How to Compute 5% Cash Limit of Receipts & Payments for Section 44AB?

This article explains how to compute the Cash limit of 5% of the aggregate of all the amounts received as well as payments during the year, for the purpose of checking the applicability of Section 44AB (clause a), as amended by Finance Act, 2020 w.e.f FY 2019-2020. As per amendment in section 44AB, Tax Audit is not applicable, in case of person carrying on business, with Turnover upto 5 Crores and Maximum Cash Receipt i.e. 5% of aggregate of all the amounts received along with Maximum Cash Payment limit i.e. 5% of aggregate of all the payments during the year.  Thus, assessee has to make certain calculations for checking the applicability of Tax Audit.

The following chart depicts the calculation requirements of amended section:- calculation requirements of amended section 44AB

 Calculation for Non-Applicability of Section 44AB

Turnover

 

Total Receipts

 

Total Payments

 

Person carrying on business having his total sales does not exceed Rupee 5 crore in the previous year Aggregate of all amounts received (i.e. Total Receipts) 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 (i.e. Total Receipts)

 

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 (i.e. Total Payments)

 Thus, for non applicability of Tax Audit under this clause, Person has to satisfy all the 4 conditions:-

1. Person should be carrying on Business

2. Maximum Turnover during the year should be INR 5 Crore

3. Maximum Cash Receipt should be 5% of aggregate of all the amounts received during the year (Total Receipts)

4. Maximum Cash Payment limit should be 5% of aggregate of all the payments during the year (Total Payments)

Amended Section 44AB w.e.f. FY 2019-2020

Text of amended section 44AB(a) has been reproduced below:-

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 “five crore rupees” had been substituted; or 

Important Four Terms for checking Applicability of Section 44AB(a) 

a) Business: –

The term “business” is defined in section 2(13) of the Act, as under: “Business” includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

b) Turnover:-

In the “Guidance Note on Terms Used in Financial Statements” published by the ICAI, the expression “Sales Turnover” (Item 15.01) has been defined as under:- “The aggregate amount for which sales are effected or services rendered by an enterprise. The term `gross turnover’ and `net turnover’ (or `gross sales’ and `net sales’) are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”. 

c) Total Receipts:- (By any mode i.e. Cash/Bank)

Total receipts for any business would consist of :-

1. Amounts received from Cash Sales,

2. Receipts from Debtors (Current Year Sales realized or Previous Year/s outstanding realized during current year)

3. Receipts of Loan/Borrowings current year

4. Amounts received as Advance from Customers during the year

5. Amount received from Sales of Fixed Assets

6. Amounts received as Re-imbursement/Pure Agent

7. Amounts received as Output Tax (i.e. GST received along with Sales)

8. Amounts contributed by Partners/shareholders.

Thus, one has to compute the Total Receipts (Cash plus Bank) of the Business, In nutshell:-

1. Total of Cash Register – Receipt Side (excluding Opening Balance & Contra entries i.e. Cash withdraw from Bank) to be taken into consideration

2. Total of Bank Register – Receipt Side (excluding Opening Balance & Contra entries i.e. Cash deposited into Bank and Funds transferred from our one account to another bank account) to be taken into consideration.

Example of Total Receipts Computation

Rs. in thousands

All amounts are rupees in thousands i.e. 10,00,000 has been written as 1,000 Total Receipt for the year Cash Receipt Bank Receipt
Opening Cash in Hand as on 01.04.2019  – Rs. 1,000
Opening Bank Balance as on 01.04.2019 – Rs. 1,500
Bank Payment received in FY 2019-2020 from Debtor outstanding as on 31.03.2019 – Rs. 2,000 2,000 2,000
Cash Sales during FY 2019-2020 – Rs. 2,500 (including GST of Rs.250) 2,500 2,500
Credit Sales during FY 2019-2020 – Rs. 3,000 (including GST of Rs.300)
Cash received out of Credit Sales of Rs.3,000 during FY 2019-2020 – Rs. 2,700 (including GST of Rs.270) 2,700 2,700
Advance received from Customer during FY 2019-2020 for sales to be effected in FY 2020-2021 – Rs.3,500  (100 Cash + 3,400 Bank) 3,500 100 3,400
Custom Duty collected from our Customer (to be deposited in his behalf as Pure Agent) – Rs. 4,000 4,000 4,000
Term Loan Sanctioned Rs. 5,000 but Disbursed Rs. 4,500 during FY 2019-2020 4,500 4,500
Unsecured Loan Taken Rs. 5,500 (Repaid Rs. 500 same year) 5,500 5,500
Cash Credit Limit — New/Renewal/Enhanced/Utilized /Disbursed — Rs. 6,000
Cash deposited into Bank/ Cash withdrawal from Bank- Rs. 6,500
Funds transferred from own one Bank Account to another Bank Account — Rs. 7,000
Sales of Fixed Assets – Rs. 7,500 7,500 7,500
Total Receipts 32,200 5,300 26,900

 For non applicability of Tax Audit, Cash Receipt can be maximum 5% of Total Receipts i.e. 5% of Rs.32,200 (i.e. Rs. 1,610), however in this case, Cash Receipts are Rs.5,300. Hence Tax Audit would be applicable.

There can be other adjustments as well, e.g. Cheque Bounced, RTGS Returned, or any other adjustment, that must be taken into consideration.

Capital Introduced by Proprietor

In case of Capital Introduced by Proprietor, it should not be taken into consideration while computing Total Receipt as well as Cash Receipt, because for the purpose of Income Tax computation, both Proprietor as well as his Entity, are one & the same person. One can’t receive money from his own-self.  However, there is no clarification from CBDT in this regard.

Such contribution is not to be included because of the simple reason that one cannot transact with himself. There has to be another person involved in order to constitute a cash receipt. This confusion is created by ITR form in which the schedule therein states that “amount received will also include the capital contribution’’, this is against the spirit of the law, it cannot be counted as receipt because there have to be two different persons involved which is other than myself. One cannot receive money from himself.

d) Total Payment (By any mode i.e. Cash/Bank)

Total payment for any business would consist of :-

1. Amounts paid for Cash Purchase/Expenses,

2. Amount Paid to Creditors (Current Year Purchase or Previous Year/s outstanding paid during current year)

3. Repayment of Loan/Borrowings current year

4. Amounts paid as Advance to supplier during the year

5. Amount paid for Purchase of Fixed Assets

6. Amounts paid as Re-imbursement/Pure Agent

7. Amounts paid as Input Tax (i.e. GST paid along with Expenses & Purchases)

8. Amounts withdrawal by Partners.

Thus, one has to compute the Total Payments (Cash plus Bank) of the Business, In nutshell:-

1. Total of Cash Register – Payment Side (excluding Contra entries i.e. Cash deposited into Bank) to be taken into consideration

2 Total of Bank Register – Payment Side (excluding Contra entries i.e. Cash withdraw from Bank and Funds transferred from our one account to another bank account) to be taken into consideration. 

There can be other adjustments as well, e.g. Cheque Bounced, RTGS Returned, or any other adjustment, that must be taken into consideration.

For non applicability of Tax Audit, Cash Payments can be maximum 5% of Total Payments. 

Generate Receipts & Payments Account from Accounting Software

If your accounting software generates, Receipts & Payment account, then it can be used for easy computation. Otherwise one has to manually create the same from books of accounts. 

Information to be provided in ITR -3 Form regarding section 44AB

Information to be provided in ITR -3 Form regarding section 44AB Whether this computation of 5% of Cash receipt/payments is mandatory? Can we simply opt for Tax Audit, without this computation??

1. Chartered Accountant has to mention specific clause of Section 44AB in FORM 3CD , under which assessee is being audited. The same clause has to be mentioned while creating UDIN. Hence in case, Assessee is not liable for Tax Audit under any of the clauses of Section 44AB, due to benefit available under this clause. Thus, without any computation, this can’t be ascertained.

2. Due dates for ITR filing are different for assessee covered under Tax Audit and Non-Tax Audit Assessee.

3. In case of Individual/HUF, TDS deduction responsibility u/s.194C, 194I, 194J etc has been linked with specific clauses of section 44AB.

Whether this computation of 5% of Cash receipt/payments is also applicable for Company, LLP with Turnover upto 5 crore?

Yes, section 44AB(a) is applicable for all the assessees i.e. Individual , HUF, Firms, LLP, companies. 

Whether GST audit (GSTR 9C) would be applicable in case Section 44AB audit is not applicable for Turnover upto 5 crore?

There is no such exemption in both the laws.

Readers can refer following article for detailed analysis of Section 44AB & Section  44AD, https://taxguru.in/income-tax/tax-audit-section-44ab-vs-section-44ad.html 

Disclaimer: The contents of this article are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional. 

Article Contributed by: 

CA Sagar Gambhir | FCA, DISA (ICAI) | casagargambhir@gmail.com

Author can be reached at casagargambhir@gmail.com for any queries, issues & recommendations relating to article.

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10 Comments

  1. Pramod says:

    I received a remittance of Rs 1.01 crores to my Bank from a stock broker towards settlement of a trade dispute in FY 2019-20 (AY 2020-21). I am showing some legal expenses, but they are not exceeding 5% of the receipt. Do I need any tax audit ?

  2. MUNAF PATEL says:

    Sir

    For calculation of total turnover, whether GST output tax would be excluded ? Should we consider only taxable amount (without output GST) ?

    1. CA Sagar Gambhir says:

      As per guidance note of ICAI on Tax Audit,

      The term ‘turnover’ for the purposes of this clause may be interpreted
      to mean the aggregate amount for which sales are effected or services
      rendered by an enterprise. If sales tax and excise duty are included in the
      sale price, no adjustment in respect thereof should be made for considering
      the quantum of turnover. If, however, the Excise duty an /
      or sales tax recovered are credited separately to Excise duty or Sales tax
      Account (being separate accounts) and payments to the authority are
      debited in the same account, they would not be included in the turnover.

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