Tax Audit under Section 44AB of Income Tax Act

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Sakshi Shah

Section 44AB
Tax Audit
Last updated on March 28th, 2023

Tax Audit under Section 44AB of the Income Tax Act is the examination and review of the books of accounts of a taxpayer having income from business or profession. The taxpayer should appoint a practicing CA i.e. Chartered Accountant to audit the books of accounts. The tax auditor would ensure that books of accounts have been maintained correctly, report observations, and required information in the tax audit report. The applicability of tax audit depends upon the turnover/sales/gross receipts of the business or profession.

Tax audit limit has been increased from INR 5 Cr to 10 Cr for taxpayers who carry out 95% of their transactions in the digital mode as announced in the budget 2021 by the FM. This limit was initially increased from INR 1 Cr to INR 5 Cr in Budget 2020

Tax Audit under Section 44AB for Business

Turnover / Sales up to INR 1 Cr

Turnover / Sales more than INR 1 Cr and up to INR 2 Cr

Turnover / Sales more than INR 2 Cr

Note: The prescribed rate is 8% for non-digital transactions and 6% for digital transactions

Tax Audit limit change FY 2020-21 onwards

The limit for turnover under Section 44AB is INR 1 Cr. Under budget 2021, the turnover limit under Sec 44AB has been increased from INR 5 Cr to 10 Cr if the following conditions are satisfied:

  1. Cash Payments do not exceed 5% of the Total Payments in the financial year AND
  2. Cash Receipts do not exceed 5% of the Total Receipts in the financial year

Note: For the taxpayers who do not satisfy the above conditions, the limit under Sec 44AB of INR 1 Cr remains unchanged

Tax Audit limit change FY 2019-20 onwards

The limit for turnover under Section 44AB is INR 1 Cr. Under Budget 2020, the turnover limit under Sec 44AB has been increased from INR 1 Cr to 5 Cr if the following conditions are satisfied:

  1. Cash Payments do not exceed 5% of the Total Payments in the financial year AND
  2. Cash Receipts do not exceed 5% of the Total Receipts in the financial year

Note: For the taxpayers who do not satisfy the above conditions, the limit under Sec 44AB of INR 1 Cr remains unchanged.

Tax Audit u/s 44AB for Profession

Turnover / Sales up to INR 50 lacs

Turnover / Sales more than INR 50 lacs

Tax Audit under Section 44AB(c) of Income Tax Act

If a business eligible for Presumptive Taxation under Sec 44AE, 44BB, or 44BBB but reports profits or gains lower than the prescribed rate under the relevant section, they are liable to Tax Audit under Section 44AB(c).

Tax Audit of Trading Income

Stock Traders trade in shares, securities, commodities, and currency through online trading platforms. Income from trading in Equity Intraday, Equity F&O, Commodity Trading, and Currency Trading is considered as a Business Income. Thus, it is important to determine if the Tax Audit as per the provisions of the Income Tax Act is applicable to Trading Income.

Under budget 2021, the limit for turnover as per Section 44AB is increased from INR 5 Cr to INR 10 Cr if at least 95% of the total payments and at least 95% of the total receipts are digital in nature.

In the case of Traders, the limit for Tax Audit applicability u/s 44AB would be INR 10 Cr since all transactions are digital. For the taxpayers who do not satisfy the above conditions, the limit under Sec 44AB of INR 1 Cr remains unchanged.

Let us understand the conditions for Tax Audit in the case of Stock Traders who have all their trading transactions online. The presumptive rate is 6% since the transactions are digital. The increased limit of INR 10 Cr is applicable FY 2020-21 onwards. If the tax audit is applicable the trader should appoint a CA to prepare and file a tax audit report.

In the case of Income Tax on Trading, since all these trading transactions are digital, the prescribed rate under Sec 44AD would be 6% instead of 8% in normal cases.

Tax Audit of Trading Income – AY 2021-22 Onwards

Trading Turnover up to INR 2 Cr

Trading Turnover more than INR 2 Cr and up to INR 10 Cr

Trading Turnover more than INR 10 Cr

Tax Audit of Trading Income – Upto AY 2019-20

Trading Turnover up to INR 1 Cr

Trading Turnover more than INR 1 Cr and up to INR 2 Cr

Trading Turnover more than INR 2 Cr

FAQs

If a business is liable to get accounts audited under any other law, is Tax Audit under Income Tax Act also required?

Assessee such as Company is liable to Statutory Audit under Companies Act 2013. As per Section 44AB, if an assessee is required to get audit under any other law, he/she need not get the accounts audited again to comply with Section 44AB. In such a case, the assessee should submit the report as per audit under the other law and also a Tax Audit Report (Form 3CB-3CD) by a Chartered Accountant as prescribed by Section 44AB.

What is the Due Date for Tax Audit as per Section 44AB?

Assessee liable to tax audit as per section 44AB of the Income Tax Act should get the books of accounts audited on or before 30th September of the next financial year. In case of the applicability of tax audit for AY 2019-20, the due date to file the audit report was 30th September 2019.

AY 2020-21 onwards, the due date to file the Tax Audit Report has been amended to 31st October of the next financial year. The assessee should appoint a practicing CA. Once the CA electronically files the tax audit report, the assessee must approve the tax audit report from the account on incometaxindiaefiling.gov.in.

What is the penalty if I do not get books of accounts audited as per Section 44AB?

If the assessee does not get accounts audited as per requirements of Section 44AB, the Assessing Officer may impose a penalty under Section 271B. The penalty is lower of the following:
(a) 0.5% of Sales / Turnover / Gross Receipts OR
(b) INR 1,50,000
However, if the assessee can provide a valid justification and prove a reasonable cause for not getting a tax audit, the Assessing Officer may not impose any penalty.

Is the Tax Audit limit of INR 5 Cr increased for MSME only?

After the Budget 2020 speech, there was confusion regarding the tax audit limit. Whether the limit of INR 5 Cr was increased for MSME only?
No. The limit of INR 5 Cr is not restricted to MSME only. As per the Finance Bill, the increased limit in Sec 44AB is applicable to any person who earns Business Income.

I have a loss from Intraday / F&O Trading. Is Tax Audit applicable?

Tax Audit applicability as per Income Tax Act is:

1. If the Trading Turnover in a financial year is up to INR 2 Crore and net profit is less than 6% of the trading turnover
2. If the Trading Turnover exceeds INR 2 Crore irrespective of profit or loss
The limit of turnover to determine tax audit has been increased to INR 5 Cr under Budget 2020. The new limit is applicable to AY 2020-21. Therefore in the case of loss from Intraday Trading, Tax Audit is applicable.

How do I calculate Trading Turnover for Intraday Trading and F&O Trading?

Trading Turnover should be calculated to determine the Tax Audit applicability as per the Income Tax Act. Absolute Turnover is the sum of the absolute value of profit and loss of each trade during the financial year.
1. Trading Turnover for Intraday Trading = Absolute Turnover
2. Trading Turnover for F&O Trading
Futures = Absolute Turnover
Options = Absolute Turnover + Premium on Sale of Options

Got Questions? Ask Away!

  1. Last year I filed a return under Presumptive Taxation for my F&O business. This year I have losses. Is audit applicable to me?

  2. Hi @Zainab_Hawa1,

    Yes, since you have losses from F&O business in this year, audit is applicable to you.

    Hope this clarifies!

  3. Hi @rajat_goyal1,

    No, a tax audit is not applicable if the turnover is ₹2 crores - ₹10 crores and the profit is less than 6% of the turnover (including loss).

  4. Hi @CA_Niyati_Mistry,

    I had an Intraday Trading in the FY22-23 and Total Turnover is -6 P&L is -217 as per Zerodha.

    Now, when I’m filing my return it’s asking for a Tax Audit. Do I need to do a tax audit only for on trading?

  5. @CA_Niyati_Mistry

    Even if I have done it mistakenly :smile: ? I mean it’s just one trade that too a very small amount. Can I file without having it audited?

    Thanks for you response.

  6. Hey @Saurav_Gupta,

    The amount of turnover is small but there might be a certain situation specific to you, because of which it is asking for Audit. I cannot give a view based on incomplete information.

    However you can Ask an Expert and get your queries answered.

    Hope this helps!

  7. Hello @NavalKabra9

    Since you have not opted out of presumptive tax scheme in any of last 5 years and turnover is below 1 crore, tax audit is not applicable.

    You can prepare P & L, Balance sheet and file ITR 3.

    In case you need any expert assistance for filing ITR 3, you can book a MEET using the below link:

    Book a MEET

    Thanks.

  8. is ITR3 started for the current year ?

  9. Hi @HIREiN
    ITD have not yet enabled filing of ITR 3.

    However, you can prepare ITR on Quicko (DIY) as well as book a MEET where tax expert shall prepare the ITR and keep JSON ready! As soon as ITD enables filing, we can go ahead and file the same.

    Thanks

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