he will not require to get his books of account audited .
In Second possibility, as he does not satisfy two conditions of maximum 5 % of cash receipts and cash payments, then he has to get his books of audited as per provisions of sec 44 AB [a] of the Income Tax Act, 1961.
B] ] If person carrying on business, his total total sales, turnover, gross receipts is Rs. 1.5 crores.
[ that above Rs. 1 crores but does not exceeds 2 crore ]
In such situation , following situation may arise:
1] Person whose total cash receipts and total cash payments does not exceeds 5 % of such receipts or payments.
In such situation, there are two more situation may arise –
‘a] His total profit or income for that business which is eligible business and person is eligible assessee, is more than or equal to 8 % or 6 % [ if his gross total turnover or receipts recd in banking mode] .
In this scenario, person will not require to audit as he satisfy condition stated in Sec 44 AB [a] and Sec 44 AD [1]
‘b] His total profit or income for that business which is eligible business and
person is eligible assessee, is below 8 % of 6 % [ if his gross total turnover or receipts recd in banking mode]
In this scenario, . though his total cash receipts and total cash payments does not exceeds 5 % of such receipts or payments, but he is showing his income or profit from eligible business below 8 % or 6 % , as the case may be, he is required to get his books of account audited as per provisions of Sec 44 AD [1].
Because, In Sec 44 AB , there is no such exclusions or exceptions is provided or in Sec 44AD is not amended to suit the amendment in the Sec 44 AB.
2] Person whose total cash receipts and total cash payments does exceeds 5 % of such receipts or payments.
In such case, there are two possibilities as below :
‘a] His total profit or income for that business which is eligible business and person is eligible assessee, is more than or equal to 8 % of 6 % [ if his gross total turnover or receipts recd in banking mode] .
In this scenario, person will not require to audit as he satisfy condition stated in Sec 44 AD [1]. Provisions of Sec 44AB will not applicable to him because Sec 44 AB provided clearly that –
“ Provided that this section shall not apply to the person, who declares profits and gains for the previous year in accordance with the provisions of the sub-section [1] of section 44AD 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. “
‘b] His total profit or income for that business which is eligible business and person is eligible assessee, is below 8 % of 6 % [ if his gross total turnover or receipts recd in banking mode]
In this case , assessee has to get his books of account audited as per provisions of sec 44 AD [1].
So from the above discussion, the summary of the provisions are tabulated as below:
| Sr. No. | Turnover | Eligible Business and Eligible Assessee
|
% of Cash Receipts and Cash Payments | % of Profit or Income | Audit Required | Section Audit which audit is required |
| 1
|
Up to 1 cr | YES | NA | ≥ 8 % or 6 % | NO | NA |
| YES | NA | < 8% OR 6% | YES | Section 44AD | ||
| 2 | 1 TO 2 Crore | YES | ≤ 5 % | ≥ 8 % or 6 % | NO | NA |
| YES | ≤ 5 % | < 8% OR 6% | YES | Section 44AD | ||
| YES | > 5% | ≥ 8 % or 6 % | NO | NA | ||
| YES | > 5% | < 8% OR 6% | YES | Section 44AD | ||
| 3 | 2 TO 5 CRORE | NA | ≤ 5 % | NA | NO | NA |
| NA | > 5% | NA | YES | Section 44AB |
So from the above discussion and table, the small eligible asseesee who has eligible business, though his turnover is below 2 crore , and his total cash receipts and cash payments is below 5 % of such receipts or payments, is required to get his books of account audited as per sec 44 AD and assessee whose turnover is more than 2 crore , and if his total cash receipts and total cash payments is less than or equal to 5 % of such receipts or payments, is not required to get his books of account audited u/s 44 AB ,So his burden of compliance is reduced but assessee whose turnover is below 2 crore , his burden of compliance is not reduced. It is strange and injustice to small assessee. So it is expected that CBDT should come out with suitable clairification or Govt. should make suitable amendments in the Income Tax Act, 1961 whrereever it is necessary.
*****
Disclaimer : I tried to put analysis of the provisions of sec 44 AB and 44 AD of the Income Tax Act, 1961 and its applicability on assesses. It just discussion and study purpose. Please go through and let me no , if there is any error or omissions. Thanks.
CA Shirish Vinchurkar – Chartered Accountants, Chalisgaon, email : [email protected]
Author Bio
Whether tax audit is mandatory when business turnover is less than Rs 25 lakhs and makes a loss of 2 lakhs,(less than 6 % of turnover ) and this is first year of business ( opting for presumptive taxation scheme does not arise) ,in view of amendment of Sec 44 Ad subsection (5 ) after finance bill 2016
Sir, if any one incurred trading (F&0) loss of 5,00,000 and his Turnover is around 1.5 crores what happened in this case because he receive all money through bank only.
Sir, What is meant by cash payments has to be less than 5% or total payments? My question is regard to stock option trading – if I purchase a stock option on Sharekhan, and make a loss, is it deemed there is a cash payment? How much? Kindly help at the earliest. I need to figure whether my return needs to be audited or not. Thanks.
2nd Para First line is incorrect it should be “With effect from 01/04/2020, that is from assessment year 2021-22” instead of “With effect from 01/04/2020, that is from assessment year 2020-21”.
Please correct it.
This is the perfect analysis of the 2 sections. I had the same thought regarding this. Appreciable post.
Sir agar mera turnover 1.26 crore hai and Profit ratio 3% hai and all receipts cash then audit under which section
Well i have come across different views on this Issue…
now more confused what to do 🙂
itatonline.org/articles_new/demystifying-applicability-of-tax-audit-u-s-44ab-of-the-income-tax-act-1961/
Dear Sir,
Is the new amendment giving an option to assessee (who satisfy the conditions) to refrain from filing tax audit report? Can such asseesse file tax audit report if they want? Or is it a mandatory exemption?
Thank for such a wonderful chart and explanation.
It is very say that new amendments in 2020 is not suitable for small taxpayers compared to Middle and Higher class taxpayers.
Even the Old Regime and NEW Regime too.
Since in todays world many small salaried or business have some commitment under 80C and other deductions which results into lower Net Taxable Income under Old Regime.
So unless one had Income more then 14 to 15 lacs , old regime maybe be better …
but New Regime is better for net taxable income above 15Lacs.
Like you rightly said this 44AB amendment is no useful for turnover less then 2 cr but business having turnover between 2 to 5 can get benefit under this clause.
So unfair in both amended for low taxable income people compared to middle and high taxable income.