Provisions of Sec 44AB under Tax Audit

Sec 44AB states the provisions related to tax audit of certain entities. A tax audit is an independent examination of books of account by a chartered accountant. The chartered accountant conducting tax audit gives his observations, findings and qualifications in form 3CA/ 3CB. The provisions of Sec 44AB are as:

44AB. Every person,

(a) carrying on business shall, if his total sales, turnover or gross receipts, as thecase 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. ofthe 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) 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) ofsection 44ADare 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 its 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 :

Provided also that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report by an accountant in the form prescribed under this section.

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 date one month prior to the due date for furnishing the return of income under sub-section (1) of section139.

Assessee required to get accounts audited on Compulsory Basis

The above table shows the different situations under which the books of accounts are to be audited under section 44AB of the Act.

a) Where accounts are audited under companies Act: then it will be sufficient if the accounts are audited under such law before the specified date (30th October) and assessee obtains a report from a chartered accountant in the prescribed form under Income TaxAct.

b) Where accounts are audited under any other provisions of the Income Tax Act 1961: Where a person is required to get his accounts audited under any other law, then it shall be sufficient compliance with the provisions of this section if such person gets the accounts audited under such other law before the specified date and furnish by that date the report of the audit as required under such other law and a further report by an accountant in the form prescribed under thissection.

c) Report of audit of accounts to be furnished under section 44AB.

Rule 6G.

(1) The report of audit of the accounts of a person required to be furnished under section 44AB shall,

(a) in the case of a person who carries on business or profession and who is required by or under any other law to get his accounts audited, be in Form No.3CA:

(b) in the case of a person who carries on business or profession, but not being a person referred to in clause (a), be in FormNo.3CB.

(2) The particulars which are required to be furnished under section 44AB shall be in Form No.3CD.

Tax auditor shall furnish tax audit report online by using his login details in the capacity of 'chartered accountant. Taxpayer shall also add CA details in their login portal. Once audit report is uploaded by tax auditor, same should either be accepted/rejected by taxpayer in their login portal. If rejected for any reason, all the procedures need to be followed again till the audit report is accepted by the taxpayer.

1. How to calculate the gross receipt or turnover?

Applicability of tax audit under section 44AB depends upon gross receipts, sales or turnover of an assessee, so the first and foremost thing is their calculations.

As per 'Guidance Note on Terms Used in Financial Statement' published by the ICAI, the meaning of 'Turnover' shall be the aggregate amount for which sales are affected by an enterprise.

Total Turnover/ Gross Receipts - (Not defined in the Act)- ICAI ―Guidance Note on Terms Used in Financial Statements‖ , the expression ―Sales Turnover‖ (Item 15.01) has been defined.

Significance of word Gross Receipts.

Method of Accounting applicable to Section 44AD. As per this section the assessees have an option to choose either Mercantile or cash method of Accounting.

Total Turnover is the amount received / receivable from clients in respect of sales of Previous Year.

Gross Receipts are the amounts received from clients for the services provided or to be provided and does not include the value of material supplied by the client. Total Turnover/Gross Receipts-ICAI

What are the receipts which forms part of Turnover -

1) GST, excise duty, Cess, and other Levy, if included in the Invoices / bills raised. (Depending on the Method of accounting followed by theassessee)

2) Sales of unusables empties andPackages.

3) Service Charges charged fordelivery

What are the receipts which does not form part of Turnover -

1) Sale of Property, Plant andequipments

2) Advance received from customers, deposits Received or retentionmoney.

3) Any Security, retention or other deposit obtained fromemployees.

4) Interest Income or other similarreceipts

5) Value of Inventory

Transactions of buying and selling units is a speculative activity ( future goods- unascertainable) where no physical delivery is taken or given - the amount of transactions as noted in the contract notes cannot be taken as turnover .

· Turnover in SpeculativeTransactions

The value of the sale transactions of commodity carried out through MCX without taking delivery could not be considered as ―Turnover‖ for the purpose of section 44AB

· Where share broker does not sell goods of its constituents as his own and only charges commission for bringing two parties together to transactions of sale and purchase of shares, such transactions cannot amount to ‗sale, turnover or receipt' of share broker himself within meaning of Sec.44AB.

· Turnover in certain cases

i. KachhaArahtias Vs Pacca Arahtias

Whether in cases where an agent affects sales/turnover on behalf of his principal, such sales/turnover has to be treated as the sales/turnover of the agent for the purpose of section 44AB?

As there is no uniform pattern followed by the commission agents, consignment agents, brokers, kachhaarahtias and paccaarahtias dealing in different commodities in different parts of the country, Board issued a circular- Refer Circular No. 452, dated 17th March- 1986

Kachhaarahtias are concerned, the turnover does not include the sales effected on behalf of the principals and only the gross commission has to be considered for the purpose of section 44AB.

A paccaarahtia raises bill on his own. The relation between him and his constituent is substantially that between the two principals, so the total sales/turnover of the business should be taken into consideration for determining the applicability of the provisions of section 44AB.

ii. Commission earned from Advertising agencywas to be Turnover and not the entire value of service. Sale on principal to principal basis : Gas Cylinders Agency, "the agreement clearly indicated that the appellant was appointed as a distributor on principal to principal basis for sale of gas cylinders to consumers. … Consequently, the sale of gas cylinders was liable to be included on the turnover of the appellant."

iii. Treatment of discounts: Trade discount should be excluded from ‗sales' or ‗turnover' for purpose of qualifying limit u/s. 44AB; that discounts are allowed in sales bills themselves or at the time when payment were made by the parties to the assessee and the discount amounts are properly recorded in the assessee'saccounts.

iv. Receipts from Job Work: It may be noticedt hat "sales","turnover" or "gross receipts" are not words of art used in relation to any individual transaction independently, but have been used as "sales", "turnover" or "gross receipts". The expression 'total' qualifies all the other three expressions viz. 'sales', 'turnover' and 'gross receipts'. So, job work receipts have to be clubbed to arrive the total turnover.

v. Turnover for a chit fund :Subscription amount collected by the foreman of a chit fund from subscribers is on capital account, and thus not part of turnover/ gross receipts/ sales for the purpose of Sec.44AB.

vi. Income of a nursing home, whether professional or business income :Activities of a nursing home constitute business and not profession activities of the nursing home...constitute business activity, and ITAT Rejects Revenue's contention that activities of assessee-firm constitutes a vocation/profession.

vii. Income-tax Act contains section 145A which provides for inclusion of taxes, cess, etc. in the value of sale, purchase and inventory. However, the purpose of this provision is limited to calculation of income taxable under the head 'Profits and Gains from Business or Profession'. Whether this provision can be applied for calculation of 'Turnover' (or sales) for the purpose of Section 44AA, 44AB, 44AD and 44ADA has been a matter of disagreement between the revenue andtaxpayer.

In case of an assessee who has opted for Composition Schemeunder GST Act, the tax is not to be recovered from the customer and it is debited to the Statement of profit & loss as an indirect expense. Thus, amount of GST paid by an assessee should not form part of his gross turnover. In case of other assessees, as GST is charged from the customer and it is recognized separately in the books of accounts, it is not clear whether the amount of GST shall be included in the turnover for the purpose of calculation of taxable income only (as provided by Section 145A) or for every other provision which has a reference to 'turnover'. Unless the CBDT clarifies its stand on this matter, it would be appropriate to ignore the amount of GST while calculating the gross turnover or gross receipts because of followingreasons:

a) Section 145A begins with "For the purpose of determining the income chargeable under the head "Profits and gains of business or profession" which makes this provision inapplicable for otherpurposes.

b) If GST recovered from customer is credited to Current Liability Accounts (Output CGST or Output IGST or Output SGST) and payments to the authority are also debited to the said separate account, these should not form part of turnover shown in profit and loss account.

c) Inclusion of GST in the turnover would have the cascading effect, i.e., presumptive income shall also be computed on the component of GST which is never treated as income of theassessee.

How many tax audit reports a Chartered accountant can Sign? Specified Number of Tax Audit Assignments

The council of Institute of Chartered Accountants of India in its 331st meeting held on 10th to 12th February 2014 has increased number of tax audits to 60 from 45 with effect from 1st April 2014

Tax Audit conducted during the Financial Year

Any No. of Branches, of the same concern - One Tax Audit Assignment Head Office & Branch Offices of a concern - One Tax Audit Assignment Tax Audit u/s 44AD, 44AE, 44BB & 44BBB is excluded from the above limit

Firm of CAs - Each partner 60 Tax Audit Assignments

It is to be noted that a Chartered Accountant in practice can conduct 60 tax audits relating to an assessment year.The ICAI had clarified that audit prescribed under any statute which requires the assessee to furnish an audit report in the form as prescribed under section 44AB of the Income-tax Act, shall not be considered for the purpose of reckoning the specified number of tax audit assignments if the turnover of the auditee is below the turnover limit specified in section 44AB of the Income-tax Act. The ICAI has modified the guidelines on August 23, 2018 to provide that the audits conducted under Section 44AD, 44ADA and 44AE of the Income-tax Act(Presumptive Taxation Schemes) shall not be considered for the purpose of reckoning the 'specified number of tax audit assignments'