Decoding Audit provision u/s 44AB amended by Budget 2020 | New tax audit limit.

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In 2016 it was the first time when confusion was created between presumptive taxation u/s 44AD and Audit u/s 44AB when limit for presumptive taxation was increased from 1 crore to 2 crore without giving corresponding amendment u/s 44AB.

Now in 2019-20, the government has decided to give more and more options to assessee and confuse them. It was first done with options in corporate tax rate u/s 115BAA and 115BAB and now with Budget 2020 more options have been introduced for Individuals and even for audit.

In the Budget Speech it was mentioned that

“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.”

Thus from the above speech it was assumed that the threshold limit has been increased from 1 crore to 5 crore for all the assessee’s. However that’s not how simple it is let’s see what amended was made to the section by Finance Bill, 2020.

“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'”

Now this proviso made the picture a bit clear that a proviso has been inserted containing the condition that if receipts in cash is less than 5% of total receipts and payments in cash is less than 5% of total payments then the turnover limit of Rs. 5 crore would be applicable otherwise the limit for audit would be Rs. 1 crore.

This can be further understood by reading the memorandum for section 44AB which is as under:

“In order to reduce compliance burden on small and medium enterprises, it is proposed to increase the threshold limit for a person carrying on business from one crore rupees to five crore rupees in cases where,-

(i) aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipt; and

(ii) aggregate of all payments in cash during the previous year does not exceed five per cent of such payment.”

Thus, memorandum makes it more clear what is the intention of the lawmaker. However there are still certain queries left:

• What is the definition of receipt in above proviso? Will it consider any incoming amount?
• What is the definition of payments in above proviso? Will it consider any outgoing amount?
• What is the option available to assessee with turnover above Rs. 1 crore and below 2 crore can he file ITR 3 and show any amount of profit if he fulfills 5% condition?
• What will happen with the assessee whose turnover is above Rs. 2 crore but below 5 crore and who says that his cash receipts and cash payments are less than 5% of total? Can he file ITR 3 and show any amount of profit without getting his books of accounts audited. If at the time of scrutiny AO find the amount to be more than 5% will he be liable for penalty for getting his accounts audited.

Keeping in mind above queries it is advisable to get the accounts in case the turnover is above Rs. 1 crore and one is not opting for presumptive taxation as paying fees for audit will obviously be less than penalty for non audit of accounts unless all the transactions are done online and no cash transaction is done which is rare in traditional businesses. Also audit of accounts provide a support in scrutiny assessment cases.

In a nutshell the new provision can be understood as:

If cash receipts/ cash payment less than 5% of total receipts and payments respectively then threshold for audit is 5 crore otherwise the threshold is 1 crore.

This amendment shall be applicable from A.Y. 2020-21. 

Do share your views with regard to this amendment in comments below.

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