What is a tax audit?
The Income-tax Law requires the taxpayer to get the audit of the accounts of his business / profession from the viewpoint of Income-tax Law.
Section 44AB gives the provisions relating to the class of taxpayers who are required to get their accounts audited from a Chartered Accountant. The audit under Section 44AB aims to ascertain compliance with various provisions of the Income-tax Law and the fulfilment of other requirements of the Income-tax Law. The audit conducted by the Chartered Accountant of the accounts of the taxpayer in pursuance of the requirement of Section 44AB is called tax audit. The Chartered Accountant conducting the tax audit is required to give his findings, observations, etc., in the form of an audit report. The report of tax audit is to be given by the Chartered Accountant in Form Nos. 3CA / 3CB and 3CD.
Who is required to get books audited under Section 44AB?
Under Section 44AB of the Income Tax Act 1961, every person carrying on business is required to get his accounts audited if:
- His total sales, turnover or gross receipts in business exceed 1 Crore rupees in any previous year.
Exception 1
In order to reduce the compliance burden on small and medium enterprises, the threshold limit for a person carrying on business has been progressively enhanced — the Finance Act 2020 raised the limit from Rs. 1 crore to Rs. 5 crore, and the Finance Act 2021 further increased it to Rs. 10 crore — in cases where:
- the aggregate of all receipts in cash during the previous year does not exceed five percent of the total amount; and
- the aggregate of all payments in cash during the previous year does not exceed five percent of the total payments.
In other words, if a person has turnover below Rs. 10 crore he need not get the books of account audited under Section 44AB, provided the aggregate cash inflows and outflows are each less than five percent of the aggregate inflows and outflows during the previous year.
Exception 2
This provision is not applicable to a person who opts for the presumptive taxation scheme under Section 44AD where the total sales or turnover does not exceed Rs. 3 crore (the limit was enhanced from Rs. 2 crore to Rs. 3 crore by the Finance Act 2023, effective AY 2024-25, where cash receipts do not exceed 5% of total turnover).
Other categories required to obtain a tax audit
- In case of a person carrying on a profession, he is required to get his accounts audited if his gross receipts in profession exceed Rs. 75 lakh in any previous year (effective AY 2024-25), provided cash receipts do not exceed 5% of total gross receipts — as per Section 44AB(b) read with Finance Act 2023.
- An assessee who declares profit for any previous year in accordance with Section 44AD and declares lower profit in any of the five assessment years pursuant to the previous year succeeding such previous year, lower than the profit computed as per Section 44AD, and whose income exceeds the amount which is not chargeable to tax.
- If an eligible assessee opts out of the presumptive taxation scheme within the aforesaid period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter.
- A person who is eligible to opt for the presumptive taxation scheme of Section 44ADA but claims the profits or gains for such profession to be lower than the profit and gains computed as per the presumptive taxation scheme, and whose income exceeds the amount which is not chargeable to tax.
- A person who is eligible to opt for the presumptive taxation scheme of Section 44AE but claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of Section 44AE.
- A person who is eligible to opt for the taxation scheme prescribed under Section 44BB or Section 44BBB but claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections.
Consequence of non-compliance of tax audit requirement
According to Section 271B, if any person who is required to comply with Section 44AB fails to get his accounts audited in respect of any year or years as required under Section 44AB, or fails to furnish such report as required under Section 44AB, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:
- 0.5% of the total sales, turnover or gross receipts (as the case may be) in business, or of the gross receipts in profession, in such year or years.
- Rs. 1,50,000.
However, according to Section 271B, no penalty shall be imposed if reasonable cause for such failure is proved.
Due date for furnishing the tax audit report
The tax audit report under Section 44AB must be obtained from a Chartered Accountant and electronically furnished to the Income Tax Department on or before the due date for filing the income tax return — generally 30th September of the relevant assessment year for taxpayers liable to tax audit (extended to 30th November where the assessee is required to furnish a transfer-pricing report under Section 92E), as prescribed under Section 139(1) read with Section 44AB. The income tax return for such taxpayers is then required to be filed by 31st October (or 30th November in TP cases). Late filing of the tax audit report exposes the assessee to penalty under Section 271B.
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