Applicable TAR Clause – 44AB(a) Or 44AB(e) For Turnover Between Rs. 1cr – 2cr

Which Clause Of Tax Audit Is Applicable – 44AB(a) OR 44AB(e) – When Business Turnover, Sales, Gross Receipts Etc. Is Over Rs. 1 Cr. But Up to Rs. 2 Cr.

INTRODUCTION :- The section 44AB of the Income Tax Act, 1961 (“Act”) imposes liability for mandatory tax audit when any of the condition mentioned in clause (a) to (e) is applicable. It is frequently asked that when business turnover is over Rs. 1Cr. but up to Rs. 2 Cr. then which clause of section 44AD i.e., 44AD(a) or 44AD(e) will be applicable.

The tax audit liability under clause 44AD(a) arises when business turnover etc. exceeds specified limit and tax audit liability under clause 44AD(e) arises when there is any infringement related to section 44AD(1) as mentioned in section 44AD(4).

In this article an attempt has been made to discuss the above issue in the light of the various applicable  provisions of relevant sections i.e. sec 44AB and sec 44AD of the Act.

RELEVANT PROVISIONS OF SEC. 44AB :- In the present case only clause (a) and clause (e) of sec 44AB are relevant. The above clauses of sec 44AB alongwith other relevant parts are mentioned in succeeding paras.

44AB. Every person,—

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year :

(e) 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,

get his accounts of such 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 :

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:

RELEVANT PROVISIONS OF SECTION 44AD :-

Special provision for computing profits and gains of business on presumptive basis.

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession” :

(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.

Explanation.—For the purposes of this section,—

(b) “eligible business” means,—

 (i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

 (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees. 

ANALYSIS OF RELEVANT PROVISIONS OF SEC 44AB & 44AD :- On analysis of above provisions, the following conclusions emerges –

(1) The clause (a) of sec 44AB provides for basic, independent and exclusive liability for tax audit if the total business turnover etc. in the previous year exceeds Rs. 1 Crorer.

(2) The above mentioned first proviso of section 44AB gives relaxation from the above basic tax audit liability when the two conditions mentioned in the above proviso itself are satisfied i.e., (a) the profits and gains for the above previous year are declared as per section 44AD(1) i.e., at presumptive rate of 8% / 6% ; and (b) the total business turnover etc. do not exceed Rs. 2 Crorer.

(3) When business turnover is over Rs. 2 Crorer there is no eligibility for declaring profits etc. as per section 44AD(1), therefore, it can be logically said that, this second condition is not an independent condition. This is merely supportive to the first condition. Therefore, this second condition may be temporarily ignored here merely for simplification purpose, without any effect on the correct decision making on the present issue.

(4) Thus, on the basis of above discussion, it can be simply concluded that there is basic liability for tax audit if business turnover etc. exceeds Rs. 1 Crorer. However, this liability can be escaped only if the profit is declared as per section 44AD(1). If the profit is not declared as per section 44AD(1), then basic tax audit liability will persist as it is. There is no other way to escape from the above basic tax audit liability. (One thing is also mentionable here that the condition is simple whether the profit etc. is declared as per section 44AD(1) or not. Here it is not material that whether the profit has not been declared as per section 44AD(1) deliberately or due to any ineligibility for section 44AD(1)).

(5) Thus, if the business turnover etc. is over Rs. 1 Cr. and profit etc. is not declared as per section 44AD, the basic tax audit liability under sec 44AD(a) will persist. It will not get diluted. The turnover limit of Rs. 2 Crorer has nothing to do with the basic tax audit liability. It does not affect basic tax audit liability under sec 44AB(a). The turnover limit of Rs. 2 Crorer is for deciding eligibility for section 44AD only. Thus, if turnover is over Rs. 1 Crorer (and though it is only up to Rs. 2 Crorer), and profit etc. is not declared under section 44AD(1), then basic tax audit liability under clause 44AD(a) will persist. It will not get affected at all due to the fact that turnover is only up to Rs. 2 Crorer.

(6) The clause (e) of section 44AD, casts liability for tax audit in case where the provisions of section 44AD (4) are applicable and the income exceeds maximum amount not chargeable to tax. The similar provisions for tax audit liability are also contained in section 44AD(5).

(7)  The section 44AD(4) provides that if above section 44AD(1) presumptive income is not declared continuously for prescribed period then there will not be eligibility for declaring profit under section 44AD(1) for subsequent prescribed period. Thus, simply it can be said that the audit liability has been casted in case of leaving of section 44AD(1) before prescribed period.

(8) In the personal opinion of the author, this audit liability under clause 44AD(e) is an additional tax audit liability. It will be applicable only in cases where the turnover is Rs. 1 Crorer or below. It is so because in cases of turnover of Rs. 1 Crorer and above, the basic tax audit liability under clause 44AD(a) is already persisting in such cases also.

The clause section 44AD(a) read with first proviso to section 44AB provides for liability if turnover is over Rs. 1 Crorer and profit is not declared as per section 44AD(1). When section 44AD(4) becomes applicable in any case it means there is ineligibility for section 44AD(1). It means in such case profit is not declared under section 44AD(4). In such case turnover is over Rs. 1 Crorer and profit is not declared under section 44AD(1). Thus, such a case is clearly covered under the provisions of clause 44AD(a). Therefore, there was no need to bring any additional clause (e) for imposing tax audit liability in such cases.

(9)  In case of turnover of Rs. 1 Crorer or less, there is no basic tax audit liability under clause 44AD(a). Therefore, in the opinion of the author, clause 44AD(e) might have been brought to cover the cases below Rs. 1 Crorer turnover etc. under audit on infringement of section 44AD(1). Thus, clause 44AD(e) may be applicable only in cases of turnover Rs. 1 Crorer or below.

(10) In the opinion of the author, the clause 44AD(e) is not at all replacement of clause 44AD(a) in cases where turnover is up to Rs. 2 Crore. It do not gives any relaxation from clause 44AD(a) in such cases. Even if it is erroneously considered so, then it will produce absurd results. For example, suppose one person not covered under section 44AD has turnover of Rs. 1.01 Crorer and total income of Rs. 1 thousand, he will be liable for audit under clause 44AD(a).

Suppose there is another person to whom provisions of section 44AD are applicable and he makes infringement as mentioned in sec 44AD(4) and his turnover is Rs. 2 Crorer and his total income is Rs. 2.49 lakhs he will not be liable for tax audit under clause 44AD(e) (as per above wrong interpretation in view of author). Thus, here condition occurring is that that the person making infringement is enjoying escapement from tax audit liability despite higher turnover, despite higher income and despite infringement. Another person who is not making any infringement is liable for tax audit despite low turnover, low net profit as compared to the above referred infringing first person.

(11) Thus, in the opinion of the author, the correct interpretation of liability for audit under clause 44AD(e) may be that it is applicable only in cases where the turnover is Rs. 1 Crorer or below and the total income is more than basic exemption limit.

(12) It is also mentionable here that if the turnover is over Rs.1 Crorer but up to Rs. 2 Crorer and total income is below basic exemption limit and section 44AD(4) / (5) are applicable, there may be liability for tax audit and that too under clause 44AD(a).

(13) Here it is also mentionable that tax audits conducted under clause 44AD(a) are counted for the purpose of specified limit of tax audits which can be done by the chartered accountants as per ICAI regulations. The tax audits in case of turnover over Rs. 1 Crorer up to Rs. 2 Crorer may, to be on safer side, be counted by the auditor under above clause 44AD(a).

CONCLUSION :  THUS, ON THE BASIS OF ABOVE DISCUSSION, THE AUTHOR IS OF THE PERSONAL OPINION THAT THE TAX AUDITS IN CASES OF TURNOVER ETC. OVER RS. 1 CRORER AND UP TO RS. 2 CRORER MAY BE TREATED AS AUDIT UNDER CLAUSE 44AD(a) AND TAX AUDITS IN CASES OF TURNOVER ETC. OF RS. 1 CRORER AND BELOW MAY BE TREATED AS AUDIT UNDER CLAUSE 44AD(e).

SECTION 44AB FOR READY REFERENCE OF READERS –

Audit of accounts of certain persons carrying on business or profession.

44AB.  Every person,—

(a)  carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year :

 [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 ” [ten] crore rupees” had been substituted:]

 [Provided further that for the purposes of this clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash; or]

(b)  carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees in any previous year; or

(c)  carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or

(d)  carrying on the profession shall, if the profits and gains from the profession are deemed to be the profits and gains of such person under section 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year; or

(e)  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,

get his accounts of such 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 :

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:

Provided further that this section shall not apply to the person, who derives income of the nature referred to in section 44B or section 44BBA, on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later :

Provided also that in a case where such person is required by or under any other law to get his accounts audited , it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report by an accountant in the form prescribed under this section.

Explanation.—For the purposes of this section,—

 (i)  “accountant” shall have the same meaning as in the Explanation below sub-section (2) of section 288;

(ii)  “specified date”, in relation to the accounts of the assessee of the previous year relevant to an assessment year, means  [date one month prior to] the due date for furnishing the return of income under sub-section (1) of section 139. 

SECTION 44AD FOR READY REFERENCE OF READERS –

Special provision for computing profits and gains of business on presumptive basis.

44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession” :

Provided that this sub-section shall have effect as if for the words “eight per cent”, the words “six per cent” had been substituted, in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(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.

(6) The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to—

 (i)  a person carrying on profession as referred to in sub-section (1) of section 44AA;

(ii)  a person earning income in the nature of commission or brokerage; or

(iii) a person carrying on any agency business.

Explanation.—For the purposes of this section,—

(a) “eligible assessee” means,—

(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and

 (ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” in the relevant assessment year;

(b) “eligible business” means,—

(i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and

(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.

DISCLAIMER : The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author do not owns any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article. Before taking any action relevant to the above topic, it is advised that the user may please refer relevant Act, Rules etc.