A tax audit is an examination to ensure that a taxpayer’s financial records accurately adhere to generally accepted accounting principles and the Income-tax Act’s requirements. This process helps verify that all records are properly maintained and accurately reflect the taxpayer’s actual income. It also aids in detecting any fraudulent activities. However, undergoing a tax audit does not protect the assessee from further scrutiny assessments or potential disallowances of expenses 1 . Only a practising Chartered Accountant can conduct a tax audit.
The tax audit report must be submitted using the forms specified below:
| Category of Taxpayer | Form for Audit Report | Annexure to Audit Report |
| Books of account are audited under another law | Form 3CA | Form 3CD |
| All other cases | Form 3CB | Form 3CD |
Forms 3CA and 3CB serve as the audit report formats. Form 3CD is a detailed statement of particulars required under Section 44AB of the Income-tax Act, which must be attached to either Form 3CA or Form 3CB.
If the assessee’s books of accounts are subject to audit under any other law, it suffices to conduct the audit as per that law and submit both the audit report and the statement of particulars (Form 3CD) prepared by a Chartered Accountant. These documents should be furnished by the specified due date.
Section 44AB mandates the audit of books for any assessee engaged in business or profession under certain conditions outlined below:
| Nature of Business or Profession | Category of Taxpayer | When is the Audit Mandatory? |
| Any professions (specified or non-specified) | Any | If gross receipts from the profession during the relevant previous year exceed Rs. 50 lakhs. |
| Business | Both payment and receipt in cash do not exceed 5% of the total receipts and payment, respectively. | If total sales, turnover or gross receipt from the business during the previous year exceeds Rs. 10 crores. |
| Either payment or receipt in cash exceeds 5% of the total receipts and payment, respectively. | If total sales, turnover or gross receipt from the business during the previous year: |
Tax audit provisions under Section 44AB do not apply to assessees covered by Section 44B, Section 44BBA, or Section 44BBC (effective from Assessment Year 2025-26).
provisions under Section 44AB do not apply to assessees covered by Section 44B, Section 44BBA, or Section 44BBC (effective from Assessment Year 2025-26).
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Yes, a tax audit is required regardless of total income levels. Section 44AB mandates a tax audit even if the assessee’s total income does not exceed the maximum exemption limit. The purpose of a tax audit under Section 44AB is to aid the Assessing Officer in accurately determining the total income of an assessee according to the provisions of the Act. Thus, if turnover exceeds the specified limits outlined in Section 44AB, a tax audit is obligatory, even if the total income falls below the exemption threshold.
Section 44AB applies uniformly to both residents and non-residents. A non-resident is required to have their accounts audited if their turnover, sales, or gross receipts within India exceed the prescribed thresholds. The audit for a non-resident will focus solely on the business activities conducted within India.
To qualify for the enhanced tax audit threshold of Rs. 10 crores, a business must primarily conduct transactions through banking channels. Specifically, both cash receipts and cash payments during the financial year must not exceed 5% of total receipts and payments, respectively. This means that over 95% of all transactions should be executed through non-cash methods.
It is important to clarify that any transactions involving a cheque or bank draft, unless made as an ‘account payee only’, are considered cash transactions. This includes transactions using bearer or crossed cheques that are not marked ‘account payee’.
Each condition concerning ‘amounts received’ and ‘payments made’ must be met independently. Failing to meet either condition disqualifies the business from the enhanced limit, meaning the standard audit thresholds apply.
The responsibility to demonstrate eligibility for this higher threshold lies with the taxpayer. If a taxpayer’s cash transactions exceed the 5% limit, they risk a penalty under Section 271B for not auditing their accounts unless they can show a reasonable cause under Section 273B to avoid penalties.
Illustrative Example: Mr A operates a readymade garments trading business. During the financial year 2022-23, he reports a turnover under Rs. 10 crores and the following transactions:
| Particulars | Mode of transaction | |
| Cash (Rs. in lakhs) | Bank (Rs. in lakhs) | |
| Receipts | ||
| Sales | 20 | 480 |
| Advance from customers | 10 | 20 |
| Unsecured loan | 10 | 100 |
| Total receipts | 40 | 600 |
| Payments | ||
| Purchase | 15 | 400 |
| Rent | Nil | 50 |
| Loan repayment | 5 | 50 |
| Total Payments | 20 | 500 |
The turnover of Mr A during the financial year 2022-23 is up to Rs. 10 crores. He shall not be liable for tax audit if his cash receipt and payment during the year do not exceed 5% of the total receipt or payment, as the case may be.
Computation of Percentage of Cash Receipts & Payments:
| Particulars | Total (A) | Cash (B) | % in cash (B/A*100) |
| Receipts | 640 | 40 | 6.25% |
| Payments | 520 | 20 | 3.85% |
Although Mr A’s cash payments are within the permissible limit (under 5%), his cash receipts exceed the 5% threshold at 6.25%. Consequently, Mr A does not qualify for the increased Rs. 10 crore threshold and must undergo a tax audit.
No, professionals do not have access to the enhanced turnover limit of Rs. 10 crores for tax audits. Section 44AB of the Income-tax Act distinguishes between business and profession: clause (a) addresses businesses, while clause (b) refers to professions. The provision that sets the enhanced turnover limit of Rs. 10 crores specifically under clause (a) applies solely to businesses. Therefore, professionals are not entitled to this increased threshold for tax audits.
Under the Income Tax Act, Section 44AB sets the criteria for when an assessee must have their accounts audited. One significant exception is for individuals who choose the presumptive taxation scheme under Section 44AD. Here’s a breakdown:
This structure clarifies the conditions under which an audit is required, aligning with the exemptions provided by the presumptive taxation scheme under Section 44AD.
Let’s analyse the tax audit requirements for an assessee with different turnover scenarios and their choices regarding the presumptive taxation scheme under Section 44AD.
Example:
If an assessee’s turnover is more than Rs. 1 crore and cash transactions (both payments and receipts) are less than 5% of the total, does this subject them to a tax audit?
Here’s a detailed breakdown in tabular form to clarify:
| Situation | Turnover | Whether Liable for a Tax Audit? |
| Assessee opted for Section 44AD in the last 5 years but not in the current year |
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Income or losses from trading in futures and options (F&O) are treated as non-speculative business income and are taxable under the head’ Profits and Gains from Business or Profession’, even if these transactions do not involve actual delivery of goods.
To determine whether a tax audit is necessary for a salaried employee engaged in F&O trading, one must first calculate the turnover from these activities. The need for a tax audit depends on this turnover figure. If the total sales, turnover, or gross receipts from trading exceed Rs. 1 crore during the financial year, a tax audit is mandatory. However, this threshold increases to Rs. 10 crores if more than 95% of transactions are conducted through banking channels, meaning cash transactions do not exceed 5% of total transactions.
Example: Mr A, besides earning a salary, has traded in futures and options throughout the year. Below are the details of his transactions:
| Transaction | Buy Value | Sell Value | Realised P&L | Computation of Turnover |
| 1 | 40,00,000 | 50,00,000 | 10,00,000 | 10,00,000 |
| 2 | 60,00,000 | 30,00,000 | (30,00,000) | 30,00,000 |
| 3 | 75,00,000 | 60,00,000 | (15,00,000) | 15,00,000 |
| 4 | 3,20,00,000 | 2,00,00,000 | (1,20,00,000) | 1,20,00,000 |
| 5 | 2,30,00,000 | 1,30,00,000 | 1,00,00,000 | 1,00,00,000 |
| Total | 7,25,00,000 | 4,70,00,000 | (55,00,000) | 2,75,00,000 |
Mr A’s turnover from futures and options (F&O) trading amounts to Rs. 2,75,00,000, resulting in a net loss of Rs. 55,00,000. As F&O transactions are typically conducted digitally through banking channels, the higher threshold of Rs. 10 crores for a tax audit is applicable. Consequently, Mr A does not require a tax audit since his business turnover falls below the stipulated limit for the increased threshold.
Section 44ADA allows professionals to opt for presumptive taxation if their gross receipts do not exceed Rs. 50 lakhs during the relevant previous year. This limit can be increased to Rs. 75 lakhs if cash transactions do not exceed 5% of the total gross receipts for the year.
Here’s a breakdown of when a tax audit is applicable based on different scenarios:
| Case | Gross Receipts | Profit | Whether Tax Audit Applicable? | Reason |
| Case 1 |
Charitable and religious institutions are governed by special provisions outlined in Sections 11 to 13 of the Income Tax Act. To claim exemptions under these sections, trusts or institutions must meet certain conditions, including registration, maintaining books of account, undergoing audits, and filing income returns as specified under Section 12A. Once these conditions are met, the income of such institutions is calculated according to Sections 11 and 12, not by the usual commercial principles.
For entities registered under Section 12AB, the income defined under Section 11(1) should be computed following these special provisions rather than the standard provisions of the Act. Specifically, Section 14 and the five heads of income do not apply. The audit requirement under Section 44AB pertains to the ‘Profit & Gain from Business’ head, meaning it is mandated only when the income is assessed under this category or when a tax audit under Section 44AB is explicitly required.
Judicial precedents such as the Delhi Tribunal’s decision in United Educational Society v. Jt. CIT [2019] 107 taxmann.com 127 and the Mumbai Tribunal’s ruling in Asstt. CIT v. India Magnum Fund [2002] 81 ITD 295 have clarified that Section 44AB does not extend to incomes covered under Chapter III, which are excluded from total income calculations. Consequently, charitable institutions whose income computation falls under Sections 11 and 12 are not subjected to tax audits under Section 44AB, unless specified otherwise.
Charitable trusts do undergo specific audits under Section 12A, with audit reports required to be submitted in Forms 10B or 10BB. These sections operate independently of the five heads of income, thus preserving the exemptions granted under Section 12AB. For business operations within these trusts, the ICAI’s “Guidance Note on Tax Audit” advises that if their business turnover exceeds certain thresholds (Rs. 1 crore or Rs. 10 crore in some cases), an audit under Section 44AB is necessary, notwithstanding the exemptions under various subsections of Section 10 and Section 11.
In summary, charitable or religious trusts generally do not require a tax audit under Section 44AB for income processed under Sections 11 and 12, unless their business activities surpass the prescribed turnover limits.
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Section 44AA of the Income-tax Act mandates the maintenance of books of accounts for various taxpayers. Below is a detailed table illustrating the requirements based on taxpayer categories, income thresholds, and gross turnover or receipts:
Nature of Business or Profession
Threshold Limits for Gross Turnover or Receipts
* Meaning of Specified Profession:
** For entities established during the previous year, the applicability of maintaining books of accounts will be determined based on whether the income or gross receipts for the current year are expected to exceed the prescribed thresholds. If not likely to exceed, the maintenance of books is not required.
Taxpayers must maintain specific documents to fulfill the requirements of Section 44AA regarding the maintenance of books of accounts. Here’s a breakdown based on the nature of the business or profession and applicable thresholds:
According to Clause 11 of Form 3CD, auditors must list all books of accounts and the addresses where they are maintained. If books are kept at multiple locations, the auditor must specify each address along with the corresponding details of the books maintained there. For companies, it’s also important for the auditor to check if Form AOC-5 has been filed with the Registrar of Companies. This form is necessary when books of accounts are held at a place other than the registered office.
Beyond listing the books under Clause 11(b), auditors have the responsibility to thoroughly examine these books. After such examination, they should confirm in Form No. 3CB whether the books maintained qualify as ‘proper books of account’ according to regulatory standards.
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