Who has to get Accounts Audited under section 44AB of Income Tax Act 1961?

“Understanding who needs accounts audited under Section 44AB of the Income Tax Act, 1961. Explore the criteria for businesses and professionals, recent amendments, and exemptions. Get insights into the obligations, audit thresholds, and implications of non-compliance. Stay informed about changes in audit requirements for different entities.”

Section 44AB, which was inserted by the Finance Act of 1984 and became effective from April 1, 1985, makes it obligatory for individuals engaged in business or a profession to have their accounts audited if their sales, turnover, or gross receipts exceed Rs. 40,00,000 during the previous year. For professional individuals, if their gross receipts exceed Rs. 10,00,000 during the previous year, they are also required to have their accounts audited. At the time of its introduction, the Finance Minister was Pranab Mukherjee. Despite opposition from various stakeholders such as tax practitioners and advocates, the government remained steadfast, and although challenges were filed in many High Courts, this section remained in effect.

After 24 years, in the Finance Act of 2010, amendments were made to increase the limits of sales, turnover, and gross receipts from Rs. 40,00,000 to Rs. 60,00,000, and for professionals, it increased from Rs. 10,00,000 to Rs. 15,00,000, effective from April 1, 2011.

Within two years, in the Finance Act of 2012, the limits were further increased from Rs. 60,00,000 to Rs. 1 crore for businesses and from Rs. 15,00,000 to Rs. 25,00,000 for professionals.

Professionals covered under Section 44AB include:

1. Legal activities: Advocates, Chartered Accountants, tax consultants, etc.

2. Medical activities: Doctors, hospitals, etc.

3. Engineering or architecture activities

4. Accountancy

5. Technical consultancy

6. Interior decoration, designers, etc.

7. Film artists

8. Sports persons

9. Company secretaries

10. Information technology

11. Any other profession as decided by the CBDT

Section 44AB makes it obligatory for a person engaged in business to have their accounts audited by an accountant. An accountant, as defined in the Explanation to section 288(2) of the Income Tax Act, 1961, refers to a chartered accountant as defined in clause (b) of subsection (1) of Section 2 of the Chartered Accountants Act, 1949 (38 of 1949), who holds a valid certificate of practice under subsection (1) of section 6 of the Act. However, it does not include:

(a) in case of an assesse, being a company, the person who is not eligible for appointment as an auditor of the same company in accordance with the provisions of sub section 93) of section 141 of the Companies Act, 2013 (18 of 2013); or

(b) in any other case,-

(i) the assesse himself, or in the case of the assesse, being a firm or association of persons or Hindu Undivided Family, any partner of the firm, or member of the association of the family;

(ii) in case of the assesse, being a trust or institution, any person referred to in clauses (a),(b),(c) and (cc) of sub section (3) of section 13;

(iii)  in case of any person other than persons referred above the person who is competent to verify the return under section 139 in accordance with the provisions of section 140;

(iv)  any relative of any of the persons referred to in sub clauses (i), (ii) and (iii);

 (v)   an officer or employee of the assesse;

(vi)  an individual who is a partner, or who is in the employment, of an officer or employee of the assesse;

(vii) an individual who, or his relative or partner;

(viii) a person who, whether directly or indirectly, has business relationship with the assesse of such nature as may be prescribed;

(ix)  a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.

Section 44AB makes it obligatory for a person engaged in business to have their accounts audited if their total sales, turnover, or gross receipts exceed Rs. 1 crore in any previous year (Section 44AB(a)).

1^st proviso of section 44AB (a), w.e.f. 1^st April, 2020 provides that in the case of a person whose:

(1) aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount; and

(2)  aggregate of all amounts made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment.

Then such person is not required to get audit of accounts, in respect of business carried on, where the total sales, turnover, or gross receipts does not exceed Rs. 10crore,as against Rs.5crore for assessment year 2020-21.

2^nd proviso of section 44AB (a), with effect from 1^st April, 2020 and on words provides that for the purposes of section 44AB (a), the payment or receipt, as the case may be, by cheque drawn on a bank or by a bank draft, which is not account payee, will be deemed to be the payment or receipt as the case may be, in cash.

Likewise, a person carrying on profession will also have to get his accounts audited, if his gross receipts in profession exceed Rs. 50,00,000 in any previous year, Section 44AB (b).

Following first proviso shall be substituted for the existing first proviso to section 44AB by the Finance Act, 2023, with effect from 1^st April, 2024.

Provided that this section shall not apply to a person, who declare profits and gains for the previous year in accordance with the provisions of sub section (1) of section 44AD or subsection(1) of section 44DA.