Pursuant to clause (a) of Section 44AB of the Income Tax Act, 1961 (‘the IT Act’), Tax Audit is mandatory if business is having total sales, turnover or gross receipts more than Rs. 1 crore in any Previous Year (‘PY’). Clause (a) of Section 44AB of the IT Act read as under-
‘(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case maybe, in business exceed or exceeds one crore rupees in any previous year.’
However, in order to reduce compliance burden for small assessee, Finance Act, 2020 w.e.f. 01.04.2020 has brought major amendment to IT Act related to applicability of Tax Audit. By the Finance Act, 2020 a proviso has been inserted in Section 44AB(a) of the IT Act which may be read as under-
“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”
Please note that w.e.f. Assessment Year (‘AY’) 2020-21, the threshold limit for tax audit under Section 44AB(a) of the IT Act, for a person carrying on business, is increased from Rs. 1 Crore to Rs.5 crores in cases where the aggregate cash receipts and aggregate cash payments made during the year does not exceed 5% of total receipt and total payment respectively. It means more than 95% of the business transactions should be done through banking channels in order to avoid tax audit as per the aforesaid proviso.
It is also important to note that the both condition of cash receipts and payments [does not exceeds 5 % of such receipts and payments] should be satisfy to get the benefits of the aforesaid amendment [i.e. no audit required upto Rs. 5 crores of sales, turnover or gross receipts]. If both the conditions are satisfied then the assessee is not required to get his books of account audited under section 44AB(a) of the IT Act despite that sales, turnover or gross receipts is more than Rs. 1 crore as mentioned under Section 44AB(a) of the IT Act.
In view of the above, if the aggregate cash receipts and aggregate cash payments do not exceed 5% then the threshold limit will become Rs 5 crores and thus Tax Audit under Section 44AB(a) would not be applicable.
Tax Audit under Section 44AB(e) with reference of Section 44AD of the IT Act.
There are lot of confusion in the mind of professional about threshold limit of audit. One confusion regarding audit under Section 44AB(e) of the IT Act. It is submitted that there is no confusion regarding tax audit under Section 44AB(e) of the IT Act. It is also submitted that all 5 conditions of Section 44AB of the IT Act are separate and assessee is required to get audit if falls in any conditions.
First, it is important to note that first proviso of Section 44AB of the IT Act “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 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”. The said proviso was inserted by Finance Act, 2016, w.e.f. 01.04.2017.
It means Section 44AD overrides Section 44AB of the IT Act and there is no need of tax audit if ‘eligible person’ under Section 44AD of the IT Act declares profits and gains for the previous year in accordance with the provisions of 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.
It is pertinent to mention that out of the total 5 (Five) conditions of compulsory audit of accounts of certain persons carrying on business or profession, under section 44AB of IT Act, one condition which mentioned in clause (e) of section 44AB of the IT Act, also make mandatory for an assessee to get audit the account.
The said clause (e) of Section 44AB of the IT Act reads as under-
“carrying on the business shall, if the provisions of sub-section (4) of Section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income tax in any previous year.”
It is important to note that the aforesaid clause (e) applies only in case where the provisions of sub-section (4) of Section 44AD of the IT Act are applicable. Therefore, it is necessary to know first about the provisions of sub-section (4) of Section 44AD of the IT Act. It is notable that a new condition has been added to Presumptive Income by Finance Act, 2016, w.e.f. 01.04.2017 by substituting sub-section (4) of Section 44AD of the IT Act. Sub Section (4) of section 44AD of the IT Act was totally substituted with a new provision and accordingly where an ‘eligible assessee’ declaring profit in accordance with Section 44AD of the IT Act and for next 5 assessment years succeeding such previous years declares profits not in accordance to Sub section (1) to Section 44AD of the IT Act shall not be eligible to avail the benefit of this section for another Five Assessment Years subsequent to assessment year in which assessee declares not in accordance to Section 44AD of the IT Act.
The sub- section (4) of Section 44AD of the IT Act reads as under-
“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 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).”
It is pertinent to note that to synchronize provisions with the above amendment, sub-section (5) of Section 44AD of the IT Act also got amended. It now implies that when an eligible assessee declares profits & gains not in accordance with Section 44AD [i.e., provisions of Sub Section (4) of Section 44AD applies to such assessee] they are mandatorily required to maintain books of accounts as required under Sub Section (2) of Section 44AA of the IT Act and get them audited as required under Section 44AB of IT Act, if their total income exceeds the maximum amount not chargeable to tax.
The said sub- section (5) Section 44AD of the IT Act reads as under-
“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.”
When assessee opts not to declare profit for any of the previous year in accordance with Section 44AD of the IT Act [but had declared income in accordance with Section 44AD in previous year] then for succeeding five assessment years relevant to such previous year, they shall maintain books of accounts and get them audit if their total income exceeds the maximum amount not chargeable to tax as per the requirements of Section 44AA and 44AB of the IT Act.
More clearly, where a person does not declare profit in accordance with Section 44AD(1) of the IT Act in any Assessment Year (‘AY’) (i.e. shows profit less than 8% or 6%) then he cannot claim benefit under section 44AD(1) for that AY and next 5 AYs. Thus, he has to compulsorily get his accounts audited under section 44AB(e) of the IT Act for that AY and subsequent 5 AYs if the turnover less than or equal 2 crores and total income exceeds basic exemption limit during such 6 years.
Crux of aforesaid provisions: –
1. If assessee are going to opt the presumptive scheme, the assessee must file ITR under presumptive scheme for at least 5 years in continuation. [sub-section (4) of Section 44AD of the IT Act].
2. Moreover, if assessee decide to show and file profits as per their regular business (not presumptive basis) before the end of these 5 years, the assessee will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years. [sub-section (4) of Section 44AD of the IT Act].
3. Further, in case of
a) provision of sub-section (4) is applicable i.e. assessee chooses not to compute income under sub section (1) of section 44AD of IT Act, and
b) their income exceeds the maximum amount not chargeable to tax in any previous year
shall maintain books of accounts and get them audited, as required as required under sub-section (2) of section 44AA and as required under section 44AB of the IT Act. [sub-section (5) of Section 44AD of the IT Act].
Remark: It is submitted that the government is discouraging taxpayers from misusing the presumptive scheme and constantly changing their option often. Therefore, if you opt for presumptive scheme continue for 5 years and if you want to opt out, you will be barred from resuming presumptive for a period of 5 years. However, the time limit of 5 years condition applies only to businesses.
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.
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Whether , there is any requirement to certify or declare about cash transactions within 5 pc, in the ITR or in any other form to be filed.
Otherwise,
can this be a reason for scrutiny of ITR by the AO to satisfy about TAR exemption.