Tax Audit under Section 44AB: Applicability, Limits, and Due Dates

Tax Audit

A tax audit is an examination of an organization’s or individual’s financial records to ensure that information is accurately reported to the tax authorities. It involves a thorough review of financial statements, accounts, and other relevant documents to verify compliance with tax laws and regulations.

Section 44AB gives the provisions relating to the class of taxpayers who are required to get their accounts audited from an accountant. The audit under section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfillment of other requirements of the Income-tax Law. The audit conducted by the accountant of the accounts of the taxpayer in pursuance of the requirement of section 44AB is called tax audit.

Applicability

Following assessee are required to get their accounts audited by an accountant and to furnish (electronically) the audit report:

1. An assessee carrying on business

Threshold limit-  where total sales, turnover or gross-receipts of business for the previous year exceeds Rs. 1 crore.

Exception 1:

• Where a person: Declares profits and gains for the previous year u/s 44AD;

• His total sales / turnover / gross receipts in business do not exceed Rs. 2 crore in the previous year

Then, provision of tax audit is not applicable.

However, where the provision of sec. 44AD(4) is applicable in case of a person carrying on business and his income exceeds the basic exemption limit in any previous year, the provision relating to tax audit is applicable.

Exception 2:

• Where a person Declares profits and gains for the previous year u/s 44AD;

• His total sales / turnover / gross receipts in business do not exceed Rs. 3 crore in the previous year; and Aggregate of all amounts received during the previous year in cash does not exceed 5% of the total turnover or gross receipt of such previous year

Then, the provision of tax audit is not applicable.

Exception 3:

• Where aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount; and

• aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment.

If the above conditions are satisfied, then the higher threshold limit of Rs. 10 crore shall be applicable instead of 1 crore.

In nutshell, applicability of tax audit in case of business assessee are as under:

2. An assessee carrying on profession

Threshold limit: Gross receipts of profession for the previous year exceeds Rs. 50 lacs.

Exception 1

• Where a person Declares profits and gains for the previous year u/s 44ADA; and

• His gross receipts from profession does not exceed Rs. 50 lakhs in the previous year;

Then, the provision of tax audit is not applicable.

Exception 2

• Where a person Declares profits and gains for the previous year u/s 44ADA; and

• His gross receipts from profession does not exceed Rs. 75 lakhs in the previous year; and

• Aggregate of all amounts received during the previous year in cash does not exceed 5% of the gross receipt of such previous year

Then, the provision of tax audit is not applicable.

3. An assessee covered u/s 44AE, 44BB or 44BBB

Threshold limit— Where assessee has claimed that his income from such business is lower than the deemed income computed in accordance with the respective section.

4. An assessee covered u/s 44ADA

Threshold limit— Assessee has claimed that his income is lower than the presumptive income (computed u/s 44ADA) and his income exceeds the maximum amount which is not chargeable to income-tax (i.e. basic exemption limit)

Note— It is to be noted that where an assessee has non-business or non-professional receipts exceeding the amount mentioned in the sec. 44AB, tax audit u/s 44AB is not applicable. For example, an individual having income under the head “Salaries” amounting to Rs. 12 crore, the provision of sec. 44AB is not applicable.  

Audit Report—

We can say there are two types of forms: 3CA-3CD and 3CB-3CD.

Therefore, only one of two will apply to each taxpayer.

• Form 3CA-3CD applies to a person who is required by or under any law to get its accounts audited.

• Form 3CB-3CD is applicable to a person not referred above, i.e., where accounts are not required to be audited under any other law.

The tax audit report (Form 3CA/3CB alongwith Form 3CD) is required to be uploaded using digital signature of the tax auditor. These forms should be accompanied by the audited financial statements of the assessee.

Consequences of failure to get accounts audited [Sec. 271B]

If any person fails to get his accounts audited in respect of any previous year relevant to an assessment year or furnish a report of such audit as required under section 44AB, the Assessing Officer may direct that such person shall pay penalty, being lower of the following:

• ½ percent of total sales or turnover or gross receipt; or

• Rs.1,50,000

However, section 273B provides that the penalty shall not be imposed if the assessee proves that there was reasonable cause for such failure.

Few of the instances accepted by the judiciary as ‘reasonable cause’:

• Resignation of the tax auditor and consequent delay;

• Death or physical inability of the partner in charge of the accounts;

• Labour problems such as strike, lock out for a long period, etc.;

• Loss of accounts because of fire, theft, etc. beyond the control of the assessee;

• Non-availability of accounts on account of seizure;

• Natural calamities, commotion, etc. Failure of official e-filing portal of the Income-tax department

Where no accounts are maintained, the question of auditing the accounts does not arise and therefore, no proceedings can be initiated for imposing penalty under Section 271B.

Submission of Audit report