Section 44AB: An Analysis of Tax Audit provisions after Finance Act, 2020

The provisions of Section 44AB have been amended by the Finance Act, 2020 giving rise to major confusion in the minds of businessmen and professionals alike. A third threshold limit of Rs 5 crores has been added in order to reduce compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector. In this article I have tried to clarify the provisions by simplifying the language and presenting the information in the form of a chart.

I always believe that any analysis should begin by reading the bare act. So, first of all, let us read what the bare act has to say:

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 “five crore rupees” had been substituted; 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 assesse 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.

(The Text which is in bold has been added by Finance act, 2020   w.e.f. AY 20-21)

Section 44AB gives the provisions relating to the class of taxpayers who are mandatorily required to get their accounts audited from a chartered accountant. The audit under section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfillment of other requirements of the Income-tax Law. The audit conducted by the chartered accountant of the accounts of the taxpayer in pursuance of the requirement of section 44AB​ is called tax audit.

The chartered accountant conducting the tax audit is required to give his findings, observation, etc., in the form of audit report in Form Nos. 3CA/3CB and ​3CD.

The two major amendments made by Finance Act, 2020 in respect of tax audit are as follows

1) Up to AY 2019-20, a person carrying on business was compulsorily required to get his accounts audited by a chartered accountant, if his total sales, turnover or gross receipts (as the case may be) in business for the year exceeds Rs. 1 crore. This provision is​ not applicable to the person, who opts for presumptive taxation scheme under section 44AD​ and his total sales or turnover doesn’t exceed Rs. 2 crores.

However, w.e.f. Assessment Year 2020-21, the threshold limit for tax audit u/s 44AB(a), 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. In other words, more than 95% of the business transactions should be done through banking channels in order to avoid tax audit.

2) Up to AY 2019-20, a person covered by section 44AB should get his accounts audited and should furnish the audit report on or before the due date for furnishing the return of income u/s 139(1). i.e. 30th September of the relevant assessment year. However, w.e.f. AY 2020-21 this due date of filing return of income for tax audit assessees has been amended to 31^st Oct,2020. This was accompanied by a amendment in Explanation to Sec 44AB. According to the amendment the due date of filing tax audit report will be one month prior to the due date for furnishing the return of income u/s 139(1). Thus, For AY 20-21 the due date for filing tax audit report for FY 2019-20 corresponding to the assessment year 2020-21 will be 30^th Sept, 2020 (one month prior to 31^st Oct, 2020)

 (Recent update: On account of the Covid-19 situation , the government in a press conference dated May 13, 2020 announced that the income tax return (ITR) filing deadline for FY 2019-20 for all persons has been extended  from July 31, 2020 & October 31,2020, 2020 to November 30, 2020 and tax audit report due date  from September 30, 2020 to  October 31, 2020 )

Now we will understand all the provisions of Sec 44AB wef. AY 2020-21 with the help of a chart as follows

(You may also want to read Sec 44AD AND 44ADA before going through the chart)

For Resident Professionals (Sec 44AB + Sec 44ADA)

1. If total income exceeds basic exemption limit only then tax audit is applicable.

2. The assessee can opt for presumptive taxation u/s 44ADA.

For Business (Sec 44AB + Sec 44AD)

A) For Resident Individual /HUF/Firm (excl LLP) ( i.e. persons to whom Sec 44AD(1) applies)

1. However GST Audit will be applicable if registered under GST (GST Audit threshold limit being Rs 2 crore).

2. If total income exceeds basic exemption limit only then tax audit is applicable

3. Audit will not be applicable since the assessee can go for presumptive taxation scheme u/s 44AD

4. Where a person does not declare profit in accordance with Sec 44AD(1) in any AY (i.e. shows profit less than 8% or 6%) then he cannot claim benefit u/s 44AD(1) for that AY and next 5 AYs. Thus, he has to compulsorily get his accounts audited u/s 44AB(e) for that AY and subsequent 5 AYs if the turnover ≤ 2 crores and Total income > basic exemption limit during such 6 years. (Read Sec 44AD(4) & 44AD(5)).

5. There is some ambiguity in this case. If in this case the aggregate cash receipts and aggregate cash payments do not exceed 5% then the threshold limit will become Rs 5 crores and thus Audit u/s Sec 44AB(a) won’t be applicable. The only option left is to go for audit u/s 44AB(e) which again is a debatable topic. Further some professionals are of an opinion that no audit is required in such a case. Hope this ambiguity is resolved by a clarification soon.

B) For other assessees (i.e. Sec 44AD not applicable)

1. However, GST Audit may be applicable if registered under GST (GST Audit threshold limit being Rs 2 crore).

Recent Update: For businesses with an annual turnover of less than Rs 5 crore, filing of GSTR-9C for FY 2018-19 has been waived off.

​​​​​​​The report of the tax audit conducted by the chartered accountant is to be ​furnished in prescribed form i.e. Form No. 3CB and the prescribed particulars are to be reported in Form No. 3CD.

Persons like company or co-operative society are required to get their accounts audited under their respective laws. According to third proviso to section 44AB, if a person is required by or under any other law to get his accounts audited, then he need not get his accounts audited again to comply with the requirement of section 44AB. Is such a case, it shall be sufficient if such person gets the accounts of such business or profession audited under such other law and obtains the report of the audit as required under such other law and also a report by the chartered accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD. Thus, where audit is done under other law then 3CA plus 3CD is applicable instead of 3CB plus 3CD.

Further, according to section 271B, if any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB or furnish tax audit report​, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:

(a) 0.5% of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such year or years.

(b) Rs. 1,50,000.

However, according to section 271B​, no penalty shall be imposed if reasonable cause for such failure is proved.

Disclaimer: The information contained in this article is intended solely for the dissemination of information and doesn’t aim at soliciting work in any manner. Though meticulous care has been taken but the author assumes no liability in respect of any loss/damage incurred while acting on the basis of information provided. The above article is based on the authors private view. The author shall not be responsible for any extracts or references made. For any queries or suggestions, the author can be reached at [email protected].