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

Income Tax Tax Audit
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: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

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: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

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: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?

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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?

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Hi @Adi,

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

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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

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

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Hi @Dharmendra_Pundeer

No, a tax audit is not applicable in case of salary income.
However, if your income in an FY exceeds â‚ą50 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!

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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!

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I have done audit of Firm u/s 44AB in form 3CB ,3CD . wherein some clerical mistake is there . Now my query is . can i revise the audit report?

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Hey @vds91150,

If the audit report is not accepted by the firm you can ask them to reject the same and upload the audit report again.

Revision of audit report is not allowed unless there is some strong and valid reason. Revision is allowed under following circumstances:

  1. Revision of accounts of the taxpayer
  2. Change of law with a retrospective amendment
  3. Change in the interpretation of provisions, CBDT circular, CBDT judgment, etc
  4. Technical change in system or software

Hope this helps!

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if a person has F&O turnover of say 60 lacs and profit of say 35 lacs and cash payment / receipts less than 5% , then

  1. can he opt for presumptive tax
  2. is audit required for filing such return

thnaks

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Hey @deepak2508,

Following are the answers to your Queries,

  1. As per section 44AD (Presumptive Taxation for business), when you have a business turnover of less than Rs. 2Cr and books of accounts are not maintained, you can report 6% of your turnover/ gross receipts as profits. However, in the case of trading income, the financials can be maintained conveniently, and hence actual profits can be reported under regular business income.

  2. Audit is not required as the turnover is less than Rs. 1Cr.

Hope this clarifies!

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share fno trading turnover limit is 10 crore ! am i right ?

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thanks eleborating on point 1 , if one wants to file for presumptive tax, it is legal and allowed ( with F&0 turnover of 60 lacs and profit of 35 lacs with cash receipts/paymnt less than 5% )

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Hey @HIREiN,

For any business with cash payments/ receipts less than 5%, an audit is applicable when the turnover exceeds Rs. 10Cr. Hence, as f/o trading transactions are completely digital, the turnover limit for audit will be Rs. 10Cr.

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Hey @deepak2508,

As mentioned previously, as per section 44AD (Presumptive Taxation for business), when you have a business turnover of less than Rs. 2Cr and books of accounts are not maintained, you can report 6% of your turnover/ gross receipts as profits. However, in the case of trading income, the books of accounts can be maintained conveniently, although there’s no law prohibiting the opting in of Presumptive scheme for trading income, we recommend disclosing actual profits under regular business income.

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mam i am sking this question for theoritical purpose to better understnad the concept of presumtptive taxation… if F&O turnover is 60 lacs and profit of 35 lacs ( and cash receipt/paymnt less than 5%) then can is it legal and allowed to claim presumtive tax on this income, your answer saying that one shd disclose profits under regular business income creates a doubt where in such case presumtive tax can be taken or not

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Hello @deepak2508,

The concept of Presumptive taxation scheme is to provide relief to small taxpayers from maintaining books of accounts. It allows showing a specific percent 6/8 percent of turnover as profit or actual profit whichever is higher.

In case of FnO traders, the books of accounts are easily maintained so it is recommended not to opt in for presumptive taxation. It is no where prohibited that FnO traders cannot opt for presumptive taxation.

Hope this clarifies!

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