Tax Audit u/s 44AB

Let's me first clear, doubts among the professionals when 44AD(4) is applicable when?

First situation:-
example: when subsection 44AD(4) is applicable.
Suppose:
1 year of business having turnover lower than 2 crore, but declared profit above 8 %.
But in 2nd year opt-out from the 44AD provision, hence claimed lower profit opted for 44AB Tax audit
Hence subsection (4) attracted in this case he required to do tax audit and debarred for next 5 years from beneficial for 44AD.

Hence tax audit is applicable for all next 5 AY.

Second situation:- 
BUT subsection (4) not applicable when, never claim benefit of 44AD, and declared profit during the year anything even though loss.
example business turnover less than 1 crore and declared profit 5 lakhs. No question for 44AD.
No audit is required as it doesn't fall in any 5 clauses of sec. 44AB, also 44AD(4) not applicable.
No audit required, but required to maintain books since not claiming 44AD.

Balance and p&L need to fill in ITR 4 but no audit pls.

Tax Audit u/s 44AB is applicable where in cases:-

1. Business turnover exceeds of Rs. 1 crore.

2. Declared net profit below u/s 44AE, 44BB, 44BBB

3. Professional receipt exceeds of Rs. 50 lakhs.

4. Presumptive net profit u/s 44ADA declared below 50%.

5. Opt out within 5 years from the presumptive taxation of option u/s 44AD(4) attracted. 
clause (e)  sec. 44AB. Both condition need to be satisfied
- 44AD(4) is applicable and
- Income above basic limit.

Also incase of:-
Share trading value of turnover delivery base or net difference of FnO, intra day exceeds Rs. 1 crore.

What do you think, about tax audit?

Tax audit is the verification of the books of accounts of an assessee to validate the income tax computation and compliance with the laws of Income Tax. Auditing of books of accounts must be carried out by a chartered accountants.

Due date and penalty:-

The tax audit is a statutory obligation on the part of the taxpayer and is applicable on all cases where the turnover or the gross receipts during the previous year is more than the limit prescribed under section 44AB for the respective assessment year. The due date for filing the tax audit report is 30th September of the assessment year. In case the audit report is not submitted within its due date then the taxpayer is required to pay a penalty of an amount equal to 1.5% of the gross receipts/turnover, however, subject to a maximum fine of Rs. 1.5 lac.

Legal synopsis:-

In case the turnover of the taxpayer (irrespective of its category) is equal to or more than Rs. 1 Crore from the business or Rs. 50 Lac from the income from profession then as per The Income Tax Act, 1961 an audit known as Tax Audit by a practicing chartered accountant (CA) is required to be done under section 44AB. The tax audit report must be filed online at the income tax portal before 30th September of the assessment year.

The tax auditor has to conduct and file the tax audit report directly on the portal of the income tax department, which, however, require the approval of the taxpayer.

No need for tax audit, if Presumptive Taxation Scheme choosen

If a person is enrolled under the presumptive taxation scheme under section 44AD and total sales or turnover is more than Rs. 2 crores, then tax audit would be required. Also, any person enrolled under the presumptive taxation scheme who claims that the profits of the business are lower than the profits calculated in accordance with the presumptive taxation scheme would be required to obtain a tax audit report.

If you are opting for the presumptive scheme, you must-

a. File presumptive scheme for at least 5 years in continuation.

b. If you decide to show and file profits as per regular business (ITR-3) before the end of these 5 years, you will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years.

Please note that 5 years shall be counted starting the year in which you first file usual taxes for such business.

The government is discouraging taxpayers from misusing the scheme and constantly changing their option often. So if you opt for presumptive continue for 5 years and if you want to opt out, you’ll be barred from resuming presumptive for a period of 5 years.

Businesses with turnover up to Rs 2 crores can opt for presumptive taxation scheme.

We’ll quickly list down the features of this scheme-

a. Your turnover must be less than Rs 2 crores.

b. Your NET income shall be considered as 8% of your turnover (net income will be considered 6% in case of digital receipts).

c. You don’t have to maintain accounting records.

d. You don’t have to pay advance tax.

e. You don’t have to get your accounting records audited.

f. You can file your tax return in ITR-4 a much shorter and simpler form than ITR-3.

Professionals have also been added in the ambit of presumptive taxation accordingly gross receipt up to Rs. 50 lakhs, can presume 50% net profit. Newly section 44ADA inserted. However, the time limit of 5 years condition applies only to businesses.

Tax audit applicability in case of shares trading

a. Speculative Business Income:-

Income from intra-day trading is considered as speculation income and taxed as such.

Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vides section 44AB, whether the differences are positive or negative.

b. Non Speculative Business Income:-

1. Income from trading F&O (both intraday and overnight) on all the exchanges is considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of underlying contract. Even though currently almost all equity, currency, & commodity contracts in India are cash settled, but by definition they give rise to giving/taking delivery (there are a few commodity future contracts like gold and almost all agri-commodity contracts with delivery option to it).Income from shorter term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.

2. Profit / Loss in derivatives (futures and options) is treated as non-speculation business even though delivery is not effected in such transactions.

3. Accordingly trading in derivatives including commodity derivatives on a recognized stock exchange will not be considered as a speculative transaction and hence not treated as speculative business. Therefore since these are not considered as speculative business, therefore income from such transactions will be considered as normal business income and loss from such transactions will be considered as normal business loss.

The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.

c. Delivery based transaction Capital Gain/ Business Income:-

Whereas transaction for delivery base the purchase or sale of any commodity including stocks, the total value of the sales is to be considered as turnover.
Thanks & Regards

CA. Ashwani Rastogi

Partner, ARJS & Associates

M.Com, FCA, ACS, FAFD

Chartered Accountants 

​​​011-42137042, +91 9990999281

Office:- 2029, Bank Street, Karol Bagh, 

New Delhi 110005 (India)