It was a hectic filing season this year as majority of professionals were expecting the extension of e-filing date, but the ministry wasn’t in the same mood but anyways, we had just crossed one season and now we entered in the most important and confusing season of Tax Audits.

Why I am calling it confusing?

It’s been more than 5 years, I am writing on Tax Audit, have written various articles to full-fledged books but still I get the same queries of professionals every year since the very beginning. It’s a circle going on like 80 professionals understand the limits every year and 20 new gets confused.

From the trend of the queries I received, the biggest issue I found is, lack of understanding of the Bare Act in professionals. People try to search for the easier version but forgot to verify the facts from the Bare Act.

So, one advise to all the tax professionals who are reading this article: Must read the Bare Act provisions from the Income Tax Act, 1961 after reading this article and then try to get the 360-degree view of the section.

So. Let’s start.

Section 44AD deals with person engaged in business and opting for presumptive taxation

For the current year audit, we have various situations to understand. I will try to cover all the situations in the following two scenarios.

Scenario I: NO TAX AUDIT REQUIRED

Situation 1: Turnover is less than 1 crores, and the assessee has not opted for 44AD in any of the previous years.

Do not search for anything else, no need to consider the profit percentage. If the turnover is saying, 80 lakhs and the profit is 4 lakhs (less than 6%), still no tax is required. This is the normal scenario. Books should be maintained, although audit is not required but department can ask anytime to reproduce the books in front of them.

Deciding factor in above case – Turnover below 1 cr.

Situation 2: Turnover is less than 1cr, the assessee has opted for 44AD in the immediate previous year and the profit declared in current Previous Year is more than 6% or 8% (as the case may be).

This is a bit confusing. So, do not confuse yourself with the 1 cr limit, here the main point of concern is: If the client has opted for 44AD in the immediate previous year, then it the current Previous Year also, he needs to opt for 44AD if he wants to continue the benefit of 44AD in next 5 Assessment Years.

So, suppose if the turnover is below 1 cr and as per 44AD, client has declared profit more than 6% or 8% as per the case, then he is not required to get the books audited.

Deciding factor in above case – Percentage of profit should be more than 6% or 8% as per the case.

Situation 3: Turnover is more than 1 cr but less than 2 cr, the assessee has opted for 44AD in the immediate previous year and the profit declared in current Previous Year is more than 6% or 8% as the case may be.

This is the normal case of section 44AD which is the simplest and most availed benefit by small taxpayers. As per this scenario, the income exceeded 1cr, that means audit is required as per 44AB, but the assessee has opted for 44AD, therefore, the limit for him is 2cr.

But this limit of 2cr in this case comes with a condition of profit declaration.

Now, read this carefully:

1st Condition: The turnover exceeds 1 cr but less than 2 cr.

2nd Condition: The assessee has declared the profit more than 6% or 8% as the case be.

If both the conditions are fulfilled, no tax audit required.

Deciding factor in above case – Turnover + Percentage of profit should be more than 6% or 8% as per the case.

Situation 4: Turnover is more than 1 cr but less than 10 cr. cash receipts are less than 5% of the Turnover and cash payments are less than 5% of the Total Payment.

This is a newly inserted provision which was added last year. Earlier, the upper limit was 5 cr which has been revised to 10 cr.

Basically, it is section 44AB which says, if the assessee has total turnover of more than 1 cr but less than 10 cr and he is fulfilling the following 2 conditions then audit is not required:

1st Condition: Cash receipts are less than 5% of the Turnover.

2nd Condition: cash payments are less than 5% of the Total Payment.

As I have already mentioned that is a part of section 44AB, therefore, there is no condition of profit percentage declaration (6% or 8%).

Deciding factor in above case – Turnover + Cash transactions

Scenario II: TAX AUDIT REQUIRED

Situation 1: Turnover is less than 1cr, the assessee has opted for 44AD in the immediate previous year and the profit declared is less than 6% or 8% as the case may be.

Let’s say the turnover is 90 lacs and the client has taken the benefit of 44AD in the immediate previous year. Now in the current Previous Year, the profit declared is 4.5 lacs (5%) only,

As per the plain reading of Section 44AB, the audit is not required because assessee is outside 44AD now and the turnover is less than 1 cr but wait, it is not so simple.

Here comes Section 44AB(e) in the picture.

As per section 44AB(e), any assessee carrying on the business if opted for 44AD in immediate previous year and declared profit less than 6% or 8% in the current previous year and the profit so declared is exceeding the basic exemption limit, then he needs to get his accounts of such previous year audited.

So, as per the above provision, the audit is applicable in this case.

Deciding factor in above case – Assessee opted out from 44AD and Percentage of profit is less than 6% or 8% as per the case but exceeding the basic exemption limit.

Situation 2: Turnover between 1 cr and 2 cr, Assessee availed the 44AD in immediate previous year, but Profit declared in current previous year is less than 6% or 8% as the case may be.

Let’s say the assessee is having turnover of 1.5 cr and he has declared the profit of 8 lacs (5.33%).

Simply saying, audit is required as soon as the turnover exceeds 1cr as per section 44AB and 44AD gives the limit of 2cr but with a precondition of minimum profit declaration of 6% or 8% as per the case be.

So, in the above case, the turnover is more than 1 cr and less than 2 cr and further the profit is less than 6% or 8%, so simply, audit is required.

Also, now the assessee can’t avail the benefit of 44AD for next 5 Assessment Years and he must get its accounts audited irrespective of the turnover or profit declaration (The only exception to audit is net profit less than basic exemption limit of tax) – Section 44AD(4).

Deciding factor in above case – Turnover + Profit less than 6% or 8% as the case may be.

Analysis of the Limits under section 44AD - Tax Audit

Situation 3: Turnover more than 1 cr but less than 10 cr, cash receipts are more than 5% of the Turnover and cash payments are more than 5% of the Total Payment.

As I have mentioned previously, it is section 44AB which says if the assessee has total turnover of more than 1 cr but less than 10 cr and he is not fulfilling the following 2 conditions then audit is required:

1st Condition: Cash receipts are less than 5% of the Turnover.

2nd Condition: cash payments are less than 5% of the Total Payment.

As I have mentioned that is a part of section 44AB, therefore, there is no condition of profit percentage declaration (6% or 8%).

Deciding factor in above case – Turnover + Cash transactions

Situation 4: Turnover of more than 10 cr.

Simple answer – Tax Audit is required irrespective of cash transactions or profit declaration.

I have tried my best to cover all aspects in the above-mentioned situations. Hope this article would serve your purpose.

Disclaimer: The information shared by the author is purely reflects his personal views. It is nowhere associated in any manner to his employer organization.

It is strictly advisable to refer the Bare Act provisions of Income Tax Act, 1961 before forming any legal opinion based on above article. The author will not be responsible in case of any damage from the legal opinion formed based on above article.

The author can be contacted at 9888855340 (Only WhatsApp, No calls) or [email protected]

Author Bio

Qualification: CA in Job / Business
Company: PwC AC Kolkata
Location: Panchkula, Chandigarh, India
Member Since: 12 Jun 2019 | Total Posts: 35
Published Author - An Insight Into Tax Audit by Young Global Publications, New Delhi View Full Profile

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4 Comments

  1. Sakshi Joshi says:

    This helped me a lot in understanding the minute concepts of section 44AD.
    To the point explanation made it easier to understand.

  2. DILIP KHETAN says:

    If assessee got his accounts audited for last AY 20-21 and 21-22 where his turnover exceeded Rs. 1 Crore and profits were below 8%. In AY 22-23 his NP exceeded 8% then audit not required as per 3rd case of No Audit required as per the article.
    However, the Act says that once an assessee gets his accounts audited after opting 44AD in last years, he has to get his accounts audited for next 5 AY. And such the audit must be done in AY 22-23 also or not?? Please clarify.

    1. CA Atul Khurana says:

      Dear Sir,
      Your question is not clear. If the audit was done in last year then it means either the client was not under 44AD or the client has breached the condition of 44AD in that year. If the client was not in 44AD previously then he can opt for 44AD in current previous year but if the condition was breached then in any case the audit is required.

  3. P K Agarwal says:

    I think, In situation 1. in place of ” still no tax is required—” it should be “—-no tax audit is required–“. The word ‘audit’ is missing.
    This is initial observation, I am yet to go through your article.
    Thanks

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