My client's turnover is Rs 6 crore and almost everything moves through the bank. Is he outside tax audit, and what counts as 'cash' for the 5 per cent test?
The Rs 1 crore threshold in s.44AB(a) is replaced by Rs 10 crore only where BOTH tests are met — cash receipts do not exceed 5 per cent of all amounts received, and cash payments do not exceed 5 per cent of all payments made. For that purpose the statute itself deems a payment or receipt by a cheque or bank draft which is not account payee to be a payment or receipt in cash.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text as published by the Income Tax Department) on 2021-04-01, reported as Income-tax Act 1961, s.44AB, clause (a) and the first and second provisos thereto, as inserted and substituted by the Finance Act 2021 with effect from 1 April 2021. It bears on section 44AB, section 44AD, section 44ADA, section 271B of the Income Tax Act 1961, in Cash Transaction Limits and How Tax Law Is Read matters.
Two traps sit in this proviso and both are in the statutory words rather than in any circular. First, the test is conjunctive: a business with 2 per cent cash receipts but 8 per cent cash payments does not get Rs 10 crore and is back at Rs 1 crore, with s.271B waiting behind it. Second, 'cash' is a wider word here than it looks — a bearer or crossed-but-not-account-payee cheque is deemed cash on both sides of the test, which routinely catches businesses that pay wages, freight or site expenses by self or bearer cheque and believe they are banking everything. Note the limits of what the section answers: it deals with non-account-payee cheques and bank drafts, and it says nothing about journal entries, book adjustments, or cash deposited by a customer directly into the assessee's bank account. Those are live questions on which this provision gives no answer, and an adviser should not represent that it does.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 44AB(a) requires every person carrying on business to get his accounts audited where his total sales, turnover or gross receipts in business exceed one crore rupees in any previous year. The first proviso to that clause substitutes ten crore rupees for one crore rupees in the case of a person whose aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent of the said amount, AND whose aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent of the said payment. The second proviso provides that for the purposes of that clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash. The substitution of 'ten' for 'five' and the insertion of the deeming proviso were both made by the Finance Act 2021, with effect from 1 April 2021. The section separately fixes fifty lakh rupees for a profession under clause (b), and by a later proviso disapplies the section to a person declaring profits under s.44AD(1) or s.44ADA(1). 'Specified date' is defined in the Explanation as the date one month prior to the due date for furnishing the return under s.139(1).
Not applicable — statutory provision. The operative rule is that the higher Rs 10 crore threshold is available only where both the cash-receipts test and the cash-payments test are satisfied, and that a non-account-payee cheque or bank draft counts as cash on both limbs of that test.
Not applicable — statutory provision, and no decision construing either proviso has been traced. What follows is this library's reading of the statutory words and is not authority; no court has held it. The structure of the first proviso is conjunctive on its face: limb (a) governs receipts and limb (b) governs payments, they are joined by 'and', and only 'in the case of a person whose' both conditions are answered does the substitution of 'ten crore rupees' for 'one crore rupees' operate. The second proviso is expressed to apply 'for the purposes of this clause', so the deeming of non-account-payee instruments as cash governs both limbs of the first proviso and not merely one.
Provided further that for the purposes of this clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash;
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Handle my notice → Ask a CA on WhatsAppThe Rs 1 crore threshold in s.44AB(a) is replaced by Rs 10 crore only where BOTH tests are met — cash receipts do not exceed 5 per cent of all amounts received, and cash payments do not exceed 5 per cent of all payments made. For that purpose the statute itself deems a payment or receipt by a cheque or bank draft which is not account payee to be a payment or receipt in cash. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text as published by the Income Tax Department) and bears on section 44AB, section 44AD, section 44ADA, section 271B of the Income Tax Act 1961. It is reported as Income-tax Act 1961, s.44AB, clause (a) and the first and second provisos thereto, as inserted and substituted by the Finance Act 2021 with effect from 1 April 2021. Two traps sit in this proviso and both are in the statutory words rather than in any circular. First, the test is conjunctive: a business with 2 per cent cash receipts but 8 per cent cash payments does not get Rs 10 crore and is back at Rs 1 crore, with s.271B waiting behind it. Second, 'cash' is a wider word here than it looks — a bearer or crossed-but-not-account-payee cheque is deemed cash on both sides of the test, which routinely catches businesses that pay wages, freight or site expenses by self or bearer cheque and believe they are banking everything. Note the limits of what the section answers: it deals with non-account-payee cheques and bank drafts, and it says nothing about journal entries, book adjustments, or cash deposited by a customer directly into the assessee's bank account. Those are live questions on which this provision gives no answer, and an adviser should not represent that it does. If it applies to you, the first step is this: Run both tests separately before concluding the client is under Rs 10 crore — receipts against total receipts, payments against total payments — and document each computation in the file.
Section 44AB(a) requires every person carrying on business to get his accounts audited where his total sales, turnover or gross receipts in business exceed one crore rupees in any previous year. The first proviso to that clause substitutes ten crore rupees for one crore rupees in the case of a person whose aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent of the said amount, AND whose aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent of the said payment. The second proviso provides that for the purposes of that clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash. The substitution of 'ten' for 'five' and the insertion of the deeming proviso were both made by the Finance Act 2021, with effect from 1 April 2021. The section separately fixes fifty lakh rupees for a profession under clause (b), and by a later proviso disapplies the section to a person declaring profits under s.44AD(1) or s.44ADA(1). 'Specified date' is defined in the Explanation as the date one month prior to the due date for furnishing the return under s.139(1). The matter was decided on 2021-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text as published by the Income Tax Department). On those facts the CBDT Circulars & Instructions held as follows. Not applicable — statutory provision. The operative rule is that the higher Rs 10 crore threshold is available only where both the cash-receipts test and the cash-payments test are satisfied, and that a non-account-payee cheque or bank draft counts as cash on both limbs of that test.
Not applicable — statutory provision, and no decision construing either proviso has been traced. What follows is this library's reading of the statutory words and is not authority; no court has held it. The structure of the first proviso is conjunctive on its face: limb (a) governs receipts and limb (b) governs payments, they are joined by 'and', and only 'in the case of a person whose' both conditions are answered does the substitution of 'ten crore rupees' for 'one crore rupees' operate. The second proviso is expressed to apply 'for the purposes of this clause', so the deeming of non-account-payee instruments as cash governs both limbs of the first proviso and not merely one. In the words reproduced by the source cited on this page: "Provided further that for the purposes of this clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which is not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash;"
It was decided by the CBDT Circulars & Instructions on 2021-04-01 and is reported as Income-tax Act 1961, s.44AB, clause (a) and the first and second provisos thereto, as inserted and substituted by the Finance Act 2021 with effect from 1 April 2021. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 44AB, section 44AD, section 44ADA, section 271B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not applicable — statutory provision. The operative rule is that the higher Rs 10 crore threshold is available only where both the cash-receipts test and the cash-payments test are satisfied, and that a non-account-payee cheque or bank draft counts as cash on both limbs of that test. It arises in Cash Transaction Limits and How Tax Law Is Read matters, on section 44AB, section 44AD, section 44ADA, section 271B of the Income Tax Act 1961, and was decided by Not applicable — statutory text as published by the Income Tax Department. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Extract, from the bank statements and the cheque counterfoils, every instrument that was not marked account payee, and add those amounts to the cash side of whichever test they fall on. Remember the denominators the section uses: 'the aggregate of all amounts received including amount received for sales, turnover or gross receipts' and 'the aggregate of all payments made including amount incurred for expenditure' — not turnover alone. Do not treat journal entries or third-party cash deposits into the bank as settled either way; take the point expressly if it arises, and be candid with the client that the statute is silent. Check the year. The proviso threshold was Rs 5 crore before it was raised to Rs 10 crore, and both the Rs 10 crore substitution and the deeming of non-account-payee instruments were made by the Finance Act 2021 with effect from 1 April 2021 — that is, from AY 2021-22. Where the client instead files under s.44AD(1) or s.44ADA(1), read the separate proviso further down the section, which takes such a person out of s.44AB altogether.
Searched for later treatment; none was found. That is not the same as a source affirming it. The provision has not itself been amended since the Finance Act, 2021. The section as published gives clause (a) with the one crore rupees figure, the first proviso substituting ten crore rupees where cash receipts do not exceed five per cent of all amounts received and cash payments do not exceed five per cent of all payments, and the second proviso deeming a payment or receipt by a cheque or bank draft which is not account payee to be cash for that purpose - the same text this entry states. The Notes on Clauses to the Finance Bill, 2025 records no amendment to section 44AB. No later decision on the provisos has been traced. This states the law under the Income-tax Act, 1961, which governs every assessment year up to and including AY 2026-27 and the disputes arising from those years. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This entry is statutory text, not a decision, and it is entered because no decision applying the Rs 10 crore proviso has been traced. It asserts no holding, no bench and no judge's words; every quoted string in it is statutory text. The date in the decided_on field, 1 April 2021, is the commencement date of the Finance Act 2021 amendment and is NOT a decision date; the companion entry on s.44AA(2) treats that field the same way. The text is taken from the Income Tax Department's own page for s.44AB and has been cross-read against two other published renderings of the same section. The sources agree word for word on the two provisos to clause (a) that this entry is about. They do not agree elsewhere: in one of those renderings the third proviso still carries the words 'and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year' and does not mention s.44ADA, whereas the Department's own text reads 'shall not apply to a person, who declares profits and gains for the previous year in accordance with the provisions of sub-section (1) of section 44AD or sub-section (1) of section 44ADA' with no monetary limit. The Department's text is the later and is preferred, and its reading of that proviso is confirmed on two independent departmental versions; but no amendment footnote dating that particular proviso has been found, so this entry does not say which Finance Act made the change, and a reader relying on that third proviso should verify it against the bare Act before advising. Two amendment footnotes record, respectively, that 'ten' was substituted for 'five' by the Finance Act 2021 with effect from 1 April 2021 and that the deeming proviso was inserted by the same Act from the same date; those footnotes have been read, but the Finance Act 2021 itself has not. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not applicable — statutory provision. The operative rule is that the higher Rs 10 crore threshold is available only where both the cash-receipts test and the cash-payments test are satisfied, and that a non-account-payee cheque or bank draft counts as cash on both limbs of that test.
TaxSphere, “Statutory position — s.44AB, provisos to clause (a): the Rs 10 crore threshold and the 5 per cent cash test”, https://taxnotice.vittsphere.com/caselaw/case/section-44ab-first-proviso-ten-crore-and-the-five-per-cent-cash-test/ (validity last checked 2026-09-07)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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My client's turnover was Rs 1.22 crore, above the s.44AB audit limit. He declared eight per cent under s.44AD and got no audit. The officer has levied s.271B. Is he liable?
The officer treated my cash deposits as turnover, said I crossed the s.44AB limit and levied s.271B. The quantum was settled under Vivad se Vishwas. Does the penalty still stand?
What are the current 44AD, 44ADA and 44AB limits, and what does the 5% cash test mean?
My client filed under s.44AD for two years and then declared below eight per cent in the third. What happens to him for the next five years, and does he now have to get audited?
