Tax Audit & Section under which audit is required: An overview

 

 

As soon as Tax auditor starts with the preparation of the audit, the first formal question at point NO. 8 which is asked is the section under which the audit is done by the auditor. Let us know about all the possible answer to this question. First of all, it is well known fact that the section 44AB of the Income tax act deals with the provision related to Tax audit in the Income Tax Act.

There are total 5 clause under which one might be required to get their books of accounts audited. It may happen that the assessee may fall under one more than one clasue, in such case the taxpayers can select different option in the drop box menu.

The five clauses are as under:

1. Clause (a) of section 44AB

2. Clause (b) of Section 44AB is as under:

3. Clause (c) of Section 44AB is as under:

4. Clause (d) of Section 44AB is as under:

5. Clause (e) of Section 44AB is as under:

Let us know more about each of the 5 clauses:

 

Clause (a) of section 44AB is as under:

“(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:

[Provided further that for the purposes of this clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash,]

this clause shall have effect as if for the words “one crore rupees”, the words “[ten] crore rupees” had been substituted; or“

In short, the first clause provides for tax audit in relation to any person carrying on business and if the turnover or gross receipts from business exceeds Rs. 1 crore. This clause is applicable to all types of entities such as proprietorship, partnership firm, LLP, AOP, BOI etc which carries on business. As per this clause (a) no business is required to get their books of accounts audited under Income tax act if the turnover of their business is below Rs. 1 crore. It may be noted that this limit of Rs. 1 crore has been increased to Rs. 10 crore from FY 2020-21 if the total of amount received or amount paid in cash by such business does not exceed 5% of total receipt or payment respectively. Any amount paid by cheque other than account payee cheque shall also be considered as amount paid in cash.

Clause (b) of Section 44AB is as under:

“(b) carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees in any previous year; or”

Clause (b) provides that any person carrying on profession will be liable for Tax audit if it’s receipts from such profession exceeds Rs. 50 lakh. Section 44AB does not define profession and as per Income tax act section 2(36), Profession includes vocation.

Clause (c) of Section 44AB is as under:

“(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”

Clause (c) provides for presumptive income provisions applying for business related to plying of vehicles, mineral oil business or turnkey projects and such businesses declares their profit lower than the profit ratio or value mentioned in these sections then they are required to get their books of accounts audited.

Clause (d) of Section 44AB is as under:

“(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”

Tax audit under this clause is also applicable on profession but specifically with person who are covered under section 44ADA (i.e. legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or cinematic film artist) and he claims his profit from such profession as lower than the profit deemed under section 44ADA (i.e. minimum 50% of gross receipt) and whose total income exceeds maximum amount not chargeable to tax.

Hence, in our opinion all professionals who are having receipts less than Rs. 50 lakh and who declares profit less than 50% of total receipts needs to compulsorily get their books of accounts audited even if they are maintaining books of accounts and not taking benefit of presumptive taxation.

Clause (e) of Section 44AB is as under:

“(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,”

This is one of the most controversial and wisely used clause now. It is applicable for those person who are liable for Tax audit under sub-section 4 of section 44AD and whose total income exceeds maximum amount not chargeable to tax. Now, person who are covered under sub-section 4 of section 44AD are as under:

“(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).”

In short, this is applicable if a person is liable for audit if a person who had in previous year declared profit in accordance with provision of section 44AD(1) i.e. (i.e. at minimum 6% or 8% of turnover without maintaining books of accounts) and if for any of the next five years if the assessee does not disclose profit as per the provision of section 44AD(1) then the assessee will be liable for getting it’s books of accounts audited under section 44AB. One must carefully note that a person is liable for audit under this clause only if he has declared profit under section 44AD, hence if a person has never opted for declaring profit under section 44AD then even if his profits are not as per provision of section 44AD he won’t be required for tax audit under this clause. There are numerous issue of differential opinion and contrary views as far as this clause is concerned.