What is Section 44 AB of Income Tax Act?
The Income Tax Act of 1961 has various sections regarding income tax regulations around tax audits. A
business personnel or a professional will have to comply with the regulations based on their eligibility criteria.
Section 44 AB of Income Tax Act 1961 deals with the audit of accounts for individuals who meet certain
requirements and need to get their accounts audited by a Chartered Accountant (CA).
the section states the threshold limit mandatory for a tax audit. If a business or a professional crosses this
threshold, a mandatory tax audit will be conducted for them.
Here it is important to note for taxpayers who own more than one business or profession, aggregate turnover
will have to be above the threshold limit to conduct a mandatory tax audit.
A tax audit under Section AB A of Income Tax Act is an examination and assessment of the books of accounts
of an organization carrying businesses or professionals. It reviews income, expenses, deductions, and their taxes.
Section 44 AB of Income Tax Act states that businesses with a gross turnover in the preceding year crossing
Rs. 1 crore, will have to get a tax audit. In case, the cash transactions are less than 5%, then the threshold will
be Rs. 10 crores.
Further, the section mandates that if gross receipts from a taxpayers profession crosses Rs. 50
lakhs in the preceding year, an audit becomes mandatory.
Section 44 AB also states that an audit becomes mandatory if a business or profession has opted for
presumptive taxation as per Section 44 AE, Section 44DA, Section 44BB, and Section 44 BBB.
The preceding year is the year before the financial year in which the tax audit is required. However, the
due date for completion of tax audit and filing returns is always 30th September of the assessment year wherein tax
audit report has to be filed through Form 3 CA and Form 3CD.
Objectives Of Tax Audit
Tax audit mandates proper maintenance of accounting books for the computation of taxes with the following
objectives:
-
- Proper maintenance of accounting books avoids fraudulent activities and
certification by auditor.
-
- Report discrepancies if any
-
- Report compliance with the provisions of the Section 44 AB tax audit
-
- Verify information filed in ITR regarding income, deductions, and taxes
-
- Make computation of tax and deductions easy
The tax audit reports are prepared electronically by a CA either in Form 3CA or Form 3CB. In either case,
the tax auditor will furbish the prescribed particulars in Form 3CD which will form a part of audit report.
Threshold For Tax Audit
Every person who earns an income from any business or profession shall maintain books of accounts and get a
tax audit done, except if they are exempted under a presumptive taxation scheme.
| Category of Person |
Threshold For Tax Audit |
| Business |
|
| Carrying Business while not opting for a presumptive taxation scheme |
Total turnover, sales, or gross receipts exceed Rs. 1 crore in financial year. The threshold is Rs. 10
crores if cash transactions are up to 5% of total gross payments and receipts. |
| Carrying Business not eligible to claim presumptive taxation scheme under Section 44AD |
If income exceeds the maximum amount not chargeable to tax in subsequent 5 consecutive tax years |
| Profession |
|
| Carrying on profession |
Total gross receipts must exceed Rs. 50 lakhs in the financial year |
| Carrying profession eligible for presumptive taxation scheme under Section 44ADA |
Income must exceed the maximum amount not chargeable to income tax Under the presumptive taxation
scheme, claim profit or gain lower than the prescribed limit |
| Business Loss |
|
| Carrying on business while not opting for presumptive taxation scheme |
Total turnover, sales, or gross receipt of taxpayers exceed Rs 1 crores. In case the taxpayer has
incurred a loss from carrying a business and the taxpayers total income exceeds the basic
threshold limit |
| Carrying on business (Section 44AD) and having business loss with income below basic threshold limit
|
44 AB tax audit is not applicable. |
| Carrying on business (Section 44AD) and having business loss with income exceeding basic threshold limit
|
If a taxpayer has income exceeding the basic threshold limit and declares a taxable income within
prescribed limits under presumptive tax scheme. |
All eligible businesses and professionals must comply with the jurisdiction and tax laws applicable under
Section 44 AB of Income Tax Act 1961. Failure to comply with these laws may impose monetary penalties typically
calculated as a percentage of the tax liability or income subjected to audit. Moreover, interest charges may be
accrued on unpaid tax liability and in severe cases of repeated non-compliance, legal action may be taken against
the taxpayer. In some cases, tax authorities report to credit agencies about non-compliance, negatively impacting
your credit rating.
A taxpayer must comply with the provisions to avoid penalties and legal complications. All taxpayers must
furnish a tax audit report and maintain complete books of accounts.
FAQs
What is the difference between 44AB and 44AD?
Income tax section 44AB is applicable for businesses with total sales, turnover, or gross receipts exceeds
one crore rupees in previous year or professionals who have gross recipts exceeding Rs. 50 lakhs.
Section 44 AD is applicable for businesses with turnovers not exceeding Rs. 2 crores and declared profit is
not exceeding 6%.
Who are eligible for 44AD?
The scheme under section 44AD is applicable to businesses, professionals, and partnership firms. It is
applicable for professionals since the simple taxation process came into effect in the financial year 2016-17. While
it is applicable for India-based firms, limited liability partnership firms are not applicable. All types of
businesses other than plying carriages, hiring, brokerage or commission are eligible for the Income Tax Act 1961.
What is the clause of 44 AD?
Small taxpayers can adopt presumptive taxation schemes of Section 44AD, 44ADA, 44AE to avoid the tedious
task of maintaining accounts and getting them audited. For all eligible businesses or professionals, income is
computed on the presumptive basis at the rate of 8% of the annual total sales turnover or gross receipts for the
year.
What is the turnover limit for ITR 4?
The taxpayers turnover or gross receipts of the business must be less than Rs. 2 crores to avail of
benefits of ITR-4 under 44 AB of income tax.
What is the last date of the 44AB tax audit?
The due date for completion of tax audit under Section 44 AB and filing returns is always 30th September of
the Income Tax Act (assessment year) wherein tax audit report has to be filed through Form 3 CA and Form 3CD.
What is the penalty for 44AB?
Failure to comply with Section 44 AB of Income Tax Act means the taxpayer will have to pay a penalty of
0.5% of the annual gross sales/ turnover/ gross receipts or Rs. 1.5 lakhs. The penalty payable will be lower of the
two. However in case of labor strikes, natural disasters, delay on account of tax auditor resigning, loss of books
of accounts due to genuine reasons, and if a partner in charge of accounting books becomes physically incapacitated,
penalty may be waived.
What is Form 3CA?
Form 3CA is where the Chartered Accountant enters the details on the audit of the account of business or
profession of the assessee before proceeding to Form 3CD.
