Tax Audit Applicability: FY 2020-21

The finance Bill, 2020 has brought a major amendment to section 44AB of the income tax act an extract of which stands as follows,

23. 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;

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

After insertion of such changes, the position stands as follows:

Where the provisions of 44AD(4) are applicable to the assessee and his his income exceeds the maximum amount which is not chargeable to income-tax in any previous year, he shall be liable to Tax Audit as per section 44AB (e) of the Income Tax Act. (This holds good though the turnover of the assessee does not exceed 5 crores and having Cash receipts and payments not exceeding 5%)

*1 Presently (i.e  FY 19-20), where the turnover of an assessee does not exceed Rs. 2 crores and he does not show profits equal to 6% or 8% as per 44AD, he is liable to maintain books of accounts u/s 44AA and get his accounts audited u/s 44AB.

As per the Budget 2020, (i.e from FY 2020-2021 onwards), an assessee having cash receipts and payments not exceeding 5%, is not liable for tax audit if his turnover does not exceed Rs. 5 crores.

Now- for an Assessee having Turnover below 5 crores and having Cash receipts and cash payments not exceeding 5%.

Due to the proposed change in budget 2020 the situation stands as follows,

– For assesse having TO> 2 crores (but below 5 crores and having Cash receipts and cash payments not exceeding 5%), he is NOT liable to Tax Audit. This holds good irrespective of the assessee showing profits up to 6% or 8% as per 44AD or not.

– For assesse having TO< 2 crores (but having Cash receipts and cash payments not exceeding 5%), he is Liable to Tax Audit, if he does not show profits up to 6% or 8% as per 44AD.

Example

• A having TO 2.1 crores but NOT showing profits of 6% or 8% is NOT LIABLE to TAX Audit.
• A having TO 1.9 crores SHALL be liable to TAX Audit if he does not show Profits of 6% or 8% as per 44AD.

This anomaly exists with respect to Resident IND/HUF/FIRM, since 44AD is applicable to these entities only. No confusion exists with regard to applicability of tax Audit with respect to companies or other persons.

Since, such a situation seems to be illogical and prejudicial to small traders having TO below 2 crores, a notification resolving this issue may be expected from the CBDT in this regard in the near future.

Applicability of Tax Audit discussed above is only with respect to an assessee carrying on Business. Such analysis made above do not apply to a person engaged in Profession.

The above article is based on the authors private view. The author shall not be responsible for any extracts or references made.