Silent Shift in Tax Audit Triggers: Section 63 vs Section 44AB

CA Sandesh Jain 25 Apr 2026 648 Views 0 comment Print Income Tax | Articles, Featured

THE SILENT SHIFT IN TAX AUDIT TRIGGERS

Understanding the New Mandatory Audit Requirement
under Section 63 of the Income-tax Act, 2025
vis-à-vis Section 44AB of the Income-tax Act, 1961

1. Introduction

The Income-tax Act, 2025 (hereinafter referred to as the “New Act”), which replaces the Income-tax Act, 1961 (hereinafter referred to as the “Old Act”) with effect from FY 2026–27, carries forward most of the presumptive taxation framework in its existing form. The turnover thresholds, deemed profit rates, and the 5-year lock-in rule in section 44AD remain substantively unchanged.

However, a careful reading of Section 63 of the New Act (corresponding to the erstwhile Section 44AB) reveals a significant and largely overlooked change in the tax audit trigger mechanism. This change has the potential to affect a large number of small and medium business assessees who have historically operated outside the presumptive taxation regime while legitimately avoiding audit obligations.

This article undertakes a comparative analysis of the relevant provisions to highlight this critical shift and its practical implications.

2. Position Under the Old Act — Section 44AB read with Section 44AD

2.1 Audit Triggers Under Section 44AB (Old Act)

Section 44AB of the Old Act prescribed five distinct clauses, (a) through (e), under which a tax audit was triggered. The clauses relevant to business assessees under the presumptive taxation scheme were:

Clause	Audit Trigger
(a)	Business turnover exceeds ₹1 crore (enhanced to ₹10 crore where cash receipts and payments each do not exceed 5% of the respective totals).
(c)	Business covered under Section 44AE / 44BB / 44BBB, and the assessee claims income lower than the deemed profit.
(d)	Profession covered under Section 44ADA, and the assessee claims income lower than the deemed profit, provided total income exceeds the basic exemption limit.
(e)	Provisions of sub-section (4) of Section 44AD are applicable (i.e., the 5-year lock-in rule has been triggered), and total income exceeds the basic exemption limit.

2.2 The Critical Observation — No “Lower Profit” Trigger for Section 44AD Businesses

A close reading of Section 44AB reveals that there was no clause in the Old Act that required a tax audit merely because a person carrying on a business covered under Section 44AD declared profits lower than the deemed rate of 6%/8%. Clause (e) was triggered only when sub-section (4) of Section 44AD was applicable — that is, when the assessee had first opted into the presumptive scheme and subsequently opted out within the next five years.

This meant that an eligible assessee who never opted for Section 44AD at all could maintain regular books of account, file a return with a balance sheet and profit & loss account showing profits below the 6%/8% threshold, and face no audit obligation under Section 44AB — provided the turnover was within the applicable limit under clause (a).

ILLUSTRATION 1 — Position Under the Old Act

Mr. Arun, a resident individual, operates a trading business. His turnover for FY 2025–26 is ₹1.80 crore. His cash receipts and payments are each below 5% of the respective totals. His actual net profit is ₹6.30 lakh (i.e., 3.5% of turnover). Mr Arun has not never opted for section 44AD.

Analysis: Mr. Arun has never opted for Section 44AD. His turnover is below ₹10 crore (enhanced limit under clause (a)). Since he has not triggered Section 44AD(4), clause (e) of Section 44AB does not apply (i.e the 5 year lock in rule does not apply since Arun has never entered into section 44AD). Result: No tax audit required. He can file a regular return with books of account showing 3.5% profit.

3. Position Under the New Act — Section 63 read with Section 58

3.1 Restructured Audit Triggers Under Section 63

Section 63 of the New Act replaces Section 44AB and section 58 of the New Act replaces section 44AD, 44ADA and 44AE. Section 63 of the New Act restructures the audit triggers into a Table format under sub-section (1). The two relevant entries are:

Sl. No.

Condition for Audit

(a) Business turnover exceeds ₹1 crore, subject to clause (b);

(b) Enhanced to ₹10 crore where cash receipts and payments each do not exceed 5%;

If a person is carrying on business or profession referred to in Section 58(2) or 61(2) and the profits and gains are claimed to be lower than the deemed profits as referred to in the said sections.

3.2 The Key Change — A New Standalone Audit Trigger

Sl. No. 2 of the Table in Section 63(1) introduces a fundamentally new audit trigger that had no equivalent provision in the Old Act. Under this provision, any person carrying on a business of the type covered under Section 58(2) Table Sr No 1 (i.e erstwhile section 44AD) — which includes any business (other than that of goods carriage business) with turnover up to ₹2 crore / ₹3 crore — who declares profits lower than the deemed rate (6%/8%), is mandatorily required to get the books of account audited.

Crucially, this trigger is not conditional on the assessee having first opted into the presumptive scheme under Section 58 of the New Act. Nor is it linked to the 5-year lock-in rule under Section 58(7) of the New Act [i.e erstwhile section 44AD(4)]. It operates independently — the mere fact that the assessee’s business falls within the scope of Section 58(2) of New Act (i.e Erstwhile section 44AD) and profits are declared below the deemed threshold (i.e 8%/6%) is sufficient to attract the audit requirement.

ILLUSTRATION 2 — Position Under the New Act (Same Facts as Illustration 1)

Mr. Arun’s trading business continues with a turnover of ₹1.80 crore in FY 2026–27 (first year under the New Act). Cash receipts and payments remain below 5%. Actual net profit is ₹6.30 lakh (3.5% of turnover). He has never opted for presumptive taxation.

Analysis: Mr. Arun’s business is of the type covered under Section 58(2) Table Sl. No. 1 (any business other than goods carriage, turnover below ₹2 crore). He is declaring profit at 3.5%, which is lower than the deemed rate of 8% (or 6% for banking mode receipts). Under Section 63(1) Table Sl. No. 2, since his declared profit is lower than the deemed profit under Section 58(2), he is now required to get his books audited — even though he never opted for presumptive taxation.

This is a direct departure from the position under the Old Act where no audit was required in these very same circumstances.

4. Summary — Two Distinct Audit Triggers Under the New Act

The New Act effectively creates two distinct and independent audit triggers for businesses covered under Section 58(2) Table Sl. No. 1 (i.e erstwhile section 44AD):

Trigger

Provision in New Act

Equivalent in Old Act

Opt-Out Lock-In

Section 58(7) read with Section 58(8): If the assessee opts for presumptive taxation u/s 58 (2) Table Sr No 1 (i.e erstwhile section 44AD) and opts out within the next 5 years, he loses the benefit for the subsequent 5 years and must maintain books and get audited.

Section 44AD(4) read with Section 44AD(5) and Section
44AB(e). Substantively identical.

Lower Profit

Declaration (NEW)

Section 63(1) Table Sl. No. 2: If the assessee carries on business referred to in Section 58(2) and declares profit lower than the
deemed profit, audit is required — regardless of whether the assessee ever opted for the presumptive scheme.

NO EQUIVALENT. Section

44AB had no clause requiring audit merely for declaring lower profit under Section 44AD without first opting in.

5. Practical Implications for Assessees and Practitioners

Under the Old Act, a well-known planning approach existed: an eligible assesse with turnover within the enhanced limit (₹10 crore with less than 5% cash transactions) or with a turnover less than ₹ 1 crore (in case of more than 5% cash transactions) who genuinely earned less than 8%/6% could simply not opt for Section 44AD, maintain proper books, file a regular return with a balance sheet and profit & loss account, declare profit less than 8%/6% and avoid audit entirely. Many small traders and manufacturers with thin margins legitimately used this route.

Under the New Act, this route is no longer available. From FY 2026–27, the moment an eligible assessee in any business covered by Section 58(2) Table Sl. No. 1 (i.e erstwhile section 44AD) declares profit below the 6%/8% threshold, audit under Section 63 is triggered — irrespective of whether the assessee ever intended to claim the presumptive benefit.

ILLUSTRATION 3 —

Ms. Priya runs a grocery distribution business with a turnover of ₹2.50 crore (all through banking channels, cash transactions less than 5%). Her actual profit margin is 2%. Under the Old Act, she maintained books and filed a regular return at 2% profit — no audit was required since her turnover was within the ₹10 crore limit and she never opted for Section 44AD.

Under the New Act: Her business falls within Section 58(2) Table Sl. No. 1 (turnover below ₹3 crore with cash transactions below 5%). Her declared profit of 2% is below the deemed rate of 6%. Section 63(1) Table Sl. No. 2 now mandates audit. Ms. Priya now faces two choice:

Option A: Declare profit at 6% or above under Section 58 (accepting higher tax liability) and avoid audit.

Option B: Declare actual profit at 2%, maintain books of account, and get them audited under Section 63.

6. Decision Framework for FY 2026–27 Onwards

For an eligible assessee carrying on a business covered under Section 58(2) Table Sl. No. 1 (i.e., any business other than goods carriage, with turnover within the prescribed limits), the decision matrix from FY 2026–27 is as follows:

Scenario	Audit Required?	Remarks
Profit declared at or above 6%/8% under Section 58	No	Section 63(2) provides express exemption.
Profit declared below 6%/8% (never opted for Section 58 i.e erstwhile section 44AD)	Yes (NEW ACT)	Section 63(1) Table Sl. No. 2. This is the new trigger with no equivalent provision in the Old Act.
Opted for Section 58 (i.e erstwhile section 44AD) and then opted out within 5 years	Yes	5 year lock in rule will apply Section 58(7) read with Section 58(8). Same as old Section 44AD(4)/(5) read with 44AB(e).
Turnover exceeds ₹1 crore / ₹10 crore (as applicable)	Yes	Section 63(1) Table Sl. No. 1. Same as old Section 44AB(a). No change.

7. Conclusion

The introduction of Sl. No. 2 in the Table under Section 63(1) of the New Act represents a quiet but consequential shift in the tax audit landscape. While the presumptive taxation thresholds and computation methodology remain largely unchanged, the audit safety net that existed under the Old Act for assessees who chose not to opt for presumptive taxation has been removed.

Under the Old Act, the audit obligation under Section 44AB was linked to voluntary entry into and subsequent exit from the presumptive scheme. The New Act delinks the audit trigger from the assessee’s choice — it is now linked to the nature of the business and the level of declared profit, regardless of whether the assessee ever intended to avail the presumptive benefit.

For practitioners, this change necessitates a review of advisory strategies for clients. The erstwhile approach of “maintain books, file regular return, avoid audit” is no longer a viable option where declared profits fall below the deemed rates.

It is advisable that practitioners proactively communicate this change to their clients well before the commencement of FY 2026–27, so that informed decisions can be made regarding the choice between accepting deemed profits at the prescribed rates versus maintaining books and undergoing audit.

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Disclaimer: The views expressed in this article are the personal views of the author and are meant for academic and informational purposes only. They should not be construed as professional advice. The author shall not be responsible for any loss or damage arising from the use of this article.