Section 44AB: Tax Audit under Income Tax Act

An audit is like a detailed inspection of financial records to ensure they’re accurate and follow the rules. Different laws require various types of audits, like company audits mandated by company law, cost audits, stock audits, and tax audits under income tax law. Tax Audit is an examination or review of a taxpayer’s financial statements and books of accounts of a business or profession. Chartered accountants conduct it as per Section 44AB of the Income Tax Act.

• Tax Audit Applicability u/s 44AB
  • For Businesses under normal scheme of taxation
  • For Businesses under presumptive scheme of taxation
  • For Professions under normal scheme of taxation
  • For Professions under presumptive scheme of taxation
  • For specified businesses
  • Applicability of Tax Audit in case of Trading Income

  Tax Audit Applicability u/s 44AB

  A tax audit is conducted to meticulously examine the books of accounts while detecting any discrepancies, errors, or potential instances of tax evasion and reporting them in the tax audit report. This process is essential for enforcing tax laws effectively and optimizing tax revenue collection.

  For Businesses under normal scheme of taxation

  Engaging in any business activity in India makes you subject to tax audit if your turnover or sales exceed INR 1 crore in a financial year.

  • If a majority of transactions of the business are conducted digitally i.e. cash payments/ receipts are less than 5% of total payments/ receipts then the turnover limit for tax audit applicability increases from INR 1 crore to 10 crores.

  For Businesses under presumptive scheme of taxation

  If a presumptive taxation scheme is opted in, the minimum profit of 6% or 8% of turnover is not reported as per section 44AD, and total income is more than the basic exemption limit then a tax audit will be required.

  If a business exits the presumptive taxation scheme before 5 years, it can’t opt in again for another 5 years. In this case, if total income exceeds basic exemption during this period then a tax audit will be applicable.

  For Professions under normal scheme of taxation

  If gross receipts from the profession exceed INR 50 lakhs in a financial year then tax audit is mandatory.

  For Professions under presumptive scheme of taxation

  If a presumptive taxation scheme is opted in, the minimum profit of 50% of turnover is not reported, and total income is more than the basic exemption limit then a tax audit will be required.

  For specified businesses

  If a goods carriage business is eligible for Presumptive Taxation under Sec 44AE, 44BB, or 44BBB but reports profit lower than the prescribed rate under the relevant section, then a tax audit will be applicable.

  Applicability of Tax Audit in case of Trading Income

  Income from trading in Equity Intraday, & Derivative Trading is considered Business Income. Thus, it is important to determine if the Tax Audit as per the provisions of the Income Tax Act applies to Trading Income.

  In the case of Traders, the turnover limit for tax audit applicability would be INR 10 Crore since all transactions are digital.

  Non-Applicability of Tax Audit

  If a business/ profession is reporting profits as per the presumptive taxation scheme u/s 44AD/ 44ADA respectively then tax audit is not applicable

  If the business’s turnover is between 2 crores to 10 crores, then irrespective of profit/ loss, a tax audit is not applicable.

  Due date for filing Tax Audit report

  After the tax audit is performed, the CA has to report all the findings & digitally sign the report by filing Form 3CB-3CD in case of individual taxpayers.

  The due date to file such a report is 30th September of the relevant assessment year. While due date to file ITR where tax audit is done is 31st October of the relevant assessment year.

  Penalty for non-compliance

  If a taxpayer is required to get a tax audit done but fails to do so then the penalty will be lower of following:

  • 0.5% of the of the total sales, turnover, or gross receipts, OR
  • INR 1,50,000/-

  If there is a valid reason for the failure, no penalty will be imposed under section 271B.

  FAQs

  What is the Due Date for Tax Audit as per Section 44AB?

  Taxpayers undergoing tax audits as per section 44AB of the Income Tax Act must audit their books of accounts on or before the 30th of September of the next financial year.

  What penalty will I face if I do not audit books of accounts as per Section 44AB?

  If the assessee fails to audit accounts, the Assessing Officer may levy a penalty under Section 271B. The penalty is lower of the following:
  (a) 0.5% of Sales / Turnover / Gross Receipts OR
  (b) INR 1,50,000
  However, if the assessee can provide a valid justification and prove a reasonable cause for not getting a tax audit, the AO may not impose any penalty.

  How do I calculate Trading Turnover for Intraday Trading and F&O Trading?

  Trading Turnover should be calculated by taking the Absolute Figures i.e. the sum of the absolute value of profit and loss of each trade during the financial year.
  

  Got Questions? Ask Away!

  Zainab_Hawa1 says:

  Last year I filed a return under Presumptive Taxation for my F&O business. This year I have losses. Is audit applicable to me?

  CA_Niyati_Mistry says:

  Hi @Zainab_Hawa1, Yes, since you have losses from F&O business in this year, audit is applicable to you. Hope this clarifies!

  rajat_goyal1 says: Hello
  If Turnover is between 2 to 10 Cr and there is loss, then Tax audit is applicable or not ? Muskan_Balar says:

  Hi @rajat_goyal1, No, a tax audit is not applicable if the turnover is ₹2 crores - ₹10 crores and the profit is less than 6% of the turnover (including loss).

  Saurav_Gupta says:

  Hi @CA_Niyati_Mistry, I had an Intraday Trading in the FY22-23 and Total Turnover is -6 P&L is -217 as per Zerodha. Now, when I’m filing my return it’s asking for a Tax Audit. Do I need to do a tax audit only for on trading?

  CA_Niyati_Mistry says: Hey @Saurav_Gupta, Yes, tax audit is applicable on the Intraday Trading only. Hope this clarifies! Saurav_Gupta says:

  @CA_Niyati_Mistry Even if I have done it mistakenly ? I mean it’s just one trade that too a very small amount. Can I file without having it audited? Thanks for you response.

  CA_Niyati_Mistry says:

  Hey @Saurav_Gupta, The amount of turnover is small but there might be a certain situation specific to you, because of which it is asking for Audit. I cannot give a view based on incomplete information. However you can Ask an Expert and get your queries answered. Hope this helps!

  NavalKabra9 says:

  Hi Team, In F.Y. 2022-23 I started my job and have salary of 10 lakh, and started doing F&O trading (turnover 70k), with a loss of 50k. Is Tax audit applicable to me for this AY 23-24 filing?

  AkashJhaveri says:

  Hello @NavalKabra9 Since you have not opted out of presumptive tax scheme in any of last 5 years and turnover is below 1 crore, tax audit is not applicable. You can prepare P & L, Balance sheet and file ITR 3. In case you need any expert assistance for filing ITR 3, you can book a MEET using the below link: Book a MEET Thanks.