Circular No. 3

What this is

Circular No. 3 was issued by the Central Board of Direct Taxes on 9 February 2001. Its subject is 414. Filing of Audit Report under sections 44AD(6), 44AE(7) and 44AF(5) of the Income-tax Act, 1961, for the assessment year 1998-99.

What it does

Allows the audit report required by sections 44AD(6), 44AE(7) and 44AF(5) for assessment year 1998-99 to be filed at any time before the assessment is completed, instead of by the specified date under section 44AB, and directs that in such cases those sub-sections shall be deemed to have been complied with. Those sub-sections require an assessee in civil construction, in plying, hiring or leasing goods carriages, or in retail business who returns income lower than the presumptive figure to keep books under section 44AA(2) and get them audited and the report furnished under section 44AB.

Why it was issued

The three sub-sections were inserted with retrospective effect from 1 April 1998 by the Finance Act, 1999, so on the specified date for assessment year 1998-99 they did not exist in the statute and the assessees could not have filed the report in time. The Board treated the default as due to circumstances beyond their control and acted to remove genuine hardship.

Who it reaches

• Civil contractors covered by section 44AD who returned income below the presumptive figure for assessment year 1998-99
• Goods carriage operators covered by section 44AE in that year
• Retail traders covered by section 44AF in that year
• Assessing Officers completing those assessments

The provisions it speaks to

The instrument, as the Board published it

414. Filing of Audit Report under sections 44AD(6), 44AE(7) and 44AF(5) of the Income-tax Act, 1961, for the assessment year 1998-99
1. Sections 44AD, 44AE and 44AF of the Income-tax Act, 1961, provide for estimating the income under the head ‘Profits and gains of business or profession’ in the cases of assessees en­gaged in the business of (i) civil construction, (ii) plying, hiring or leasing goods carriages, and (iii) retail businesses; provided the turnover or the number of vehicle, as the case may be, is below a specified figure.
2. Up to the assessment year 1997-98, under the provisions of the Income-tax Act, the above assessees could return income lower than the estimated income subject to compulsory scrutiny under section 143(3) of the Income-tax Act, 1961.
3. For the assessment year 1998-99 and subsequent years, sub-section (6) of section 44AD, sub-section (7) of section 44AE and sub-section (5) of section 44AF provide that in case of a re­turned income lower than the income estimated under the provi­sions of corresponding section, the assessees must keep and maintain such books of account or other documents as required under sub-section (2) of section 44AA and get their accounts audited and furnish a report of such audit as required under section 44AB. The requirement of section 44AB is that the audit report must be audited by an accountant before the specified date and the same must also be furnished by that date in a prescribed form.
4. Sub-section (6) of section 44AD, sub-section (7) of section 44AE and sub-section (5) of section 44AF were inserted with retrospective effect from 1-4-1998 by the Finance Act, 1999. Accordingly, the assessees were not in position to file audit report for the assessment year 1998-99 before the specified date; as on that date these sub-sections did not exist in the statute. Hence, the default of the assessees in complying with the re­quirement of filing audit report before the specified date for the assessment year 1998-99 was due to circumstances beyond the control of such assessees. To remove the genuine hardship in all such cases, the Board hereby directs that for the assessment year 1998-99, the audit report, where called for under the provisions of sections 44AD(6), 44AE(7) and 44AF(5), if not filed by the specified date as stipulated under section 44AB, could be filed anytime before the completion of assessment and in all such cases, the provisions of sections 44AD(6), 44AE(7) and 44AF(5) will be deemed to have been complied with.
Circular : No. 3/2001, dated 9-2-2001.

What to watch

• The relaxation is for assessment year 1998-99 alone; for later years the section 44AB specified date applies as it stands.
• The outer limit is the completion of the assessment, not an open-ended one; a report produced after the order was passed is not covered.
• The books required under section 44AA(2) still had to be kept; only the timing of the audit report is relaxed.
• Assessments for assessment year 1998-99 are long closed, so the relief this circular gave has run its course.

Where you meet it

A penalty notice under section 271B, or a scrutiny assessment for assessment year 1998-99 rejecting a below-presumptive return for want of a timely audit report.

On the same provision

• Notification No. 92 — Section 120 (1) and (2) of the Income-tax Act, 1961 - Income-tax authorities - Jurisdiction of – Amendment in Notificati 8 December 2009
• Notification No. 06 — A notification under section 44AA of the Income-tax Act, 1961 8 January 2004
• Notification No. 30 — In Schedule-I, to the said notification for serial numbers 67, 74, 207, 208, 209, 210 and 211, and the entries relating 4 February 2003
• Notification: 21 Date of Issue : 4/2/2002 — Amendment of the Income-tax Rules under section 44AA of the Income-tax Act, 1961 4 February 2002
• Notification No. 385E- — Profession of information technology notified under section 44AA 4 May 2001
• Circular No. 714 — 1118. Clarification regarding applicability of section 194C/194J in case of advertising agency 3 August 1995

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