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Audit of accounts of certain persons carrying on business or profession

  • Monday, 25 May 2015 18:24
  • Written by 

The purpose of Tax Audit is to ensure that books of Accounts have been maintained in accordance with the provisions of the Income Tax Act.  Tax Audit also ensures that the Accounts are properly being presented to the Assessing Officers when called for. However there are cases when person is required to get his accounts audited even though his turnover is less than Rs. 1 Crore in case of business and less than Rs. 25 lakhs in case of profession. Through this article, I am trying to put light on the provisions of Income Tax Act in regard to persons required to get their books of accounts audited.  

 

Tax Audit Conditions 

As per section 44AB- Every person  

1 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. ; or 

2 Carrying on profession shall, if his gross receipts in profession exceed twenty-five lakh rupees. ; or 

3 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 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business 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 a Chartered Accountant. The due date for filing the Tax Audit Report u/s 44AB is 30th September of the Assessment year. 

 

Analysis  

A person is required to get his books of accounts audited as per provisions of section 44AB if he satisfies any of the following conditions: 

• If the person is carrying on the business and his Total Sales exceeds Rs. 1 Crore. ; or 

 

• If the person is carrying on profession and his Gross Receipts exceed Rs. 25 Lakhs. ; or 

 

• If the person is carrying on business and claims lower profit than the profits and gains deemed under section 44AD. 

 

Now to understand the 3rd limb of analysis we need to read provisions of Section 44AD.

 

As per Sub Section (5) of section 44AD-  

 

Not with standing anything contained in this section.

 

1 an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) of Section 44AD. 

2 whose total income exceeds the maximum amount which is not chargeable to income tax. 

3 shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA. 

4 get them audited and furnish a report of such audit as required under section 44AB.

 

Analysis  

If the assessee claims that his total income is lower than the income deemed under section 44AD and his total income is chargeable to tax, then he shall have to get his accounts audited under section 44AB and furnish the prescribed report within prescribed time. 

 

Thus as per provisions of Section 44AD r/w Section 44AB person who satisfy all of the following conditions is required to get his books of  accounts audited under Section 44AB. 

 

• Person is an eligible assessee. Eligible Assessee means-   An individual , Hindu undivided family ,A partnership firm, but not a limited liability partnership firm. 

who is a resident. 

 

• Person is carrying on an eligible business. Eligible Business means- o Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE. o  whose total turnover or gross receipts in the previous year does not exceed an amount of one crore rupees. 

 

• The profits of an assessee engaged in eligible business under the head ‘Profits and gains from business and profession less than 8% of the total turnover of the assessee i.e. less than the profits deemed under this section. 

• Total Income of person is also more than the maximum amount which is not chargeable to tax. 

 

Below illustration will further clarify the above provisions: 

 

Illustration 1: Mr. A, an eligible assessee is carrying on an eligible business. 

 

CASE 1: 

 

Total Sales: Rs. 70, 00,000 

Expenditure: Rs. 65, 00,000 

Net Profit: Rs. 5, 00,000 

 

Mr. A wants to claim his profit to be Rs 5, 00,000, then he is required to get his accounts audited under section 44AB even though his turnover is less than Rs 1 Crore. As Mr. A satisfies all the following conditions- o Eligible Assessee. o Carrying on Eligible Business. o Profits are less than the 8% of total turnover i.e. less than Rs 5, 60,000. o His total income is more than the maximum amount which is not chargeable to tax i.e. more than Rs 2, 50,000. 

DUE DATE FOR FILING RETURN OF MR. A WILL BE 30TH September. 

CASE 2: 

 

Total Sales: Rs. 70, 00,000 

Expenditure: Rs 62, 00,000 

Net Profit: Rs 8, 00,000 

Mr. A wants to claim his profit to be Rs 8, 00,000, then he is not required to get his accounts audited under section 44AB. As his profits are more than 8% of total turnover. 

DUE DATE FOR FILING RETURN OF MR. A WILL BE 31st July. 

CASE 3: 

 

Total Sales: Rs. 70, 00,000 

Expenditure: Rs 68, 00,000 

Net Profit: Rs 2, 00,000 

 

Mr. A wants to claim his profit to be Rs 2, 00,000, then he is not required to get his accounts audited under section 44AB.Even though his profits are less than 8% of turnover but his total income is also less than the maximum amount not chargeable to tax i.e. less than Rs 2, 50,000. 

 

DUE DATE FOR FILING RETURN OF MR. A WILL BE 31st July. 

 

 

Illustration 2: M/s XYZ a partnership firm is carrying on eligible business. 

 

CASE 1: 

 

Total Sales: Rs. 40, 00,000 

Expenditure: Rs 38, 00,000 

Net Profit: Rs 2, 00,000 

 

M/s XYZ wants to claim its profit to be Rs 2, 00,000 then XYZ is required to get its accounts audited under section 44AB. As M/s XYZ satisfies following conditions- o Eligible Assessee. o Carrying on Eligible Business. 

1 . Profits are less than the 8% of total turnover i.e. less than Rs. 3, 20,000. 

2.  Its total income is more than the maximum amount which is not chargeable to tax i.e. Nil. Since, the firm is taxed at an income starting from Rs. One.  

 

DUE DATE FOR FILING RETURN OF M/s XYZ WILL BE 30TH September. 

 

CASE 2: 

 

Total Sales: Rs. 40, 00,000 

Expenditure: Rs 41, 00,000 

Net loss: Rs 1, 00,000 

 

M/s XYZ wants to claim loss of Rs 1, 00,000 then it is not required to get its accounts audited under section 44AB.Even though its profits are less than 8% of turnover but its total income is also less than the maximum amount not chargeable to tax i.e. Nil. Since, the firm is taxed at an income starting from Rs. One. 

 

DUE DATE FOR FILING RETURN OF M/s XYZ WILL BE 31st July. 

 

Illustration 3: M/s PQR private limited is carrying on eligible business. 

 

CASE 1: 

 

Total Sales: Rs. 50, 00,000 

Expenditure: Rs. 48, 00,000 

Net Profit: Rs. 2, 00,000 

M/s PQR private limited wants to claim its profit to be Rs 2, 00,000, then it is not required to get his accounts audited under section 44AB even though its profits are less than 8% of turnover as company is not an eligible assessee as per section 44AD. 

 

 

CONCLUSION: 

Therefore, in case of eligible assessees (i.e. resident individual, HUF and Partnership Firm) carrying on eligible business having turnover of less than Rs 1 Crore, showing profits from such business less than 8% of turnover(i.e. less than profits deemed u/s 44AD) and is having total income chargeable to tax. Then such a person is required to get his books of accounts audited u/s 44AB. Due date for filing of return in case of such assessee shall be 30th September.   

 

 

 

 

 

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