Income Tax Audit
Income Tax Act, a tax audit is mandatory for businesses with a turnover above Rs.1 crore and professions with gross receipts exceeding Rs.50 lakhs in a financial year.
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What is Section 44AB of the Income Tax?
Section 44AB of the Income Tax Act of 1961 deals with mandatory tax audits for certain taxpayers in India. It requires taxpayers whose business or professional income (turnover or gross receipts) exceeds a specified limit in a financial year to get their accounts audited by a chartered accountant. This audit verifies the accuracy of their income and deductions reported in the tax return, ensuring compliance with tax regulations.
Who is liable to do a tax audit under Section 44AB of the Income Tax?
The Income Tax Act, Section 44AB, mandates tax audits for two categories of taxpayers:
- Businesses: A tax audit becomes compulsory if a business’s gross turnover exceeds Rs. 1 crore in the preceding financial year. The threshold limit will be increased to Rs. 10 crores if the cash transactions do not exceed 5% of total transactions.
- Professionals: Professionals whose gross receipts surpass Rs. 50 lakhs in the preceding financial year are liable for a tax audit.
In the table below, we have given the other circumstances that taxpayers need to get their tax audits done,
Category of Person | Threshold for Tax Audit |
Business | |
– Businesses not opting for presumptive taxation scheme | Exceeding Rs. 1 crore in total sales, turnover, or gross receipts during the fiscal year. If cash transactions represent up to 5% of total gross receipts and payments, the turnover threshold for a tax audit is raised to Rs. 10 crores (effective from FY 2020-21). |
– Businesses eligible for Presumptive taxation under Sections 44AE, 44BB, or 44BBB | If profits or gains fall below the prescribed limit under the presumptive taxation scheme. |
– Businesses eligible for Presumptive taxation under Section 44AD | Declaring taxable income below the prescribed limits under the presumptive tax scheme while having income exceeding the basic threshold limit. |
– Businesses not eligible for presumptive taxation under Section 44AD due to opting out during the lock-in period | If income exceeds the maximum amount not subject to tax in the subsequent 5 consecutive tax years from the fiscal year when opting out of presumptive taxation. |
– Business under the presumptive taxation scheme (Section 44AD) | Tax audit exemption if total sales, turnover, or gross receipts do not exceed Rs. 2 crore in the fiscal year. |
Profession | |
– Non-presumptive taxation scheme | Crossing Rs. 50 lakh in total gross receipts during the fiscal year. |
– Presumptive taxation under Section 44ADA | 1. If profits or gains are lower than the prescribed limit under the presumptive taxation scheme. 2. If income surpasses the maximum amount, it is not subject to income tax. |
Business Loss | |
– Business loss without opting for presumptive taxation | Crossing Rs. 1 crore in total sales, turnover, or gross receipts. A tax audit is required if the taxpayer’s total income exceeds the basic threshold limit but incurs a loss from business operations (without opting for presumptive taxation). |
– Business loss with presumptive taxation (Section 44AD) and income below the basic threshold limit | No tax audit is required. |
– Business loss with presumptive taxation (Section 44AD) and income exceeding the basic threshold limit | Declaring taxable income below the prescribed limits under the presumptive tax scheme and having income exceeding the basic threshold limit. |
Due Date for Filing Tax Audit Report
The due date for completing and filing the tax audit report under section 44AB of the Income Tax Act is 30th September of the assessment year. Hence, if a taxpayer is required to obtain a tax audit, the assessee must file the income tax return on or before 30th September along with the tax audit report. If the taxpayer is also liable for transfer pricing audit, the due date for filing audit is 30th November of the assessment year.
Penalty for not filing a Tax audit report
If a taxpayer required to obtain a tax audit does not get the accounts audited, a penalty could be levied under Section 271B of the Income Tax Act. The penalty for not completing the tax audit is 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1,50,000. While failing to comply with audit requirements typically incurs a penalty, there are exceptions for reasonable causes. Tribunals and courts have recognized the following as reasonable causes:
- Natural disasters or calamities
- Resignation of the tax auditor, leading to a delay in completing the audit
- Extended labour issues such as strikes or lockouts
- Loss of accounting records due to circumstances beyond the taxpayer’s control
- Physical inability or death of the partner responsible for managing the accounts
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