Understanding Sec 44AB

Section 44AB reads as under :-

"Audit of accounts of certain persons carrying on business or profession.

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 sixty lakh rupees in any previous year; or

(b) carrying on profession shall, if his gross receipts in profession exceed fifteen lakh rupees in any previous year; or

(c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD or section 44AE or section 44AF, as the case may be, 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, as the case may be, in any previous year, get his accounts of such previous year audited by an accountant

before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed:

Provided that this section shall not apply to the person, who derives income of the nature referred to in section 44B or section 44BB or section 44BBA or section 44BBB, on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later:

Provided further that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report in the form prescribed under this section.

Explanation - For the purposes of this section, -

(i) "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288; 

(ii) "specified date", in relation to the accounts of the previous year relevant to an assessment year means, -

(a) where the assessee is a company, the 30th day of September of the assessment year;

(b) in any other case, the 30th day of September of the assessment year."

1. 
   The44AB section stipulates that every person carrying on business or profession is required to get his accounts audited by a chartered accountant before the "specified date" and furnish by that date the report of such audit, if the total sales, turnover or gross receipts exceed Rs.60 lakhs in the case of business and gross receipts exceed Rs.15 lakhs in the case of profession - vide clauses (a) and (b) of section 44AB.
2. Clause (c) of section 44AB, inserted by the Finance Act 1997 w.e.f. assessment year 1998-99, provides that in the case of an assessee carrying on a business of the nature specified in sections 44AD, 44AE , tax audit will be required, if he claims his income to be lower than the presumptive income deemed under the said sections. Therefore, an assessee will be required to get his accounts audited even if his turnover does not exceed Rs.60 lakhs.
3. Under the provisions of sections 44AD , an assessee can opt to be assessed on presumptive basis, so long as the gross receipts/total turnover from any of the business(es) do not exceed Rs.60 lakhs. Once the total turnover/gross receipts from any such business(es) exceed Rs.60 lakhs, a tax audit will be required under clause (a) of section 44AB. The provisions of sections 44AA and 44AB shall not apply insofar as they relate to the business of plying, hiring or leasing goods carriages as referred to in section 44AE(1) and business as referred to in section 44AD(1). In computing the monetary limits under sections 44AA and 44AB, the turnover/gross receipts, or, as the case may be, the income from the said business shall be excluded.
4. If a person is carrying on business(es), coming within the scope of sections 44AD, 44AE , but he exercises his option given under these sections to get his accounts audited under section 44AB, tax audit requirements would apply, in respect of such business(es) even if the turnover of such business(es) does not exceed Rs.60 lakhs. In the case of a person carrying on businesses covered by section 44AD,44AE and opting for presumptive taxation, tax audit requirement would not apply in respect of such businesses. If such person is carrying on other business(es) not covered by presumptive taxation, tax audit requirements would apply in respect thereof, if the turnover of such business(es), other than the business(es) covered by presumptive taxation thereof, exceed Rs.60 lakhs.
5. The first proviso to section 44AB stipulates that the provisions of that section will not be applicable to a person who derives income of the nature referred to in sections 44B, 44BB, 44BBA or 44BBB. Where the assessee is carrying on any one or more of the businesses specified in section 44B or section 44BB or section 44BBA or section 44BBB referred to in the first proviso to section 44AB, the sales/turnover/gross receipts from such businesses shall not be included in the total sales/turnover/gross receipts for determining the applicability of section 44AB.
6. A question may arise in the case of an assessee who is eligible to claim deductions under sections 80HH, 80HHA, 80HHC, 80HHD, 80HHE,80HHF, 80-I or 80-IA etc., as to whether it will be necessary for him to get separate audit reports/certificates under these sections in addition to an audit report under section 44AB. The requirement of section 44AB is a general requirement covering the overall position of the accounts of the assessee. This applies to the consolidated accounts of the assessee for the relevant previous year covering the results of all the units owned by the assessee whether situated at one place or at different places. Therefore, when the turnover of all the units put together exceed the prescribed limits, the assessee will have to get the audit report under section 44AB in the prescribed form and separate audit reports in the forms prescribed for different purposes like sections 80HH, 80HHA etc. will have to be further obtained by the assessee to meet the specific requirements of the relevant sections.

Section 44AB defines separate Limit for Business(60lakh) and Profession(15Lakhs) ,so it is essential to understand what is business and what is profession . Few point to resolve this issue has been given here under for your ready reference.

`Profession' and `business' explained

1. The term "business" is defined in section 2(13) of the Act, as under :-"Business" includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.The word `business' is one of wide import and it means activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. The expression "business" does not necessarily mean trade or manufacture only -Barendra Prasad Roy v ITO [1981] 129 ITR 295 (SC).
2. Section 2(36) of the Act defines profession to include vocation.Profession is a word of wide import and includes "vocation" which is only a way of living. - CIT v. Ram Kripal Tripathi [1980] 125 ITR 408 (All).
3. Whether a particular activity can be classified as `business' or `profession' will depend on the facts and circumstances of each case. The expression "profession" involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale, of commodities. - CIT Vs. Manmohan Das (Deceased) [1966] 59 ITR 699 (SC). 

The following have been listed out as professions in section 44AA and notified thereunder (Notifications No. SO-17(E) dated 12.1.77 and No.SO 2675 dated 25.9.1992):

1. Accountancy
2.  Architectural
3. Authorised Representative
4.  Company Secretary
5.  Engineering
6.  Film Artists/Actors, Cameraman, Director, Singer, Story-writer,etc.
7.  Interior Decoration
8.  Legal
9.  Medical
10.  Technical Consultancy

The following activities have been held to be business :-

1.  Advertising agent 
2.  Clearing, forwarding and shipping agents - CIT v. Jeevanlal Lallubhai & Co. [1994] 206 ITR 548 (Bom).
3. Couriers
4.  Insurance agent 
5. Nursing home
6.  Stock and share broking and dealing in shares and securities -CIT v. Lallubhai Nagardas & Sons [1993] 204 ITR 93 (Bom).
7. Travel agent. 

1. It will be noted that the provision relating to tax audit applies to every person carrying on business, if his total sales, turnover or gross receipts in business exceed Rs.60 lakhs and to a person carrying on a profession, if his gross receipts from profession exceed Rs.15 lakhs in any previous year. However, the term "sales", "turnover" or "gross  receipts" are not defined in the Act, and therefore the meaning of the aforesaid terms has to be considered for the applicability of the section.
2. In the “Guidance Note on Terms Used in Financial Statements”published by the Institute, the expression “Sales Turnover” (Item 15.01)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”.
3. The Guide to Company Audit issued by the Institute, while discussing “sales”, states as follows : (Page 53 of 4th Edition, 1980)“Total turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sales for each class separately.
• Note(i) The term `turnover' would mean the total sales after deducting therefrom goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any. Adjustments which do not relate to turnover should not be made e.g. writing off bad debts,royalty etc. Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account.”
4. The “Statement on the Amendments to Schedule VI to the Companies Act, 1956” issued by the Institute, (Page 14, 1976 edition) while discussing the disclosure requirements relating to `turnover’ states as follows:-“As regards the value of turnover, a question which may arise is with reference to various extra and ancillary charges. The invoices may involve various extra and ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc. It is suggested that ordinarily the value of turnover should be disclosed exclusive of such ancillary and extra charges, except in those cases where because of the accounting system followed by the company, separate demarcation of such charges is not possible from the accounts or where the company’s billing procedure involves a composite charge inclusive of various services rather than a separate charge for each service.In the case of invoices containing composite charges, it would not ordinarily be proper to attempt a demarcation of ancillary charges on a proportionate or estimated basis. For example, if a company makes a composite charge to its customer, inclusive of freight and despatch, the charge so made should accordingly be treated as part of the turnover for purpose of this section. It would not be proper to reduce the value of the turnover with reference to the approximate value of the service relating to freight and despatch. On the other hand, if the company makes a separate charge for freight and despatch and for other similar services, it would be quite proper to ignore such charges when computing the value of the turnover to be disclosed in the Profit and Loss Account. In other words, the disclosure may well be determined by reference to the company’s invoicing and accounting policy and may thereby vary from company to company. For reasons of consistency as far as possible, a company should adhere to the same basic policy from year to year and if there is any change in the policy the effect of that change may need to be disclosed if it is material, so that a comparison of the turnover figures from year to year does not become misleading.”
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 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 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”. 
6. Considering that the words "Sales", "Turnover" and "Gross receipts" are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the assessee. Section 145(1) provides that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" should be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The method of accounting followed by the assessee is also relevant for the determination of sales, turnover or gross receipts in the light of the above discussion. 

Applying the above generally accepted accounting principles, 

a few typical cases to arrive at Turnover/Sales amount may be considered: 

1. Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can be deducted from the turnover.
2. cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover.
3. Turnover discount is normally allowed to a customer if the sales made to him exceed a particular quantity. This being dependent on the turnover, as per trade practice, it is in the nature of trade discount and should be deducted from the figure of turnover  even if the same is allowed at periodical intervals by separate credit notes.
4. Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. If it is in the nature of commission on sales, the same cannot be deducted from the figure of turnover. 
5. Price of goods returned should be deducted from the figure of turnover even if the returns are from the sales made in the earlier year/s.
6. Sale proceeds of fixed assets would not form part of turnover since these are not held for resale.
7.  Sale proceeds of property held as investment property will not form part of turnover.
8. Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover. 
9. A question may also arise as to whether the sales by a commission agent or by a person on consignment basis forms part of the turnover of the commission agent and/or consignee as the case may be. In such cases, it will be necessary to find out, whether the property in the goods or all significant risks, reward of ownership of goods belongs to the commission agent or the consignee immediately before the transfer by him to third person. If the property in the goods or all significant risks and rewards of ownership of goods continue to belong to the principal, the relevant sale price shall not form part of the sales/turnover of the commission agent and/or the consignee as the case may be. If, however, the property in the goods, significant risks and reward of ownership belongs to the commission agent and/or the consignee, as the case may be, the sale price received/receivable by him shall form part of his sales/turnover.
10. In this context, it would be useful to refer to the CBDT Circular No.452 dated 17th March, 1986, where the Board has clarified the question of applicability of section 44AB in the cases of Commission Agents, Arhatias, etc.
11.  Share brokers, on purchasing securities on behalf of their customers, do not get them transferred in their names but deliver them to the customers who get them transferred in their names. The same is true in case of sales also. The share broker holds the delivery merely on behalf of his customer. The property in goods does not get transferred to the share brokers. Only brokerage which is being accounted for in the books of account of share brokers should be taken into account for considering the limits for the purpose of section 44AB. However, in case of transactions entered into by share broker on his personal account, the sale value should also be taken into account for considering the limit for the purpose of section 44AB. The case of a sub-broker is not different from that of a share broker. 

The term "gross receipts" is also not defined in the Act. It will include all receipts whether in cash or in kind arising from carrying on of the business which will normally be assessable as business income under the Act. 

Broadly speaking, the following items of income and/or receipts would be covered by the term "gross receipts in business": 

1. Profits on sale of a licence granted under the Imports (Control)Order, 1955 made under the Imports and Exports (Control) Act,1947;
2.  Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
3.  Any duty of customs or excise re-paid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1995; 
4. The aggregate of gross income by way of interest received by the money lender;
5. Commission, brokerage, service and other incidental charges received in the business of chit funds;
6.  Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, travelling etc.) and if the same is credited to a separate account in the books, only the net surplus on this account should be added to the turnover for the purposes of Section 44AB;
7. The net exchange rate difference on export sales during the year on the basis of the guiding principle explained in (vi) above will have to be added.
8. Hire charges of cold storage; 
9. Liquidated damages;
10. Insurance claims - except for fixed assets; 
11.  Sale proceeds of scrap, wastage etc. unless treated as part of sale or turnover, whether or not credited to miscellaneous income account;
12. Gross receipts including lease rent in the business of operating lease;
13.  Lease rent or interest on financing in the business of finance lease ; and 
14. Hire charges and instalments received in the course of hire purchase.

The following items would not form part of "gross receipts in business"for purposes of section 44AB.

1.  Sale proceeds of fixed assets;
2. Sale proceeds of assets held as investments;
3. Rental income unless the same is assessable as business income;
4. Dividends on shares except in the case of an assessee dealing in shares; 
5. Income by way of interest unless assessable as business income;
6. Reimbursement of customs duty and other charges collected by a clearing agent; 
7. In the case of a recruiting agent, the advertisement charges received by him by way of reimbursement of expenses incurred by him;
8. In the case of a travelling agent, the amount received from the clients for payment to the airlines, railways etc. where such amounts are received by way of reimbursement of expenses incurred on behalf of the client. If, however, the travel agent is conducting a package tour and charges a consolidated sum for transportation, boarding and lodging and other facilities, then the amount received from the members of group tour should form part of gross receipts, and 
9. In the case of an advertising agent, the amount of advertising charges recovered by him from his clients provided these are by way of reimbursement. But if the advertising agent books the advertisement space in bulk and recovers the charges from different clients, the amount received by him from the clients will not be the same as the charges paid by him and in such a case the amount recovered by him will form part of his gross receipts.
10. Thus the principle to be applied is that if the assessee is merely reimbursed for certain expenses incurred, the same will not form part of his gross receipts. But in  the case of charges recovered, which are not by way of reimbursement of the actual expenses incurred, they will form part of his gross receipts.

Other Important points

• Out Of Pocket Expenses included or Not: In the case of a professional, the expression "gross receipts" in profession would include all receipts arising from carrying on of the profession. A question may, however, arise as to whether the out of pocket expenses received by him should form part of his gross receipts for purposes of this section. Normally, in the case of solicitors, advocates or chartered accountants, such out of pocket expenses received in advance are credited in a separate client's account and utilised for making payments for stamp duties, registration fees, counsel's fees, travelling expenses etc. on behalf of the clients. These amounts, if collected separately either in advance or otherwise, should not form part of the "gross receipts". 
• If, however, such out of pocket expenses are not specifically collected but are included/collected by way of a consolidated fee, the whole of the amount so collected shall form part of gross receipts and no adjustment should be made in respect of actual expenses paid by the professional person for and/or on behalf of his clients out of the gross fees so collected. However, the amount received by way of advance for which services are yet to be rendered will not form part of the receipts, as such advances are the liabilities of the assessee and cannot be treated as his receipts till the services are rendered. 
• Carrying on business and engaged in business at the same time: 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, rupees17 lakhs but his total sales, turnover or gross receipts in business are, say, rupees 32 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 15 lakhs. If however, the professional receipts are, say, rupees 14 lakhs and total sales turnover or gross receipts from business are, say, rupees 47 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.
• Carrying on more than on business activities on different or same trade name: It may, however, be noted that 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 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 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.
• Limit is to be assessed each year: It must also be understood that the issue whether the turnover exceeds Rs.60 lakhs in the case of business or the gross receipts exceed Rs.15 lakhs in the case of profession is to be determined in each year independent of the results obtained in the preceding year or years.Further, this section applies only if the turnover exceeds the prescribed limit according to the accounts maintained by the assessee. If the Assessing Officer wants the assessee to get his accounts audited in cases where the figures of turnover as appearing in the books of account of the assessee do not exceed the prescribed limits, he 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.