Tax Audit under Income Tax Act after the amendments by Finance Act 2020

Section 44AB, contains provisions of the "TAX AUDIT" under the Income Tax Act 1961. "TAX AUDIT" is an examination of books of accounts of the assessee. The examination is conducted to ensure that the assessee has properly maintained the books of accounts and other records and the tax liability has been computed properly.

Tax Auditor, while issuing Tax Audit Report, ensures correctness of the books of accounts and reports any discrepancy/observation/non-compliance of the act and verifies that assessee has computed his taxable income as per the provisions of Act.

In this article, we will discuss the amendments made by Finance Act 2020 in section 44AB (i.e. Income Tax Audit) and its related concepts along with the consequential amendments to other sections of the Income Tax Act 1961.

Prior to Finance Act 2020, under section 44AB of the Act, every person carrying business was required to get his accounts audited, if his total sales, turnover or gross receipts from such business exceeds" One Crore Rupees" in any previous year. In case of a person carrying profession, was required to get his accounts audited, if his gross receipt from such profession exceeds " Fifty Lac Rupees" in any previous year.

In order to rationalisation and to reduce compliance burden on small and medium enterprises, Finance Act 2020 has amended the clause (a) of section 44AB,in whichit increased the threshold limit for applicability of Tax Audit, for a person carrying on business and increased it from one crore rupees to five crore rupees, where,-

1) aggregate of all receipts in cash during the previous year does not exceed five percent of total such receipts;and

2) aggregate of all payments in cash during the previous year does not exceed five percent of total such payments.

(Note: Threshold limit be considered 5 crore instead of 1 crore, only and only if both the conditions are fulfilled. That means, cash payments should not exceed 5% of total payments and also cash receipts should not exceed 5% of total receipts)

Let us understand this amendment with the help of few illustrations below:

1) Mr A , has turnover of Rupees 5,20,00,000/-. His cash payments are less than 5% of total payments made during the previous year and total cash receipts are also less than 5% of the total receipts, during the previous year.

In this situation since the turnover is already over 5 crore (i.e 5.20 crore), hence it will not affect the decision of tax audit, whether the cash payments and cash receipts, are less than 5% of total payments and receipts respectively. Hence, in the given situation, Mr A is required to get Tax Audit u/s 44 AB.

2) Mr B , has turnover of Rupees 3,50,00,000/-. His cash payments are less than 5% of total payments made during the previous year and total cash receipts are also less than 5% of the total receipts, during the previous year.

In this situation since the turnover is 3.50 crore, hence in this case we need to check whether the cash payments and cash receipts, both, are less than 5% of total payments and receipts, respectively. Since Mr B's cash payments are less than 5% of total payments made during the previous year and total cash receipts are also less than 5% of the total receipts. Hence, in this situation Mr B is not required to get Tax Audit u/s 44 AB.

3) Taking same illustration 2 above, Mr B , has turnover of Rupees 3,50,00,000/-. His cash payments are less than 5% of total payments made during the previous year but the total cash receipts are not less than 5% of the total receipts, during the previous year.

In this situation since the turnover is 3.50 crore, hence in this case we need to check whether the cash payments and cash receipts, both, are less than 5% of total payments and receipts, respectively. Since Mr B's cash payments are less than 5% of total payments made during the previous year but total cash receipts are not less than 5% of the total receipts. Hence, in this situation Mr B is required to get Tax Audit u/s 44 AB. (both the conditions need to be fulfilled, to apply the threshold limit of 5 crore instead of 1 crore)

4) Mr C, has turnover of Rupees 70,00,000/-. His cash payments are less than 5% of total payments made during the previous year but the total cash receipts are not less than 5% of the total receipts, during the previous year.

In this situation since the turnover is 70 Lac (i.e. below 1 crore), hence Tax audit will not apply and it will not affect the decision, whether the cash payments and cash receipts, are less than 5% of total payments and receipts respectively. In this situation Mr A is not required to get Tax Audit u/s 44 AB.

Now after the amendment made by Finance Act 2020, the section 44AB is enacted as below:

Every person shall get his accounts audited by an accountant (specified u/s 288) and furnish the Audit Report before specified date :-

a) if carrying on business and its total sales, turnover or receipts, as the case may, be exceed or exceeds one crore rupees in any previous year;

Provided that the limit of One Crore Rupees will be substituted by Five Crore Rupees in case where:-

1) aggregate of all amounts "received in cash" including amount received for sales, turnover or gross receipts during the previous year, does not exceed the 5% of the said amount, and;

2) aggregate of all "payment made in cash" including amount incurred for expenditure during the previous year, does not exceed the 5% of the said amount

b) if carrying on profession and its gross receipts in profession exceed Fifty Lac rupees in any previous year;

c) if carrying on business which are covered under section 44AE , 44BB, 44BBB and claimed the income to be lower than the profit or gain deemed to be profit or gain under such sections in any previous year;

d) if carrying on profession which are covered under section 44ADA and claimed the income to be lower than the profit or gain deemed to be profit or gain under such section 44ADA and his total income exceeds maximum amount which is not chargeable to income tax, in any previous year;

e) if carrying on business which are covered under sub-section 4 of section 44AD (Presumptive Income) i.e. who had claimed the income to be lower than the profit or gain deemed to be profit or gain under section 44AD and his total income exceeds maximum amount which is not chargeable to income tax, in any previous year.

Further, to enable and foster "pre-filling" of income tax returns, in case of persons having income from business or profession, it was utmost required to change the due date of furnishing the "Tax Audit Report" at least one month prior to the due date of "Filing of Return of Income".

Therefore, to harmonise the system and to cope up with the difficulties faced, during pre-filling of Income Tax Returns, the Finance Act 2020, has now made the requisite amendments in some other sections, which are described as follows:-

1) Amendment is made to the explanation (ii)of the section 44AB (where the due date to file the Tax Audit Report is mentioned) and now the due date of furnishing the Tax Audit Report has been made as "the date one month prior to the due date of filling of return of income specified under sub-section 1 of section 139." Earlier, the due date to file tax audit report was same as due date of filling of Income Tax Return by the assessee.

In layman terms, we can say that the due date of furnishing of Tax Audit Report is now will be one month prior to the filling of Income Tax Return for those assessees, to whom the tax audit u/s 44AB is applicable.

2) Amendment is made to the explanation (ii)of the section 139(1) (where the due date to file the Income Tax Return is mentioned) and now the due date of furnishing of Income Tax Return is made to 30th Day of September 31st Day of October (earlier which was 30th Day of September) to the following assessees being :-

a) A Company; or

b) A Person (other than Company), whose accounts are required to be audited under the Income Tax Act 1961 or under any other law for the time being in force.

c) A Working Partner of a firm, whose accounts are required to be audited under the Income Tax Act 1961 or under any other law for the time being in force.

(Note 1:- Earlier only working partners of the firms, which were required to be audited under this act or any other law, were allowed to file their Income Tax Returns by 30th September and other (Non-Working) partners of such firms, were required to file their Income Tax Return by 31st July. This amendment has removed the word "working" and curtailed the absurd burden on non-working partners of such firms, to file the Income Tax Return by 31st July. Now, all the partner of such, whether working or non-working, are being allowed to file their Income Tax Returns by 31st October)

(Note 2:- There is no change to the due date of furnishing of Income Tax Return by the other assesees, except above mentioned 3 categories of assessees)

In order, to have a better understanding of above amendments, let's have a quick look at pre-budget and post-budget scenario due to Finance Act 2020:-

Now, due to the above changes made by the Finance Act 2020 and segregating and fixing the due date of filling of Audit Report, one month prior to the filling of Income Tax Return, consequential changes also required the amendments to some other sections of the Act, which are discussed as below:-

1) The provisions ofsection 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 and section 115VW of the Income Tax Act 1961, wherever there was a requirement to file the Tax Audit Report, are now amended and accordingly changes are made to each section, and now specifically mentioned that the due of filling of audit report will be one month prior to the due date of filling of income tax return u/s 139(1) of the Income Tax Act 1961.It is to be noted that the due date of filling of Audit Report, was previously mentioned in these sections was same as due date of filling of Return of Income u/s 139(1) of the Income Tax Act 1961.

2) The amendment of extending threshold limits for getting books of accounts audited, from 1 crore to 5 crore in some cases, will have consequential effect on some specific sections of TDS/TCS provisions contained in sections 194A (TDS on Interest – other than interest on security), 194C ( TDS on payments to contractors), 194H (TDS on commission or brokerage), 194I (TDS on Rent), 194J (TDS on Fees for professional and technical services) and 206C (Tax Collected at Sources).

As these provisions fasten liability of TDS/TCS on certain categories of person, if their gross receipt or turnover, as the case may be , from the business or profession carried on by them exceeds the monetary limit specified in clause (a) or clause (b) of section 44AB.

But by the Finance Act 2020, the monetary limits has categorized as 1 crore and 5 crore (depending upon fulfillment of certain conditions provided). Therefore, it was required to amend these sections 194A, 194C, 194H, 194I, 194J and 206C and provide the specific monetary limit of one crore or fifty lac, as the case may be.

Now it is categorically mentioned in all these sections that the TDS/TCS will required to be deducted, if sales, gross receipts or turnover will exceed, the monetary limit specified in clause (a) or clause (b) of section 44AB of the Act Rupees One Crore in case of the business or Rupees Fifty Lac in case of the profession, as the case may be.

Accordingly, any person carrying business and having sales/ turnover or gross receipts exceeding 1 Crore rupees or any person carrying profession having gross professional receipts exceeding 50 Lac rupees, will have to comply these sections of TDS/ TCS (i.e. 194A, 194C, 194H, 194I, 194J & 206C), irrespective of the fact, whether or not, they are required to get the Tax Audit u/s 44AB.

The above discussed amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the Assessment Year 2021-2022 and subsequent Assessment Years.

(Note: If we read out the Memorandum of Finance Act 2020, It is mentioned under the amendments of Section 44AB, that these amended provisions will be applicable from Assessment Year 2020-2021, which seems to be apparent mistake and look like it mistakenly typed as 2020-2021 instead of 2021-2022. But the same is correctly mentioned as 2021-2022 in the Finance Act 2020)

The author can also be reached at legal.ca.rakesh@gmail.com