Prescribed limit to be determined in each year independent of the results obtained in the preceding year

[Answer]

Issue

whether the turnover exceeds Rs.40 lakhs (Rs. 60 lakhs from financial year 2010-11) in the case of business or the gross receipts exceed Rs.10 lakhs(Rs. 15 lakhs from financial year 2010-11) in the case of profession is to be determined in each year independent of the results obtained in the preceding year or years.

This section applies only if the turnover exceeds the prescribed limit according to the accounts maintained by the assessee.

If the Assessing Officer wants assessee to get his accounts audited in cases turnover appearing in the books of account of the assessee do not exceed the prescribed limits, AO has no option but to pass an order under section 142(2A) directing the assessee to get his accounts audited from a particular chartered accountant as may be nominated by the Commissioner of Income-tax or the Chief Commissioner of Income-tax.

[Tax Audit Report]

Question:

In cases where the assessee carries on more than one business activity, what should be taken as the sales, turnover and/or gross receipts for the purpose of determining of limit of audit under section 44AB.

Solution:

In cases where the assessee carries on more than one business activity,the results of all business activities should be clubbed together.
In other words, the aggregate sales, turnover and/or gross receipts of all businesses carried on by an assessee would be taken into consideration in determining whether the limit of Rs.60 lakhs as laid down in this section has been exceeded or not.

However, where the business is covered by section 44B or 44BB or 44BBA or 44BBB, turnover of such business shall be excluded.

Similarly when the business is covered by sections 44AD, 44AE and 44AF and the assessee opts to be assessed under the respective sections on presumptive basis,
the turnover thereof shall be excluded. So far as a partnership firm is concerned, each firm is an independent assessee for purposes of Income-tax Act.

Therefore, the figures of sales of each firm though having common partners will have to be considered separately for purposes of determining whether or not the accounts of such firm are required to be audited for purposes of section 44AB.

[GJAFCA]

A question may arise in the case of an assessee carrying on business and at the same time engaged in a profession as to what are the limits applicable to him under section 44AB for getting the accounts audited. In such a case if his professional receipts are, say, rupees twelve lakhs but his total sales, turnover or gross receipts in business are, say, rupees twenty two lakhs, it will be necessary for him to get his accounts of the profession and also the accounts of the business audited because the gross receipts from the profession exceed the limit of rupees ten lakhs if however professional receipts are, say, rupees seven lakhs and total sales turnover or gross receipts from business are, say, rupees thirty four lakhs it will not be necessary for him to get his accounts audited under the above section, because his gross receipts from the profession as well as total sales, turnover or gross receipts from the business are below the prescribed limits. (The view as per guidance note issued by ICAI)

[GJAFCA]

The above view of ICAI appears to be sound as far as ‘sales’/‘turnover’ is concerned. However, it appears that the above view, insofar as it relates to ‘gross receipts’, is contrary to ITAT’s decision in Dy. CIT v. Gopal Krishan Builders [2004] 91 ITD 124 (Lucknow) (SMC). In that case, the Tribunal happened to consider the expression “total sales, turnover or gross receipts”.

Hence it would be advisable and safe to get the accounts audited even if the sales is Rs. 32 lac and the professional income is Rs. 9 lac as the aggregate of the two comes to Rs. 41 lac.

[GJAFCA]

Yes, it would be included to ascertain the limit. See Bajrang Oil Mills Vs. ITO 2007 (Raj)

[GJAFCA]

It was held in the case of Brij lal Goyal Vs. ACIT [2004] 88 ITD 413 (delhi) that the sales surrendred during search can not be clubbed for the purpose of section 44AB.

Assessee disclosed his turnover for relevant assessment years as less than Rs. 40 lakhs - However, documents seized from assessee’s premises during search proceedings revealed that assessee had carried out additional sales of more than Rs. 53 lakhs during relevant assessment year which were not recorded in regular books of account - Taking into account said additional sales, aggregate turnover of assessee exceeded Rs. 40 lakhs, and, therefore, Assessing Officer imposed penalty for not getting accounts audited in terms of section 44AB - Whether merely because assessee accepted additional sales for purpose of assessment of relevant year on basis of entries in seized documents, same would not constitute accounts of assessee maintained in regular course of business and on that basis alone liability could not be fastened on assessee by holding him to have committed default.

[GJAFCA]

As per 5.5. The Statement on the Manufacturing and Other Companies (Auditors' Report) Order, 1988 issued by the Institute in May 1989, while discussing the term ‘turnover’ in paragraph 41(c) states as follows:

“The term ‘turnover’ for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise. If salestax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discount 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. However, sales of scrap shown separately under the heading miscellaneous income’ will have to be included in turnover”.

But in the view of moderator, keeping in view the provisions of section 145A of the Income Tax Act, 1961, the excise duty, sales tax and vat should be added to the sales to ascertain the turnover for the purpose of section 44AB.

[GJAFCA]

No. Sales tax and excise duty are treated as part of turnover as per section 145A of the Income Tax Act hence are treated part of income first and allowed as expenses even if not routed through profit & loss account. But service tax is not treated part of turnover in terms of section 145A

But in case of composite contract where sales tax/vat as well as service tax is charged, it would be wise to add the service tax also for ascertaining the turnover for the purpose of section 44AB.

[gopalji]

If an assessee maintains the combined books of account for the business eligible for presumptive taxation like section 44AD or 44AF as well as other business not eligible for presumptive taxation, then it would not be possible to excercise the option of presumptive taxation since the expenses can not be ascertained seperately. Hence the turnover of all the business though otherwise eligible for 44AD or 44AF etc, would be combined for the purpose of ascetaining the limit of Rs. 40 lakhs.

[gopalji]

The term sale has been defined by various states for the purpose of sales tax or VAT but the same may not be hold good in the context of section 44AB. For example sale of car (fixed assets) is treated as sales for the purpose of sales tax/vat in various states but the sale consideration of car can not be clubbed in the turnover or sales in this context as these are the deeming provisions only which can not alter the basic principles of accounting.