Section 44AB: Tax Audit under Income Tax Act

An audit is like a detailed inspection of financial records to ensure they’re accurate and follow the rules. Different laws require various types of audits, like company audits mandated by company law, cost audits, stock audits, and tax audits under income tax law. Tax Audit is an examination or review of a taxpayer’s financial statements and books of accounts of a business or profession. Chartered accountants conduct it as per Section 44AB of the Income Tax Act.

Tax Audit Applicability u/s 44AB

A tax audit is conducted to meticulously examine the books of accounts while detecting any discrepancies, errors, or potential instances of tax evasion and reporting them in the tax audit report. This process is essential for enforcing tax laws effectively and optimizing tax revenue collection.

For Businesses under normal scheme of taxation

Engaging in any business activity in India makes you subject to tax audit if your turnover or sales exceed INR 1 crore in a financial year.

• If a majority of transactions of the business are conducted digitally i.e. cash payments/ receipts are less than 5% of total payments/ receipts then the turnover limit for tax audit applicability increases from INR 1 crore to 10 crores.

For Businesses under presumptive scheme of taxation

If a presumptive taxation scheme is opted in, the minimum profit of 6% or 8% of turnover is not reported as per section 44AD, and total income is more than the basic exemption limit then a tax audit will be required.

If a business exits the presumptive taxation scheme before 5 years, it can’t opt in again for another 5 years. In this case, if total income exceeds basic exemption during this period then a tax audit will be applicable.

For Professions under normal scheme of taxation

If gross receipts from the profession exceed INR 50 lakhs in a financial year then tax audit is mandatory.

For Professions under presumptive scheme of taxation

If a presumptive taxation scheme is opted in, the minimum profit of 50% of turnover is not reported, and total income is more than the basic exemption limit then a tax audit will be required.

For specified businesses

If a goods carriage business is eligible for Presumptive Taxation under Sec 44AE, 44BB, or 44BBB but reports profit lower than the prescribed rate under the relevant section, then a tax audit will be applicable.

Applicability of Tax Audit in case of Trading Income

Income from trading in Equity Intraday, & Derivative Trading is considered Business Income. Thus, it is important to determine if the Tax Audit as per the provisions of the Income Tax Act applies to Trading Income.

In the case of Traders, the turnover limit for tax audit applicability would be INR 10 Crore since all transactions are digital.

Non-Applicability of Tax Audit

If a business/ profession is reporting profits as per the presumptive taxation scheme u/s 44AD/ 44ADA respectively then tax audit is not applicable

If the business’s turnover is between 2 crores to 10 crores, then irrespective of profit/ loss, a tax audit is not applicable.

Due date for filing Tax Audit report

After the tax audit is performed, the CA has to report all the findings & digitally sign the report by filing Form 3CB-3CD in case of individual taxpayers.

The due date to file such a report is 30th September of the relevant assessment year. While due date to file ITR where tax audit is done is 31st October of the relevant assessment year.

Penalty for non-compliance

If a taxpayer is required to get a tax audit done but fails to do so then the penalty will be lower of following:

• 0.5% of the of the total sales, turnover, or gross receipts, OR
• INR 1,50,000/-

If there is a valid reason for the failure, no penalty will be imposed under section 271B.

FAQs