Before diving into whether you need your books to be audited under Section 44AB, let’s understand the meaning of Tax Audit. Tax audit refers to the examination of a taxpayer’s accounts. This examination of books of accounts is conducted for ensuring that such taxpayer has maintained his books of accounts as well as other records in a proper manner. This audit also ensures that the books of accounts of such taxpayer truly reflect the income earned by him. A tax audit is basically a measure initiated to check fraudulent tax practices.

Who is subjected to a tax audit under Income Tax Act, 1961?

An individual is subjected to a tax audit if the sales, gross receipts, or turnover from his business is more than INR 1 crore in the financial year (this limit was increased to INR 5 crore, subject to the condition that cash payments and receipts during the financial year doesn’t exceed 5 percent of the taxpayer’s total receipts and payments). Also, refer to the Budget 2021 update below.

However, an individual might be required to get his books of accounts audited in certain other circumstances listed below:

  • Any person carrying on a business which is eligible for presumptive taxation scheme under Section 44AE (Engaged in the business of plying, hiring, or leasing goods carriages), 44BB (Shipping business by non-residents), or 44BBB (Foreign companies engaged in civil construction, etc. in specific turnkey power projects) and Section 44AF (Profits and gains from the retail business), and claims profits which are lower than the limits prescribed under the aforesaid sections.
  • Any person carrying on a business which is eligible for a presumptive taxation scheme under Section 44AD (Small taxpayers with less than INR 2 crore of turnover) of the Income Tax Act and declares his taxable income which is lower than the prescribed limits under aforesaid presumptive taxation scheme.
  • Any person who is carrying on business and declaring profits under presumptive taxation under Section 44AD and his total sales, gross receipts, or turnover exceeds INR 2 crore in the financial year
  • Any person carrying on profession whose total gross receipts is more than INR 50 lakh in the financial year
  • Any person carrying on the profession which is eligible for presumptive taxation scheme under Section 44ADA (Profits and gains arising from professions) and claims profits which is lower than the limits prescribed under the scheme.
  • Any person reporting loss from carrying on business and hasn’t opted for a presumptive taxation scheme where his total sales, gross receipts, or turnover is more than INR 1 crore
  • Any person whose total income exceeds the threshold limit but has reported a loss from carrying on a business where his sales, gross receipts, or turnover is more than INR 1 crore

What is the timeline for tax audit under Section 44AB?

If you’re required to get your books of accounts audited under Section 44AB, you need to file the income tax audit report  by 30th September of the relevant assessment year. You need to mandatorily e-file your income tax audit report and furnish all the relevant details as required.

What if you don’t get your books of accounts audited under Section 44AB?

If you are required to get your books of accounts audited under Section 44AB and you fail to do so, you will be liable to pay a penalty of 0.5 percent of your total turnover which you would have earned in the relevant financial year. However, this penalty cannot exceed INR 1.5 lakhs.

In case you’re able to provide that you have a legitimate reason, then no penalty would be levied as per the provisions contained in Section 271B.

Budget 2021 Announcement related to Tax Audit

In Budget 2021 session, the Indian Finance Minister, Mrs. Nirmala Sitharaman offered a major relief for the companies transacting digitally. In a bid to curb non-cash transaction and incentive digital payments while reducing the compliance burden of SMEs, the union government has now extended the threshold limit from earlier INR 5 crore to INR 10 crore.

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2 Comments

  1. Team KV says:

    Correction: …..books of accounts audited under Section 44AB, you need to file the income tax audit report by 30th September (one month prior to the filing of ITR) and your income tax returns by 31st October of the relevant assessment year.

  2. Rajinder says:

    Sir, it was really good reading the article. I have a small query and I shall be thankful if the same is replied to.:
    A trader doing elegible business has turnover of 1.72 Cr in his proprietory concern (all thru bans/electronic mode) and net business income of 3.5 lakhs only. This is his 1st yr of business. Is he required to get his accounts audited? Under which provisions? Sec 44AD lays down that his income will be assessed at higher of 6% i.e 13.2 Lakhs or
    returned income i.e. 3.50 lakhs. Is there any provision which says that if he gets his accounts audited u/s 44AB then he will not be assessed at 6%? I may mention that prior to amendment of sub-sec (4) of Sec 44AD by Finance Act 2016 w.e.f 01-14-2017, sub-sec 4 provided that relief. But after the said amendment, is this relief available and if yes under which provision ? Pl enlighten me and I shall be highly obliged. Thanx

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