Who needs to get their Books of accounts audited under Income Tax Act | Tax audit under Income tax

PDFPrint

Section 44AB of the Income tax act deals with the provision related to Tax audit. There are in all 5 clause under which one might be required to get their books of accounts audited and in this post we shall try to discuss each clause one by one.

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“

Now the first clause deal with conducting 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.

Thus, as per 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.

However, this limit of Rs. 1 crore shall be 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.

Also, 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) is very simple and says 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) deals with some specials 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 clause makes Tax audit applicable for such 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).”

As per the above provision 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.

It is important to note here 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.

Now that we have discussed all 5 clauses of Section 44AB, let’s discuss situations wherein Tax audit under section 44AB won’t be applicable which is as under:

“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”

A person is not required to do Tax audit is he declares profit under section 44AD, 44B or 44BBA or any other provision of presumptive taxation.

Now let’s discuss a few important points and some FAQ related to Tax audit under Income tax act:

1. Does a company or LLP need to do Tax audit if turnover is below Rs. 1 crore or is incurring a loss?

Ans: No A company or LLP is not required to get it’s books of accounts audited if turnover does not exceeds Rs. 1 crore even if the company is declaring loss.

2. An individual who is having first year of business and is incurring loss is required to get his books of accounts audited under section 44AB?

Ans: If the turnover is below the limit of Rs. 1/ 10 crore and if he has never opted for section 44AD then he is not required to get his books of accounts audited under section 44AB.

3. Can a person get his books of accounts audited voluntarily even if his turnover is below the limit?

Ans: As of now there is no provision under Income tax Act wherein a person can get it’s books of accounts audited voluntarily however still they can get their books of accounts checked (audited) by a Chartered Accountant without filing Form 3CD.

4. A person doing intra day trading or F&O in stock market and incurring loss needs to get it’s books of accounts audited under Income tax act to carry forward such losses?

Ans: If a person is having turnover below the limits mentioned under section 44AB(1) i.e. 1/ 10 crore and has not opted for benefits of provision under section 44AD in previous year then that person is not required to get books of accounts audited to carry forward loss.

To read more on how to calculate turnover in relation to intra day trading and F&O trading CLICK HERE.

To know about Tax audit in case of Trust under Income Tax audit CLICK HERE.

If you still have any query Comment below.

Disclaimer: The views presented in the above article are personal views of our team (based on information available on public domain) and has no legal binding. For any legal opinion consult a tax professional.

Contributor on above article:

CA Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with Jain Shrimal & Co. in Jaipur having experience in dealing Assessments, Tax Audit, Tax planning for NRI, Business planning and consultation.
E-mail: canamanmaloo@gmail.com | LinkedIn: Naman Maloo

You can book phone consultation/ assistance online with expert as mentioned below:

Connect with us on: LinkedIn, Telegram, Instagram, Facebook and Youtube for regular Updates.

PDFPrint