Tax Audit u/s 44AB: Is it applicable to you?

:spiral_calendar: Due date reminder: 30th September is the due date for filing the audit report for AY 2023- 24.

Individuals who run businesses or earn professional income receive payments and incur expenses on a daily basis. To keep track of such transactions, they are required to maintain “books of accounts” that contain a record of the financials. Now, while reporting such income in the ITR, to ensure that these books of accounts have been maintained and declared correctly, a tax audit is required.

Let’s delve into the what, why, and whos of tax audits under section 44AB of the Income Tax Act.

What is a tax audit?

Simply stated, a tax audit is like an examination of the books of accounts of a business/ profession. It is carried out by a CA (Chartered Accountant), who makes sure that the books of accounts have been kept up to date and includes observations and the necessary information in the tax audit report.

Why is a tax audit required?

A tax audit is required to:

  1. Verify compliance, accuracy, and certification of financial records.
  2. Evaluate reported income and deductions for accuracy.
  3. Identifying and reporting discrepancies or observations to promote compliance and integrity.

Who needs to get a tax audit done?

The applicability of tax audit depends upon the turnover/sales/gross receipts from the business or profession along with a few more conditions. Below are the criteria of tax audit applicability for both business and profession.

Audit applicability for business u/s 44AB

:bulb: The above criteria are subject to a key consideration, that is,

If a person is not eligible to opt into the presumptive taxation scheme u/s 44AD, they will have to get an audit done. And when is someone not eligible to opt in for the presumptive scheme?

There are two conditions,

  1. Once opted in, they opted out within 5 years.
  2. They have not completed 5 years since they opted out.

If any of the above conditions are satisfied, one is not eligible to opt in for the presumptive taxation scheme; hence, a tax audit will be applicable.

Audit applicability for profession u/s 44AB

:bulb: Another key consideration is that a tax audit is not applicable if the total income is below the basic exemption limit.

What are the consequences of not getting a tax audit done?

If a tax audit is applicable and one fails to get it done, the tax authorities will issue a notice for a defective return. Further, they may impose a penalty of 0.5% of turnover or gross receipts or Rs. 1,50,000 whichever is lower.

What is the due date?

In the case of a tax audit, the due date for filing the audit report is 30th September, and the due date for filing ITR is 31st October of the relevant assessment year. Also, a DSC (Digital Signature Certificate) is required to file the ITR when one is getting a tax audit done.

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Let’s understand better with some examples.

  1. Ashish does intraday and F/O Trading. He has a turnover of 12 Crores and profits of 50 Lakhs. Does he require a tax audit?

    Answer: Trading in F/O and intraday segments is considered as business income and as the turnover exceeds 10 Cr, a tax audit will be applicable.

  2. Rahul runs a small retail shop and has a turnover of 8 lakhs. He incurs a loss of 2 lakhs and almost 50% of his business payments are in cash. Does he require a tax audit?

    Answer: No, Rahul does not require a tax audit. A tax audit is not mandatory because his turnover is below the threshold of 1 crore for businesses.

  3. Priya is a freelance graphic designer and has gross receipts of 15 lakhs. She has expenses of 5 lakhs. Is a tax audit applicable?

    Answer: No, Priya does not require a tax audit. Her gross receipts are below the threshold of 50 lakhs for professionals and the profit (10 lakhs) is more than 50% of the Gross receipts (15 lakhs), and a tax audit is not mandatory.

  4. Sunita is a doctor with a medical practice and earns 80 lakhs in professional fees. Is she required to get an audit done?

    Answer: Yes, Sunita requires a tax audit. Her gross professional receipts exceed 50 lakhs, and a tax audit is mandatory for professionals when their gross receipts cross this limit.

  5. Ravi runs a small construction business and initially opted for the presumptive taxation scheme u/s 44AD. After 3 years, he decided to opt out of the scheme as his business grew. However, it has been only 2 years since he opted out. Does he require a tax audit?

    Answer: Yes, Ravi requires a tax audit. Although he opted out of the presumptive taxation scheme under Section 44AD, he has not completed 5 years since he made that switch. According to the tax regulations, if you have opted into the scheme and then opted out within 5 years, you can not opt for the presumptive taxation scheme for the next 5 years and have to get a tax audit done.

Still, have doubts? Ask away!

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Hii
If in PY Turnover exceeds 2cr but not more than 10cr, and all cash payments and Receipts are below 5%.But we cannot opt Presumptive scheme under sec 44AD and and actual profit is Below 6%.
Can We File Normal ITR With Balance sheet and Profit and loss statement With late fee?

Hey @Adi,

Yes, you can file the ITR without an audit as the turnover is between 2CR and 10CR. However, you’ll not be able to carry forward losses, if any, in such a case.

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Okay
Thank You So Much
If Turnover is 1.90cr and Profit is Below 6% and Filled ITR with Balance sheet and Profit and Loss Statement?

Hi @Adi,

As the turnover is between 1Cr to 2CR, a tax audit will be mandatory if the cash receipts/payments exceed 5%.

Hi if we have commission income more than 20l then tax audit is applicable… which section and books need to be maintained as per 44ab

Is tax audit applicable for salaried professional earning more than 50lacs?

Hi @Dharmendra_Pundeer

No, a tax audit is not applicable in case of salary income.
However, if your income in an FY exceeds ₹50 lakhs, make sure to fill Schedule Assets & Liabilies.
Here’s a read about Who should file Schedule AL in ITR?- Learn by Quicko for your reference.

Hope this helps!

Hey @venky_venkatesh,

Commission income is reported under the head “Income from Business and Profession” as Business. Hence, the audit applicability will be determined as per the criteria for businesses, and if the turnover is below Rs. 1CR, audit will not be applicable. However, the books of accounts need to be maintained.

Hope this Clarifies!