"If you run a business or profession, you might need a tax audit if your income crosses certain limits."
Every person carrying on a business or profession must consider a tax audit if their sales, turnover, or gross receipts exceed specified limits. This includes individuals, firms, LLPs, companies, and others as defined in section 2(31) of the Income Tax Act. If a trust is not carrying on a business, it is not covered under this section.
Initial Test for Tax Audit:
The initial test to determine the need for a tax audit is whether the person's sales, turnover, or gross receipts exceed the specified limits under section 44AB. The limits and criteria vary as per the clauses in section 44AB.
Applicability Under Section 44AB
Section 44AB has five clauses specifying when a tax audit is required:
Clause 44AB(a):
- Business Criteria:
- Sales/Turnover/Gross Receipts exceed Rs 10 crores.
- Limit reduces to Rs 1 crore if:
- Cash receipts exceed 5% of total receipts.
- Cash payments exceed 5% of total payments.
Example:
- If turnover is Rs 8 crores, total receipts are Rs 20 crores, and total payments are Rs 15 crores:
- Cash receipts should be < Rs 1 crore.
- Cash payments should be < Rs 75 lakhs.
Key Point: Non-account payee cheques/drafts are considered as cash.
Clause 44AB(b):
- Profession Criteria:
- Gross receipts exceed Rs 50 lakhs in the previous year.
Clause 44AB(c):
- Specific Business Types:
- S. 44AE: Goods carriage business owning ≤ 10 carriages.
- S. 44BB: Non-resident providing services or leasing machinery for mineral oil extraction.
- S. 44BBB: Non-resident in civil construction for turnkey power projects.
Clause 44AB(d):
- Professional Income Lower Than Deemed:
- Applies if income claimed is lower than deemed profits under section 44ADA.
- Income Criteria:
- For gross receipts < Rs 50 lakhs.
- From AY 2024-25, gross receipts < Rs 75 lakhs if cash receipts ≤ 5%.
Example:
- If gross receipts are Rs 60 lakhs and total receipts are Rs 5 crores, cash receipts should be < Rs 3 lakhs.
Clause 44AB(e):
- Business Under Presumptive Taxation:
- For businesses under section 44AD opting out in any financial year of the lock-in period.
- Income Criteria: Income exceeds the maximum amount not chargeable to tax.
Table at a Glance:
| Clause | Criteria | Limits and Conditions |
|---|---|---|
| 44AB(a) | Business | Sales > Rs 10 cr; or > Rs 1 cr if cash receipts/payments > 5% |
| 44AB(b) | Profession | Gross receipts > Rs 50 lakhs |
| 44AB(c) | Specific Business Types | 44AE, 44BB, 44BBB as described |
| 44AB(d) | Lower Professional Income | Income < deemed under 44ADA; < Rs 50 lakhs (Rs 75 lakhs from AY 2024-25 with conditions) |
| 44AB(e) | Presumptive Tax Opt-Out | Income > maximum not chargeable to tax |
44AB vs 44AD:
Clause 44AD:
- Presumptive Taxation:
- Individuals, HUFs, or firms (excluding LLPs) opting for presumptive taxation under section 44AD are not required to get their books audited under section 44AB if their turnover is more than Rs 1 crore but less than Rs 2 crores.
- From AY 2024-25, the limit under section 44AD increases to Rs 3 crores if cash receipts ≤ 5% of total turnover/gross receipts.
Example:
- If turnover is Rs 2.40 crores, total receipts are Rs 10 crores, and cash receipts are less than Rs 12 lakhs, section 44AD can be availed.
Opting Out:
- If a person avails section 44AD but opts out in any of the next 5 years, section 44AD(4) applies. If total income exceeds the maximum amount not chargeable to tax, a tax audit under section 44AB(e) is required.
Example:
- If turnover is Rs 1.5 crores in AY 2023-24 under section 44AD, but in AY 2024-25 turnover is Rs 2.5 crores and the person opts out of section 44AD, a tax audit under section 44AB(e) is required.
Penalty for Non-Compliance:
If a taxpayer fails to get the required tax audit done, the penalty may be:
- 0.5% of total sales/turnover/gross receipts, or
- Rs 1,50,000, whichever is lower.
Reasonable Causes for Waiving Penalty:
- Natural calamities
- Resignation of the auditor
- Extended strikes or lock-outs
- Loss of accounts due to uncontrollable situations
- Physical inability or death of a partner handling accounts
Conclusion:
Understanding the applicability of tax audits under section 44AB is crucial for compliance. The criteria vary based on the type of business or profession and specific limits on sales, turnover, or receipts. Non-compliance can result in penalties, but reasonable causes may offer relief.
For a detailed understanding, always refer to the specific clauses under section 44AB and consult a tax professional if needed.
