The Finance Act, 2021 has increased the threshold limit of turnover for tax audit u/s 44AB from Rs. 5 crores to Rs. 10 crores where cash transactions do not exceed 5% of total cash transactions. It is further clarified that transactions settled through non-account payee cheques shall be treated as cash transactions for the purpose of computing the threshold limit of 95% digital transactions.
The Finance Bill, 2021 as passed by the Lok Sabha, proposed to insert a new second proviso to section 44AB(a) that for computation of the threshold limit of turnover Rs. 10 crores, a receipt or payment transaction through a non-account payee cheque or a non-account payee bank draft shall be deemed to be a cash receipt or a cash payment respectively. Thus, the same shall be included while computing the 5% cash transaction turnover limit under section 44AB(a).
While presenting the Union Budget 2021, Finance Minister Nirmala Sitharaman announced major relief for persons who are subject to tax audit under the Income Tax Act, 1961 (“Act”). In order to incentivise digital transactions and to reduce the burden of compliance of small and medium enterprises, Finance Bill, 2021 proposed to change and increase the turnover threshold limit from Rs. 5 crore to Rs. 10 crore for the applicability of tax audit under section 44AB of the Act provided at least 95% transactions are done digitally.
Every person carrying on business or profession is required to get his accounts audited by an accountant and is required to furnish Tax Audit Report in Form 3CA-CD or Form No. 3CB-3CD if his total sales/turnover/gross receipts exceed Rs. 1 crore.
Finance Act, 2020 has increased the turnover limit from 1 crore to Rs. 5 crore for a person carrying on business, subject to a condition that cash receipts and cash payments during the year do not exceed 5% of the total receipts/payments.
The Finance Bill 2021 as introduced in the Lok Sabha on 1-2-2021 proposed to further increase this limit from Rs. 5 crore to Rs. 10 crore.
Accordingly, any person carrying on business shall now not be required to get his accounts audited by an accountant only if his total sales/turnover/gross receipts do not exceed Rs. 10 crore and cash receipts and cash payments during the year do not exceed 5% of total receipts/payments.
The margin of 5% in cash transactions is required to be computed by the assessee himself. No audit report or certificate is required to be taken by the assessee from any CA in this regard.
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.
In computing the turnover limit of 5% in cash, the law states that the aggregate of all receipts in cash and aggregate of all payments in cash shall not exceed 5% of total receipts and payments.
From this provision, this is not clear whether cash includes bearer/crossed cheque or not. In other words, if a transaction is carried out through a non-account payee cheque or non-account payee draft, whether the same shall be considered as a cash transaction or a cheque transaction for computing the 5% turnover limit.
Finance Bill, 2021 as passed by the Lok Sabha on 23-03-2021 has clarified the position. A new proviso is proposed to be added to section 44AB to provide that any payment or receipt by a cheque drawn on a bank or by a bank draft, which is not an account payee cheque or draft, shall be deemed to be the payment or receipt in cash. In other words, if any transaction is carried on through a bearer cheque/bearer draft or crossed cheque/draft, the same will be considered as a cash transaction.
The text of the new second proviso to section 44AB(a) as proposed by the Finance Bill, 2021 (as passed by Lok Sabha) is reproduced below-
“Provided further that for the purposes of this clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash.”.’.
Applicability: This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22. Thus, The higher limit of turnover will take effect from FY 2020-21 itself.
Issues after the proposed amendment related to a transaction by an account payee cheque/draft for turnover limit u/s 44AB(a)
Readers are aware that it is not specified in the proviso to section 44AB(a) regarding who shall certify the 5 per cent limit of cash transactions for availing a higher turnover limit for tax audit. Neither there is any provision in the statute to furnish any form or declaration from an 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.
The newly added proviso has in fact curtailed the operation of the higher turnover limit of Rs. 10 crore. The new second proviso to Section 44AB(a) clearly states that any receipt or payment carried on or settled through a non-account payee cheque or draft then the same shall be considered as cash transactions. This will lead to an increase in the cash transactions threshold limit of Rs. 5 crore. Thus, even though bearer or crossed cheques are transactions in cheques, these are to be treated as cash transactions for computing the higher threshold limit of Rs. 10 crore.
This will lead to a situation where the assessee has to prove that the transactions are indeed carried on through account payee cheques. In the case of RTGS, NEFT or other digital modes of receipts or payments, there will not be any problem in proving that those transactions are carried on digitally in non-cash mode.
The problem will be there in case of transactions carried on through cheques. Both the bearer/crossed and account payee cheques will be reflected as ‘cheque transactions’ in the bank statements. Thus it will not be possible for the assessee to prove that such cheque transactions are indeed account-payee cheque. Remember, one needs to prove it for both the receipts of cheques and payments by cheques.
In case the assessee fails to prove that the payments and receipts are through account payee cheques and if the turnover of the assessee exceeds Rs. 1 crore but does not exceed Rs. 10 crore then such an assessee may be liable to penalty under section 271B for failure to get the accounts audited or failure to furnish a report of audit as required under section 44AB
One needs to keep documentary evidence like a copy of cheques received and paid to prove that the same is settled through account payee cheques. Above this, a certificate from the bank may be obtained to prove that the transactions are in fact settled in account payee cheque and not by any bearer or crossed cheques.
In certain cases, one may find getting the accounts audited under section 44AB much easier than not going for tax audit despite turnover up to Rs. 10 crore.
Tax Planning for the extended time limit for filing of income tax return: In case the turnover exceeds Rs. 1 crore but is up to Rs. 10 crore, one can use the present provisions as a tax planning tool for enjoying the higher time limit for filing of the income tax return.
As per section 139, the due date to file the return of income in case of a non-corporate assessee viz., an individual, HUF, a firm is 31st July of the assessment year where the person is not subject to tax audit provisions under section 44AB.
In case such a non-corporate assessee viz., an individual, HUF, a firm is subject to tax audit u/s 44AB, the due date to file the return is 31st October of the assessment year. However, the audit report is required to be filed one month before the due date to file the return of income i.e by 30th September of the assessment year.
Thus by getting the accounts audited, the assessee will get rid of the problem of proving the transactions being settled in account payee cheque.
This is illustrated with the following example.
Example: Mr. Rakesh is carrying on business and his turnover the FY 2020-21 is Rs. 9 crore. More than 90% of transactions are done through account payee cheques and 7% of the transactions are settled through RTGS/NEFT. The remaining 3% of the transactions are in cash mode.
Mr. Rakesh is in dilemma whether he should go for the tax audit or not for the AY 2021-22.
Since Mr. Rakesh’s turnover is more than Rs. 1 crore, he is liable for compulsory tax audit under section 44AB(a). However, since his turnover does not exceed Rs. 10 crore and his more than 95% receipts and payments transactions are in the non-cash mode, thus, as per the proviso to section 44ABA(a), the tax audit is not compulsory.
However, he has to prove that transactions settled through account payee cheques are indeed account payee cheques and not bearer or crossed cheques.
Further, in case he does not opt for the tax audit, his due date to file the return of income shall be 31st July 2021.
In case he opts for the tax audit, he can absolve himself from the hassle of proving the transactions being settled by account payee cheques. Further, he will get the benefit of an extended due date for filing of return of income to 31st October 2021.
Read Also:
CBDT Changes Form 3CD from AY 2021-22 || Allows Revised Tax Audit Report
Changes in Tax Audit Turnover Limit to Rs. 10 Crore under section 44AB: Budget 2021
Changes in Tax Audit Turnover Limit under section 44AB-Budget 2020
5% Cash Limit of Receipts and Payments for Tax Audit-Section 44AB
0 Comments