From Assessment Year 2020-21, the turnover limit, for a person carrying on business, is increased from Rs. 1 Crore to Rs. 5 crore in case when both the cash receipts and payments made during the year does not exceed 5% of total receipts or payments, as the case may be. In other words, more than 95% of the business transactions should be done through banking channels.
Section 44AB requires certain persons having more than the prescribed limit of ‘Turnover” or “'Sales” or ''Gross receipts” from business or profession for compulsory tax audit under the Income Tax Act, 1961 (“Act”). The Tax Audit report is required to be furnished in Form 3CA-3CD or Form 3CB-3CD. For this purpose, one needs to determine and calculate the ‘turnover’ of the business or profession of the assessee. Further various limits of turnover are prescribed in the Act for different assessees. The latest one is added by an amendment by the Finance Act, 2020 to section 44AB.
The Finance Minister while presenting the Union Budget 2020 has stated the reasons for increasing the threshold limit of turnover for tax audit from Rs. 1 crore to Rs. 5crore in the following words-
“Currently, businesses having turnover of more than one crore rupees are required to get their books of accounts audited by an accountant. In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, I propose to raise by five times the turnover threshold for audit from the existing Rs. 1 crore to Rs. 5 crore. Further, in order to boost less cash economy, I propose that the increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash.”
Though the Finance Minister in her Budget Speech referred to the provisions for MSME sectors, the amended provisions are applicable for all the persons carrying on business and is not opting section 44AD.
Introduction
Section 44AB has five clauses (a) to (e). The provisions of each of the five clauses are tabulated below-
Section 44AB provides for a compulsory tax audit of accounts of certain persons carrying on business or profession. It is applicable not only for those assessees who declare income as per normal provisions of the Act after maintaining proper books of account but it also applies to persons declaring their income as per presumptive tax scheme under section 44AD, section 44ADA and others. Tax Audit not only applies to persons having income from business but it also applies to a person having income from profession. The applicability of tax audit is linked to the amount of turnover or sales or gross receipts of the assessee which varies under various circumstances.
Turnover Limit for Tax Audit
Section 44AB provides for various turnover limit for persons having income from business and income from profession.
Section 44AB(a) provides that where the total sales, turnover or gross receipts in the business exceeds Rs. 1 crore in any previous year, it is obligatory for the person carrying on such business to get his accounts audited before the specified date and furnish the report of such audit in the prescribed form by that date.
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Finance Act, 2020 has added an exception to this clause by which the limit of total sales, turnover or gross receipts is increased to Rs. 5 crore in place of Rs. 1 crore. This has been done in order to reduce the compliance burden on small and medium enterprises. However, this increase in the limit of total sales, turnover or gross receipts comes with certain conditions which basically aims to promote digital business transactions. For this purpose, a proviso is added to clause (a) of section 44AB.
This provision shall come into effect from 1st April 2020 or Assessment Year 2020-21 itself.
As stated above, under section 44AB of the Act, every person carrying on business is required to get his accounts audited, if his total sales, turnover or gross receipts, in business exceed or exceeds one crore rupees in any previous year. The proviso increases the threshold limit for a person carrying on business from Rs. 1 crore to Rs. 5 crore in cases where-
(i) the aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipt; and
(ii) the aggregate of all payments in cash during the previous year does not exceed five per cent of such payment.
Therefore, it is not that in all the cases the limit of turnover for the purpose of applicability of tax audit has been increased to Rs. 5 crore. It is only when at least 95% of the business transactions - both the receipts and payment transactions are carried on digitally, the higher turnover limit of Rs. 5 crore shall apply. If the person fails to satisfy the 95% digital transactions condition then the turnover limit of Rs. 1 crore shall apply. Hence in order to avail the benefit of the higher turnover limit of Rs. 5 crore, a person shall not carry his business transactions in cash in excess of 5% of total business receipts as well as payments.
Who shall compute the limit of 5% of cash receipts and payments
Since section 44AB casts an obligation on assessees to obtain a report of the audit in the prescribed form by the ‘accountant’. The term ‘accountant’ means a Chartered Accountant.
However, it is not specified in the proviso to section 44AB(a) regarding who shall certify the 5 percent limit of cash transactions for availing higher turnover limit for tax audit. Neither there is any provision in the statue to furnish any form or declaration from any accountant to compute or calculate the 5% cash limit.
Hence, it can be inferred that the said limit of 5% shall be required to be computed by the assessee himself and not by any accountant. Although he may obtain the services of an ‘accountant’ for determining the eligibility of higher turnover limits.
How to Compute the limit of 5% of receipts and payments in cash
Components of 95% of non-cash receipts and payments
The proviso to section 44AB(a) has used the term ‘cash’. Therefore any receipts or payments made other than cash shall be recognised under this proviso. For example, it shall cover transactions in cheque, net-banking, Debit Card, Credit Card, UPI, wallets, etc which are not in cash. It shall even include transactions in kind i.e barter transactions. Normally, these are called digital transactions.
Section 44AB(a) and the proviso thereto reads as under-
44AB. Every person,—
(a) 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 in any previous year 89:
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 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; or
The above proviso is decoded as under-
The expression “aggregate of all amounts received” denotes the Total Receipts of the assessee in cash and through banking channels. Total receipts invariably include receipt from sales or turnover of the business of the assessee.
The words ‘in cash’ only includes receipts in cash mode only. In other words, the assessee must have received the amount in cash.
The words ‘said amount’ refers to “aggregate of all amounts received” (Total Receipts) and not to the turnover or sales amount.
Similarly, the expression “aggregate of all payments” denotes the Total Payments of the assessee in cash and through banking channels. Similarly. The words ‘said payment’ refers to the total payment which is invariably the “aggregate of all payments”.
In certain provisions, the law has used the words “an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed” and not the ‘cash’. For example, section 44AD has used these words for the lower rate of tax of 6% instead of cash. Therefore, this provision is more liberal since it allows a higher turnover limit of 5 crore if other than cash transactions (receipts and payments) are at least at 95% of total receipts and total payments respectively.
Similarly in different wordings, section 80G provides that "No deduction shall be allowed under this section in respect of donation of any sum exceeding two thousand rupees unless such sum is paid by any mode other than cash."
Hence transactions in the following modes will be regarded as transactions not carried on in cash-
(i) Account Payee Cheques
(ii) Demand Draft/Pay Order
(iii) Credit Card
(iv) Debit Card
(v) Net Banking
(vi) IMPS (Immediate Payment Service)
(vii) UPI (Unified Payment Interface)
(viii) RTGS (Real Time Gross Settlement)
(ix) NEFT (National Electronic Funds Transfer)
(x) BHIM (Bharat Interface for Money) Aadhar Pay
CBDT has notified the 'other electronic mode of payments' by Notification No. 08/2020 dated 29.01.2020.
The limit of 5% receipt in cash or payments in cash is not limited to sale or purchase transactions. It rather covers all receipts and payments in cash including sales and purchases.
In general receipts in cash of the following nature are included-
Receipt on Sale of goods and services
Receipt from debtors for the current year sales/outstanding receivables from earlier years
Sale of fixed assets
Sale of scrap
Receipt of Loans and Advances
Trade advances
Receipt of deposits
Sale of investments
Some typical payments in cash of a business concern included are-
Payments for Purchases
Payment to Creditors for current year purchases/outstanding creditors
Purchase of Fixed Assets and other Capital Expenditure
Payments for salary, electricity, telephone charges, and other revenue expenditure
Payments for Insurance
Repayment of Loans and Advances
Loans given
Trade Advances given
Deposits made, etc.
Issues in computing the limit of 5% cash transactions
Some of the issues in computing the limit of 5% cash transactions (receipts and payments) for the purpose of applicability of higher turnover limit of Rs. 5 crore u/s 44AB are discussed below-
1. Capital Contribution: When an Individual/sole proprietor introduces capital in his business in cash, then the same shall not be included in the total receipts in cash of the assessee. This is for the simple reason that one cannot transact with himself.
However, the notified ITR forms (ITR-3/5/6) do not follow this principle. It requires that all the cash receipt of the business including capital contribution should be considered in determining the 5% cash transactions limit.
In column (a2ii) in sheet named 'Part A- General' ITR-3 for AY 2020-21 requires the following-
If Yes is selected at a2i, whether aggregate of all amounts received including amount received for sales, turnover or gross receipts or on capital account like capital contributions, loans etc. during the previous year, in cash, does not exceed five per cent of said amount
However, in case of partnership firms, the situation is different since a firm is assessed as a separate person under income tax law and is considered distinct from its partners. To clarify, if a firm receives any capital contribution in cash from any partner, it shall be counted towards the limit of 5%.
2. Direct cash deposit into bank account by customers: In this case, it will be included in cash transactions. Even if the assessee debit the bank account in his books, it will be regarded as a cash transaction since the account is ultimately settled in cash.
In the case of Sri Renukeshwara Rice Mill vs. ITO reported in (2005) 278 ITR 77 (Bang.), the ITAT Bangalore held that payment in cash directly in the bank account of payee fulfils the criteria for ensuring the object of introduction of Section 40A(3). This is not a direct payment to the payee but only to the credit of this bank account without the payee actually receiving the cash. Such payment is not in violation of provision of Section 40A(3) and hence no disallowance is called for.
This decision was rendered in the context of violation of and disallowance under section 40A(3) which at that time provides for payment in account payee cheques/drafts with certain exceptions. This decision has a limited applicability. This does not set the principle that such a payment is not a cash transaction.
3. Direct Cash deposit in creditors account: It will be included in computing cash payments of the assessee since the account is ultimately settled in cash.
4. Receipts/Payments in bearer cheques: In case the amount is received by a ‘bearer cheque’ and the same is used for withdrawing cash from the payer’s account, it will amount to a cash transaction.
5. Capital Expenditure: All the payments in cash is included whether it is paid for revenue expenditure or capital expenditure. There is no differentiation provided in the law.
6. Capital Receipt/Exempt Income- All receipts include receipts of capital nature and also the exempt income for eg., Agricultural Income.
7. Adjustment by book entry: In a case where a person is a customer as well as vendor of the assessee. The debtors amount is set-off with the amount payable to the same person/vendor. Since no cash is involved in settling the due amount, this will be considered as non-cash transactions.
8. Cash deposited and Cash Withdrawals from bank account: Cash deposit and the cash withdrawals from the bank account amounts to contra entry or transactions with self and hence are excluded for computing the 5% cash limit.
Thus, any receipt of advance, receipt and repayment of loan, direct and indirect expenses, etc. - every transaction is covered in calculating the limit of 5% transactions in cash.
In order to compute the limit, the assessee should aggregate all the receipts from his cash ledger and bank ledger and then find out the percentage of cash receipts.
Similarly, the assessee should aggregate all the payments from his cash ledger and bank ledger and then find out the percentage of cash payments.
If both the cash receipts and cash payments is 5% or less, he shall get the benefit of higher turnover limit of Rs. 5 crore for tax audit. Otherwise, the limit of turnover for applicability of tax audit shall be Rs. 1 crore.
Points to remember for the 5% cash transactions limit:
1. It should be noted that both the receipts and payments should be within the tolerable limit of 5% to avail the benefit of higher turnover limit of Rs. 5 crore from Rs. 1 crore. This is because the conditions (a) and (b) of the proviso to section 44AB(a) are joined by the word ‘and’ which denotes both the cash receipts and cash payments of the business of the assessee should be within 5%.
2. The limit of 5% cash receipts is not limited to turnover or total sales or gross receipts of the business of the assessee. It covers all the receipts of the business of the assessee-including the sales. Hence, the limit of 5% is on total receipts of the assessee.
3. Similarly, in case of payments, all the payments, whether capital expenditure or revenue expenditure, are required to be considered for determining the limit of 5% in cash. It is not restricted to the payment for the purchases of goods traded only.
Illustration
Let us understand this with the help of the following example.
Mr. Rakesh is a retail trader. His turnover for the financial year 2019-20 and his total cash transactions are given below-
1. Sales is Rs. 3 crore and Rs. 2.95 crore is collected by cheque, debit/credit card. Rs. 0.05 crore is received in cash. His total purchases for the year is Rs. 2.00 crore and paid the entire amount in cheque.
2. During the year he had paid electricity charges of Rs. 7 Lakh in cash, coolie and freight charges of Rs. 4 lakh in cash, shop insurance of Rs. 1 lakh through net banking, salaries to staff of Rs. 3 lakh in cheque, conveyance expenses Rs. 1 lakh in cash and car petrol expenses of Rs. 2 lakh in cash.
3. He has contributed capital of Rs. 5 lakh in cash in his business. He has also received Rs. 5 Lakh in cash on sale of certain old fixed assets. He has also received advances from customers amounting to Rs. 1 lakh in cash and Rs. 9 Lakh in cheque during the year.
4. During the year he has withdrawn cash of Rs. 10 lakh from his bank account and deposited Rs. 15 Lakh into his bank account.
Compute his limit of turnover for the purpose of tax audit u/s 44AB for AY 2020-21.
Total receipts for AY 2020-21:
As stated above, tax audit is applicable if the turnover or total sales exceeds Rs. 1 crore in a financial year. However, if the turnover does not exceed Rs. 5 crore, then tax audit will not apply if the gross receipts in digital modes are at least 95% of total receipts. In this case, the assessee has 96.50% of gross receipts in the digital mode as against 3.50% in cash. Hence, condition one to the proviso to section 44AB(a) is satisfied.
The next condition needs to be checked is the mode of payment in digital or cash mode. Remember, both the conditions need to be satisfied for being eligible for a higher turnover limit of Rs. 50 crore.
Total Payments for AY 2020-21:
Aggregate of payments in digital mode is less than 95% of total payments. The actual digital payments are 93.58% of total payments of the assessee. The cash payments are 6.42% of total payments of the assessee and thus exceeds the limit of 5%. Thus, the assessee fails to comply with the second condition of the proviso to section 44AB(a).
Since Mr Rakesh fails to satisfy both the conditions of the proviso to section 44AB(a), the turnover limit for applicability of tax audit provisions on Mr. Rakesh is 1 crore and not Rs. 5 crore. Since, the turnover for the year 2019-20 is Rs. 3 crore, which is in excess of Rs. 5 crore, he shall be liable to get his accounts audited under section 44AB(a). The higher threshold limit of turnover of Rs. 5 crore will not apply in this case.
The above computation of 5% limit of cash transactions can be done in the following manner also-
Notes:
1. Capital Contribution is not considered.
2. Similarly, cash deposits and withdrawals from his own bank account is not considered.
To whom Turnover limit of Rs. 5 crore shall apply
A person who maintains books of accounts and declares his profit at actuals is required to get his accounts audited if his turnover exceeds Rs. 1 crore during the previous year. However, if his receipts and payments in cash does not exceed 5% of total receipts and total payments then the limit of turnover for mandatory tax audit is Rs. 5 crore from assessment year 2020-21.
This is as per clause (a) of section 44AB. This clause covers only a person carrying on business. Hence, if a person does not carry on business, he will not be eligible for a higher turnover limit of Rs. 5 crore even if his 100% transactions are in non-cash mode. For example, the higher limit of turnover of Rs. 5 crore will not apply to a person carrying on profession. This is because the audit provisions for a person carrying on profession is covered under clause (b) of section 44AB. For such a person, the turnover/gross receipts limit for tax audit is Rs. 50 Lakh even after the amendment by the Finance Act, 2020.
The higher limit of turnover of Rs. 5 crore also will not apply to a person carrying on business but declaring his profit as per section 44AE or section 44BB or section 44BBB 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 in any previous year.
Similarly, a person carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year, the higher turnover limit of Rs. 5 crore will not apply as this is covered by clause (e) of section 44AB. For availing the benefit of section 44AD, the turnover limit is Rs. 2 crore which shall apply even after the amendment by the Finance Act, 2020.
The first proviso to section 44AB states that the provisions of section 44AB shall not apply to a person, who declares profits and gains for the previous year in accordance with the provisions of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed Rs. 2 crore in such previous year.
However, for a person carrying on business and declaring income from business under normal provisions, the turnover limit of Rs. 1 crore is contained in section 44AB(a). Further, there is a limit on the person who can opt for section 44AD being an Individual, HUF and a firm. Only these persons can opt for presumptive taxation income under section 44AD and can declare 8% or 6% of income without maintaining the detailed books of accounts.
A person carrying on profession but is not covered by section 44AA, then he can opt for section 44AD. If such a person does not opt for section 44AD, then as per section 44AB(b), his turnover limit shall be Rs. 50 Lakh and cannot be Rs. 5 crore even if his entire income is in non-cash mode. Section 44AB does make any reference to profession specified or notified under section 44AA. Rather, it covers every profession.
Hence, for the purpose of clarifying the concept of different assessees for determining different limit of turnover of Rs. 1 crore or Rs. 2 crore or Rs. 5 crore, the following cases are tabulated below-
In case of a person who cannot not opt for section 44AD (presumptive taxation scheme), the rules are straight forward.
Confusions and complexities arise when the provisions of section 44AD apply. One should remember that section 44AD is applicable only for an Individual, HUF or a firm (eligible assessee). Others cannot opt for section 44AD.
The turnover limit for opting section 44AD is Rs. 2 crore as per section 44AD. Further, the first proviso to section 44AB states that section 44AB shall not apply to the person, who declares profits and gains for the previous year in accordance with the provisions of section 44AD(1) and his total sales, turnover or gross receipts, as the case may be, in business does not exceed Rs. 2 crore in such previous year.
Therefore if an eligible assessee’s turnover is less than Rs. 1 crore and he opts for section 44AD and declares his income @ 8%/6% of his turnover, no tax audit u/s 44AB is required irrespective of his proportion of cash transactions.
In case, an eligible assessee‘s turnover is less than Rs. 1 crore and he opts for section 44AD but declares his income lower than @ 8%/6% of his turnover, tax audit u/s 44AB is required irrespective of his proportion of cash transactions. This is as per section 44AD(4) read with clause (e) of section 44AB.
In case, an eligible assessee‘s turnover is more than Rs. 1 crore but less than Rs. 2 crore and he opts for section 44AD and declares his income @ 8%/6% of his turnover, no tax audit u/s 44AB is required irrespective of his proportion of cash transactions.
In case, an eligible assessee‘s turnover is more than Rs. 1 crore but less than Rs. 2 crore and he opts for section 44AD but declares his income lower than @ 8%/6% of his turnover, tax audit u/s 44AB is required irrespective of his proportion of cash transactions. This is as per section 44AD(4) read with clause (e) of section 44AB.
Hence there is no change and impact of proportions of cash transactions for an eligible assessee opting section 44AD for turnover upto Rs. 2 crore. The applicability of tax audit in case of a person opting section 44AD is governed by section 44AB(e) and not by section 44AD(a).
Now in a situation where the turnover of an eligible assessee is in between Rs. 1 crore and Rs. 2 crore and his income is less than 8%/6% of turnover and he never opted section 44AD in earlier years and his cash transactions are within 5% of total receipts and total payments respectively, then it is better for him to to go for the normal provisions after complying with the provisions of section 44AA related to maintenance of books of accounts. In this case, he will be out of the scope of tax audit because in this case, he will be governed by section 44AD(a) for which a higher turnover limit of Rs. 5 crore shall apply.
Meaning of Turnover for section 44AB including for higher turnover limit of Rs. 5 Crore
The meaning of the term ‘turnover’ is discussed in brief. The Term ‘Turnover’ has not been defined under the Income Tax Act, 1961.
“Guidance Note on Terms Used in Financial Statements” published by the Institute of Chartered Accountants of India (ICAI), the expression “Sales Turnover” has been defined as under:-
“The aggregate amount for which sales are effected or services rendered by an enterprise. The term `gross turnover’ and `net turnover’ (or `gross sales’ and `net sales’) are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”.
The issue is whether the term ‘turnover’ shall include or exclude indirect taxes like GST, excise duty, custom duty, etc. for purposes of section 44AB needs some discussion.
The “Guidance Note on Tax Audit under section 44AB of the Income Tax act, 1961” issued by the ICAI states as follows-
The term ‘turnover’ for the purposes of section 44AB may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise.
If sales tax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discounts can be deducted from sales but not the commission allowed to third parties.
If, however, the Excise duty and/or sales tax recovered are credited separately to Excise duty or Sales tax Account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover.
Clause (ii) of section 145A states that for the purpose of determining the income chargeable under the head "Profits and gains of business or profession, the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee. Thus section 145A provides for inclusion of GST and other indirect taxes in the amount of sales/turnover. However, this provision is for the purpose of computing the income from business or profession and has limited applicability. This makes section 145A inapplicable for other purposes.
Hence, the guidance given by the ICAI should be adopted for determining the amount of turnover. Indirect taxes should normally not be included to arrive at the turnover limits for the purpose of section 44AB.
Conclusion
In the nutshell, for non-applicability of Tax Audit due to higher turnover limit of Rs. 5 crore under section 44AB(a), a person shall satisfy the following conditions:
1. The person should be carrying on business.
2. The turnover or sales or gross receipts during the previous year should not exceed Rs. 5 crore.
3. Receipts in cash should not exceed 5% of the aggregate of all the amounts received during the year.
4. Payments in cash should not exceed 5% of the aggregate of all the amounts payments during the year.
Update:
Changes in Tax Audit 5% Turnover Limit || Bearer Cheque is a Cash Transaction || Finance Act 2021
Changes in Tax Audit Turnover Limit to Rs. 10 Crore under section 44AB
Further Readings:
Is ITR and Tax Audit Due Date Extended till 31.03.2021
How to report EPF and ESI due date extension in Tax Audit Report for AY 2020-21
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