TAX AUDIT APPLICABILITY from AY 2020-21:

 

 

In Budget 2020, Govt introduces one more slab of turnover of INR 5 Cr for the person, whose CASH RECEIPTS & CASH PAYMENTS does not exceeds 5% of such payments, and straightway exempted such category from Tax Audit.

EXTRACT OF Section 44AB. – Audit of accounts of certain persons carrying on business or profession is mentioned as follows.

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;

from AY 20-21 , Govt. inserted 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. …Applicable from AY 20-21.

(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:

Explanation.—for the purposes of this section,—

(i)   “Accountant” shall have the same meaning as in the Explanation below sub-section (2) of section 288;

(ii)     “specified date”, in relation to the accounts of the assessee of the previous year relevant to an assessment year, means the due date for furnishing the return of income under sub-section (1) of section 139.

From AY 20-21 specified date will mean one month prior to the due date for furnishing the return of income under sub-section (1) of section 139.

It is to be noted that 44AB limit is still 1 crore (except above specified), and 44AD has limit of Rs. 2 crores. Also, in Section – 44AD, which deals with Special provision for computing profits and gains of business on presumptive basis, there is NO CHANGE IN FINANCE BILL, 2020.

Following Chart that covers all possibilities & slabs of TAX AUDIT APPLCIABLITY FROM AY 20-21.

–  For assesse having TO> 2 crores (but below 5 crores and having Cash receipts and cash payments not exceeding 5%), he is NOT liable to Tax Audit. This holds good irrespective of the assessee showing profits up to 6% or 8% as per 44AD or not.

–  For assesse having TO< 2 crores (but having Cash receipts and cash payments not exceeding 5%), he is Liable to Tax Audit, if he does not show profits up to 6% or 8% as per 44AD.

For Example:

(A having TO 2.1 crores but NOT showing profits of 6% or 8% is NOT LIABLE to TAX Audit. A having TO 1.9 crores SHALL be liable to TAX Audit if he does not show Profits of 6% or 8% as per 44AD.)

This anomaly exists with respect to Resident IND/HUF/FIRM, since 44AD is applicable to these entities only. Since, such a situation seems to be illogical and prejudicial to small traders having TO below 2 crores, a notification resolving this issue may be expected from the CBDT in this regard in the near future.

Note: (Applicability of Tax Audit discussed above is only with respect to an assessee carrying on Business. Such analysis made above do not apply to a person engaged in Profession.)

Summary in form of chart:-

 

 

 

Few Important Check Points:

 

While computing whether total cash receipts and payments are less than 5% or more than 5% of the total receipts and payments, following should be taken due care of:

ü  Contra entries to be reduced, both from payment and receipt side of cash ledger.

ü  Also, capital contribution or drawings made by proprietor of firm are to be reduced both from payment and receipt side, as to receive or to get paid, a different person should be there, a mere receipt/payment by self is not a receipt or payment.

ü  Further in case of Salary, interest or profit dist. or capital contribution done by or to partner to/by a partnership firm, same will not be taken while calculating the limit of 5%, as its just a appropriation of profits , there being no employer employee relationship, also, its existence is not treated as separate legal entity.