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)

Tax Audit Limit for Business Rs. 2 Crore & for Profession Rs. 1 Crore

Author Bio

Qualification: CA in Practice
Company: Jain Shrimal & Co.
Location: Jaipur, Rajasthan, IN
Member Since: 05 Sep 2017 | Total Posts: 3

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54 Comments

  1. MANISH JAIN says:

    my turnover is 3.8cr i have maintained all books of account uptodate, but i dont want to go for tax audit. what ITR i have to file and how so that my file not comes under TAX AUDIT. kindly suggest

  2. Bichitra Nanda kund says:

    My turnover is 90 lakh. I have maintained books of accounts and all rdceipts in digitally. Can I show my profits less tha 6% . Please suggest

  3. Anbalagan Narayanasamy says:

    Respected Sir,
    Our Turn over is above 1 crore and net profit is more than 8 % for the financial year 2018-19 . We are file Tax audit report is must or not

    1. Arjav mehta says:

      No you are not required for tax audit if your turnover does not exceed rs 2 cr . You should declare at least 6 % profit if entire sale is through bank channel or 8% otherwise.

  4. Hari J says:

    I lost my job in FY 2018-19. However, received kind of severance package and outstanding salary (+ leave accruals), a total gross amount of little over 10L. I started to invest money in equities with a long-term view. But then I wanted to try option trading so did just one transaction in Mar 2019 (I didn’t know about taxation complications back then just thought it would be considered as STCG/STCL) paying a premium of ~ 15,000 and lost the entire amount. Now my broker has reported it as 0 profit and turnover of RS 15000 under FNO section. Also, I had received ~ Rs 3000 on a buyback offer. Now this is reported as STCG under equity section by my broker.
    With all discussions around taxation w.r.t trading I believe I would have to file ITR3 or ITR4 for 2019-20 AY. Still confused on tax audit part and, also, I have no clue about book of accounts since all purchase (equity/FNO) details are being maintained in brokerage platform.
    Please let me know if 1) audit is applicable for me? 2) What would be the content/documents that would qualify as book if accounts? I can prepare/maintain one. 3) I had only filed ITR1 all along and need advise on filing best ITR option: ITR2, ITR3 or ITR4 in my case.
    Response would be greatly appreciated.

  5. Murtaza says:

    Turover of Partnership firm is less than 1cr and net profit is less than 8% in FY 2018-19. In FY 2017-18 also it was same but assessee had got tax audit done and then filed the returns. So now whehter in FY 2018-19 he has to get tax audit done or not???
    Please reply

    1. Arjav mehta says:

      If you are never opted for 44AD (presumptive 8% income) then you are not required for audit even if your income is lees than 8% and turnover is lesser than 1 cr.

  6. Mr.KRISHNE GOWDA C says:

    Any decided Case Laws are available to prove that Maintenance of books NOT required where
    1. Assessee is Individual business man.
    2. For the AY. 2016-17.
    3. Assessee declares in under sec. 44AD.
    4. Declares lower than 8%.
    5. Total Income is Loss.
    Kindly get me some case(s).

  7. CA Mahendra says:

    If turnover more than 1 crore then audit is applicable irrespective of profit. if turnover below 1 crore and profit showing less than 8% then audit is applicable…
    Ok dear friend any problem u can contact on 7721083703

  8. INDER JIT SEHGAL says:

    Sir, my pension income is below taxable income,
    in share market I have suffered losses in trading (F&O)
    My CA is pressing for Tax Audit.
    As per your guidance Tax Audit is not required.
    Please code authority/section in short to convince him.

  9. Nitin Borkar says:

    I have salary income of 8 lakhs and paid tax on it but i also have loss on account of fno trading, and Intra day trading as well as short term loss of approx 4.5 lakhs do i need tax audit?

  10. Gagan bansal says:

    Dear all
    My prop. Firm f.y 2017-18 turnover is 75 lac and net profit is 4 lac
    Last year my net income is 8% and not required audit but f.y 2017-18 net profit below 8 %
    My question is require tax audit or not in f.y 2017-18

  11. Hitesh says:

    I have few questions for specifiing intraday specultation profit in ITR3.(Taxable slab: 30%)
    Intraday Turnover : 40,000 approx
    Profit : 3000
    brokerage + STT + other taxes : 1500
    1. What will be the taxable amount for this.
    2. Where should we show the intrday speculation profit. Which section should I use from P&L sheet for this.
    3. I assume, audit is not required in this case, then Do i need to update it in Balance Sheet No Account Case. If Yes then what values to be mention.

    Please help

  12. Shivam Gupta says:

    A firm having gross receipts 70 lakhs and profit below 8% opt Section 44AA. do the firm liable for tax audit?

    As under 44AB, Firm who opt section 44AA liable for audit, if their turnover exceeds 1 cr.

  13. Hitesh says:

    I am a salaried person with CTC as 15 Lakh, Also doing trading in all segments (Intraday,delivery and FnO frequently).
    As per my brokers tax report, my total turnover is approx 40 Lakhs and toal P/L is (-2,62,000 Rs) means the total profit is in negative and less then 8% of
    total turnover.
    My question : Is Audit mandatory for me with ITR3 or just ITR2 will be ok as I dont have any profit as such which I can show in as business income. Please update

  14. Chandrashekhar B. Prabhumirashi says:

    Sir

    In case of one of my clients, F. Year 2017-18 is its first Financial Year of carrying out Partnership Business. During this F. Year, it has recorded Sales Turnover of Rs.12.81 Lakhs and the Net Profit of Rs.0.81 Lakhs after Partner’s remuneration of Rs.0.33 Lakhs.

    Now my query is that this firm is required to carry out Audit only because their Net Profit is below 8%?

    Can u please help me out in the above situation?

    Further can I ask my client to go for presumptive scheme as this F. Year i.e. 2018-19, business will not go beyond Rs.1.00 Crore?

    Waiting for your quick response with brief comments.

    1. Y K MISHRA says:

      Audit u/s 44AB is required because in case of partnership firm your clients income is exceeding the basic exemption limit. because in case of partnership firm you r required to pay tax even where firms income is Rs 1000/- only.

  15. Subhash Chand says:

    Dear Naman Sir,

    Is opinions reached to the Law?

    What is the final Conclusion?

    Below 1Crore and Profit Less than 8%… Audit required or not?

  16. SS says:

    Sir my annual turnover for F.Y.2016-2017 is Rs.20,39,000/- and i declared net profit 3%. Mine is partnership firm. Whether I am liable for Tax audit or not ?

  17. Raja says:

    sales turnover 50,00,000
    Expenses 47,50,000
    net profit 2,50,000

    individual required to get his accounts audited as per sec 44AB ? is net profit less than 8%
    and also maintain books of accounts.
    Please tell me audit is applicable or not in this case

  18. CA. DARSHAN SONI says:

    Dear Sir,
    As per my understanding, You have elaborated in detail and not given the conclusion in proper manner.

    Simple In Nutshell, below points to be considered. Please correct me if I am wrong.

    1. Applicable to business only and not to professionals, that If you declare profit @ 8% or more in one year and next year if you get the books audited. Then next 5 years of Audit, you have to get the books of accounts audited even if your income exceeds the threshold limit andhave profit more than 8%.

  19. 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??

    1. 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…..

  20. 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.

  21. 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)

  22. 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

  23. 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.

  24. 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?

  25. 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

  26. 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

  27. 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 ?

  28. 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.

    1. 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.

  29. 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.

      1. 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 %

    1. Sanjay Kumar Sharma says:

      Our Purchase is Rs, 25,80,000/- & Sale is RS. 35,40,000 Please tell me how many Gross Profit & Net Profit I can take in without Tax Audit Firm for the F/Y 2018-19.

  30. 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%

  31. 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.

    1. 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.

  32. 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.

    1. 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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