Changes in Section 44AB and due date of ITR & Reports

Background

Tax reforms have been high on the agenda of the Central Government in the last couple of years. Increasing the tax base, reduction in tax rates for companies without any exemption/ deduction, incentivise the start-ups, single window clearance, etc. have been some of the crucial steps taken by the Government to reduce the tax litigation and create an environment of tax compliant society in India.

In this backdrop, the Finance Minister of India, in the Budget Speech 2020 emphasised on reducing the tax compliance burden in India and boosting India as an attractive destination for foreign investments.

This article analyses the changes proposed in Section 44AB of the Income-tax Act, 1961 (‘the Act’), its impact on various other sections including the due dates of filing the Income-tax returns by the taxpayers.

Section 44AB of the Act, as it stands presently, reads as under:

Further, the Explanation below sub-section (2) of Section 288 defines “accountant” to mean a chartered accountant within the meaning of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of Section 6 of that Act subject to certain exclusions as contained therein.

The above section stipulates that the following persons are required to get their accounts compulsorily audited by a chartered accountant:

• A person carrying on business if the total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds ₹ 1 crore in any previous year.
• A person carrying on profession, if his gross receipts in profession exceeds ₹ 50 lakhs in any previous year.
• A person covered under section 44AE (Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages) or 44BB (Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils) or 44BBB (Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects) of the Act if such person claims that the profits and gains from the business are lower than the profits and gains computed under these sections.
• A person covered under section 44ADA (Special provision for computing profits and gains of profession on presumptive basis) if such person claims that the profits and gains from the profession are lower than the profits and gains computed in accordance with the provisions of Section 44ADA and if his income exceeds the maximum amount which is not chargeable to tax in any previous year.
• A person covered under section 44AD(4) if his total income exceeds the maximum amount which is not chargeable to income-tax in any previous year.

Further, Rule 6G of the Income-tax Rules, 1961 (the Rules) prescribes that the audit report under section 44AB shall be furnished in the following forms:

• In the case of a person who carries on business or profession and who is required by or under any law to get this accounts audited – The audit report should be submitted in Form 3CA.
• In the case of a person who carries on business or profession and who is not required to get his accounts audited under any other law – the audit report should be submitted in Form 3CB.

In both the cases provided above, the prescribed particulars are required to be furnished in Form 3CD.

Legislative History and Background of Tax Audit

The provisions of Section 44AB of the Act were introduced for the first time in the Finance Bill, 1984. While introducing such provisions, the then Finance Minister of India, Mr. Pranab Mukherjee in his speech said,

Further as per the Memorandum to the Finance Bill, 1984, it was stated that:

Tax audit report has been one of the most important aspects of the tax system and it provides a basic framework for preparation of the Income-tax return for the assessees under the provisions of the Act. At the same time, it places a tremendous responsibility on the members of our profession in carrying out the audit and in furnishing the audit report setting forth the prescribed particulars.

When the requirement for preparation of tax audit report was introduced in year 1984, most of the accounting systems were manual and hence, the third party audit was introduced to ensure the authenticity of the books of accounts and records thereto.

To cope with the evolving situations and provide robust information framework, Tax audit report has also undergone various changes over the years.

With the development of accounting systems (like introduction of new systems like ERP, Tally, etc.), access to global markets through liberalised policies and increased focus on accounting of the business/ profession, there was an expectation from the Industry to relax the provisions of Section 44AB of the Act. The presence of presumptive taxation provisions and self-declaration mechanisms in place also added more fuel to this expectation. Presently, the books of accounts/various ledgers are mostly kept in computerised form and the third party information is also available in digitalised/e-formats.

Various other factors which may have contributed to this expectation can be summarised as under:

• With increased focus on accountability and correct reporting, the Act provides enough penal consequences for the assessees who do not comply with the provisions of the Act or submit the false or wrong information.
• There is enough duplication regarding the various information which are required to be furnished in tax audit report as well as in Income-tax return forms (ITR). Hence, tax audit report may be an additional compliance burden on the small assessees.
• There are stringent governance norms under various other laws in force (e.g. the Companies Act, 2013, SEBI regulations, etc.) for the assessee to prepare their books of accounts which represent true and fair view.

Changes Proposed in Section 44AB and Connected Provisions

To overcome this compliance burden, the Finance Bill, 2020 has proposed following changes in Section 44AB of the Act and other connected provisions:

• The threshold limit for furnishing tax audit report under section 44AB of the Act for person carrying on business has been increased to ₹ 5 crores from ₹ 1 crores where:

Thus, if cash payment or cash receipts for a year are up to ₹ 25 lakhs with total turnover or sales or gross receipt from the business upto ₹ 5 crores, there shall be no requirement to get the accounts audited under Section 44AB and accordingly, there shall be no requirement to furnish the Tax Audit report.

Changes in the due date for furnishing various reports (including tax audit report):

Presently, the due date for filing the tax audit report under section 44AB of the Act and various other reports (e.g. Form 3CEB – Transfer pricing certificate, Form 29B- MAT Certificate, certificates required under sections 10A, 12A, 50B, 80-IA, 80-IB etc) for claiming exemption/ deductions under the Act is aligned with the date specified under section 139(1) of the Act for filing the ITR.

In order to enable pre-filled tax return forms to ensure ease of compliance, it has been proposed that in case of persons having income under the head of profits and gains from business and profession, the above mentioned reports shall be furnished by the taxpayers one month prior to the due date of filing the tax return.

The proposed amendments will be effective from 1st April 2020 and will accordingly apply from AY 2020–21 onwards. Consequential amendments have been made in various other Sections i.e. Section 10, Section 10A, Section 12A, Section 32AB, Section 33AB, Section 33ABA, Section 35D, Section 35E, Section 44AB, Section 44AD, Section 50B, Section 80-IA, Section 80-IB, Section 80JJAA, Section 92F, Section 115JB, Section 115JC and Section 115VW of the Act.

Changes in the TDS/ TCS provisions having reference to Section 44AB of the Act:

The amendment relating to increase the threshold to ₹ 5 crores under Section 44AB of the Act for getting the books of accounts audited will also have consequential effect on various TDS/TCS provisions contained in Sections 194A, 194C, 194H, 194I, 194J and 206C as these provisions trigger liability of TDS/TCS on certain categories of persons, if the gross receipt or turnover from the business or profession carried on by them exceed the monetary limit specified in clause (a) or clause (b) of Section 44AB.

Therefore, it has been proposed to amend these sections to include the reference to the monetary limits specified in clause (a) or clause (b) of Section 44AB of the Act to ₹ 1 crore in case of business or ₹ 50 lakhs in case of profession, as the case may be.

Change in the due date for filing the Income-tax return (ITR) – Amendment in Section 139 of the Act:

Presently, the due date for furnishing the tax return:

1. in case of a company; or
2. a person other than the company whose accounts are required to be audited under the Act or under any law for the time being in force; or
3. a working partner of a firm whose accounts are required to be audited under the Act or under any law for the time being in force;

is 30th September of the relevant AY. Further, in case a taxpayer is required to furnish the Transfer pricing report as required under Section 92E, the due date of filing the tax return is 30th November of the relevant AY.

It is proposed to extend the due date for furnishing the tax return from 30th September to 31st October of the relevant AY. It may be noted that there are no changes in due date of filing the ITR if the taxpayer is required to furnish Form 3CEB under Section 92E of the Act.

It is also proposed to remove the distinction between a working and non-working partner of a firm with respect to the due date of filing their personal ITR. The ITR in such case is now proposed to be filed by 31st October of the AY in these cases.

The proposed amendments are effective from 1st April 2020 and will accordingly apply from AY 2020–21 onwards.

Conclusion

While the above amendments are the steps taken in the right direction, it would have far reaching consequences. The requirement to do away from tax audit report for businesses having the total sales, turnover or gross receipts exceeding ₹ 5 crores will entail putting significant efforts on preparation of ITR going forward. This would be the case as the relevant information having bearing on the tax computation (e.g. Section 43B disallowances, provisions related to gratuity, tax depreciation schedule, provision for leave encashment, etc.) will still have to be compiled by the Companies which were earlier covered in the Tax audit reports.

Further, early filing of tax audit reports and other reports/ certificates as required under various provisions of the Act will ensure that the exercise for annual tax compliance season is started early to avoid last minute rush. The businesses/ taxpayers may also like to standardise the various processes related to annual tax return filing to ensure timely compliance.