According to Section 44AB of the Income Tax Act, certain categories of taxpayers are required to get their accounts audited by a Chartered Accountant. The audit report must be submitted using either Form 3CA or Form 3CB, as applicable.
This blog will help you understand the provisions related to the income tax audit under Section 44AB. But before diving deeper into the specifics of this section, let’s first understand the meaning of the term “audit.”
As per the Google Dictionary, an “audit” is defined as an official inspection of an organization’s financial records, typically conducted by an independent entity.
What Is a Tax Audit?
Various laws mandate different types of audits for both individuals and businesses. For instance, company law requires a statutory audit for companies, while cost accounting regulations call for a cost audit. Similarly, under the Income Tax Act, taxpayers engaged in business or profession may be required to have their accounts audited for tax purposes.
What Are the Main Objectives of a Tax Audit?
Conducting a regular tax audit of a business or profession is crucial to ensure that the books of account are accurately maintained.
The Chartered Accountant performing the audit must present their findings and observations in the specific forms prescribed by the Central Board of Direct Taxes (CBDT). This process helps the tax authorities detect and prevent fraudulent practices, while also enabling assessing officers to efficiently verify the accuracy of the financial records through standardized reporting.
Who Needs to Get Their Accounts Audited?
Under Section 44AB of the Income Tax Act, specific categories of taxpayers are required to undergo a tax audit based on their turnover, gross receipts, or the nature of their income declaration. Below is a breakdown of who must get their accounts audited:
1. For Businesses
You must get your accounts audited if:
Your total sales, turnover, or gross receipts exceed ₹1 crore in a financial year.
You are covered under Section 44AE, 44BB, or 44BBB (presumptive income schemes) and declare income lower than the deemed profits as per these sections.
You opt for Section 44AD (presumptive taxation for small businesses), declare lower income, and your total income exceeds the basic exemption limit (₹2.5L/₹3L/₹5L depending on age).
Note:
If you are under Section 44AD and your turnover does not exceed ₹2 crore, and you declare income as per presumptive provisions, tax audit is not required.
2. For Professionals
A tax audit is mandatory if:
Gross receipts from your profession exceed ₹50 lakhs in a financial year.
You opt for Section 44ADA (presumptive taxation for professionals), declare income lower than the prescribed 50% of gross receipts, and your total income exceeds the exemption limit.
Important Exclusion
Sections 44B and 44BBA:
Tax audit requirements under Section 44AB do not apply to non-residents earning income as per Section 44B (Shipping business) or Section 44BBA (Airline business).
Already Audited Under Other Laws?
If your accounts are already audited under any other applicable law (e.g., Companies Act), you do not need a separate audit under Section 44AB.
However, the tax audit report still needs to be submitted using the prescribed Income Tax forms.
Tax Audit Forms Prescribed Under Section 44AB
| Form | Applicability |
|---|---|
| Form 3CA | For businesses/professions already audited under another law (e.g., Companies Act) |
| Form 3CB | For those not subject to any other mandatory audit |
| Form 3CD | A detailed statement of particulars, submitted along with 3CA or 3CB |
What Is the Deadline for Submitting the Tax Audit Report?
A person covered under Section 44AB is required to get their accounts audited and obtain the audit report on or before the due date for filing the income tax return, which is generally 30th September of the relevant assessment year (*).
The Chartered Accountant must file the tax audit report electronically with the Income Tax Department. After the report is filed, the taxpayer must approve it through their e-filing account on the official Income Tax Department website (www.incometaxindiaefiling.gov.in).
What Is the Penalty for Not Getting the Accounts Audited?
If a taxpayer fails to submit the audit report, the Assessing Officer may impose a penalty under Section 271B, which could be:
5% of the total sales, turnover, or gross receipts, or
Rs 1,50,000, whichever is lower.
However, no penalty will be levied if the taxpayer can provide a valid reason for the failure to submit the audit report under Section 271B.
Turnover Limit for Income Tax Audit
Do You Need a Tax Audit?
In general, businesses must have their books audited by a Chartered Accountant if their annual sales exceed ₹1 crore. For professionals, an audit is required if their income surpasses ₹50 lakh.
But here’s the twist! Since April 2021, businesses with sales of up to ₹10 crore can avoid an audit if more than 95% of their transactions are digital (with less than 5% in cash payments).
Remember, these are just the basic guidelines. There are other situations where an audit might still be necessary.
Categories of Taxpayers Who Must Conduct a Tax Audit
For Businesses:
Big Spenders:
If your business generates over ₹1 crore in sales during the year, you must get a tax audit. However, if your payments are primarily digital (with cash transactions under 5%), the threshold increases to ₹10 crore before an audit is required.Presumptive Tax Users:
If you’re using simplified tax calculation methods under Sections 44AE, 44BB, or 44BBB, you’ll need a tax audit if you claim profits lower than the limits prescribed by these sections.Section 44AD Users:
If your business operates under Section 44AD and shows profits lower than the prescribed limits, and if your income exceeds the basic tax-free limit, a tax audit is mandatory.Former 44AD Users:
If you were using the Section 44AD presumptive tax method but stopped within the last 5 years, and now your income exceeds the basic tax-free limit, you’ll need to undergo a tax audit.Loss-Making Businesses:
Even if your business incurs losses, you may still be required to undergo a tax audit if your sales exceed ₹1 crore and your income is above the basic tax-free limit.
For Professionals:
High Earners:
Professionals who earn over ₹50 lakh a year must get their accounts audited.Presumptive Tax Users (Section 44ADA):
Professionals using the simplified tax method under Section 44ADA, like doctors and lawyers, need a tax audit if they claim less than 50% of their gross receipts as profit and their income exceeds the basic tax-free amount.Category Condition Businesses (Not Using Presumptive Tax) Sales > ₹1 crore (Up to ₹10 crore if cash transactions are less than 5%) Businesses Using Presumptive Tax (Sections 44AE, 44BB, or 44BBB) Claimed profits are lower than the prescribed limits Businesses Using Presumptive Tax (Section 44AD) Declared income is below the prescribed limit & income exceeds the basic exemption limit Former Users of Presumptive Tax (Section 44AD) Income exceeds the basic exemption limit within 5 years after opting out Loss-Making Businesses Sales > ₹1 crore & income exceeds the basic exemption limit Professionals Gross receipts > ₹50 lakh Professionals Using Presumptive Tax (Section 44ADA) Profits claimed are less than 50% of receipts & income exceeds the basic exemption limit
How and When Tax Audit Reports Are Submitted
Online and Convenient:
Your Chartered Accountant will submit the tax audit report directly to the Income Tax Department through their online account. You’ll also need to provide the CA’s details in your tax portal.
Your Approval Is Required:
Once the report is uploaded, you’ll receive a notification. It is your responsibility to review the report and approve or reject it via your tax portal. If you reject the report, the process will restart.
Important Deadlines to Remember:
The deadline for submitting your tax audit report depends on whether your business involves international transactions:
Domestic Business: The report must be filed by September 30th of the following year.
International Business: The report is due by October 31st of the following year.
Note: Be sure to submit your tax audit report before the final date for filing your income tax return, as it coincides with the deadline for the audit report.
Who Is Mandatorily Subject to Tax Audit?
As a business owner, you may need a tax audit. Here’s a quick guide to help you understand when it’s required:
Big Spenders:
If your business earns more than ₹1 crore in a year, a tax audit is generally required.Cash-Friendly Businesses:
If the majority of your payments are digital (less than 5% cash), you can have up to ₹10 crore in sales before needing an audit. This rule was updated to encourage digital payments.
Categories of Taxpayers Who Must Undergo a Tax Audit
Category of Person | Threshold |
|---|---|
Businesses (Not Opting for Presumptive Tax) | Sales/turnover/gross receipts exceed ₹1 crore. If cash transactions are up to 5% of total receipts and payments, the turnover threshold for audit increases to ₹10 crore (effective from FY 2020-21). |
Businesses Using Presumptive Tax (Sections 44AE, 44BB, or 44BBB) | Profits or gains claimed are lower than the prescribed limit under the presumptive taxation scheme. |
Businesses Using Presumptive Tax (Section 44AD) | Declares taxable income below the prescribed limits under the presumptive tax scheme and has income exceeding the basic exemption limit. |
Former Users of Presumptive Tax (Section 44AD) | Income exceeds the basic exemption limit in the 5 years following the opt-out from presumptive taxation. |
Loss-Making Businesses (Not Opting for Presumptive Tax) | Sales/turnover/gross receipts exceed ₹1 crore and income exceeds the basic exemption limit. |
Professionals | Gross receipts exceed ₹50 lakh in the financial year. |
Professionals Using Presumptive Tax (Section 44ADA) | Profits or gains claimed are less than 50% of receipts and income exceeds the basic exemption limit. |
Frequently Asked Questions (FAQs)
What is an income tax audit under Section 44AB?
An income tax audit under Section 44AB is a mandatory review of a business’s financial records by a Chartered Accountant (CA). It is required when a business’s turnover exceeds a certain threshold. The audit ensures that the business’s income is accurately reported and complies with tax regulations.
What documents are audited under Section 44AB?
The tax audit includes various financial documents such as sales and purchase bills, cash books, bank statements, inventory records, and other relevant financial paperwork. The auditor uses these documents to verify income, expenses, and the business’s overall financial status.
What are Form 3CA and Form 3CD?
Form 3CA is the audit report prepared by the Chartered Accountant, outlining audit findings and income calculations. Form 3CB is a summary of the audit report, while Form 3CD provides detailed disclosures and computations related to the business’s financials.
Who can conduct a tax audit under Section 44AB?
Only a Chartered Accountant (CA) registered with the Institute of Chartered Accountants of India (ICAI) can conduct a tax audit under Section 44AB. These professionals are qualified to review financial records and prepare the required audit report.
How is turnover calculated for a tax audit?
Turnover for a tax audit generally includes total sales, receipts, and other income generated from business activities. Specific rules may apply, so it’s best to consult with a CA to ensure accurate calculation of turnover for your business.
