Audit of accounts of certain persons carrying on business or profession

The purpose of Tax Audit is to ensure that books of Accounts have been maintained in accordance with the provisions of the Income Tax Act. Tax Audit also ensures that the Accounts are properly being presented to the Assessing Officers when called for. However there are cases when person is required to get his accounts audited even though his turnover is less than Rs. 1 Crore in case of business and less than Rs. 25 lakhs in case of profession. Through this article, I am trying to put light on the provisions of Income Tax Act in regard to persons required to get their books of accounts audited.

Tax Audit Conditions

As per section 44AB- Every person

  • Carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees. ; or
  • Carrying on profession shall, if his gross receipts in profession exceed twenty-five lakh rupees. ; or
  •  Carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year.

get his accounts of such previous year audited by a Chartered Accountant. The due date for filing the Tax Audit Report u/s 44AB is 30th September of the Assessment year.

Analysis

A person is required to get his books of accounts audited as per provisions of section 44AB if he satisfies any of the following conditions:

  • If the person is carrying on the business and his Total Sales exceeds Rs. 1 Crore. ; or
  • If the person is carrying on profession and his Gross Receipts exceed Rs. 25 Lakhs. ; or
  • If the person is carrying on business and claims lower profit than the profits and gains deemed under section 44AD.

Now to understand the 3rd limb of analysis we need to read provisions of Section 44AD.

As per Sub Section (5) of section 44AD-

Notwithstanding anything contained in this section

  • an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) of Section 44AD.
  • whose total income exceeds the maximum amount which is not chargeable to income tax.
  •  shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA.
  • get them audited and furnish a report of such audit as required under section 44AB.

Analysis

If the assessee claims that his total income is lower than the income deemed under section 44AD and his total income is chargeable to tax, then he shall have to get his accounts audited under section 44AB and furnish the prescribed report within prescribed time.

Thus as per provisions of Section 44AD r/w Section 44AB person who satisfy all of the following conditions is required to get his books of accounts audited under Section 44AB.

  • Person is an eligible assessee. Eligible Assessee means-
    • An individual.
    • Hindu undivided family.
    • A partnership firm, but not a limited liability partnership firm. who is a resident.
  • Person is carrying on an eligible business. Eligible Business means-
    • Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE.
    • whose total turnover or gross receipts in the previous year does not exceed an amount of one crore rupees.
  • The profits of an assessee engaged in eligible business under the head ‘Profits and gains from business and profession less than 8% of the total turnover of the assessee i.e. less than the profits deemed under this section.
  • Total Income of person is also more than the maximum amount which is not chargeable to tax.

Below illustration will further clarify the above provisions:

Illustration 1: Mr. A, an eligible assessee is carrying on an eligible business.

CASE 1:

Total Sales: Rs. 70, 00,000

Expenditure: Rs. 65, 00,000

Net Profit: Rs. 5, 00,000

Mr. A wants to claim his profit to be Rs 5, 00,000, then he is required to get his accounts audited under section 44AB even though his turnover is less than Rs 1 Crore. As Mr. A satisfies all the following conditions-

  • Eligible Assessee.
  • Carrying on Eligible Business.
  • Profits are less than the 8% of total turnover i.e. less than Rs 5, 60,000.
  • His total income is more than the maximum amount which is not chargeable to tax i.e. more than Rs 2, 50,000.

DUE DATE FOR FILING RETURN OF MR. A WILL BE 30TH September.

CASE 2:

Total Sales: Rs. 70, 00,000

Expenditure: Rs 62, 00,000

Net Profit: Rs 8,00,000

Mr. A wants to claim his profit to be Rs 8, 00,000, then he is not required to get his accounts audited under section 44AB. As his profits are more than 8% of total turnover.

DUE DATE FOR FILING RETURN OF MR. A WILL BE 31st July.

CASE 3:

Total Sales: Rs. 70,00,000

Expenditure: Rs 68,00,000

Net Profit: Rs 2,00,000

Mr. A wants to claim his profit to be Rs 2,00,000, then he is not required to get his accounts audited under section 44AB.Even though his profits are less than 8% of turnover but his total income is also less than the maximum amount not chargeable to tax i.e. less than Rs 2,50,000.

DUE DATE FOR FILING RETURN OF MR. A WILL BE 31st July.

Illustration 2: M/s XYZ a partnership firm is carrying on eligible business.

CASE 1:

Total Sales: Rs. 40, 00,000 Expenditure: Rs 38, 00,000 Net Profit: Rs 2, 00,000

M/s XYZ wants to claim its profit to be Rs 2, 00,000 then XYZ is required to get its accounts audited under section 44AB. As M/s XYZ satisfies following conditions-

  • Eligible Assessee.
  • Carrying on Eligible Business.
  • Profits are less than the 8% of total turnover i.e. less than Rs. 3, 20,000.
  • Its total income is more than the maximum amount which is not chargeable to tax i.e. Nil. Since, the firm is taxed at an income starting from Rs. One.

DUE DATE FOR FILING RETURN OF M/s XYZ WILL BE 30th September.

CASE 2:

Total Sales: Rs. 40,00,000

Expenditure: Rs 41,00,000

Net loss: Rs 1,00,000

M/s XYZ wants to claim loss of Rs 1, 00,000 then it is not required to get its accounts audited under section 44AB.Even though its profits are less than 8% of turnover but its total income is also less than the maximum amount not chargeable to tax i.e. Nil. Since, the firm is taxed at an income starting from Rs. One.

DUE DATE FOR FILING RETURN OF M/s XYZ WILL BE 31st July.

Illustration 3: M/s PQR private limited is carrying on eligible business.

CASE 1:

Total Sales: Rs. 50, 00,000

Expenditure: Rs. 48, 00,000

Net Profit: Rs. 2, 00,000

M/s PQR private limited wants to claim its profit to be Rs 2, 00,000, then it is not required to get his accounts audited under section 44AB even though its profits are less than 8% of turnover as company is not an eligible assessee as per section 44AD.

CONCLUSION:

Therefore, in case of eligible assessees (i.e. resident individual, HUF and Partnership Firm) carrying on eligible business having turnover of less than Rs 1 Crore, showing profits from such business less than 8% of turnover(i.e. less than profits deemed u/s 44AD) and is having total income chargeable to tax. Then such a person is required to get his books of accounts audited u/s 44AB. Due date for filing of return in case of such assessee shall be 30th September.

(Submitted by – Tarun Kumar (B.Com, CA-Final) Mobile: +91-888-282-8112 Email-ID: tktarun786@gmail.com)

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A passionate Chartered Accountant having practical work exposure in the area of Direct Tax. An organised and efficient person by nature who loves to take challenges of working with dynamic and fast paced environment with the help of knowledge and work experience. View Full Profile

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29 responses to “Applicability of Tax Audit & Related Income Tax Provisions”

  1. beno says:

    Sir,
    Is “coducting statutory auditing of books of accounts and filing of income tax returns” is different from “conductng tax audit”.
    Kindly explain

  2. Saravanan says:

    Kindly reply me,
    my annual turnover for FY 2015-2016 is above 1 crore, if i shown the net profit 8% and above then, its in tax audit or not…..?…

  3. arun kumar says:

    nice artical all doubt clear , example is very good

  4. Sup says:

    Hi, one of my friend’s father was running a business under partnership. He expired in August 2017. Because of this, the firm could not get the books of accounts audited and file before the tax audit due date ie 7.11.17. What are the possible solutions for this? Can the deceased partner’s son get the tax audit done and file his father’s anf firm’s income tax returns after due date?? What are the consequences of late filing due to natural death of the managing partner?
    Please reply

  5. prajakta says:

    thanku

  6. Imtiyaz says:

    In case of Partnership firm in previous Loss and Assessment year is profit and profit is less then 8% and turnover is Also Less then 2 Cr so its Gross total income is Nil. its required to audit his Book of Account under Section 44AD?

  7. hetal shah says:

    for any trust if income exceeds 3 crore in that case Tax Audit is Compulsory ?

  8. Ananya says:

    Loss in case of partnership firm means deemed tax audit right?

  9. amit zala says:

    My Question is i am Transporter and i have two Truck owner AY 14-15 Total Income of Transportation of Rs.2905400 and Rs.600000/- Remuneration Income Rs.76642/- Other Income and Total Expenses of Rs. 2843365/- i have show the net profit rs. 738676/- and as per income tax Deduction Rules I have Claim Rs. 101852/- Deduction total net income was 636824/- so my total Income tax of Rs. 52365/- Payble and my Tds of Rs. 60000/- but in income tax notice my all Expenses delouse reason of i have not audit my account and profit below of 8 % so please Gide me of this case

    • shyam agarwal says:

      My business( carring and farwarding agency) turn over is 72 lac in fy 2016-17 and I show 8,40,000/- income then my accounts is auditable are not ?

  10. PINAKIN VYAS says:

    My Question is that I am service provider How many income our Account book Audit

  11. clbhoot says:

    My Question is that if a firm is having profit of Rs.98,500 u/s 44AD but after adjusting Remuneration u/s 40(b) there is loss and total income is -9800 then it is necessary to get books of accounts audited and whether it was necessary to enter p&L and balancesheet while filing original return? please reply.

  12. Asha Jyothi says:

    My ..query is
    If a Cooperative Society Having Income More than 1 crore …which Tax audit report applicable either 3CA-3CD or 3CB-3CD????

  13. S verma says:

    a cooperative society engaged in distribution on behalf of state govt. . turnover is 65 lakhs and profit is 95000 . is tax audit report under section 44ab/44ad compulsory ? and e filing of return with digital siganture is compulsury or not pls suggest

  14. TEJAL says:

    private companies, HUF and partnership firm when come into the audit

  15. Devadas says:

    No logic…you may be miss understood the provision…in case of illu..1 of case 3..Rs. 200000 is the amount claimed as income…which is below taxable limit of Rs.250000. But for analysing the applicability of section 44 AD you should compare the 8 % income with the maximum taxable limit. in the given case 8% of gross turn over is Rs.560000/- which is above maximum limit…if you want to claim income which is lower than this(whether it is 510000 or 200000), you should have to get your account audited.

  16. vaibhav malde says:

    what if, private limited company having turnover more than 1 cr., but having los of 25 lakh, is it nessary to do an audit u/s 44 AB?

  17. keshav says:

    suppose an individual has a loss of Rs.3000000 then is the individual required to get his books of accounts audited

  18. Vipul says:

    Very nice and useful

  19. Bhavana says:

    Hi,
    My query is regarding applicabilty of Tax Audit for Speculative Transactions. It is clear that Intra day Trading transactions are to be included in Income from Business or Profession.There is no stock in trade and investment because the transactions are settled on a daily basis without taking Delivery.
    For the purpose of Turnover only the Net amount ie. the difference in Purchase and Sales is alone Included. Say the turnover is Rs.5,00,000( Negative bills- Rs300000 and Positive bills-Rs.200000), Here though the TO is <than 1Cr, the profit is not minimum 8% meaning which 44AD criteria is satisfied . I am incurring net loss of Rs.200000/-. Am I liable for Tax Audit?
    Also my total income is more than the amount chargeble to Tax. Please support your answer with example and eplanation for better clarity.

  20. jitendra vithalani says:

    In partenership firm,
    No slaes,no purchase,
    Only purchase godown then, should we file IT return ?, should we audit?

  21. Himanshu says:

    My query is that if a person is profession having loss under pgbp and also she has a salary income. Her total income is more than amount chargable to tax. So, Tax Audit u/s 44AB is required to be conducted or not.

  22. Tarun Kumar says:

    Dear Sudhin,

    If shares are held as Stock in trade then provisions of tax audit may be attracted if all the conditions of section are satisfied.

    Dividend is exempt u/s 10(34), so question of taxability doesn’t arise.

    To make Distinction between shares held as stock-in-trade and shares held as investment you can refer CBDT CIRCULAR NO. 4/2007, DATED 15-6-2007

  23. SUDHIN says:

    What about profit from share transactions if the profit is less than 8% and turnover is also less than 1 Cr. What are the implications of the dividend got also? How to differentiate b/w an investor and from one for whom it is considered as a business?
    Thanks,

  24. Tarun Kumar says:

    Mr. Satish, Advances received against sales are not part of turnover and are classified as assets. Thus advances will not be considered while calculating 8% of total turnover.

  25. Rajiv Agrawal says:

    very good examples. thanks a lot. It will clear all the doubs of professionals for further guidance.

  26. Sarvam says:

    Good job Mr. Kumar.

  27. satish boob says:

    dear sir,very illustrative,but what about advances received against sales and capital goods transactions ??

  28. Ashish Jain says:

    Superb analysis…keep sharing

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