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.

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

Guide : Book Keeping and Audit for Business and Profession

Who is Required to Maintain Books of Accounts?

The income tax act specifies the books of accounts that need to be maintained for the purpose of the Income Tax. These are mentioned under section 44AA of the income tax act and rule 6F. Every person who has the following professions is required to maintain the books of accounts:

  • Legal
  • Medical
  • Engineering
  • Architectural profession
  • Profession of accountancy
  • Technical Consultancy
  • Interior Decoration
  • Authorized Representative
  • Film Artist
  • Or Any other profession as is notified by the Board in the Official Gazette shall keep and maintain the books of accounts and other documents if his total gross receipt in the profession exceeds INR 1,50,000 in any one of the 3 years immediately preceding the previous year, or where the profession has been newly set up in the previous year than in that case if his total gross receipts in the profession for that year are likely to exceed INR 1,50,000.
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Here is a summary of the above requirements:

Type of profession / business Condition 1 Condition 2
Specified Professions i.e; Legal, Medical, Engineering, Architectural, Accountancy, Technical Consultancy, Interior Decorator, Authorized Representative, Film Artist. Total Gross Receipt in the profession exceeds INR 1,50,000 in any one of the 3 years immediately preceding the previous year. (where the profession has been newly set up in the previous year than in that case if his total gross receipts for that year are likely to exceed INR 1,50,000.)
Non- Specified Professions and Business Income from business and profession exceeds INR 1,20,000. (In case newly set up business or profession if his income from business or profession is likely to exceed INR 1,20,000 during such previous year) Total sales, turnover or gross receipts in business or profession exceeds INR 10,00,000 in any one of the 3 years immediately preceding the previous year. (In case of newly set up business or profession if his total sales, turnover or gross receipts is likely to exceed INR 10,00,000 during such previous year.)

In the case of Specified professions, even if you don’t fulfill the condition 1 as mentioned above, you need to maintain the books of account. The only condition here is that the Assessing office should be able to calculate the taxable income of your profession.

Books of Accounts that need to be Maintained as per Rule 6F

The following books of accounts and documents are to be maintained as per Rule 6F:

  1. A cashbook: Records of all day-to-day cash receipts and payments and the cash balance in hand at the end of each day or at the end of each month.
  2. A journal: if the accounts are maintained according to the mercantile system of accounting. A journal is a record of financial transactions in order by date. It is often defined as the book of original entry.
  3. Ledger: It is a complete record of financial transactions. It holds account information that is needed to prepare financial statements and includes assets, liabilities, owner’s equity, revenues, and expenses.
  4. Carbon copies of bills: whenever such bills are issued by the person which are more than INR 25.
  5. Original bills: in respect of expenditure incurred by a person which is more than INR 50.

A person carrying on medical profession shall, in addition to the books of account and other documents needs to keep and maintain the following:

  1. A daily case registers in Form 3C i.e; Patient’s Name, Nature of professional service rendered (general consultancy, surgery, injection, visit, etc), Fees received, Date of receipt.
  2. An inventory as on the first and the last day of the previous year, of the stock of drugs, medicines, and other consumable accessories used of his profession.

The books of accounts and other documents should be kept and maintained at the principal place of his profession or at the respective places at which the profession is carried on.

Taxpayer Profit/Loss Applicable Taxing Section Applicable as per Section 44AA 
Business
Income > INR 1,20,000 Profit Normal Provisions Yes
Sales, turnover, gross receipts > INR 25 Lakh Profit/Loss Normal Provisions Yes
Sales, turnover, gross receipts </= INR 25 Lakh Proft/Loss Presumptive Taxation – Section 44AD No
Sales, turnover, gross receipts </= INR 25 Lakh Profit/Loss Normal Provisions No
Turnover </= 2 Cr Profit Presumptive Taxation – Section 44AD No
Turnover </= 2 Cr Loss Presumptive Taxation – Section 44AD No
Turnover </= 2 Cr Profit/Loss Normal Provisions Yes
Profession
Gross receipts </= 50 Lakh Profit/Loss Presumptive Taxation – Section 44AD No
Gross receipts </= 50 Lakh Profit/Loss Normal Provisions Yes

How long one should keep these Books of Accounts?

The books of accounts and other documents specified above shall be kept and maintained for a period of 6 years from the end of the relevant assessment year. In case you fail to maintain the books of accounts and other documents, a penalty of INR 25,000 will be levied to you.

If you have any international transactions or specified domestic transactions and you fail to maintain such information and documents then you will have to pay penalty for the amount of 2% of the value of each international transaction. However, if the taxpayer can prove there is a reasonable cause for failure to maintain accounting records then such penalty may not be levied.

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Penalty for Non-Maintenance of Accounting Records

Failure to maintain the accounting records as per the requirements of Section 44AA, a penalty will be levied under section 271A. The maximum penalty that can be charged is INR 25,000. However, providing a reasonable cause for the failure to maintain accounting records may result in no penalty being levied on the taxpayer.

Who needs to get their Books of Accounts Audited?

Audit of accounts is compulsory under section 44AB in following scenario:

Tax Payer Audit of books of accounts when
An individual carrying on Business Total sales, turnover or gross receipts, in business exceeds 1 Crore rupees in any previous year.
An individual carrying on Profession Gross receipts in profession exceed 25 Lakh rupees in any previous year.
An individual covered under presumptive income scheme U/S 44AD Income of business is lower than the presumptive income calculated as per section 44AD and the total income is more than the minimum income which is exempt from tax.

Which Tax Audit Reports to be Submitted and What are the Due Dates for the same?

Taxpayer Audit Report Prescribed particulars Due Date of Audit Due Date for Submission of Report
A person who carries on business or profession who is required to get his accounts audited Form 3CA Form 3CD 30th September of the assessment year 30th September of the assessment year
A person other than those listed above Form 3CB Form 3CD 30th September of the assessment year 30th September of the assessment year

In the case of international or specified domestic transactions, the time limit for audit and submission of report is November 30.

Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Penalty for not Auditing Books

If the taxpayer fails to carry out the audit of the accounting records as per the requirements of Section 44AB, a penalty may be levied under section 271B. The minimum penalty that can be charged is 0.5% of the total sales, turnover, or gross receipts. The maximum penalty applicable is INR 1,50,000. A penalty can be avoided if the taxpayer provides a reasonable cause for not having the accounting records audited.

FAQs

What is the penalty for not getting books of accounts audited as per Section 44AB?

If any person fails to get his accounts audited or furnish audit report as per the requirements of Section 44AB, a penalty of
1. ½ % of total sales, turnover or gross receipts
2. a sum of Rs. 1,50,000 whichever is less is levied.
However, if an assessee has a reasonable cause for failure to get an audit done in that case penalty may not be levied.

When is Book keeping not required?

If you are following the presumptive taxation scheme as per section 44AD / 44ADA / 44AE of the Income-tax Act, you need not maintain books of accounts. However, if your business income is lower than the presumptive income calculated as per section 44AD / 44ADA / 44AE then you will have to maintain books of accounts as prescribed in section 44AA.

What is the penalty for not maintaining books of accounts as per Section 44AA?

If a taxpayer fails to maintain accounting records as per Section 44AA, a penalty may be levied under section 271A. The maximum penalty amount is INR 25,000. However, if the taxpayer can prove the reasonable cause for failure to maintain accounting records then such penalty may not be levied.