Applicability of Tax Audit under section 44AB or 44AD or 44ADA
Audit of accounts of certain persons carrying on business or profession:
Section 44AB, initially introduced by Finance Minister Shri Pranav Mukharji in the Finance Act, 1984, taking effect from April 1, 1985. There was a lot of opposition to this section at the time, from business people, professionals, and especially Tax Advocates and Tax Practitioners, because auditing books of account is required of every person carrying on business if his total sales, turnover, or gross receipts, as the case may be, in business exceeds or exceeds rupees Forty Lakhs, and for professional persons whose gross receipts exceed or exceed rupees Forty Lakhs. Many representations were made, and even writ petitions were filed in various High Courts, however, section 44AB remained unchanged, and no revisions were made until March 31, 2010.
With effect from April 1, 2011, the ceiling on gross turnover for businesses has increased to rupees sixty lakhs, and the limit for professionals has increased to rupees fifteen lakhs.
With effect from April 1, 2017, the ceiling on gross turnover for businesses has been raised to Rs. One Crore, while the maximum for professionals has been raised to Rs. Twenty-five Lakhs.
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With effect from April 1, 2020, i.e. the Assessment Year 2020-21 and onwards, a proviso to section 44AB(a) stipulates that in the instance of a person whose:
- 1. The total amount received in cash during the preceding year, including sums received for sales, turnover, or gross receipts, does not exceed 5% of the amount; and
- 2. The total of all payments made in cash during the preceding year, including payments for costs, does not exceed 5% of the amount,
Then such a person is exempt from having their accounts audited if their total sales, turnover, or gross receipts do not exceed Rs. 5 crores, as opposed to Rs. 1 crore.
Similarly, if a person’s gross profits in a profession exceed Rs. 50,00,000 in any prior year, he or she must have his or her accounts audited [Section 44AB(b)]. From the foregoing, we can deduce that the time limit for having books of accounts audited varies depending on the type of business or profession.
Assume that in the previous year, certain individuals were involved in both business and profession at the same time. Now, in the instance of an Assessee who is both a business owner and a professional, the question may arise as to what the limit is for obtaining books of accounts audited under section 44AB.
It is preferable to first discuss the boundaries set in the case of a business, and then the limits set in the case of a profession.
u/s 44AB/44AD Business Turnover:
Less than Rs. 1,00,00,000 in turnover, sales, or gross receipts Although section 44AB does not apply, he may elect to use section 44AD and declare revenue according to his books of account. This option should be chosen for the next five years. Section 44AB applies if income exceeds the maximum taxable amount.
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If your turnover, sales, or gross receipts exceed Rs. 1,00,00,000, you have the choice of opting for section 44AB or section 44AD. These provisions do not apply if total sales, turnover, or gross receipts and payments for expenditure during the previous year do not exceed 5% of total sales, turnover, or gross receipts and payments for expenditure during the preceding year, as the case may be.
Gross receipts for professionals u/s 44AB/44ADA
In reference to the assessment year 2017-18 and on thereafter, Section 44ADA provides for the computation of profit and gain on profession on a presumptive basis. In the case of an assessee who is a resident of India and who is engaged in a profession referred to in section 44AA(1) and whose total gross receipt does not exceed Rs. 50,00,000 in a previous year, a sum equal to 50% of the assessee’s total gross receipt in the previous year on account of such profession, or, as the case may be, a sum higher than aforesaid sum claiming to have been earned by the assessee.
Please keep in mind that if an assessee’s professional receipts are Rs. 60,00,000 and his total sales, turnover, or gross receipts in business are Rs. 35,00,000, he will need to have his books of accounts audited for both his profession and his business because the gross receipts from the profession exceed the Rs. 50,00,000 limit.
If, on the other hand, the professional receipts are Rs. 27,00,000 and the total sales turnover or gross receipts from the business are Rs. 95,00,000, he will not need to have his books of accounts audited under the above section because his gross professional receipts, as well as total sales, turnover, or gross receipts from the above business, are less than the prescribed limit of Rs. 1,00,00,000.
There are various types of business professions that are related to each other.
- A doctor who does medicine while also selling pharmaceuticals;
- An architect who creates building designs and sells construction materials.
- A teacher who gives lessons as well as publishes and sells books.
