Compulsory Tax Audit Under Section 44AB – Profits and Gains of Business and Profession

Section 44AB of the Income Tax Act, 1961 mandates a compulsory tax audit for businesses and professionals exceeding specified turnover/gross receipt thresholds. The audit ensures compliance with tax laws and accurate reporting of income, deductions, and taxes.

1. Applicability of Tax Audit

A.  For Businesses

SCENARIO	THRESHOLD	EXCEPTIONS
General Rule	Turnover > ₹1 crore	–
Reduced Cash Transactions (≤5%)	Turnover > ₹10 crore	Cash receipts/payments ≤5% of total transactions
Presumptive Taxation (Section 44AD)	Turnover ≤ ₹2 crore (₹3 crore if cash ≤5%)	No audit if declaring 6% (digital) or 8% (cash) of turnover as income
Declaring Lower Income	Income < presumptive rate (6%/8%)	Audit required if income exceeds basic exemption limit

B.  For Professionals

SCENARIO	THRESHOLD	EXCEPTIONS
General Rule	Gross receipts > ₹50 lakh	–
Reduced Cash Transactions (≤5%)	Gross receipts > ₹75 lakh (from AY 2024-25)	Cash receipts ≤5% of total receipts
Presumptive Taxation (Section 44ADA)	Gross receipts ≤ ₹50 lakh (₹75 lakh if cash ≤5%)	No audit if declaring 50% of receipts as income
Declaring Lower Income	Income < 50% of receipts	Audit required if income exceeds basic exemption limit

C.  Special Cases

• Business Loss: Audit required if turnover > ₹1 crore (even if loss incurred).
• International Transactions: Additional transfer pricing audit (due date: 31st October).

2. Key Objectives of Tax Audit

1. Verify Compliance: Ensure adherence to income tax laws.
2. Prevent Tax Evasion: Detect discrepancies in income/deductions.
3. Facilitate ITR Filing: Simplify computation of taxable income.
4. Enhance Transparency: Provide accurate financial reporting to tax authorities.

3. Audit Report Forms

FORM	APPLICABILITY
Form 3CA	For entities already audited under other laws (e.g., Companies Act).
Form 3CB	For entities not audited under any other law.
Form 3CD	Statement of particulars (attached to 3CA/3CB).

4. Due Dates & Penalties

• Normal Cases: 30th Septemberof the assessment year.
• Transfer Pricing Cases: 31st October.
• Penalty for Non-Compliance: ₹1.5 lakhor 5% of turnover (whichever is lower) 9.

5. Exemptions

• Small Businesses: Turnover ≤ ₹1 crore (no audit).
• Professionals: Gross receipts ≤ ₹50 lakh (no audit).
• Presumptive Taxpayers: Declaring income as per Section 44AD/44ADA.

(A) Section 44AB(a): Compulsory Tax Audit for Businesses Exceeding Turnover Threshold

Section 44AB(a) of the Income Tax Act, 1961 mandates a compulsory tax audit for businesses whose total sales, turnover, or gross receipts exceed ₹1 crore in a financial year. This provision ensures accurate reporting of income, prevents tax evasion, and promotes compliance with tax laws.

1. Key Provisions of Section 44AB(a)

A.  Applicability

• Applies to businesses(not professionals) with:
  • Turnover > ₹1 crore(default threshold).
  • Higher threshold (₹10 crore): If cash transactions ≤5% of total receipts/payments.
• Exemptions:
  • Businesses opting for presumptive taxation (Section 44AD)with turnover ≤₹2 crore (₹3 crore if cash ≤5%).

B.  Audit Requirements

• Conducted by: A Chartered Accountant (CA).
• Forms:
  • Form 3CB(if no other audit required).
  • Form 3CD(statement of particulars).
• Due Date: 30th Septemberof the assessment year (e.g., 30-Sep-2025 for FY 2024-25).

2. Objectives of Section 44AB(a)

1. Verify Compliance: Ensure adherence to income tax laws.
2. Prevent Evasion: Detect underreported income or inflated expenses.
3. Standardize Reporting: Provide uniform financial disclosures to tax authorities.
4. Facilitate Scrutiny: Reduce manual verification workload for tax officers.

3. Penalties for Non-Compliance

• Failure to Audit: Penalty of 5% of turnoveror ₹1.5 lakh (whichever is lower).
• Reasonable Exceptions: Natural calamities, auditor resignation, or loss of records.

4. Comparison with Other Clauses

SUB-SECTION	APPLICABILITY	THRESHOLD
44AB(a)	Businesses	₹1 crore (₹10 crore if cash ≤5%)
44AB(b)	Professionals	₹50 lakh
44AB(d)	Presumptive taxpayers (lower income declaration)	Income < 6%/8% (business) or 50% (profession)

(B)  Section 44AB(b): Compulsory Tax Audit for Professionals Exceeding Receipts Threshold

Key Provisions:

1. Applicability:

• Mandates tax audit for professionals (doctors, lawyers, CAs, architects, engineers, etc.)
• Triggered when gross receipts exceed ₹50 lakhin a financial year
• From AY 2024-25: Threshold increases to ₹75 lakhif cash receipts ≤5% of total receipts

2. Audit Requirements:

• Must be conducted by a Chartered Accountant
• Requires submission of:
  • Form 3CA(if already audited under other laws)
  • Form 3CB(if no other audit required)
  • Form 3CD(detailed statement of particulars)

3. Exceptions:

• Professionals opting for presumptive taxation (Section 44ADA):
  • No audit required if declaring 50% of receiptsas income
  • Threshold: ₹50 lakh (₹75 lakh if cash receipts ≤5%)
• If declaring income <50% of receipts: Audit becomes mandatory

4. Due Date:

• 30th Septemberof the assessment year
• For FY 2024-25: Due by 30-Sep-2025

5. Key Differences from Business Audit (44AB(a)):

• Lower threshold (₹50 lakh vs ₹1 crore for businesses)
• Special provisions for professional-specific deductions
• Different presumptive taxation scheme (44ADA vs 44AD)

6. Penalties for Non-Compliance:

• ₹1.5 lakh or 0.5% of gross receipts (whichever is lower)
• Additional penalties for delayed filing

Example:
A lawyer with ₹60 lakh receipts in FY 2024-25 must:

1. Get accounts audited by CA
2. Submit Form 3CB/3CD by 30-Sep-2025
3. Pay penalty if missed deadline

This provision ensures professionals maintain financial discipline while allowing simpler compliance for smaller practitioners.

(C)  Section 44AB(c): Compulsory Tax Audit for Businesses Declaring Lower Income Than Presumptive Rate

Key Provisions:

1. Applicability:

• Applies to businesses eligible for presumptive taxation under Section 44AD
• Triggered when:
  • Business declares income lower than 6% (digital) or 8% (cash) of turnover
  • But total turnover exceeds ₹2 crore(₹3 crore if cash transactions ≤5%)

2. Purpose:

• Prevents artificial reduction of taxable income
• Ensures proper disclosure when not following presumptive scheme rates

3. Audit Requirements:

• Must be conducted by a Chartered Accountant
• Requires submission of:
  • Form 3CB(audit report)
  • Form 3CD(detailed statement of particulars)
• Due by 30th Septemberof the assessment year

4. Key Differences from 44AB(a):

• Applies only when presumptive scheme is available but not fully utilized
• Lower threshold than regular business audit (₹2 crore vs ₹1 crore)
• Focuses on verification of declared income

5. Exceptions:

• No audit required if:
  • Income declared at or above presumptive rates (6%/8%)
  • Turnover within presumptive scheme limits (≤₹2 crore, or ≤₹3 crore with ≤5% cash)

Practical Implications:

1. For Small Businesses:

• Can avoid audit by either:
  • Declaring income at presumptive rates (6%/8%), or
  • Keeping turnover below ₹2 crore

2. For Growing Businesses:

• Must carefully evaluate whether to:
  • Accept presumptive taxation (simpler but higher effective tax), or
  • Maintain books and claim actual expenses (lower tax but audit required)

3. Compliance Requirements:

• Must maintain proper books of accounts
• Need to justify lower income declaration
• Higher scrutiny risk if declaring significantly lower profits

Example:
A trader with:

• ₹2.5 crore turnover
• ₹12 lakh declared income (4.8% of turnover)
  Must:

1. Get accounts audited
2. Submit Form 3CB/3CD by 30-Sep
3. Justify why income is below 6% presumptive rate

Penalties:

• ₹1.5 lakh or 0.5% of turnover (whichever is lower) for non-compliance
• Potential disallowance of expenses if audit not conducted

This provision creates a balanced approach – allowing simplicity for small businesses through presumptive taxation while ensuring proper disclosure for larger businesses claiming lower profits.

(D)  Section 44AB(d): Compulsory Tax Audit for Professionals Declaring Lower Income Than Presumptive Rate

Key Provisions:

1. Applicability:

• Applies to professionals eligible for presumptive taxation under Section 44ADA
• Triggered when:
  • Professional declares income lower than 50% of gross receipts
  • But gross receipts exceed ₹50 lakh(₹75 lakh if cash receipts ≤5%)

2. Purpose:

• Ensures proper income disclosure when not following the presumptive scheme
• Prevents under-reporting of professional income
• Maintains tax compliance for high-earning professionals

3. Audit Requirements:

• Must be conducted by a Chartered Accountant
• Requires submission of:
  • Form 3CA(if already audited under other laws)
  • Form 3CB(if no other audit required)
  • Form 3CD(detailed statement of particulars)
• Due by 30th Septemberof the assessment year

4. Key Differences from Other Clauses:

• Specifically targets professionals (doctors, lawyers, CAs, architects etc.)
• Lower threshold than regular professional audit (₹50 lakh vs ₹75 lakh for cash-light practices)
• Focuses on verification when not using the 50% presumptive rate

5. Exceptions:

• No audit required if:
  • Income declared at or above 50% of gross receipts
  • Gross receipts within presumptive scheme limits (≤₹50 lakh, or ≤₹75 lakh with ≤5% cash)

Practical Implications:

1. For Professionals:

• Can avoid audit by either:
  • Declaring income at 50% of receipts, or
  • Keeping gross receipts below ₹50 lakh (₹75 lakh for digital practices)

2. Compliance Requirements:

• Must maintain proper books of accounts if declaring <50% income
• Need to justify lower profit margins with proper documentation
• Higher scrutiny for professionals showing very low profitability

3. Common Affected Professions:

• Doctors with high infrastructure costs
• Lawyers with substantial case-related expenses
• Consultants with significant operational expenditures

Example:
A doctor with:

• ₹60 lakh gross receipts
• ₹24 lakh declared income (40% of receipts)
  Must:

1. Get accounts audited
2. Submit Form 3CB/3CD by 30-Sep
3. Maintain detailed records of professional expenses

Penalties:

• ₹1.5 lakh or 0.5% of gross receipts (whichever is lower) for non-compliance
• Potential disallowance of expenses if audit not conducted
• Risk of income estimation by tax authorities

Special Considerations:

• Professionals can still claim depreciation and other allowances
• Must reconcile with GST filings if registered
• Digital transactions help increase threshold limit to ₹75 lakh

This provision creates a balanced system – allowing simplicity through presumptive taxation while ensuring proper disclosure for professionals claiming lower profit ratios. It particularly affects professionals with high gross receipts but significant practice-related expenses.

(E)  Section 44AB(e): Compulsory Tax Audit for Businesses Engaged in Specified Transactions

Key Provisions:

1. Applicability:
   • Applies to businesses engaged in certain specified transactions
   • Triggered regardless of turnover threshold when:
     • Carrying out international transactions (covered under Section 92)
     • Entering into domestic specified transactions (as notified by CBDT)

2. Purpose:
   • Ensures proper documentation of cross-border and specified domestic transactions
   • Verifies compliance with transfer pricing regulations
   • Prevents profit shifting through related party transactions
3. Audit Requirements:
   • Must be conducted by a Chartered Accountant
   • Requires submission of:
     • Form 3CEB(for international/specified domestic transactions)
     • Form 3CB(regular audit report)
     • Form 3CD(detailed statement of particulars)
   • Stricter due date: 31st Octoberof the assessment year
4. Key Characteristics:
   • Applies even if turnover is below regular audit thresholds
   • Focuses on arm’s length pricing and proper documentation
   • Requires maintenance of extensive transfer pricing documentation
5. Covered Transactions:
   • International transactions with associated enterprises
   • Specified domestic transactions between related parties
   • Cost sharing arrangements
   • Intra-group services
   • Intangible property transfers

Practical Implications:

1. For Multinational Companies:
   • Mandatory even for small-scale international operations
   • Requires maintenance of transfer pricing study reports
   • Necessitates benchmarking analysis
2. Compliance Requirements:
   • Must maintain contemporaneous documentation
   • Need to justify pricing policies
   • Higher risk of adjustments by tax authorities
3. Common Affected Businesses:
   • Indian subsidiaries of foreign companies
   • Companies with overseas branches/sister concerns
   • Businesses with related party transactions in India

Example:
An Indian subsidiary with:

• ₹80 lakh turnover (below regular audit threshold)
• ₹20 lakh payment to foreign parent for technical services
  Must:

1. Get accounts audited
2. Submit Form 3CEB by 31-Oct
3. Maintain transfer pricing documentation

Penalties:

• ₹1.5 lakh or 0.5% of transaction value (whichever is higher)
• Potential transfer pricing adjustments
• Secondary adjustment implications

Special Considerations:

• Requires understanding of OECD transfer pricing guidelines
• Documentation must be contemporaneous
• Applies even for loss-making entities
• May trigger advance pricing agreements (APAs)

This provision specifically targets businesses with complex inter-company transactions, ensuring proper reporting and compliance with international tax standards, regardless of their size or turnover.