The recent changes in sections 44AB and 44AD have left these sections quite convoluted. The turnover threshold limit to get books of accounts audited has also been increased to Rs. 5 Crores provided minimum criteria of digital transactions is satisfied. Moreover, certain scenarios which required an assessee to get his books of accounts audited under the erstwhile provisions no longer require the same. An assessee declaring income not in accordance with provisions of section 44AD is no longer required to get his books of accounts audited under all cases.

SECTION 44AB

While presenting the Union Budget for 2020-21, the Finance Minister announced that currently, businesses having turnover of more than one crore rupees are required to get their books of accounts audited by an accountant. In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, she proposed to raise by five times the turnover threshold for audit from the existing Rs. 1 crore to Rs. 5 crores.

The amendment to section 44AB reads as follows: –

In section 44AB of the Income-tax Act,–

(A) in clause (a),–

(i) the word “or” occurring at the end shall be omitted;

(ii) the following proviso shall be inserted, namely:–

‘Provided that in the case of a person whose–

(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,

this clause shall have effect as if for the words “one crore rupees”, the words “five crore rupees” had been substituted; or’;

(B) in the Explanation, in clause (ii), after the word “means”, the words “date one month prior to” shall be inserted.

Clause (a) of Section 44AB provides that every person carrying on business shall get his accounts of a 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 if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in such previous year.

The newly inserted proviso to clause (a) of Section 44AB substitutes this threshold limit of Rs.1 crore with Rs.5 crores if the given two conditions are satisfied.

Thus, in case the person satisfies the above conditions, then the person is not required to get the books of accounts audited till the total sale, turnover or gross receipts of the person does not exceeds Rs.5 crores.

In this context, the following observations can be made regarding the increased threshold limit for Tax Audit under section 44AB –

  • The amendment is carried out only in section 44AB and no amendment has been made in section 44AD. Thus, the turnover limit of 2 crores for opting Section 44AD shall continue.
  • The term ‘aggregate of all receipts and aggregate of all payments’ is very wide and covers not only receipts and payments on account of sale and purchase but also all other business transactions. All the payments or receipts including capital introduction, drawings, receipt and repayment of loans, purchase of fixed assets, etc. shall be considered. Even taxes paid in cash shall be included for the calculation. In other words, all the receipts and payments made by the entity shall be considered for calculating total value of receipts and payments as well as the aggregate value of receipts or payments made in cash.
  • This increased threshold limit for Tax Audit is applicable for a business entity only and the threshold limit for Tax Audit for a professional shall continue to be at Rs.50 lakhs even if more than 95% of the transactions are in digital mode.
  • The revised Tax Audit threshold limit shall be applicable for all business entities that satisfy the given conditions irrespective of whether they are registered as MSME or not.

SECTION 44AD

Sub-sections (4) and (5) of section 44AD read as follows before amendments made via Finance Act, 2016: –

(4)   The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.

(5)  Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) 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.

Analysis: –

1. Sub-section (4) exempted assesses taking benefit of section 44AD from complying with advance tax provisions.

2. Sub-section (5) made it mandatory for an assessee not declaring income as per this section to get his books of accounts audited.

Finance Act, 2016 amended sub-sections (4) and (5) of Section 44AD to read as follows: –

(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 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.

Analysis: –

An analysis of the above sub-sections concludes that since sub-section (4) which exempted assesses claiming benefits of Section 44AD from complying with provisions of advance tax has been substituted, they are now required to comply with the same and required to pay 100% of the advance tax liability on or before 15th March of the Financial Year.

Also, unlike erstwhile provision, wherein assesssee had the option to declare profits lower than deemed under section 44AD only if he maintained books of accounts and get them audited, under new provisions the assessee has the option to declare lower profits if he does not falls within the ambit of sub-section (4), since sub-section (5) requires only the eligible assessees to whom provisions of sub-section (4) are applicable to maintain books of accounts and get them audited.

The amendment makes it compulsory for an assessee opting to take benefits of section 44AD to continue to do so for the succeeding five assessment years or get his books of accounts mandatorily audited for the five assessment years succeeding the assessment year in which he opts out irrespective of his turnover.

Frequently Asked Questions: –

1. Whether an assessee who has declared profit in accordance with section 44AD in an assessment year and crosses audit limits under section 44AB in the next assessment year and thereby gets his books of accounts of audited be eligible to claim the benefits of Section 44AD in the next 5 Assessment Years?

A – No, since sub-section (4) covers only ‘eligible assessees’ and not ‘eligible assessees engaged in eligible business’. The term eligible assessee as explained in the section has broad coverage and includes an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm irrespective of their turnover or sales in the previous year. Hence, if you opt out of Section 44AD or are mandatorily required to get your accounts audited after declaring your income in accordance with section 44AD once, you are mandatorily required to get your books of accounts audited for the next five assessment years if your income exceeds maximum amount not chargeable to tax.

2. Whether an assessee who has declared profit in accordance with section 44AD in a previous year and decides to opt out in the next previous year is mandatorily required to get his accounts audited for the previous year in which he decides to opt out?

A – No, since sub-section (5) requires only assessees covered under sub-section (4) to get their accounts audited. And sub-section (4) provides that an eligible assessee shall not be entitled to claim benefits of 44AD for the five assessment years after the assessment year in which profits were not disclosed as per section 44AD. So, if an assessee wants to opt out of 44AD, we are required to refer Tax Audit threshold limits of Rs.1 Crore/5 Crores as per section 44AB and decide whether he is required to get his books of accounts audited or not for the particular assessment year in which he discloses profits not as per section 44AD. However, he will be required to get his accounts audited mandatorily for the next five years.

3. Whether an eligible assessee filing his return of income for the first time mandatorily required to declare profits as per section 44AD or otherwise get his accounts audited?

A – No. In case of a new assessee we have the option to file return not in accordance with provisions of Section 44AD. In which case, we will refer to section 44AB and if his turnover is lower than the limits of Rs.1 Crore/5 Crores as applicable, he shall not be required to get his books of accounts audited and shall have the same option again in the next assessment year since he never opted out of section 44AD.

4. Whether an assessee who opted out of Section 44AD and got his accounts audited for the subsequent five assessment years is mandatorily required to declare profits as per Section 44AD or otherwise get his accounts audited?

A – No since it will comply with the requirement to disclose income as per Section 44AD for five subsequent assessment years and allow him to consider options as are available to a new assessee.

Conclusion  –

The recent amendments to these sections have left them very embroiled if not easy and seems like certain circumstances which required an assessee to get their books of accounts audited under the erstwhile provisions have been left exposed. This has made it very difficult to ascertain whether an assessee is required to get his books of accounts audited or not and the following flow of questions can be helpful to ascertain the same –

1. Does the assessee fall within the ambit of sub-section (4) of Section 44AD?

A – If yes, the assessee is liable to mandatorily maintain books of accounts and get them audited without any regards to his sales or turnover if his income exceeds the maximum amount not chargeable to tax as per sub-section (5) of Section 44AD.

2. If the answer to first question is No, does the sales, turnover or gross receipts of the assessee exceeds Rs.1 Crore?

A – If no, the assessee is not liable to get his books of accounts audited even if he declares profit not in accordance with Section 44AD.

3. If the answer to first question is No, and the turnover exceeds Rs.1 Crore but is lower than Rs.2 Crore, does the assessee declare profits in accordance with Section 44AD?

A – If yes, the assessee is not liable to get his books of accounts audited. If no, we will have to check whether he satisfies the newly amended provisos to Section 44AB to conclude if audit is required and so we move on to the next question.

4. If the turnover exceeds Rs.1 Crore but is lower than Rs.5 Crores and the assessee is not an eligible business under section 44AD or the assessee declares profits not in accordance with section 44AD, whether he satisfies the criteria of having aggregate cash receipts and aggregate cash payments less than 5% of aggregate receipts and aggregate payments respectively?

A – If Yes, the assessee is not liable to get his books of accounts audited even if his declared profits is lower than that deemed under section 44AD. If No, the assessee will be        required to get his books of accounts audited.

The following matrix will make it easier to understand requirements of getting books of accounts audited in different scenarios when section 44AD(4) is applicable –

Income exceeds maximum amount not chargeable to tax?

Turnover is less than Rs.1 Crore? Cash Receipts & Payments less than 5% of Aggregate Receipts and Payments? Turnover is less than Rs.5 Crores? Audit Required?

No

Yes

Yes/No Not Required
No

No

Yes

Yes Not Required
No No No Yes/No

Required u/s 44AB(a)

Yes

Yes/No Yes/No Yes/No

Mandatorily required u/s 44AB(e)

In cases where Section 44AD(4) is not applicable and assessee declares income not in accordance with section 44AD, the following matrix can be helpful in ascertaining whether books of accounts are required to be audited or not –

Turnover is less than Rs.1 Crore?

Cash Receipts & Payments less than 5% of Aggregate Receipts and Payments? Turnover is less than Rs.5 Crores? Audit Required?
Yes

Yes/No

Not Required

No

Yes Yes

Not Required

No

Yes

No

Required u/s 44AB(a)

No

No Yes/No

Required u/s 44AB(a)

Author Bio

Qualification: CA in Practice
Company: K Sharda & Co
Location: Surat, Gujarat, IN
Member Since: 18 Feb 2020 | Total Posts: 1
CA Kaushal Sharda is a second generation Chartered Accountant and son of the founding partner CA Kamlesh Sharda and newest partner to K Sharda & Co, a firm based in south Gujarat spanning 3 decades of experience. View Full Profile

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