Pounding between Tax Audit & Presumptive Taxation provisions

Importance of Tax Audit :

Most important functions of chartered Accountants in Practice is discharging of onerous liability of Tax Audit function conferred upon them by Income Tax Act. As we know, Provisions of tax audit is mainly governed by Section 44AB r.w.s. 44AD of the Act. There are various points which generally confused practising chartered Accountants with respect to applicability of tax audit. The most important question which is generally discussed amongst CA fraternity is applicability of tax audit for assesse having turnover below 2 crore. Importance of this can be vouched from two years UDIN report made public by the ICAI.

Dependency on Tax Audit under presumptive Taxation Regime:

As per UDIN report issued by ICAI, 26.17 Lacs UDIN for tax audit were generated from the period January 2019 To December 2020. Out of total tax audit of 26.17 Lacs, 5.67 Lacs audit were done u/s 44AD(e) i.e. person who has not declared profit under presumptive taxation. In same line, Total 29.54 Lacs UDIN were generated for tax Audits carried out during the period from January 2020 to December 2021 whereas During the same period around 11.9 lacs UDIN were generated for audit under GST Act (Form 9C). Though UDIN for GST is accumulation of more than 2 years figures due to various extension still if it is presumed that if all GST audit is of one year i.e. March 2019 for which GST Audit was mandatorily required for turnover exceeding Rs 2.00 Crore. This means that remaining tax audits were performed for the assesse having turnover less than 2 Crore. This fact is alarming to the small and medium size practisoners and shows their dependency on small tax audits.

Before discussion on the topic, section 44AB and 44AD is being reproduce hereunder for ease of reference and understanding:

SECTION 44AB

 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]

Provided further that for the purpose 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.

 (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 ⁹¹[date one month prior to] the due date for furnishing the return of income under sub-section (1) of section 139

SECTION 44AD: 

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 ⁹²[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 in-comes” 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.

DISCUSSION ON VARIOUS CONTETIOUS ISSUES: Various contentious issues on the subject and discussion on these issues can be summarised in following points:

Cross Over Turnover Provisions between Section 44AB and 44AD: Section 44AB generally applies once turnover exceeds 1 Crore whereas section 44AD can be availed up to turnover of Rs 2.00 Crore. A great amount of discussion is held regarding applicability of tax audits for the assesse having turnover between 1 crore to 2 Crore.

Various questions generally comes into mind of professional like Whether they are required to declare income under presumptive taxation ? Whether the situation would be different if they have availed provisions of section 44AD in earlier Year ? If Tax Audit is required to be performed than under which clause it is to be performed ? The position becomes more confusing after introduction of new proviso wherein concept of Deemed cash has been introduced for applicability of tax audit.

Whether opting of provision of section 44AD is compulsory for turnover below 2 Crore:

 The assessee May got the different opinions on the subject matter owing to the fact that turnover of the assesse is below 2.00 Crore. One section of professional may opined about applicability of section 44AD on the basis that assesse is an “Eligible Assesse” engaged in the eligible business whereas another section of professional may opined that assesse fall under section 44AB(a) and proviso thereof.

Bare reading of both the sections suggest that both the section are specific sections. Section 44AB is specific section for Audit of accounts of certain persons in specific situation whereas section 44AD is also specific provision for computation of profit for presumptive section hence one cannot interprets these section on the ground of specific prevails over general but law relating to harmonious interpretation is a guiding factor over here.

It is well settled that the provisions of a statute must be read harmoniously together. However, if this is not possible then it is settled law that where there is a conflict between two sections, and one cannot reconcile the two, one has to determine which is the leading provision and which is the subordinate provision, and which must give way to the other. A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflict provisions will often require to determine which is the leading provision and which the subordinate provision, and which must give way to the other.

Section 44AB(a) fixes Rs 1.00 Crore as the threshold turnover limit for tax audit whereas proviso to section carves out an exception to the main section and conferred an option to the assesse to declare profit under presumptive taxation up to turnover of Rs 2.00 Crore. This point suggests us that section 44AB is a leading section and provisions of section 44AD are subordinate to section 44AB hence section 44AD should give way to the section 44AB accordingly threshold limit for tax audit should be reckoned Rs 1.00 Crore though the assesse have the option to adopt presumptive taxation route up to Rs 2.00 Crore provided other conditions are fulfilled.

Discussion on new proviso on the subject matter of Deemed Cash for turnover purpose:

As per provisions of section 44AB, turnover limit for tax audit has been increased from 1 crore to 10 crore if receipts and payment are within the permissible cash limit. The finance Act, 2021 has introduced new proviso to section 44AB(a) wherein it has been stated that transactions through non account payee cheques shall be considered as Deemed Cash for this clause. This point is very important because large chunk of audit shall be governed on interpretation and adoption of this proviso.

Here it is interesting to state that deeming provisions is with respect to only Cheques and not for E-Payment or digital payment hence RTGS/NEFT ec shall always be treated as non-cash. Now most important question is how to prove receipt and payment of cheque through account payee mode is a burning issue as assesse does not possess any documentary evidence thereof and only option left with the assesse to collect scanned copies of all cheques from the bank. After introduction of CTS clearing system, Scanned copies all receipts and issued cheques remains with the banks but it is very cumbersome to get scanned copies of cheques from the bank looking to the magnitude of cheques.

Though intention of the legislature is to ease the compliance burden of small assesse if they are dealing mostly through banking channel accordingly threshold limit for tax audit shall be 10 crore but considering the difficulty in getting evidence to prove transaction through account payee cheques turnover limit for tax audit may be considered as 1 crore instead of 10 Crore to avoid future litigation.

Whether disallowance, Penalties can be levied if transactions are considered as Deemed cash under this proviso:

Another relevant point which may also come up for discussion is applicability of section 40A(3), 269SS, 269T and 269ST if all these transactions are treated as DEEMED CASH. In this matter, It is stated that language of the section itself is very clear on this matter. Proviso of the section states that “for the purpose of this clause” which signifies that transactions shall be deemed cash only for this clause and not for otherwise accordingly provisions of section 40(a)(3),269SS, 269T and 269St shall not come into picture.

Is it compulsory to avail presumptive taxation:

From AY 2017-18, Section 44AD(5) has been changed. Earlier it was compulsory for every assessee either to declare profit under presumptive scheme or get its books of accounts audited. Now language of section 44AD(5) suggest that tax audit is compulsory only for those assesse who had availed provision of section 44AD in earlier five year and whose income is exceeding the maximum amount not chargeable to tax in other words, If an assesse had not availed the provisions of section 44AD in earlier year than it is not compulsory for him to avail presumptive taxation despite being an eligible assesse and engaged in the eligible business because only section 44AD(5) speaks about tax audit and not section 44AD(1) of the Act.

For example Mr XYZ which was constituted in FY 2020-21. Turnover of the firm is below 1 Crore. They are neither required to compulsory avail the provision of section 44AD nor required to get its accounted, Answer would remain same if the firm is old one and not availed provision of section 44AD so far.

Ready Reckoner on applicability of Tax Audit:

Based on above discussion, A table containing various possible scenario has been framed in such a way that it can be used as ready reckoner for the applicability of tax audit. One can put their turnover and net profit figures in place to illustrations given in the table to get the result.

In this table, various situation like turnover between 1-2 crore, Profit in excess or below threshold amount not chargeable to tax, Availment of provision of section 44AD, Nature of Income and various permutation and combination thereof is envisaged. Say for example, instead of turnover of Rs 1.40 Crore, You may put turnover of Rs 1.99 Crore but result will remains same:

S No	Source of Income	T.O. (Cr)	N P (Lacs)	Whether Opted Section 44AD/ 44ADA in earlier Year from AY 2017-18 onwards	Whether Tax Audit Is required to be Performed				Remarks
					If able to substantiate transaction through A/c payee cheque/ Permissible Cash limit ( A)		If not able to substantiate transaction through A/c payee cheque / Excess to Permissible Cash limit (B)
1	Business	1.40	5.00	No	No		Yes		u/s 44AB(a)
2	Business	1.40	5.00	Yes	Yes		Yes		u/s 44AB(e) for (A) and 44AB(a) for B
3	Business	1.40	11.50	No	No		Yes		u/s 44AB(a) r w note 1
4	Business	1.40	11.50	Yes	No		Yes		u/s 44AB (e) r w note 1
5	Business	1.40	2.40	No	No		Yes		u/s 44AB(a)
6	Business	1.40	2.40	Yes	No		Yes		u/s 44AB(a)
7	Business	3.00	2.40	No	No		Yes		u/s 44AB(a)
8	Business	3.00	2.40	Yes	No		Yes		u/s 44AB(a)
9	Business	3.00	3.00	No	No		Yes		u/s 44AB(a)
10	Business	3.00	3.00	Yes	No		Yes		u/s 44AB(a)
11	Business	6.00	-1.00	No	No		Yes		u/s 44AB(a)
12	Business	6.00	-1.00	Yes	No		Yes		u/s 44AB(a)
13	Business	0.80	3.00	No	No audit under any provision of the Act.
14	Business	0.80	3.00	Yes	No	Yes		u/s 44AB(e)
15	Profession	0.80	3.00	No	Yes		Yes		u/s 44AB(b)
16	Profession	0.80	3.00	Yes	Yes		Yes		u/s 44AB(b)
17	Profession	0.40	2.40	No	No		No		No audit as NP is below the amount not chargeable to tax
18	Profession	0.40	2.40	Yes	No		No
19	Profession	0.40	20.00	No	No		No
20	Profession	0.40	20.00	Yes	No		No
21	Profession	0.40	15.00	No	Yes		Yes		u/s 44AB(d)
22	Profession	0.40	15.00	Yes	Yes		Yes		u/s 44AB(d)

Note No 1:

In this situation as the declared profit is in excess of presumptive profit, Assesse have the option to go for presumptive taxation u/s 44AD and it is not necessary for him to get its accounts audited.

Conclusion:

Decision of applicability of tax audit provision becomes very tedious and confusing after certain changes and one has to take very careful analysis of facts to conclude the decision.