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Even small size firm are to get its accounts audited if income offered for taxation is less than 8%

TAX TALK-18.10.2017-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

Amendment so as to not allow the deduction towards interest/remuneration to partners from 8% (or 6%) of turnover would defeat the very purpose of providing ease of business option to small firms. It is sure to hamper & carry adverse tax impact for the firms having small turnover/receipts. Smaller size firms would be left with no other options but to get its books of accounts audited if its income is less than 8% (or 6%) of the turnover.

Even small size firm are to get its accounts audited if income offered for taxation is less than 8%

Query 1]
We have 2 small Partnership Firms, one doing trading and other doing profession. Turnover in both the firms is far less than audit limit. Whether for A.Y. 2017-18 audits of all partnerships having even small turnover is compulsory?
[Shreyas V. Moghe-shreyasmoghe45@gmail.com]

Opinion:

There are numerous instances where an attempt to simplify the tax laws & provide ease of doing business ends up with more complicated & cumbersome taxation regime. One such amendment was made by the Finance Act-2016 which has almost imposed a new compliance burden on the small size firm.

Before elaborating upon the above amendment & specific issues raised by you in the query, let us have a general overview of the few audit related important provisions of Income Tax Act.
1.      Under section 44AB, every person, other than those engaged in profession, is compulsorily required to get the books of account audited & upload the tax audit report at the income tax portal if total sales, turnover, gross receipts from business exceed Rs. 1 Cr [2 Cr from Assessment Year 2017-18 for taxpayer’s covered by section 44AD as discussed hereunder]. For professional, the limit is of Rs. 50 Lakh [Rs. 25 Lakh from AY 2013-14 to AY 2016-17].
2.      Under section 44AD, any resident- Individual/HUF/partnership firm (but not LLP) whose total sales, turnover etc doesn’t exceed Rs. 2 Crore, is not required to maintain the books of accounts if they agree to offer at least 8% of the turnover as income. The said rate of 8% rate is reduced to 6% in respect of turnover against which payment is received by an account payee cheque/draft or other ECS mode either in the relevant financial year itself or before the due date of filing the income tax return. However, benefit of section 44AD is not available if the person has (a) Income from Profession (b) Commission Income (c) Agency business income.
3.      Under section 44AE, taxpayer (who may be individual/HUF/AOP/BOI/ Firm /Company/Co-operative society or any other person who may be resident or non-resident) engaged in the business of plying, hiring or leasing of goods carriages and owns not more than 10 goods carriages at anytime during the previous year, may be excluded from the provision of maintaining books of accounts & audit if such taxpayer offers for every goods carriage income of at least Rs. 7,500/- per month or part of a month. It may be noted that tax audit provision of section 44AB will not be applicable in such cases even if the turnover exceeds Rs. 2 Crore if such person agrees to offer income on presumptive basis @ Rs. 7,500/- per month per truck.

The benefit of presumptive taxation u/s 44AD was not available to professionals. To simplify the taxation scheme & to reduce the compliance burden for professionals, the concept of presumptive taxation is extended to professionals also by introducing section 44ADA in the Income Tax Act-1961 from the AY 2017-18. As a result, any resident Indian having income from profession (legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorized representative, film artist, company secretary, information technology and such other profession as notified by CBDT) with gross receipt from such profession not exceeding Rs. 50 lakhs have an option to declare 50% or more of the gross receipts as income from such profession. If minimum 50% of the receipts is offered as income then no books of accounts is required to be maintained. However, if such person claims income to be lower than 50% of the gross receipts from such profession & further if total income exceeds the maximum amount not chargeable to income-tax, then the person has to maintain the required/specified books of account, documents and get them audited from the CA.

In your specific case for the AY 2017-18, it may be noted that;

Audit would be compulsory in case of trading firm if the turnover exceeds Rs. 2 Crore. If turnover is less than Rs. 2 Cr then audit would be compulsory only if the income offered for taxation is less than 8% (6% if payment against sale received is through banking channel) of the turnover . In case of firm engaged in the professional work, audit would be mandatory only if the gross receipt exceeds Rs. 50 Lakh. If the gross receipt is less than Rs. 50 Lakh, audit would be mandatory only if the income offered for taxation is less than 50% of the gross receipts.
Effectively, audit would be mandatory for the firm with small turnover if the income offered for taxation is less than 8% / or 6% or 50% as mentioned above.
Taxpayer need to know one important change with regard to above provision. Up to AY 2016-17, interest, remuneration/salary to partners was further expressly allowed as deduction from the amount of 8%. However, from the AY 2017-18 onwards, no additional deduction towards interest /salary to partners is permissible and the profit of 8% (or 6%) is deemed to have been arrived at after interest & remuneration to partners. Amendment so as to not allow the deduction towards interest/remuneration to partners would defeat the very purpose of providing ease of business option to smaller firms. It is sure to hamper & carry adverse tax impact for the firms having small turnover/receipts. Smaller size firms would be left with no other options but to get its books of accounts audited if its income is less than 8% (or 6%) of the turnover. All the more important, if taxpayers opt to exit from section 44AD or 44ADA in any year then they cannot take the benefit of the said sections for next 5 years !!

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
Nagpur-440008
or email it at nareshjakhotia@ssrpn.com].