The Finance Act, 1984, introduced for the first time the concept of Tax Audit under Income Tax Act for all assessees having turnover or gross receipts exceeding ₹ 40 lakh from F. Y. 1984-85 i.e. A.Y. 1985-86. Over period of years the limit of ₹ 40 lakh has gradually been increased and at present threshold limit is ₹ 1 Crore.

Section 44AB of the Act states that every person carrying on business is required to get his accounts audited if, total sales, turnover or gross receipts in business exceeds one crore rupees in any previous year. In case of a person carrying on profession he is required to get his accounts audited, if his gross receipts in profession exceeds fifty lakh rupees in any previous year.

As per Section 44AB the assessee was required to get his accounts of the previous year audited by an accountant on or before the “specified date” and furnish by that date report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed. It is further provided that the specified date as per Explanation means the due date for furnishing the return of income under sub-section (1) of section 139.

Section 139(1) provides that a person whose accounts are required to be audited under section 44AB, is required to file return of income by 30th September, of the assessment year. While in case of an person who is required to furnish report referred to in section 92E of the act, the return is required to be filed by 30th November of the assessment year.

Similar provision are provided for filing audit report along with return in provisions of section 10, section 10A, section 12A, section 32AB, section 33AB, section 33ABA, section 35D, section 35E, section 44AB, section 44DA, section 50B, section 80-IA, section 80-IB, section 80JJAA, section 92F, section 115JB, section 115JC, section 115VW of the Act.

At present Tax deduction at source and Tax collection at source provisions contained in section 194A, 194C, 194H, 194I and 206C have fasten liability of TDS/TCS on certain categories of person, if the gross receipt or turnover from business or profession carried on by them exceed the monetary limit specified in clause (a) or (b) of section 44AB. Therefore in such cases provisions of TDS/TCS are applicable if the person is covered under section 44AB.

The Finance Bill, 2020 has made amendments in respect of the above provisions.

Proposed amendments

According to the Memorandum explaining the Finance Bill it has been stated that in order to reduce compliance burden on small and medium enterprises it is proposed to increase the threshold limit of total sales, total turnover or gross receipts of a person carrying on business from one crore rupees to five crore rupees provided certain conditions are fulfilled and then he can be out of purview of tax audit.

It is also stated that in order to enable pre-filling of returns in case of person having income from business or profession it is required that tax audit report may be furnished by the person covered under tax audit at least one month prior to the due date of filling of return of income.

This requires amendments in all the sections of the Act which mandates filling of audit reports along with return of income or by the due date of filling of return of income. Thus, provisions of section 10, section 10A, section 12A, section 32AB, section 33AB, section 33ABA, section 35D, section 35E, section 44AB, section 44DA, section 50B, section 80-IA, section 80-IB, section 80JJAA, section 92F, section 115JB, section 115JC, section 115VW of the Act are proposed to amended.

Further, the due date of filling of return for an assessee referred to in clause (a) of Explanation to of sub-section(1) of Section 139 of the Act has been substituted with date of 31st October of the assessment year as against 30th September of the assessment year. However in case of person covered under section 92E (Transfer Pricing) due date of filing return has not been changed but in such cases Tax audit report is required to be obtained by 31st October of the assessment year instead of 30th November of the assessment year..

The new provisions of tax audit and related consequential amendments are discussed as under:

A) The threshold limit in respect of total sales, turnover or gross receipts in business of a person is proposed to be increased from rupees one crore to rupees five crore in order to be out of purview of tax audit under section 44AB. The two conditions have to be satisfied in order to be out of purview of tax audit. The following proviso has been inserted in clause (a) to section 44AB namely:

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 percent 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 percent 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.

Form the plain reading of the proviso the following points emerge:

i) Both the conditions of 5% in cash of receipts and payments are cumulative. A person who satisfies both the conditions will only be out of purview of tax audit.

ii) The condition (a) of proviso stipulate that “all the amounts received” in cash including amount received for sales turnover or gross receipts during the year does not exceed five percent of the said amount. It is pertinent to note that the word mentioned here is all receipts, which will also include receipts other than sales, turnover or gross receipts. The inclusive wording will include amount received in cash of total collection from debtors, sale of capital assets and other receipts. It is a very wide term and includes all types of receipts for calculation of five per cent of cash receipt.

The condition (b) of the proviso stipulate that “all payments” made in cash including amount incurred for expenditure. The payments are not restricted to expenditure but include payments such as made in cash to creditors, purchase of capital asset or any other payment which need not for expenditure. As stated above it is a wider term to be considered while calculating five percent of cash payment.

Between the two conditions the word “and” is used and hence both the conditions are to be satisfied cumulatively to be out of provisions of tax audit.

Hence if both the conditions are satisfied and total sales, turnover or gross receipts in business does not exceed rupees five crore in the previous year than the person will not be required to get his accounts audited under section 44AB.

B) However there is no change in threshold limit in respect of gross receipts in profession. As far as the person who is carrying on profession the limit of gross receipts of rupees fifty lakh remains. A person carrying on profession and having gross receipts of fifty lakh then he will have to get his accounts audited under section 44AB.

C) At present as per S.44AB, the person is required to get his accounts audited by an accountant before the “specified date”. The specified date means the due date of furnishing return of income under sub-section 1 of section 139. As per section 139(1) the due date means the 30th September of the assessment year.

The proposed amendment is made in section 44AB so as to specify the due date which is different from the due date of filing the return. The bill provides that due date means date one month prior to the due date of furnishing of return under section 139(1) of the Act. Hence in effect the accounts will be required to be audited one month prior to date of furnishing the return.

Simultaneously Section 139(1) is amendment and it has been provided that due date of filling of return in case of person covered under tax audit will be 31st October of the assessment year. Accordingly now the due date of getting accounts audited and due date of filling of returns covered under tax audit is different namely 30th September for tax audit and 31st October for filling of return. In short compared to earlier provisions there is no change in date of getting accounts audited, but due date of filing the return is extended by one month.

There is no change in due date of filing return in case a person is covered under section 92E of the act namely transfer pricing cases. Due date of filing return in such case remains same namely the 30th November of the assessment year. However considering the proposed change in due of getting account audited prior to one month of due date of filing return of income, in such cases date of getting accounts audited get reduced and now due date of getting accounts audited in cases covered under section 92E will be the 31st October of the assessment year as against 30th November.

Similar provisions in respect of due date of getting accounts audited are amended in section 44AD in cases of presumptive basis of tax and hence the person covered under section 44AD will also have the same due date as specified in section 44AB namely 30th September of the assessment year..

Memorandum to finance bill states this change due of getting account audited will enable the department to send pre-filed return. It seems that this will enable the department to consider certain adjustments before hand on the basis of tax audit report in case of persons having income from business or profession and are covered under tax audit. However there may be cases where certain actions, which might have taken subsequent to the date of tax audit and before filling of the return (say S.43B Payments) in such cases the person, will be required to be make corrections in pre-filed returns and claim the deduction. The person will have to take care such adjustments, if any, to be made before filling the return of income.

D) Considering these amendments a person is not required to get the books of account audited under section 44AB if the aggregate amount of total cash receipts and total cash payments are below five percent of the total aggregate receipts and total payments.

However it is also important to remember that there is no change in section 44AD of the Act in respect of presumptive basis of tax. Therefore such person is not compelled to pay the tax on presumptive basis. Thus the person can declare income as per books of account and is not required to get tax audit report. This seems to be anomaly in the provisions.

E) The amendment relating to extending threshold for getting accounts audited will have consequential effect on TDS/TCS provisions contained in section 194A, section194C, section194H, section 194I and section 206C as these provisions fasten the liability of TDS/TCS on certain categories of person, if the gross receipt or turnover from business or profession carried on by them exceed the monetary limit specified namely rupees one crore in case of business or rupees fifty lakh in case of the profession. Now the limit of getting books of accounts audited in certain category of persons is increased substantially and hence the limit of provisions of TDS/TCS is provided specifically in each of sections separately.

It has now been specifically provided in each of the above sections that the provision TDS/TCS will be applicable in case the turnover is of rupees one crore in the business or professional receipts of rupees fifty lakh in case of the profession, as the case may be. Therefore in such cases if turnover of business exceed one crore or professional receipts exceed rupees fifty lakhs during the financial year immediately preceding the financial year, then the person will be required to deduct TDS or collect TCS. One will be now required to remember the limit as laid down of rupees one crore in business and rupees fifty lakh in profession for the purpose of TDS/TCS.

F) The provisions of section 10, section 10A, section 12A, section 32AB, section 33AB, section 33ABA, section 35D, section 35E, section 44AB, section 44DA, section 50B, section 80-IA, section 80-IB, section 80JJAA, section 92F, section 115JB, section 115JC, section 115VW of the act provides that audit report / tax audit report is required to be filed along with return of income. Now similar provisions are made whereby the person covered under any of the above provision of the section mentioned above will be required to file such report one month prior to due date of filing the return.

Conclusion

The rationalization of the provision of section 44AB along with filing of various audit report and TDS/TCS provisions will usher in to simplification or not is question mark but one will have to vigilant and remember different dates for different provisions.

To summarize the provisions in nut shell,

1) Getting accounts audited under section 44AB and filing of the return are delinked. One month time will be available to file the return after audit of accounts. The date of getting accounts audited remains the same namely 30th September, The due date of filing return of income will be 31st October.

2) Date of filing Transfer Pricing Report under section 92E is 31st October and The due date of filing return of income will be 31st November.

3) The provisions of section 44AD are not amended and in few cases there will be anomaly. The person who otherwise though covered under section 44AD may be able to declare income as per books which may be less than stipulated under section $$AD instead of going for presumptive basis of tax and need not get his accounts audited.

4) The problem of working out 5 percent of all receipts including total sales, turnover or gross receipts and all payments including expenditure will be a challenge. The meaning of all receipts in cash will include amounts received from debtors, loans, sale of fixed assets, etc. and similarly all payments in cash will include amounts paid to debtors, repayment of loans, purchase of assets etc. There is no clarity as to whether deposit / withdrawals by proprietor or partners are to be considered for counting 5 percent One hopes that clarification in this matter in advance would help the tax payer to great extent.

5) Provisions of TDS/TCS in certain categories of the person is delinked with that of tax audit provisions and now turnover limit for persons in business is fixed at rupees one crore and for person in profession rupees fifty lakh.

6) Certain categories of persons who are covered under para F above will be required to file tax audit report/ audit report by 30th September.