Naman Shrimal

Tax audit not applicable for Turnover less than 1 crore and net profit less than 8%

Section 44 of Income Tax Act, 1961 essentially deals with sections related to audit, presumptive taxation and special provisions related to computation of income for business purpose. Till FY 2015-16, eligible assesses having turnover less than Rs 1cr and net profit less than 8% cannot were not allowed to avail the presumptive taxation scheme and had to be mandatorily audited by chartered accountant. This article tries to analyse the position brought by amendment to Section 44AB and 44AD by Finance Act, 2016.

Till FY 2015-16, Audit for profit % lower than 8%  in case of individual and partnership firm (not LLP) was mandated by the following sections:

Section 44AB

44AB. Every person,—

[(d)   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 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business 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 :

The above section had following three limbs :

  • Profits & gains u/s 44AD – Eligible business whose turnover and gross receipts is less than Rs 1 crore
  • Claim that such income is lower than the deemed profit i.e. 8%
  • income exceeds the limit over which income is taxable

The tax audit for such entities was also supported by Section 44AD(5) as follows :

(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) 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.

Finance Act, 2016 has brought presumptive taxation to professionals also. The same was incorporated in Section 44AB by replacement of word “business” with “profession”. Post the amendment, the sub-section is as follows :

Section 44AB

44AB. Every person,—

[(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]]

Therefore, now if business has to come under purview of tax audit, it can come only by way of another sub-section being introduced in the act.

Sub-section ( e) was added to Section 44AB which reads as follows :

44AB. Every person,—

[(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 :

So now, audit can only be applicable if provisions of sub0section (4) of Section 44Ad are applicable in case of assesse.

The section 44AD(4) and 44AD(5) ar as follows :

[(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.]

As per Section 44AD(4), tax audit will now be applicable only if the following conditions are met

  • Assesse declares profit for any previous year in accordance with provisions of this section – As this is a new sub-section and no assesse would have declared profit under this section in any previous year.
  • He declares profit for any of the five assessment year succeeding this previous year not in accordance with provision of sub-section (1)e. he shows less than 8% profit in the succeeding years. This condition will also not be followed as it is first year of this section

Therefore, in my view tax audit in case of assesse having turnover less than 1 cr and profit less than 8% the same would not require to be audited for FY 2016-17. This contention is also supported by sub-section 5 which mandates tax audit only conditions u/s 44AD(4) is breached.

There is alternative view that assesse declares profit for any previous year in accordance of this section means section 44AD per se and not the newly inserted 44AD(4). In that case also, if assesse has never filed return u/s 44AD (i.e. higher than 8%) and now showing profit less than 8%, he would not be required to get audited as per Income Tax act. However, in case of newly commenced business the section 44AD(4) will not be breached and the assesse would not be under purview of tax audit.

Even in subsequent years also, if assesse follows the net profit trend it will need not to be get audited under income tax act. Audit will only be mandatory when once return is filed under 44AD and in next five years profit % is lower than the deemed profit.

This is shown as per example:

Financial Year Turnover (lakhs) % Tax audit Applicability
2016-17 90 5 No as per above discussion
2017-18 85 7 Return not filed earlier u/s 44AD and now net profit % less than 8% and therefore there is no breach of section 44AD(4) and so not under purview of tax audit
2018-19 90 7 Return not filed earlier u/s 44AD and now net profit % less than 8% and therefore there is no breach of section 44AD(4) and so not under purview of tax audit
2019-20 80 9 Return now filed u/s 44AD as net profit higher than 8%
2020-21 90 6% Return in any previous year now filed u/s 44AD and return now not filed as per sub-section(1) of 44AD and therefore tax audit will be applicable.
2021-22 80 9% Because of restriction of Section 44AD(4) for further five years, irrespective of net profit % tax audit will be conducted

As per the above analysis, chartered accounts should ascertain the applicability of tax audit in all the relevant cases and Tax audit should be conducted accordingly.

(Author can be reached at Namanshrimal@jainshrimal.com)

Author Bio

Qualification: CA in Practice
Company: Jain Shrimal & Co.
Location: Jaipur, Rajasthan, IN
Member Since: 05 Sep 2017 | Total Posts: 2

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Tags : Audit (426) section 44AB (128) Tax Audit (258) Tax Audit Report (143) tax auditor (86)

24 responses to “No Tax audit for Turnover less than 1 crore & net profit less than 8%”

  1. ASHISH AGARWAL says:

    Last year my client was in audit with more than 1 crore turnover but in current year as there is loss income wll be within exemption limit and turnover too is less than 1 crore.Is he liable for audit??

  2. Jigar Dholakiya says:

    What abt net loss, when turnover is either less than 1 crore or within 1 Cr to 2 Cr. ??

    Whether tax audit applicable wef AY 17-18?

    • Jigar Dholakiya says:

      I think it would not be applicable if the words ‘net profit less than 8%’ includes Net loss as well.

      Correct me if I m wrong…..

  3. BSKRAO says:

    In reality, I am not following presumptive taxation scheme since its inception Sir, rather file return with P&L A/c B/S to establish maintenance of books, the very purpose of introduction of Tax Audit as per Circular No.387 Dt.06.07.1984 (See 1985 152 ITR). If Income-Tax Deptt. challenge this, Section 44AB may be struck down in court of law.

  4. BSKRAO says:

    In reality, I am not following presumptive taxation scheme since its inception Sir, rather file return with P&L A/c B/S to establish maintenance of books, the very purpose of introduction of Tax Audit as per Circular No.387 Dt.06.07.1984 (See 1985 152 ITR)

  5. BSKRAO says:

    There is a view that that benefit of no audit will only be available to those assesse who has not obtained benefit under presumptive taxation in any previous year as section 44AD(4) talks about breach of section once you have taken benefit of the same.

    I support this view of the author

  6. CA BHAVIK SONI says:

    In your example for FY 2019-20, You said that Return now filed u/s 44AD as net profit higher than 8%. BUT ONCE YOU CROSSED THE 8%, YOU ARE NOT ELIGIBLE TO OPT TO FILE RETURN U/S 44AD. Like that way, you will never breach the condition and will never do Tax Audit. Correct me if I am wrong.

  7. Easwaran Trichur says:

    Proprietary CA firm has loss on profession but has taxable income arising from interest/rent etc. Is he liable to Tax Audit. What IT From shall he use for filing return for AY 2017-18?

  8. R.N.Maharwal says:

    Eligible assessee with eligible business, who has not availed u/s 44AD in past have no option except to declare income @ 8% or 6% as the case may be. This is just like indirect tax (Turnover tax) and contitutionally not valid

  9. Sanjeevkumar Kabra says:

    A Partnership Firm is having turnover of say Rs. 30.00 Lakhs and Book Profit is say 9% and Net Profit after Salary and Interest to partners is 3% for FY 2016-17. Please let me know shall I get accounts audited u/s 44AB or can this income treated under Sec 44AD

  10. Narendra01 says:

    Is Tax audit required for an individual whose rental income is more than 1 crore (not business income but rental taxable income)

  11. Imtiyaz says:

    Dear sir
    In case of partnership firm incorporated in FY 2015-16
    In FY 2015-16 return fill with loss of only depreciation and it’s carry forward book of Accounts maintain.
    In FY 2016-17 profit is 2% with turnover 1500000
    Firm is liable to get his account audit in any section of income tax ?

  12. Hardik Mehta says:

    Dear Mr. Naman,

    As per my view, in case profit is shown as per provision of 44AD in FY 2016-17, then only audit is required in subsequent year(s) if profit is less than 8%.

    And also in case profit is less than 8% in FY 2016-17 then also first condition of Section 44AD(4) is breached i.e. profit for any previous year i.e. FY 2016-17 (and not to be assumed as preceding previous year) is not in accordance as per provisions of this section, therefore audit is required in FY 2016-17 as well, as per my view. Please correct if wrong.

    • namanshrimal says:

      First view is correct as per my opinion.
      Second view – all the conditions need to breached in conjugation. When the firm has not taken benefit of 44AD even if profit is less then 8%, it will not be under tax audit.

  13. Rakesh R Methwani says:

    Sir,
    It means, an assesse having T/o of Rs.85.00 Lakhs can declare income/profit @1% or less without undergoing Tax Audit, for the FY 2016-17.

    • namanshrimal says:

      Yes Sir,
      Your understanding is correct, if other conditions are also satisfied.

      • Anwar Shaikh says:

        Yes, I agree that if profit is Rs.99 lacs and net profit is 2% still Tax audit is not applicable, but this is true only if you does not file you ITR using section 44AD.
        And if you does not follow 44AD, it ultimately means you are maintaining books of accounts and AO can cross check your profit %

  14. CA Sandeep Devidan says:

    Sir, please consider that 44AD is deeming fiction created by Law that Profit will deemed to be 8 % , and 44AD(5) was right of rebuttal given to assessee. So now right of Rebutal is withdrawn in the case narrated by you unless it falls with u/s 44AD (4) . Thus the Assessee is having no option of Audit but has to disclose 8%

  15. H R SHENOY says:

    As per your article, in the example given above, for the FY 2021-22 his Turnover is just 80 Lacs and his net profit is 9% even then he has to undergo Tax audit. This may not be the correct position. Because as long as assessee declares net profit of more than 8% and his turnover is less than 1 crore Tax audit is not required, but he will not be exempted from maintaining books of account I feel.

    • namanshrimal says:

      Sir, please refer Section 44AD(4) and 44AD(5). Tax audit will be required in this case as once you have breached the condition tax audit will be compulsory for next five years.

  16. narayan says:

    can you explain the below mentioned para of your article

    There is alternative view that assessee declares profit for any previous year in accordance of this section means section 44AD per se and not the newly inserted 44AD(4). In that case also, if assessee has never filed return u/s 44AD (i.e. higher than 8%) and now showing profit less than 8%, he would not be required to get audited as per Income Tax act.

    • namanshrimal says:

      Sir,
      There is a view that that benefit of no audit will only be available to those assesse who has not obtained benefit under presumptive taxation in any previous year as section 44AD(4) talks about breach of section once you have taken benefit of the same.

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