Understanding of 44AB Tax Audit

Bharat Paudel

Introduction- The object of Tax audit under section 44AB is only to assist the Assessing Officer in computing the total income of an assessee in accordance with different provisions of the Act. Therefore,

• Even though the income of a person is below the taxable limit, he will have to get his accounts audited and if his turnover in business exceeds the prescribed limit.
• If Assessing Officer wants the assessee to get his accounts audited in cases where the figures of turnover as appearing in the books of account of the assessee do not exceed the prescribed limits, he has no option but to pass an order under section 142(2A) directing the assessee to get his accounts audited from a chartered accountant as may be nominated by the Commissioner of Income-tax or the Chief Commissioner of Income-tax

Hence It must also be understood that the issue whether the turnover/gross receipt exceeds the prescribed limit is to be determined in each year independent of the results obtained in the preceding year or years. Section 44AB related to Tax Audit applies only if turnover/gross receipt exceeds the prescribed limit according to the accounts maintained by the assessee. It would be advisable to maintain basic records to support the turnover/gross receipt for declare audit required or not.

Basics

♠ Tax audit is applicable With Following Conditions:

• Must be a person under Income tax Act
• Must carry on business or profession
• Must maintain books of account
• Object to earn profit or gain
• Profit or gain comparable under Chapter IV
• Income is Taxable or Loss allowable under Act

♣ In the Following Conditions Tax Audit do not apply:

• Entire income exempt under chapter III i.e. section 10
• Agricultural income [sec 10(1)]

Provision of Section 44AB related to Tax Audit

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; 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.

Analysis of Provisions of Tax Audit

♣ Who are required to get their accounts audited?

Every Person

• Individual/Proprietorship
• HUF
• Company
• Partnership Firm
• AOP/BOI
• Local Authority
• Co-operative / Trust
• AJP

♣ As per Guidance Note on Tax Audit Issued By ICAI the following activities have been held to be Business :

(i) Advertising agent

(ii) Clearing, forwarding and shipping agents – CIT v. Jeevanlal Lalloobhai & Co.

(iii) Couriers

(iv) Insurance agent

(v) Nursing home

(vi) Stock and share broking and dealing in shares and securities – CIT v. Lallubhai Nagardas & Sons

(vii) Travel agent.

♣ Turnover

It includes

• Profit on sale of Export License/ Duty Drawback/Cash Assistance
• Gross interest income received by Money lender
• Exchange rate difference on export sales.
• Advance received & forfeited from customers
• Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account

It excludes

• Sale/ Purchase of Fixed Assets
• Sale Proceeds of Assets held as Investments
• Rental Income
• Income by way of Interest unless assessable as business income
• Any expense which is reimbursable to the agent by the client

Nature of Business	Gross Receipts/ Turnover
Selling Agent entitled only for commission	Commission Earned/ Receivable
Selling agent who is vested with the Rights of Property, risk & reward in relation to goods	Sales Price Received/Receivable
Consignment Agent	Commission Earned
Commission Agent a) Pacca Arahtia b) Kaccha Arahtia	Total Sales Commission Earned
Building Contractor	Gross Receipts including value of material supplied
Speculation Business	Net Gain from speculation is considered as Turnover, Since “Actual delivery” of scrips or items is not made. How to Compute Turnover In Case of Future & Options, Speculation for Tax Audit
Money Lending Business	Interest Earned
Chit Fund Business	Commission Income, Brokerage Income, Service Charges
Leasing Business	Gross Receipts including Lease Rent
Share Brokers	Dealing on behalf of customers: Only Brokerage Dealing on Personal Account: Sale Value

 ♣ Circumstances when Tax Audit Applicable

⇒ In case the person is required by or any other law to get his accounts audited

It shall be sufficient compliance with the provisions of this section i.e. such assessee is not required to get his accounts separately audited under this section subject to the following conditions

– The audit under that law must be completed before the specified date i.e. before 30^th day of September of the Relevant assessment year &

– The audit report under that law & an additional tax audit report in the form (3CA/CD) prescribed under this section must be furnished by that date.

Basis	Activity	Limit	Nature of Assessee
			Resident Individual/HUF/Firm		Other
			Total Income up to Basic Exemption Limit	Total Income exceeding to Basic Exemption Limit
Turnover	Business	1crore	Yes	Yes	Yes
Gross Reciept	Profesion	50 Lakhs	Yes	Yes	Yes
Income/Gain	Business 44AE/BB/BBB	Lower than specified	Yes	Yes	No
Income/Gain	Business 44AD	Lower than 8%/6%	No	Yes	No
Income/Gain	Business 44ADA	Lower than 50%	No	Yes	No

(i) Turnover Basis

a. Any Business Turnover > 1 Crore

–  What if Purchase cross limit but not Sales?

It appears from the Chief CIT v. Vijay Maheshwari HUF ruling of the supreme court that it would safe for assessee to get their accounts audited under section 44AB if purchase exceeds prescribed limit although sales might not have exceeded the limit. However A mere dismissal of SLP of The Loardship Mrs. Sujata v. Manohar & D. P. Wadhwa J. J. Without assigning any reason does not mean that the High Court decision is approved on merits so as to be a judicial precedent.

b. Any Profession Gross Receipt > 50 Lakhs (wef A.y 2017-18)-

ii. Profit Basis

c. If showing income below the prescribed in section 44AE/BB/BBB (Specified Business for Specified Assessee)

If 44AE/BB/BBB applicable to Assessee then the provisions of section 44AB (c) requires such an assessee to get his accounts audited  if  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.

d. If showing income below the prescribed in section 44ADA (Any Business for Specified Assessee) and Total Income Exceeds Basic exemption limit

• If 44ADA applicable to Assessee then the provisions of section 44AB(d) requires such an assessee to get his accounts audited if  he has claimed his income to be lower than the profits or gains so deemed (a sum equal to 50%  of the total gross receipt is deemed as income) to be the profits and gains of his business and his total income exceeds the maximum amount not chargeable to tax.
• Assesee whose is resident and engaged in the profession referred to in Section 44AA(1) can opt for section 44ADA.

e. If showing income below the prescribed in section 44AD (Any Business for Specified Assessee) and Total Income Exceeds Basic exemption limit

• If 44AD applicable to Assessee then the provisions of section 44AB(e) requires such an assessee to get his accounts audited if  he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business and his total income exceeds the maximum amount not chargeable to tax.
• However if the total turnover exceeds Rs 2 crore in any previous year , in case of the assessee declaring income u/s 44AD ,the assessee is required to get his accounts Audited U/s 44AB (wef A.Y 2017-18).
• Under this 44AD the assessee can claim the income to be 8% of total turnover/or gross receipt received during the previous year. However, wef A.Y 2017-18, the total income shall be 6% 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 during the previous year or before the due date of submission of return u/s 139(1) specified in sub-section

Eligible Assessee

Resident Individual, HUF & Partnership Firm (not being Limited Liablity Partnership)

Non Eligible Business/ Profession

(A) Profession as per 44AA(1)

The following have been listed out as professions in section 44AA read with Rule 6F and other professions notified

(i) Accountancy

(ii) Architectural

(iii) Authorised Representative

(iv) Company Secretary

(v) Engineering

(vi) Film Artists/Actors, Cameraman, Director including an assistant director; a music director, including an assistant music director, an art director, including an assistant art director; a dance director, including an assistant dance director; Singer, Story-writer, a screen-play writer, a dialogue writer; editor, , lyricist and dress designer .

(vii) Interior Decoration

(viii) Legal

(ix) Medical

(x) Technical Consultancy

(xi) Information Technology

(A)  Commission Brokerage Income

(B)  Agency Business

(C)  Business of 44AE

• When income is taxable at the rate of 8%/6% Assessee is not under any obligation to explain individual entry of cash deposit in his bank, unless such entry has nexus with the gross receipt (CIT v. Surinder Pal Anand)
• No addition can be made on the ground that assessee was not able to explain discrepancies in account books (CIT v. Nitin Soni)
• AO has no power to assess anything in excess of return income if returned income is more than 8% of Total Sales Consideration(Abhi Developers v. ITO)
• Disallowance Provision u/s 40, 40A& 43B are not applicable (ITO v. Mark Construction)
• As per Guidance Note on Tax Audit Issued By ICAI    

When a person is carrying on	Turnover
More than one Business/Profession	The total turnover shall be clubbed together & tax audit shall be conducted if the Total Turnover exceeds 1 crores or 50 lakhs as the case may be
Business as well as profession	Total Gross receipts (Business & Profession) shall be checked

♣ Multiple Business

The Aggregate ( Clubbing) sales, turnover and/or gross receipts of all Businesses ( ACIT v Dr K Satish Shetty) carried on by an assessee would be taken into consideration in determining whether the prescribed limit as laid down in section 44AB has been exceeded or not.

– Turnover is Assessee wise rather than Business wise

– Turnover of All Business Activities carried on by assessee is aggregated other than presumptive(44AD/AE/BB/BBB)

– Circumstances in which the tax audit report can be revised

• Change in law with retrospective effect;
• Change in interpretation of law, i.e. CBDT Circulars, Notifications, Judgements;
• Revision in accounts of the company after the adoption in the AGM
• Tax auditors Duty

• • To specify the reason for such revision
  • To mention the fact in the audit report that it is the Revised Audit Report

♣ Income from PGBP & other

The Language of Section 44AB is Clear. The requirement of compulsory audit is only in respect of Business carried on by the person and not in respect of his income from other sources.The audit report is required only in respect of books of account pertaining to the business.(Gai construction v. State of Maharashtra)

♣ Tax Audit applicable income v. Not applicable income

There may be another circumstance where an assessee has mixed of different source & Head of Income amenable to taxation and also get audit meanwhile one PAN accept only one ITR/Audit Report so separate form/Report cannot be file. Hence, The tax auditor auditing the books of account etc. relating to business covered by the provisions relating to Tax Audit should sufficiently indicate in his report ( For 3CA/CB/CD) that his audit report only relate to the business covered by the provisions relating to Tax Audit and his audit report does not relate to business/ other income head/source assessable under the normal provisions of the Act. Tax Audit – Section 44AB – Applicability, Due Date, Forms & Penalty

Author can be reached at +91-9871571335

(Republished With Amendments)

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