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Income Tax Audit Under Section 44AB – Turnover Limits & Compliance Guidelines

Under Section 44AB of the Income Tax Act, 1961, certain businesses and professionals are required to undergo an income tax audit based on their turnover and cash transaction limits. This ensures tax compliance, financial transparency, and accurate reporting to tax authorities.

PURPOSE

India follows a self-assessment tax system, where individuals and businesses are responsible for calculating their income and tax liabilities as per the Income Tax Act. To ensure compliance and prevent tax evasion, the Income Tax Department mandates tax audits for eligible taxpayers.

A tax audit is a systematic review of an individual’s or business entity’s financial statements and tax records to ensure compliance with income tax laws and regulations. The primary goal of a tax audit is to validate the accuracy of tax returns, ensuring that all reported income, deductions, and credits are correct and that the appropriate tax liabilities have been met.

ELIGIBILITY AND APPLICABILITY

Criteria for Eligibility of Tax Audit

  • Gross receipts

    • Tax audit eligibility is often determined by a business's gross receipts, particularly for small businesses and self-employed individuals. If the gross receipts exceed the specified threshold under the Income Tax Act, a tax audit becomes mandatory to ensure compliance, accurate financial reporting, and tax transparency.

  • Profits

    • The Budget 2023 introduced significant amendments to Section 44AD and Section 44ADA under presumptive taxation for FY 2023-24 (AY 2024-25), increasing threshold limits:

    Category Previous Limit Revised Limit
    Sec 44AD (Small Businesses) ₹2 crore ₹3 crore*
    Sec 44ADA (Professionals: Doctors, Lawyers, Engineers, etc.) ₹50 lakh ₹75 lakh*

    The increased limits apply only if 95% of receipts are through online transactions.

    If cash transactions are limited to 5% of total gross receipts and payments, the threshold for businesses has been raised to ₹10 crore from FY 2021-22 onwards.

    Key Provisions for Businesses:

    • Threshold Increase: From ₹1 crore to ₹10 crore, subject to:
    • Cash receipts ≤ 5% of total receipts.
    • Cash payments ≤ 5% of total payments.
  • Type of business

    • Certain businesses face a higher likelihood of tax audits, especially those dealing with substantial cash transactions or demonstrating a pattern of regulatory non-compliance. Sectors with frequent cash dealings, such as retail, hospitality, and real estate, often attract increased scrutiny from tax authorities. Ensuring proper financial documentation and adherence to tax laws can help minimize audit risks and penalties.

Applicability of Tax Audit as per Income Tax Act, 1961

Business Turnover

An income tax audit is mandatory for businesses and professionals under specific conditions outlined in the Income Tax Act, 1961. Below are the key scenarios when a tax audit is required:

  • Presumptive Taxation (Section 44AD): Businesses opting for presumptive taxation must undergo a tax audit if their annual turnover exceeds ₹2 crore.
  • Lower Declared Profits: If a business under Sections 44AD, 44AE, 44AF, 44BB, or 44BBB declares profits below the prescribed percentage of turnover and total income exceeds the basic exemption limit, a tax audit is required.
  • Non-Presumptive Taxation: Businesses not opting for presumptive taxation need a tax audit if their total turnover exceeds ₹1 crore. However, if cash transactions are up to 5% of total payments, the audit threshold increases to ₹10 crore (from FY 2021-22).
  • Consistent Non-Taxable Income: If a business declares profits under Section 44AD and remains within the non-taxable income limit for five consecutive years, it becomes eligible for a tax audit.

Ensuring tax compliance through an audit helps businesses maintain financial transparency and avoid penalties.

Profits

Non-compliance with tax audit requirements under the Income Tax Act, 1961, can lead to financial penalties and legal consequences. Below are the key aspects of tax audit applicability and penalties:

  • Penalty for Non-Compliance: Failure to undergo a tax audit can result in a penalty of 0.5% of total turnover or gross receipts, subject to a maximum limit set by law.
  • Legal Consequences: Non-adherence to tax audit provisions may attract fines, legal proceedings, and, in severe cases, imprisonment.
  • Late Filing Penalty: Taxpayers filing returns beyond the due date may face penalties, which vary based on the extent of delay.

Who Must Undergo a Tax Audit?

  • Businesses: Entities with an annual turnover exceeding the prescribed limits (₹1 crore or ₹10 crore, depending on cash transaction criteria).
  • Professionals: Individuals or firms with gross receipts surpassing ₹75 lakh are required to undergo a tax audit.
  • Individuals, HUFs, & Firms: Tax audits apply when income or turnover meets the eligibility thresholds set by the Income Tax Act.
  • Companies & Other Entities: Certain businesses and organizations are legally mandated to conduct a tax audit, irrespective of revenue.

It is essential to stay compliant with tax audit regulations to avoid penalties and ensure smooth financial operations.
Type of Business

Certain businesses are more likely to face tax audits, especially those dealing heavily in cash transactions or having a history of non-compliance. Sectors such as retail, hospitality, and real estate often undergo stricter scrutiny due to potential tax evasion risks.