Section 44AB- Income Tax Audit Meaning, Limit, Applicability, Forms, Due date, Penalty, FAQs, etc.

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.

Income Tax Audit Limit

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 (FY 2019-20) 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.

The chart below will throw some extra light on the provision mention above and show clearly about applicable Income Tax Audit Limit.

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Tax Audit Limit for Individual/HUF/firm 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 Individual/HUF/firm engaged in 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)

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

Income Tax Audit Report Format – Form 3CA/3CB and 3CD

The report of the tax audit conducted by the chartered accountant is to be ​furnished in the prescribed form. The form prescribed for audit report in respect of audit conducted under section 44AB is Form No. 3CB and the prescribed particulars are to be reported in Form No. 3CD.

In the case of persons who are required to get their accounts audited by or under any other law, the form prescribed for the audit report in Form No. 3CA​ and the prescribed particulars are to be reported in Form No. 3CD.

Due date of furnishing Tax Audit Report and get the accounts audited

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 31st October 2021.

The CBDT vide Circular no. 09/2021: dated 20th May 2021, extended the due date of furnishing of Report of Audit under any provision of the Act for the assessment year 2021-22, from 30th September 2021 to 31st October 2021.

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

Tax Audit Penalty

Non-compliance of the tax audit- According to section 271B, if any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB or furnish such report as required under section 44AB​, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:

👉 0.5% of total sales, turnover, or gross receipts as the case may be (in business), or of the gross receipts in the profession, in such year or years.

👉 Rs. 1,50,000/-

However, according to section 271B, no penalty shall be imposed if reasonable cause for such failure is proved. e.g. Delay caused by the resignation of the tax auditor, natural calamities, etc.

Tax Audit Limit for CA as per ICAI

A Chartered Accountant or a firm of chartered accountants conduct the audit as per tax audit provisions. An individual can conduct only 60 audits in a financial year. In the case of a partnership firm, this limit applies to each member of the partnership firm being a chartered accountant.

Objective of the Tax Audit

Tax Audit is conducted to achieve the following objectives-

To ascertain/derive/report the requirements of Form nos. 3CA/3CB and 3CD.
Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor.
Books of account truly reflect the income of the taxpayer and claims for deduction are correctly made by him.
Certification of books of account by an auditor.
A check for fraud and malpractice by the taxpayer while filing the income tax return.
Computation of tax and deductions become easy with auditing.

Also Read-

🎯 Section 44AA of Income Tax Act- who is required to maintained books of accounts

🎯 Section 44AD of Income Tax Act- Presumptive Scheme

🎯 Section 44ADA of Income Tax Act- Presumptive Scheme for professionals

Section 44AB as per Income Tax Bare Act

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

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

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.

Provided that in the case of a person whose—

(a) 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 said amount; and

(b) 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 said payment:

Provided further that for the purposes of this clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which does not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash,

this clause shall have effect as if for the words “one crore rupees”, the words “five crore rupees” had been substituted; or

(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

(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 in accordance with 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:

Provided further that this section shall not apply to the person, who derives income of nature referred to in section 44B or section 44BBA, on and from the 1st day of April 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later :

Provided also that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report by an accountant in the form prescribed under this section.

Explanation. —For the purposes of this section,—(i) “accountant” shall have the same meaning as in the Explanation below sub-section (2) of section 288;(ii) “specified date”, in relation to the accounts of the assessee of the previous year relevant to an assessment year, means 11 [date one month prior to] the due date for furnishing the return of income under sub-section (1) of section 139.

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Frequently Asked Questions- FAQs

  1. What is meant by 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.

  2. Who is eligible for tax audit?

    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 (FY 2019-20) 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.

  3. What is the purpose of tax audit?

    Tax Audit is conducted to achieve the following purpose-

    To ascertain/derive/report the requirements of Form nos. 3CA/3CB and 3CD.
    Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor.
    Books of account truly reflect the income of the taxpayer and claims for deduction are correctly made by him.
    Certification of books of account by an auditor.
    A check for fraud and malpractice by the taxpayer while filing the income tax return.
    Computation of tax and deductions become easy with auditing.

  4. What happen if you fail tax audit?

    According to section 271B, if any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB or furnish such report as required under section 44AB​, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:

    👉 0.5% of total sales, turnover, or gross receipts as the case may be (in business), or of the gross receipts in the profession, in such year or years.
    👉 Rs. 1,50,000/-

    However, according to section 271B, no penalty shall be imposed if reasonable cause for such failure is proved. e.g. Delay caused by the resignation of the tax auditor, natural calamities, etc.

  5. Who is most likely to get audited?

    A person 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 (FY 2019-20) 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.

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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 on the basis of the above article.

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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)

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