Tax Audit Limit For Partnership Firm

In this article, we will try to clear all doubts regarding the applicability of the Income Tax Audit Limit For Partnership Firm. But before know the applicability of tax audits, everyone should know the Meaning of The Tax Audit.

What is Tax Audit

As we all know there are various types of audits being conducted under different laws such as cost audit, company audit or stock audit, etc. The term audit refers to check, review, verification, or inspection of a record, transaction, accounts, etc.

Meaning of Tax Audit- Tax audit is governed by income tax law, as the name suggests, a tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax point of view. Section 44AB gives the provision relating to the class of taxpayers who are required to get their account audited from a chartered accountant. The Audit conducted by the Chartered Accountant of the accounts of taxpayer in pursuance of the requirement of section 44AB is called tax audit.

The outcome of the audit is an audit report. This report is drawn by a Chartered Accountant, where he or she gives his or her findings and observations about the person’s compliance under audit.

Section 44AB of Income Tax Act

Section 44AB deals with the audit of accounts of a certain category of persons carrying on a business or engaged in a profession. The class of taxpayers listed under this section compulsorily have to get their accounts audited by a Chartered Accountant. The audit under section 44AB aims to ascertain the compliance of various Income Tax Law provisions and fulfill other requirements of the Income Tax Law.

A Taxpayer is required to have a tax audit carried out if the sales, turnover, or gross receipts of business exceed Rs. 1 crore in the financial year. The threshold limit of Rs. 1 Crore for a tax audit is proposed to be increased to Rs. 5 Crore from AY 2020-21 if the following two conditions are satisfied-

(i) The aggregate of all amounts received including the amount received for sales, turnover, or gross receipts during the previous year, in cash, does not exceed five percent of the total turnover/gross receipts; and

(ii) The aggregate of all payments made including the amount incurred for expenditure, in cash, during the previous year does not exceed five percent of the total payment.

Must Read- Last date of Income Tax Return and Income Tax Audit Report

Section 44AB comprise following clauses-

44AB (a) Business Turnover exceed Rs. 1 Crore

44AB (b) Professional gross receipts exceed Rs. 50 Lacs

44AB (c)-i Income less than Deemed Income u/s 44AE

44AB (c)-ii Income less than Deemed Income u/s 44BB

44AB (c)-iii Income less than Deemed Income u/s 44BBB

44AB (d) for section 44ADA

44AB (e) for section 44AD

44AB (3) audited under any other law

The all above clauses are described hereunder in this section.

Let’s understand the provision of section 44AB:-

EXTRACT OF Section 44AB – Audit of accounts of certain persons carrying on business or profession.

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 previous year;

From AY 20-21, Govt. inserted a proviso in the said clause to provide that in the case of a person whose aggregate of all amount received including the amount received for sales, turnover, or gross receipts during the previous years, in cash, does not exceed five percent of the said amount; and the aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five percent Of the said payment, this clause shall affect as if for the words “one crore rupees”, the words “five crore rupees” had been substituted.   …Applicable from AY 20-21.

(b) Carrying on profession shall if his gross receipts in profession exceed fifty lakh rupees in any previous year; or

(c) 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 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or

Also Read- Tax Audit Limit For Chartered Accountants as per ICAI

(d) carrying on the profession shall if the profits and gains from the profession are deemed to be the profits and gains of such person under section 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year; or

(e) carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case 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 an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :

Provided that this section shall not apply to the person, who declares profits and gains for the previous year by the provisions of sub-section (1) of section 44AD and his total sales, turnover, or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year:

Tax Audit Limit For Partnership Firm

The chart below will shed some extra light on the provision mentioned above and clearly show about Tax Audit Limit For Partnership firms.

Tax Audit Limit For Partnership engaged in business

Turnover of Previous yearNet profit (%)Condition of cash payment and cash receipts *Tax Audit Applicability
More than 5 CroreNANAYes, 44 AB(a)
 2-5 croreNAIf less than 5%No
 2-5 croreNAIf more than 5%Yes, 44 AB(a)
1-2 CroreMore than 8% or 6% of turnoverNANo
1-2 CroreLess than 8% or 6% of turnoverNAYes, 44 AB(a)
Up to 1 CroreMore than 8% or 6% of turnoverNANo
Up to 1 CroreLess than 8% or 6% of turnoverNAYes, 44AD (e)
Tax Audit Limit For Partnership Firm

Also Read:- Remuneration and Interest to partners, calculation of book profit under section 40b of the Income Tax Act. 1961

Tax Audit Limit For Partnership Firm engaged in the profession

Turnover of Previous yearNet profit (%)Tax Audit Applicability
More than 50 lakhNAYes, 44 AB(b)
Less than 50 LakhMore than 50 % of turnoverNo
Less than 50 LakhLess than 50 % of turnoverYes, 44 AB(d)
Tax Audit Limit For Partnership Firm

Note- The above charts are also applicable for Individuals and HUF engaged in the Profession.

Notes

Due date of Tax Audit:- For every year, the due date of furnishing the tax audit report is 30th September of the subsequent year. For AY 2021-22, to mitigate the difficulties faced by taxpayers due to the ongoing COVID-19 pandemic, the due date of the income tax audit report has been extended to 15th January 2022.

Know Full Details Here- Extended Due Date of Income Tax Audit Report

The penalty u/s 44AB- If the assessee fails to conduct the audit, he is liable for a penalty of the lower of the following:-

👉 0.5% of Turnover or gross receipts.

👉 Rs. 1,50,000/-

Know Full Details Here- Income Tax Audit Penalty and Late Fees

Section 44AD applicability- This section is only applicable to Individual/HUF/ firm.

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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken based on the above article.

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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)

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