Audit not compulsory for businesses with turnover not exceeding Rs. 5 Cr: How to count the limit of 5% limit?

Hon’ble Finance Minister Smt. Nirmala Sitharaman in her Budget Speech-2020 quoted on tax audit as under:

“Currently, businesses having turnover of more than one crore rupees are required to get their books of accounts audited by an accountant. In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, I propose to raise by five times the turnover threshold for audit from the existing ` 1 crore to ` 5 crore. Further, in order to boost less cash economy, I propose that the increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash”.

To give the effect to above, the following part is inserted in the Finance Bill which is produced in verbatim”

In section 44AB of the Income-tax Act,

 

(A) in clause (a)

(i) the word “or” occurring at the end shall be omitted;

 (ii) the following proviso shall be inserted, namely:––

“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) in the Explanation, in clause (ii), after the word “means”, the words “date one month prior to” shall be inserted.

 

 

Contents of the Explanatory Memorandum:

Explanatory memorandum to the Finance Bill while discussion above amendment in the finance Bill has mentioned that clause23 of the Bill seeks to amend section 44AB of the Income-tax Act relating to audit of accounts of certain persons carrying on business or profession.

Clause (a) of the said section provides that every person carrying on business shall get his accounts of any 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 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.

It is proposed to insert a proviso in the said clause so as to provide that in the case of a person whose aggregate of all amount received including amount received for sales, turnover or gross receipts during the previous years, in cash, does not exceed five per cent. of the said amount; and the 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.

Clause (ii) of the Explanation to the said section defines the expression “specified date” in relation to the accounts of the assessee of the previous year relevant to an assessment year as due date for furnishing the return of income under sub-section (1) of section 139.

It is proposed to amend the said clause so as to provide that the specified date will mean one month prior to the due date for furnishing the return of income under sub-section (1) of section 139.

There are few important issues which is worth noting as far as the provisions related to the tax audit limit of Rs. 5 Crore is concerned.

1. Rs. 5 Crore limit is introduced by the FY 2020 and the same is made applicable from the FY 2019-20 & not FY 2020-21. It means that the taxpayers can take the benefit of this new provision from FY 2019-20 itself.
2. The limit of Rs. 5 Cr is for businessmen and not for professionals. In short, professionals cannot take the benefit of Rs. 5 Cr limit of tax audit. The term “business” is defined in section 2(13) of the Act, as under: “Business” includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
3. There is no immunity from GST audit & GSTR 9C would be applicable even in cases where immunity is given under section 44AB for tax audit. The laws are still not synchronized and operates independently.
4.  Section 44AD has not been amended by FA-2020 which means that if the turnover of business is up to Rs. 2 Crore and the profit offered for taxation is less than 6% or 8% then the audit would still be required because of operation of section 44AD read with section 44AB even if the stipulated conditions of 5% of cash turnover is fulfilled by the taxpayers.
5. The benefit of non audit is available to the Company, LLP, AOP, BOI, etc also.

6. It may be noted that the criteria of 5% is linked to the “Total Receipts” or “Total payment” AND not with the TURNOVER.
7. The limit of 5% as referred above as Tax Audit is not applicable, in case of person carrying on business with Turnover up to 5 Crores and Maximum Cash Receipt is not exceeding 5% of aggregate of all the amounts received along with all cash Payment limit of 5% of aggregate of all the payments during the year.
8. An important question emerges, how to compute the limit of 5% as referred above. At the cost of repetition, the  Tax Audit is not applicable, in case of person carrying on business with Turnover up to 5 Crores and Cash Receipt is not exceeding 5% of aggregate of all the amounts received along with all cash Payment limit of 5% of aggregate of all the payments during the year.
9. “Aggregate of All Amount Received”  shall consists of the total receipts which may be in cash or Bank or may even be by journal entries, In short, for computing the total receipts, one will be required to compute the total debit side (ignoring op.bal) or receipt side of the cash book during the year plus total of the debit side (ignoring op.bal) or receipt side of the bank book plus the debit the total of the journal if it is in the nature of the payment from the debtors or from any other persons.
10. “Aggregate of All Amount Paid”shall consists of the total payment be by way of Cash or by way of bank or even by way of the journal entries. In short, for computing the total payment, one will be required to compute the total credit side or payment side of the cash book during the year plus total of credit side (ignoring op.bal) or payment side of the bank book plus the credit side of the total of the journal if it is in the nature of the payment to the creditors or to any other persons.

11. Cash Receipts:
    In normal course, the cash receipt shall consist of
    – recovery from debtors, may be of the current year or earlier years,
    – Cash against sales,
    – Cash as a loan or
    – Cash as an advance
    – Cash by way of capital introduction in case of firm by partners, Proprietor or Shareholder (In my view, the proprietors capital introduced in the business may not be counted for reckoning the limit of 5% as the proprietor and the firm are not different taxable entitles. In cash of firm, AOP, etc, it will also be forming the part of the total receipts) or
    – Cash for any reason whatsoever
    exceeds 5% of the total aggregate receipts of the assessee.

Whether withdrawal from bank can be considered as cash receipt? Certainly not as it is not receipt by the business from outsider.

12. “Cash paymentshall consist of payment of any nature whatsoever be it
    – expenses like freight, salary, office expenses of routine nature
    – expenses of capital nature
    – Loan repayment
    -Withdrawal of capital by the partners of the firm
    – Hand loan to employee, etc
    , the ceiling of 5% of total aggregate payment will cover all.

It means that the receipt or payment in cash should not exceed 5% so as to be outside the net of audit u/s 44AD.  Whether cash deposit in the bank shall be considered as cash payment? Certainly not as it is not payment by the business to the outsiders.

13. What is Turnover for reckoning the limit of Rs. 5 Cr.?
    The important words for proper analysis would be Turnover,  The principles laid down earlier for reckoning the limit of Rs. 2 Cr or Rs. 1 Cr earlier would be applicable here also. The meaning of “Sales Turnover” as given in the “Guidance Note on Terms Used in Financial Statements” published by the ICAI is as under:
    “The aggregate amount for which sales are effected or services rendered by an enterprise. The term `gross turnover’ and `net turnover’ (or `gross sales’ and `net sales’) are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”.  In normal course, the GST would not be forming the part of the sales turnover. Besides this, packing charges, transportation etc normally don’t form the part of the turnover.

14. Ideally speaking, now the accounting software need to be suitably updated so as to generate the report of “total receipts vis a vis cash receipts” and “total payment vis a vis cash payment”

Let us take it lightly. The limit of Rs. 5 Cr is introduced to give the ease of business to the businesses. I believe the provision has been brought to give relief to the businesses but the way the section is drafted, it has complicated the entire process. I strongly believe there can be no good tax without due representation. Law maker need to keep the law in the public domain and should be open for the interaction with the industries, trade & professional associations before making it a law. The discussion could have simplified the law. Ideally, the intended purpose could have been served if the section would have linked the 5% cash receipt or payment with the turnover rather than with the total receipts & total payment.

Hope someone takes my above contents in its true spirits and do the needful.