When Assessee Is Liable to Tax Audit Under Section 63 of Income Tax Act, 2025?

Summary: Tax audit provisions were introduced through Section 44AB of the Income-tax Act, 1961, and have undergone several amendments over time. From 1^st April, 2026, the Income Tax Act, 2025 renumbers Section 44AB as Section 63 and replaces Forms 3CA/3CB with Form 26. Section 63 requires persons carrying on business or profession to get their accounts audited when specified conditions are met. For business, the threshold is generally one crore rupees, increased to ten crore rupees where aggregate cash receipts and payments do not exceed 5% of the relevant amounts. For professions, the threshold is fifty lakh rupees. Determining turnover depends upon the nature of the assessee’s activities, the manner in which transactions are invoiced and accounted for, and the applicable principles of the ICAI Guidance Note. The article also discusses treatment of trade discounts, cash discounts, GST, scrap sales, multiple businesses, commission agents, share brokers, speculative transactions, derivatives, futures and options, delivery-based share trading, contractors, real estate businesses and online and ecommerce businesses.

When The Assessee Is Liable For A Tax Audit?

We know that Tax Audit was introduced for the first time by the Finance Act, 1984, with effect from 1^st April, 1985, by introducing new Section 44AB under the Income Tax Act, 1961. Thereafter, many amendments were made in this section. This section was applicable to an assessee who was doing either Business or Profession. When this section was introduced in 1984, there was strong opposition from the assessee and the professionals, except Chartered Accountants. Even writ petitions were filed before different High Courts. All the writ petitions were dismissed by the High Court Judges.

From 1^st April, 2026, the Income Tax Act, 2025 has been renumbered, with Section 44AB corresponding to Section 63 and Forms 3CA/3CB replaced by Form 26.

Section 63: Tax Audit Provisions

(Section 44AB of the 1961 Act)

(1) Every person, carrying the business or profession fulfilling any of the conditions specified below, shall get his accounts of the year audited by an accountant, before the specified date.

Conditions for Getting Books of Account Audited

Every person—

a. 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 in any tax year, subject to the provisions of clause (b);

b. in case of a person whose:

i. aggregate of all amounts received including amount received for sales, turnover or gross receipts during the tax year, in cash, does not exceed 5% of the said amount; and

ii. aggregate of all payments made including amount incurred for expenses, in cash during the tax year does not exceed 5% of the said amount,

Clause (a) shall have effect as if for the words “one crore rupees” the words “ten crore rupees” had been substituted;

(c) Carrying on profession shall if his gross receipts in profession exceed fifty lakh rupees in any tax year.

Determining Turnover for Tax Audit

Looking to the above changes, the limit of sales and turnover is increased from Rs.40 lakhs in the year 1985-86 and reached to Rs.10 crore in the year 2022-23, while for gross receipts Rs.10 lakhs to Rs.50 lakhs.

Determining turnover for tax audit requires an understanding of the assessee’s business model, the nature of its transactions and the manner in which they are invoiced and accounted for. The same receipt may constitute turnover in one case but not in another case.

The sale proceeds of shares held as stock-in-trade constitute turnover of the share trader. However, the sale proceeds of the same shares held as investment do not constitute turnover, as the income is taxable under the head “Capital Gains”. Therefore, each receipt should be examined as per the principles laid down by the Institute of Chartered Accountants of India’s Guidance Note.

In the case of trading and manufacturing business, turnover is considered as the total value of goods sold during the year. Trade discount and sales returns are deducted for calculation of turnover. In the same way, cash discounts are not to be reduced, because they do not affect turnover. In the same way, treatment of GST depends on the accounting method followed. If the GST is included in the sale price, it will be considered as part of turnover.

Illustration of Turnover Calculation

Mr. A is a manufacturer, sells goods worth Rs. 2 crore during the year. He allows trade discount of Rs. 5 lakhs to the wholesalers through the sales invoices and also realized Rs. 3 lakhs from the sale of scrap. For the purpose of turnover for tax audit, it will be Rs. 1.98 crore.

Turnover of Commission Agents and Other Businesses

Now the question may arise that in case of Commission Agent, how the turnover is to be calculated? He is selling goods on behalf of the principal, as the ownership of goods are not passed to the agent.

Will have to see about the other assessee that whether they will fall under section 44AB, for tax audit, like Share Brokers and Sub Brokers, Speculative Transactions, Derivatives, Futures and Options (F & O), Delivery Based Share Trading etc.

Professionals and Service Providers

So far as professionals are concerned, the relevant criterion under section 44AB is gross receipts instead of turnover.

For professionals, gross receipts includes professional fees and other services provided. Reimbursements recovered as a part of a consolidation fee are also a part of gross receipts. The same conditions are applied for the Contractors and Real Estate Business and Online and Ecommerce Business.

Multiple Businesses and Tax Audit Applicability

Question may arise in our mind that Mr. A, who is doing two manufacturing business is Rs.4.50 crore and in the business of trading his turnover is of Rs. 5.40 crore. In this case applicability of section 44AB, turnover of both the business is to be considered and as it is below Rs.10 crore, Mr. A is not liable to get his books of account audited.

Other Provisions Related to Tax Audit

Section 44AB(a), 44AB(b), 44AB(c), 44AB(d) and 44AB(e), Section 44AD, 44ADA, 44AE, 44BB, 44BBB are also concerned with Tax Audit.