Introduction: Understanding the audit requirements for businesses and professions under the Indian Income Tax Act is crucial for compliance and efficient financial management. Section 44AB of the Income Tax Act outlines specific conditions under which a tax audit is mandatory. This article provides a comprehensive guide on the audit requirements and criteria for businesses and professions for the assessment year 2024-25, detailing various turnover limits, conditions under presumptive taxation schemes, and special cases that necessitate an audit.
1. To decide if a tax audit is necessary for a business or profession, you only need to refer to section 44AB of the Income Tax Act. This section specifies the conditions under which a tax audit is required.
2. Sections 44AD and 44ADA, related to presumptive taxation, offer additional conditions or benefits but are not the main sections for determining the need for a tax audit. They are not the primary sections for tax audit requirements.
3. The rules under sections 44AD and 44ADA are optional and beneficial. Taxpayers can choose whether to use these sections. Even if eligible for the benefits under these sections, opting out does not usually lead to extra tax audit requirements under section 44AB, unless there is a break in the continuous period of 5 years of audit after choosing the presumptive taxation scheme under section 44AD.
4. For a business with a turnover up to Rs. 1 crore, a tax audit is not needed, regardless of the profit rate declared. The requirement to declare a minimum of 6% or 8% of the turnover as income does not apply for turnovers up to Rs. 1 crore to be exempt from a tax audit under section 44AB(a).
5. Similarly, for specified professionals with gross receipts up to Rs. 50 lakhs, a tax audit is not needed, regardless of the profit rate declared. The requirement to declare a minimum of 50% of the gross receipts as income does not apply for gross receipts up to Rs. 50 lakhs. Note that from April 1, 2024, this limit increases to Rs. 75 lakhs under certain conditions to be exempt from a tax audit under section 44AB(b).
6. A tax audit is always required if the turnover exceeds Rs. 10 crores for businesses or Rs. 75 lakhs for specified professionals, regardless of the profit rate declared as income.
7. If the turnover does not exceed Rs. 2 crores and the taxpayer declares 6% or 8% of this turnover as income from the business, no tax audit is required.
Applicability of Tax Audit For Business:
Tax audit is not required if the assessee declares minimum income as prescribed u/s 44AD under:
a.8% of the total turnover or gross receipts.
b. 6% of the total turnover or gross receipts received via account payee cheque, bank draft, or electronic clearing system before the tax return filing due date u/s 139(1)
c. If the cash receipts during the previous year do not exceed 5% of the total turnover or gross receipts, there will not be any requirement for Tax Audit for Turnover upto Rs. 3 crore. ( w.e.f. from April 1, 2024)
d. If the cash receipts and payments (including sales and expenses) are both 5% or less of the total, there will not be any requirement for tax audit for turnover upto Rs. 10 Crore. (44AB(a)
Applicability of Tax Audit For Specified Professionals:
i. Tax audit shall never apply to specified professionals for Gross Receipts Upto Rs. 50 Lakhs irrespective of the rate of profit declared by the assessee. The condition of declaring 50% of the gross receipts as income of the profession does not apply to professionals for gross receipts upto Rs. 50 Lakhs for availing exemption from tax audit u/s 44AB(b)
ii. If the cash receipts during the previous year do not exceed 5% of the total gross receipts, Tax audit will not be applicable to specified professionals for gross receipts upto Rs. 75 lakh ( w.e.f. from April 1, 2024)
iii. However, if the income declared is less than 50% of the gross receipts and the assessee has opted for section 44ADA then tax audit is mandatory.
8. Tabular Summary of the provisions of Tax Audit A.Y. 2024-25
|
Clause |
Description | Details |
| (a) | Business Turnover/Receipts Exceeding Limit | |
| 1. | Turnover exceeding Rs. 1 Crore | If a person runs a business and their total sales, turnover, or gross receipts exceed 1 crore rupees in any previous year, they need to get their accounts audited |
| 2. | Reduced Cash Transactions Exception | If cash receipts and payments (including sales and expenses) are both 5% or less of the total, the audit requirement threshold increases to 10 crore rupees instead of 1 crore rupees. |
| 3. | Non-Account Payee Cheques Treated as Cash | Payments/receipts by non-account payee cheques are treated as cash and included in the 5% limit. |
| 4. | Presumptive Taxation Exception | This section does not apply to a person who declares profits and gains for the previous year in accordance with subsection (1) of section 44AD. |
| 5.
|
Presumptive Income for Eligible Assessee/Eligible Business u/s 44AD | |
| Eligible Assessee: | 1. An individual, Hindu Undivided Family (HUF), or partnership firm (not LLP) who is a resident. | |
| 2. Who has not claimed deductions under sections 10A, 10AA, 10B, 10BA, or Chapter VIA deductions in respect of certain incomes in the relevant year. | ||
| Eligible Business:
|
1. Any business except the business of plying, hiring, or leasing goods carriages under section 44AE. | |
| 2. The business’s total turnover or gross receipts in the previous year should not exceed 2 crore rupees. | ||
| 3. If the cash receipts during the previous year do not exceed 5% of the total turnover or gross receipts, the limit increases to 3 crore rupees. (w.e.f 01-04-24) | ||
| Deemed Profit: | 1. 8% of the total turnover or gross receipts for the previous year will be deemed as the profits and gains of the business and taxed accordingly. | |
| 2. If the total turnover or gross receipts are received via account payee cheque, bank draft, or electronic clearing system before the tax return filing due date, the rate is reduced to 6% instead of 8%. | ||
| 3. Non-account payee cheques or drafts are considered as cash receipts for this purpose. | ||
| Non-Eligible Assessees & Businesses | 1. Professionals covered under section 44AA(1). | |
| 2. Persons earning income as commission or brokerage. | ||
| 3. Persons carrying on agency business. | ||
| (b) | Professional Gross Receipts Exceeding Limit | |
| Gross Receipts exceed Rs. 50 lakh | 1. If the assessee practices a profession and their gross receipts exceed 50 lakh rupees in any previous year, they need to get their accounts audited. | |
| Presumptive Taxation Exception | 2. This section does not apply to a person who declares profits and gains for the previous year in accordance with subsection (1) of section 44ADA. | |
| Presumptive Income for Eligible Professionals | ||
| Eligible Assessee | 1. An individual or a partnership firm (other than an LLP), who is a resident in India, | |
| 2. is engaged in a profession mentioned in section 44AA(1), and their gross receipts do not exceed 50 lakh rupees in a previous year, then: | ||
| Deemed Profit | 1. 50% of the total gross receipts will be deemed as the profits and gains of the profession, which will be taxed under “Profits and gains of business or profession”. | |
| 2. Alternatively, if the assessee claims to have earned a higher amount, that amount will be considered as the profits and gains. | ||
| Increased Limit for Low Cash Transactions: | 1. If the cash receipts during the previous year do not exceed 5% of the total gross receipts, the limit for gross receipts increases from 50 lakh rupees to 75 lakh rupees (effective from April 1, 2024). | |
| Non-Account Payee Cheques Treated as Cash | 2. Non-account payee cheques or bank drafts are considered as cash receipts for the above purpose. | |
| (c) | Special Cases for Business Profits Deemed Under Sections 44AE, 44BB, 44BBB | If the business profits are deemed under sections 44AE, 44BB, or 44BBB, and the assessee claims their income is lower than the deemed profits, they need to get their accounts audited. |
| (d) | Special Cases for Professional Profits Deemed Under Section 44ADA | If the professional profits are deemed under section 44ADA, and the assessee claims their income is lower than the deemed profits, and their income exceeds the maximum non-taxable limit, they need to get their accounts audited. |
| (e) | Special Cases for Business Under Section 44AD | If section 44AD(4) applies to the business, and the income of the assessee exceeds the maximum non-taxable limit, they need to get their accounts audited. |
| 6.
|
Exclusion for Certain Incomes (Section 44B and Section 44BBA) | 1. This section does not apply to persons who derive income as specified under: |
| 2. Section 44B (income from shipping business of non-residents). | ||
| 3. Section 44BBA (income from the operation of aircraft by non-residents). | ||
| 4. This exclusion is effective from April 1, 1985, or the date these sections came into force, whichever is later. | ||
| 7.
|
Compliance with Other Laws | 1. If a person is required to get their accounts audited under any other law, it is enough to comply with this section if: |
| 2. The person gets their business or profession accounts audited as required by that other law before the specified date. | ||
| 3. They submit the audit report required by that other law by the specified date. | ||
| 4. They also submit an additional report by an accountant in the form prescribed under this section. | ||
Tabular Summary of the Criterion for Tax Audit Applicability AY 2024-25
|
Condition |
Details |
| 1. Turnover up to Rs. 1 Crore | Tax audit shall never apply for turnover up to Rs. 1 Crore for business, irrespective of the rate of profit declared by the assessee. The condition of declaring 6% or 8% of the turnover as income of the business does not apply to turnover up to Rs. 1 Crore for availing exemption from tax audit u/s 44AB(a). |
| 2. Turnover exceeds Rs. 1 Crore but does not exceed Rs. 10 Crores | Tax audit will not be applicable under the following conditions: |
| If the turnover does not exceed Rs. 2 Crores and the assessee declares the following as income from the business, then no tax audit is required: | |
| 1. 8% of the total turnover or gross receipts. | |
| 2. 6% of the total turnover or gross receipts received via account payee cheque, bank draft, or electronic clearing system before the tax return filing due date u/s 139(1). | |
| 3. If the cash receipts during the previous year do not exceed 5% of the total turnover or gross receipts, there will not be any requirement for tax audit for turnover up to Rs. 3 Crores (w.e.f. April 1, 2024). | |
| 4. If the cash receipts and payments (including sales and expenses) are both 5% or less of the total, there will not be any requirement for tax audit for turnover up to Rs. 10 Crores (44AB(a)). | |
| 3. Turnover exceeding Rs. 10 Crores | Tax audit shall always be applicable. |
| 4. Specified Professionals | |
| 1. Tax audit shall never apply for gross receipts up to Rs. 50 Lakhs, irrespective of the rate of profit declared by the assessee. The condition of declaring 50% of the turnover as income of the profession does not apply to professionals for gross receipts up to Rs. 50 Lakhs for availing exemption from tax audit u/s 44AB(b). | |
| 2. If the cash receipts during the previous year do not exceed 5% of the total gross receipts, tax audit will not be applicable for gross receipts up to Rs. 75 Lakhs (w.e.f. April 1, 2024). | |
| 5. Tax Audit for Default in Applicable Conditions | |
| 1. If the professional profits are deemed under section 44ADA, and the assessee claims their income is lower than the deemed profits, and their income exceeds the maximum non-taxable limit, they need to get their accounts audited (44AB(d)). | |
| 2. If an assessee declared their profit according to section 44AD for a given year but does not declare their profit according to this section for any of the next five years, they will not be allowed to use the benefits of this section for the next five years after the year in which they did not comply. Accordingly, tax audit will be applicable (44AB(e)). | |
Section 44AB: Descriptive provisions for Audit Requirements for Business and Profession
Assessment Year 2024-25
1. Clause (a): Business Turnover/Receipts Exceeding Limit
If a person run a business and your total sales, turnover, or gross receipts exceed 1 crore rupees in any previous year, you need to get your accounts audited.
1. 1 Reduced Cash Transactions Exception:
If the cash receipts and payments (including sales and expenses) are both 5% or less of the total, the audit requirement threshold increases to 10 crore rupees instead of 1 crore rupees.
1.2 Payment/Receipts by Non-Account Payee Cheques is Treated as Cash and included in limit of 5%
1.3 This section shall not apply to a person, who declares profits and gains for the previous year in accordance with the provisions of subsection (1) of section 44AD i.e. Presumptive Taxation.
1.4 Presumptive Income for Eligible Assessee/Eligible Business u/s 44AD
2. Eligible Assessee:
2.1 An individual, Hindu Undivided Family (HUF), or partnership firm (not LLP) who is a resident.
2.2 Who has not claimed deductions under sections 10A, 10AA, 10B, 10BA, or Chapter VIA deductions in respect of certain incomes in the relevant year.
3. Eligible Business:
3.1 Any business except the business of plying, hiring, or leasing goods carriages under section 44AE.
3.2 The business’s total turnover or gross receipts in the previous year should not exceed 2 crore rupees.
3.3 If the cash receipts during the previous year do not exceed 5% of the total turnover or gross receipts, the limit increases to 3 crore rupees.(w.e.f 04-04-24)
4. Deemed Profit:
4.1 8% of the total turnover or gross receipts for the previous year will be deemed as the profits and gains of the business and taxed accordingly.
4.2 However, if the total turnover or gross receipts are received via account payee cheque, bank draft, or electronic clearing system before the tax return filing due date, the rate is reduced to 6% instead of 8%.
4.3 For this purpose, non-account payee cheques or drafts are considered as cash receipts.
5. Non Eligible Assessees & Non Eligible Business for Presumptive Taxation
5.1 Professionals covered under section 44AA(1).
5.2 Persons earning income as commission or brokerage.
5.3 Persons carrying on agency business
6. Clause (b): Professional Gross Receipts Exceeding Limit
6.1 If the assessee practice a profession and his gross receipts exceed 50 lakh rupees in any previous year, he need to get his accounts audited.
6.2 However, this section/condition shall not apply to a person, who declares profits and gains for the previous year in accordance with the provisions of subsection (1) of section 44ADA.
6.3 Presumptive Income for Eligible Professionals
- If an individual or a partnership firm (other than an LLP), who is a resident in India, is engaged in a profession mentioned in section 44AA(1), and his gross receipts do not exceed 50 lakh rupees in a previous year, then:
- 50% of the total gross receipts will be deemed as the profits and gains of the profession, which will be taxed under “Profits and gains of business or profession”.
- Alternatively, if the assessee claims to have earned a higher amount, that amount will be considered as the profits and gains.
6.4 Increased Limit for Low Cash Transactions
- If the cash receipts during the previous year do not exceed 5% of the total gross receipts, the limit for gross receipts increases from 50 lakh rupees to 75 lakh rupees. ( w.e.f. from April 1, 2024)
- Non-Account Payee Cheques Considered as Cash
6.5 For the above purpose, non-account payee cheques or bank drafts are considered as cash receipts.
7. Clause (c): Special Cases for Business Profits Deemed Under Sections 44AE, 44BB, 44BBB
If the business profits are deemed under sections 44AE, 44BB, or 44BBB, and the assessee claim his income is lower than the deemed profits, he needs to get his accounts audited.
8. Clause (d ): Special Cases for Business Profits Deemed Under Sections 44AE, 44BB, 44BBB
If the professional profits are deemed under section 44ADA, and the assessee claim his income is lower than the deemed profits, and his income exceeds the maximum non-taxable limit, he needs to get his accounts audited.
9. Clause (e ): Special Cases for Business under Section 44AD
If section 44AD(4) applies to the business, and the income of the assessee exceeds the maximum nontaxable limit, he need to get his accounts audited. As per section 44AD(4) If an eligible assessee declares his profit according to this section for a given year but does not declare his profit according to this section for any of the next five years, they he will not be allowed to use the benefits of this section for the next five years after the year in which he did not comply.
10. Exclusion for Certain Incomes (Section 44B and Section 44BBA)
This section does not apply to persons who derive income as specified under:
- Section 44B (income from shipping business of non-residents)
- Section 44BBA (income from the operation of aircraft by non- residents)
- This exclusion is effective from April 1, 1985, or the date these sections came into force, whichever is later.
11. Compliance with Other Laws
- If a person is required to get their accounts audited under any other law, it is enough to comply with this section if:
- The person gets their business or profession accounts audited as required by that other law before the specified date.
- They submit the audit report required by that other law by the specified date.
- They also submit an additional report by an accountant in the form prescribed under this section.
Conclusion: Navigating the audit requirements under Section 44AB for the assessment year 2024-25 involves understanding various turnover limits, presumptive taxation schemes, and special conditions. Proper compliance ensures smoother financial operations and avoids penalties. Taxpayers should consult with tax professionals to determine their specific audit obligations based on their turnover, transaction nature, and chosen taxation scheme.
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