Amendment to section 44AB in Budget 2020

Unnati Sharma | Last updated: 29 December 2020

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Quick Summary

Budget 2020 introduced an amendment to Section 44AB of the Income Tax Act, increasing the threshold for mandatory account audits. For businesses whose cash receipts and payments do not exceed 5% of their total transactions, the audit threshold has been raised from £1 crore to £5 crore. This change aims to reduce compliance burdens for small and medium-sized enterprises. The amendment is generally considered effective from Assessment Year 2021-22, but due to its beneficial nature, it may apply retrospectively from Assessment Year 2020-21.

Section 44AB of the Income Tax Act provides that every person is required to get his accounts audited if his :

(a) total sales, turnover or gross receipts, in business exceed Rs. 1 crore in any previous year, in case of business.
(b) gross receipt in profession exceeds Rs. 50 lakh in any previous year, in case of profession.

The Budget 2020 has come up with the proposal of increasing the threshold, for the applicability of audit, from Rs. 1 crore to Rs. 5 crore for category of businesses whose:

Budget 2020: Section 44AB Audit Threshold Raised

(i) aggregate cash receipts during the previous year does not exceed 5% of total receipts; and
(ii) aggregate cash payments during the previous year does not exceed 5% of total payments.

The intent was to relieve the small and medium enterprises (SME) or prescribed businesses from the compliance burden. Therefore, for businesses not covered under the above category, the threshold of Rs.1 crore remains effective.

Generally, the propositions in the Budget or Finance Bill are effective prospectively. According to this view, it could be taken that this amendment shall take effect from AY 2021-22 i.e., w.e.f. (“with effect from”) 01/04/2021.

The memorandum states the prospective applicability of this amendment from AY 2021-22 with its accord applicability in relation to AY 2020-21.

But since the intent was to benefit the assessee, the rule of beneficial construction comes into picture and it can be said that it shall have retrospective effect i.e., from AY 2020-21.

Moreover, the finance bill 2020 had made it ample clear through clause 1 under chapter I regarding the applicability of sections 2 to 104, unless otherwise mentioned, w.e.f. 01/04/2020 i.e., AY 2020-21.

Therefore, the increased threshold for the purpose of audit in case of prescribed businesses shall be effective from AY 2020-21.

FAQ :

Section 44AB of the Income Tax Act requires individuals to get their accounts audited if their total sales, turnover, or gross receipts in business exceed Rs. 1 crore, or if their gross receipts in profession exceed Rs. 50 lakh in any previous year.

Budget 2020 proposed increasing the audit threshold from Rs. 1 crore to Rs. 5 crore for businesses where aggregate cash receipts and payments do not exceed 5% of total receipts and payments, respectively.

This amendment is intended to relieve small and medium enterprises (SMEs) and other prescribed businesses from compliance burdens.

While generally prospective from AY 2021-22 (01/04/2021), the beneficial nature of the amendment suggests it could be applied retrospectively from AY 2020-21 (01/04/2020).

No, the Rs. 1 crore threshold remains effective for businesses that do not meet the criteria for the increased Rs. 5 crore threshold (i.e., those whose cash transactions exceed 5% of total receipts/payments).

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