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Date: 24^th March 2010	Compiled by: M Sathya Kumar
Liability for tax audit If a person runs a proprietary business and is also a partner in another firm, turnovers of these two entities cannot be clubbed. Section 44AB of the Income-Tax Act provides for an audit of the accounts of a person whose turnover or gross sales exceeds Rs 40 lakh per annum if the assessee is carrying on business or Rs 10 lakh of gross receipts if the assessee is carrying on profession. The 2010 Budget proposes to raise the limits to Rs 60 lakh and Rs 15 lakh respectively. The liability to tax audit arises only when income is chargeable under the head “profits and gains from business or profession”. Incomes derived under the other heads of income are not includable. The liability is fixed on the person and not for a particular business. In case a person runs two separate establishments — say, a provision store and a travel agency — and if the turnover or gross sales of these two put together exceed Rs 40 lakh per annum, the assessee would be liable for tax audit. If a person runs a proprietary business and is also a partner in another firm, turnovers of these two entities cannot be clubbed as the partnership firm is a separate “person” by itself. If the turnover of the firm exceeds Rs 40 lakh, it is only the firm which is subjected to tax audit. Partners of the firm are not subjected to tax audit merely because the firm in which they are partners has turnovers exceeding the limit. If a person is a professional and is practising as an individual as well as a partner in a firm, the liability to tax audit of the individual arises only when the gross receipts from the individual practice exceeds Rs 10 lakh. If the partner draws a salary from the firm, the salary so drawn is includable for determining the sum of Rs 10 lakh, since salary from the firm is charged under the head ‘profits and gains from business' and not as salaries. Share of income from the professional firm is not taxable and, therefore, not includable. If the professional receives the fee after applicable tax deduction, the gross value is to be considered, that is, adding back the tax deducted at source. GROSS TURNOVER This term denotes the gross amounts flowing into the kitty of the person. It only includes the amounts on which the person has absolute right to deal with. It excludes the cash inflows which are held for others. For example, in a chit fund company, it is only the commission earned by it which is to be considered for determining the tax audit liability and not the auction turnovers. Similarly, in the case of a commission agent, the income to be reckoned would be the commission earned by him and not the sales executed by him. In case of a consignment, the sales are affected by the consignee on behalf of his principal and not on his own behalf. Therefore, the turnovers would be included in the hands of the consignor and not the consignee. Only his commission would be includable to determine if the consignee is liable to tax audit. In case of a stock broker, income by way of brokerage only would be considered for the purposes of tax audit. The turnover executed by him on behalf of his clients would not be considered. If he also undertakes buying and selling of shares, the turnovers attributable to his turnovers for himself would be clubbed to the gross brokerage earned by him. GROSS SALES The term used in the section is gross sales. If a person has a sales of Rs 41 lakh and sales returns of Rs 1.5 lakh, the gross sales of Rs 41 lakh is to be reckoned. That there have been sales returns of Rs 1.5 lakh and resultant turnover being less than Rs 40 lakh would not be a valid contention. In a case where a shirt manufacturer had a contract with a truck operator for transport of shirts to different parts of the country and collected freight charges from its customers, It was held that the transport charges collected from the customer, though billed separately, would be includable in gross turnover as the contract with the transporter is independent of the contract with the customer GROSS RECEIPTS In case of a professional, the threshold limit for tax audit is Rs 10 lakh. If a professional raises a bill in two parts, say, one for rendering the service and the other towards reimbursement of expenses, the gross receipts would be the sum total of both the parts. Vocation is considered to be a part of profession. Artistes or sportspersons, though not professionals by strict interpretation, are liable to tax audit if their gross receipts exceed Rs 10 lakh. In case of a hospital, the turnover is inclusive of the other services such as bed charges, service costs and cost of medicines administered. Though the doctor is a professional, running the hospital is in the nature of business and not carrying on profession. Hence the liability to tax audit arises only on crossing the limit of Rs 40 lakh. If separate accounting is maintained for consultancy and for other services rendered at the hospital, the doctor would be liable if the consultancy receipts exceed Rs 10 lakh per annum, notwithstanding the fact that the turnover of the hospital does not exceed Rs 40 lakh. But, if the doctor merely renders consultancy services, he would be a professional and the limit of Rs 10 lakh would apply. His income from teaching, income by way of writing in journals, newspapers, etc., would also be considered in determining the limit. Similarly, in case of a chartered accountant engaged in other activities such as teaching, writing in newspapers and academic work (such as setting of question papers, valuing the answer scripts, etc), all these incomes should be clubbed to determine the liability for tax audit. Unlike a hospital, the chartered accountant is earning by mere utilisation of professional skills. Therefore, he would be liable to tax audit if the earnings exceed Rs 10 lakh. In case of an engineer, apart from consultations, the income derived by designing is construed as profession and not business. But if he executes a contract, turnover of Rs 40 lakh is to be considered, as it involves other ingredients in addition to his professional knowledge. He would rather qualify to be a contractor and not as a professional. A retired engineer taking classes at engineering colleges would be liable to tax audit if his gross receipts from the college exceeds Rs 10 lakh, based on the principle that vocation is a part of profession. His other income from exercise of his professional knowledge such as consultancy, designing, writing in technical journals, and so on, would be clubbed for the limit of Rs 10 lakh. But if he is on an employment contract, the income gets charged to tax under the head ‘salaries' and consequently there would be no liability to tax audit even if the salary exceeds Rs 10 lakh per annum. In case of an assessee actively engaged in stock market operations, profits or losses are chargeable to tax under the head profits and gains from business and not under the head ‘capital gains'. He would be liable to tax audit if the total turnover exceeds Rs 40 lakh. But a stray transaction, though exceeding Rs 40 lakh, might be considered as capital gains and therefore not liable to tax audit. Article by Kali Prasad , The author is a Hyderabad-based chartered accountant
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