Tax Audit under Section 44AB of Income Tax Act

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

• If the taxpayer has incurred loss or the profit is less than 6% or 8% of Turnover / Sales, , total income exceeds the basic exemption limit and taxpayer has opted out of presumptive taxation scheme in any of the previous 5 years, Tax Audit as per Sec 44AB(e) is applicable. The taxpayer should file ITR 3.
• If the taxpayer has a profit of more than or equal to 6% or 8% of Turnover / Sales, Audit is not applicable.
  • However, if the taxpayer has opted for the Presumptive Taxation Scheme under Section 44AD, they need to file ITR 4.
  • And, if the taxpayer has not opted for the Presumptive Taxation Scheme under Sec 44AD. The taxpayer should still file ITR 3.

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

• If the taxpayer has incurred a loss or the profit is less than 6% or 8% of Turnover / Sales, Audit as per Sec 44AB(a) is applicable. The taxpayer should file ITR 3
• If the taxpayer has a profit of more than or equal to 6% or 8% of Turnover / Sales and has not opted for Presumptive Taxation Scheme under Sec 44AD, Audit is applicable as per Sec 44AB(a). The taxpayer should file ITR 3
• If the taxpayer has a profit of more than or equal to 6% or 8% of Turnover / Sales and has opted for the Presumptive Taxation Scheme under Sec 44AD, Audit is not applicable. The taxpayer should file ITR 4
• If the taxpayer has a profit of more than or equal to 6% or 8% of Turnover / Sales and has not opted for the presumptive taxation scheme, then they must file the tax audit report

Turnover / Sales more than INR 2 Cr

• Tax Audit under Sec 44AB(a) is applicable irrespective of the profit or loss. The taxpayer should file ITR 3

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

• If the taxpayer has incurred loss or the profit is less than 50% of Gross Receipts, and the Total Income is more than Basic Exemption Limit, Tax Audit as per Sec 44AB(d) is applicable. The taxpayer should file ITR-3
• If the taxpayer has a profit of more than or equal to 50% of Gross Receipts and has not opted for the Presumptive Taxation Scheme under Sec 44ADA, Tax Audit is applicable as per Sec 44AB(d). The taxpayer should file ITR 3
• If the taxpayer has a profit of more than or equal to 50% of Gross Receipts and has opted for the Presumptive Taxation Scheme under Sec 44ADA, Tax Audit is not applicable. The taxpayer should file ITR-4

Turnover / Sales more than INR 50 lacs

• Tax Audit under Sec 44AB(b) is applicable irrespective of the profit or loss. The taxpayer should file ITR 3

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

• Tax Audit as per Sec 44AB(e) is applicable if there is loss or profit is less than 6% of Trading Turnover, total income exceeds the basic exemption limit and taxpayer has opted out of presumptive taxation scheme in any of the previous 5 years.
• Tax Audit is not applicable if the profit is more than or equal to 6% of Trading Turnover.

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

• Tax Audit is not applicable irrespective of profit or loss.
• Under Budget 2021, the turnover limit under Sec 44AB has been increased from INR 5 Cr to INR 10 Cr. However, the turnover limit under Sec 44AD has not been changed. When the Trading Turnover is between INR 2 Cr and INR 10 Cr, neither Sec 44AB is applicable nor Sec 44AD. Thus, Tax Audit is not applicable irrespective of profit or loss. The Income Tax Department is expected to make an amendment to the turnover limit of Sec 44AD to resolve this loophole.

Trading Turnover more than INR 10 Cr

• Tax Audit under Sec 44AB(a) is applicable irrespective of the profit or loss.

Tax Audit of Trading Income – Upto AY 2019-20

Trading Turnover up to INR 1 Cr

• Tax Audit as per Sec 44AB(e) is applicable if there is loss or profit is less than 6% of Trading Turnover, total income exceeds the basic exemption limit and taxpayer has opted out of presumptive taxation scheme in any of the previous 5 years.
• Tax Audit is not applicable if the profit is more than or equal to 6% of Trading Turnover.

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

• Tax Audit as per Sec 44AB(a) is applicable if:
  • There is a loss or profit is less than 6% of Trading Turnover.
  • The profit is more than or equal to 6% of Trading Turnover and the taxpayer has not opted for the Presumptive Taxation Scheme under Sec 44AD.
• Tax Audit is not applicable if the profit is more than or equal to 6% of Trading Turnover and the taxpayer has opted for the Presumptive Taxation Scheme under Sec 44AD.

Trading Turnover more than INR 2 Cr

• Tax Audit under Sec 44AB(a) is applicable irrespective of the profit or loss.

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