Section 44AB of the Income-Tax Act provides for an audit of the accounts of an assessee whose turnover or gross sales exceeds Rs 60 lakh per annum if the assessee is carrying on business or Rs 15 lakh of gross receipts if the assessee is carrying on profession.

The liability to tax audit arises only in case the income is chargeable under the head profits and gains from business or profession. Income derived under the other heads of income is disregarded. Thus, a person earning a salary of more than Rs 15 lakh is not subjected to tax audit, the fact that he is a professional notwithstanding.

The liability is fixed on the assessee and not for a particular business. If a person runs two separate establishments say, a provision store and a medical shop and if the turnover or gross sales of these two put together exceeds Rs 60 lakh per annum, the assessee would be liable for tax audit.

But if the person runs a proprietary business and is also a partner in another firm, turnovers of these two entities cannot be clubbed together since the partnership firm is a separate person by itself. If the turnover of the firm exceeds Rs 60 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.

Gross turnover

This term denotes the gross amounts flowing into the kitty of the person and includes only 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. In case of a consignment, the turnovers would be included in the hands of the consignor and not the consignee.

The sales are affected by the consignee on behalf of his principal and not on his own behalf. 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 for himself, the turnovers attributable for sale of his own shares would be clubbed to the gross brokerage earned by him.

Gross sales

In a case where a shirt manufacturer had a contract with a truck operator for transport of the 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 since the contract with the transporter is independent of the contract with the supplier.

Gross receipts

In case of a professional, the threshold limit for tax audit is Rs 15 lakh. Vocation is considered to be a part of profession for the purposes of tax audit liability. A film artiste or a sportsman, though not a professional by strict interpretation, is liable to tax audit if his/her gross receipts exceed Rs 15 lakh.

A professional raising his bills separately for professional services and for reimbursement of expenditure, would be liable for tax audit if only fees for professional services exceeds the threshold limit.

In case of a hospital, the turnover of the hospital is to be considered and not the gross receipts. Turnover of the hospital is inclusive of the other services such as bed charges, service costs, cost of medicines administered, and so on.

Though the doctor is a professional, running the hospital is in the nature of business and not carrying on profession. 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, the fact that the turnover of the hospital does not exceed Rs 60 lakh notwithstanding.

But if a doctor merely renders consultancy services, he would be a professional and the limit of Rs 15 lakh would apply. His income from teaching at medical colleges, income by way of writing in journals and news papers, and so on, should also be considered for determining the limit.

Similarly, in the case of a chartered accountant engaged in other activities, such as teaching, writing in newspapers, academic work such as setting question papers and valuing the answer scripts, and so on, all these incomes should be clubbed to determine his liability for tax audit. The chartered accountant is earning by mere utilisation of professional skills. Therefore, he would be liable to tax audit if the earnings exceed Rs 15 lakh.

In the 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 60 lakh is to be considered, as it involves other ingredients (such as materials) in addition to his professional knowledge.

For a retired engineer on a contract of employment with an institution, the income gets charged to tax under the head salaries' and consequently there would be no liability to tax audit. But if he is a freelancer taking classes at engineering colleges, he would be liable to tax audit if his gross receipts from the colleges exceed Rs 15 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 also be clubbed for the limit of Rs 15 lakh.