Understanding the Section 44AB Tax Audit in a Simplified Manner

Tax Audit under Section 44AB

Tax Audit is simply an examination of Books of Account of the Business/Profession from the Tax perspective, conducted by a Practicing Chartered Accountant and mandated by the Income Tax Law for certain categories of persons.

In this article we will briefly discuss about the applicability, non-applicability, conditions, interlinking with Presumptive Taxation, Relaxation given, due date of Tax Audit and Penalty for non-compliance under the Income Tax Act.

Applicability

Tax Audit is applicable only to Persons having Income from Business or Profession when the Gross Turnover or Sales exceeds a certain limit mentioned under this section. Thus, Tax Audit is not applicable to any income other than Income from Business or Profession like Capital Gains, House Property, etc.

Turnover Limits

Tax Audit is applicable to Any Person carrying on Business when the Gross Turnover or Sales exceeds Rs 1 Crore in any financial year.

Tax Audit is applicable to Specified Professionals when their Gross Turnover exceeds Rs 50 lakhs in any financial year.

Relaxation (Increase of Tax Audit Limit)

In case of a Business, if the aggregate amount received in cash and the payments made in cash does not exceed 5% of all the aggregate amount received and the aggregate payments made respectively, during the financial year then the Tax Audit limit for that particular Business shall be considered as 5 Crores instead of 1 Crore starting from financial year on or after 1/4/2020 i.e. from FY 2020-2021 [Finance Act, 2020].

In simple words, if at least 95% of the total receipts and the total payments have been facilitated through Banking Channel, the Applicable Tax Audit Limit in that case shall be 5 Crores.

Let us understand the above limits in case of a Business in a simplified manner with the help of the table given below

Turnover/Gross Receipts (For a Business)	Criteria/Condition	Applicability
Upto 1 Crore		Not required
Upto 2 Crore	Opting for 44AD [Presumptive Taxation] declaring profits at 6% or 8% of Turnover as required.]	Not required
Upto 2 Crore	Opting for 44AD [Presumptive Taxation] declaring profits at rate less than 6% or 8% of Turnover as required.]	Mandatory [If Profit exceeds Basic Exemption Limit else not required.]
1 Crore to 5 Crore	>=95% Receipts and Payments through Banking Channel	Not required
Above 5 Crore	Irrespective of the mode of Receipts or Payments.	Mandatory

Note: In case of a Professional, Tax Audit is mandatory if Gross Receipts exceeds 50 lakhs.

Interlinking of Tax Audit with Presumptive Taxation Scheme

A person carrying on Business having Gross Turnover or Sales of upto 2 Crores, opting for Section 44AD Presumptive Rate of Taxation for Business, and declaring its Profits at a rate below than the rate specified (i.e. 6% or 8%) on Gross Turnover or Sales mentioned in 44AD shall have to get his Books of Account Audited.

A Specified Professional having Gross Turnover of upto 50 Lakhs opting for Section 44ADA Presumptive Rate of Taxation for Specified Professionals and  declaring its Profits at a rate below than the rate specified on Gross Turnover or Sales mentioned in 44ADA shall have to get his Books of Account Audited.

For example: If a Trader has a Turnover of Rs 1.5 cr (All received through Net Banking) then he has to declare Profits @ 6% of his turnover which amounts to Rs 900000. If he wants to declare profits below Rs 900000 then he has to compulsorily get his Books audited.  

Note: The benefit of Section 44AD and 44ADA is only applicable to Resident Individual, Resident HUF and Resident Partnership Firm. Thus, Companies and Limited Liability Partnerships (LLPs) having Gross Turnover or Sales greater than the limit mentioned above shall have to get their Tax Audit done mandatorily.

Non-Applicability:

Tax Audit shall also not apply to Any Person who opts for Presumptive Taxation under Section 44AD or Section 44ADA and declares its Income or Profits at a rate lower than the Specified Rates if its Income or Profits is below the Basic Exemption Limit in any previous year.

For example: If a trader has a Turnover of Rs 10 lacs in the year then he has to declare profits of 6% as per Section 44AD which amounts to Rs 60,000. His actual profits are Rs 25,000. Since the profit to be declared (Rs 60000) is less than the Minimum exemption limit which is Rs 250000 he need not get his books audited.

Due Date for Tax Audit

Tax Audit Report is required to be furnished by a Practicing Chartered Accountant by one month before the Due Date for Filing of Return for Assessees liable under Tax Audit (Which is 31^st October from FY 20-21; earlier it was 30^th September).

The Due Date for furnishing Tax Audit Report for the Financial Year 2019-20 is extended to 31^st December 2020. However, the same is 30^th September every year.

The Due Date for furnishing Tax Audit Report in case of Transfer Pricing for the Financial Year 2019-20 is extended to 31^st December 2020. However, the same is 30^th November every year.

Penalty

If any person to whom Tax Audit is applicable fails to get its Books of Account Audited under Section 44AB, he shall be liable for a Penalty under Section 271B, which shall be lower of 0.5% of Gross Turnover or 1,50,000.

– Article written by CA Susham Rambhia for Business Guru.