FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
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FAQ 1. What is a Tax Audit?
Ans. A tax audit is a process to verify whether the books of accounts prepared by a taxpayer comply with the generally accepted accounting principles and the provisions of the Income-tax Act. It is intended to ensure that the books of account and other records are properly maintained and correctly compute the taxpayer’s actual income. The tax audit does not give the assessee immunity from scrutiny assessment or disallowance of expenses[1]. A tax audit can be conducted only by a Chartered Accountant in practice.
Read More about the Compulsory Audit of Accounts Here
FAQ 2. In which form the tax audit report has to be obtained?
Ans. The tax audit report has to be furnished in the forms as prescribed below:
Category of Taxpayer |
Form for Audit Report |
Annexure to Audit Report |
If the books of account of the assessee are required to be audited under any other law | Form 3CA | Form 3CD |
In any other case | Form 3CB | Form 3CD |
Form No. 3CA/3CB is a format of audit report, whereas Form 3CD is a statement of particulars required to be furnished under Section 44AB of the Income-tax Act.
Where an assessee is required to get his books of accounts audited under any other law, it is sufficient for him to get his accounts audited under that law and furnish a report of such audit and a report in form 3CA and 3CD by a Chartered Accountant by the prescribed due date.
Dive Deeper:
FAQs on Disclosures & Reporting in Form 3CD | Tax Audit | A.Y. 2021-22
FAQ 3. Who is required to get books of accounts audited?
Ans. Section 44AB requires the audit of books of accounts of an assessee engaged in business or profession. The table below enumerates the requirement to get the books of accounts audited by different taxpayers:
Nature of Business or Profession | Category of Taxpayer | When audit is mandatory? |
Any professions (specified or non-specified) | Any | If gross receipts from profession during the relevant previous year exceeds Rs. 50 lakhs |
Business | Cash receipt and payment up to 5% | If total sales, turnover or gross receipt from the business during the previous year exceeds Rs. 10 crore[2] |
Business | Any | If total sales, turnover or gross receipt from the business during the previous year exceeds Rs. 1 crore |
Business eligible for Presumptive Tax Scheme under Section 44AD | Resident Individual or HUF | If the income of assessee exceeds the maximum exemption limit and he has opted for the scheme in any of the last 5 previous years but does not opt for the same in current year. |
Business eligible for Presumptive Tax Scheme under Section 44AD | Resident Partnership Firm | Taxpayer has opted for the scheme in any of the last 5 previous years but does not opt for the same in the current year. |
Profession eligible for Presumptive Tax Scheme under Section 44ADA | Resident Assessee | Taxpayer claims that his profits from profession are lower than the profits computed under Section 44ADA and total income exceeds the maximum exemption limit |
Business eligible for Presumptive Tax Scheme under Section 44AE | Any Assessee engaged in plying, hiring or leasing of goods carriage | Taxpayer claims that his profits from business are lower than the profit computed under Section 44AE |
Business eligible for Presumptive Tax Scheme under Section 44BB | Non-resident assessee engaged in exploration of mineral oil | Taxpayer claims that his profits from business are lower than the profit computed under Section 44BB |
Business eligible for Presumptive Tax Scheme under Section 44BBB | Foreign Co. engaged in civil construction | Taxpayer claims that his profits from business are lower than the profit computed under Section 44BBB |
The provisions for tax audit under Section 44AB is not applicable in the case of assessees who come within the purview of Section 44B or Section 44BBA.
Dive Deeper:
FAQs on Computation of Gross Receipts/Turnover | Tax Audit | A.Y. 2021-22
FAQ 4. How to avail of the benefit of the enhanced limit of Rs. 10 crores for the tax audit?
Ans. Up to the assessment year 2019-2020, every person carrying on business was required to get its books of account audited from a Chartered Accountant if its total sales, turnover, or gross receipt from the business exceeds Rs. 1 crore during the previous year.
To reduce the compliance burden on small and medium enterprises, the Finance Act, 2020, effective from the assessment year 2020-21, has increased the threshold limit under section 44AB for the mandatory audit for a person carrying on business from Rs. 1 crore to Rs. 5 crores. The Finance Act, 2021 has increased the threshold limit from Rs. 5 crores to Rs. 10 crores, effective from the assessment year 2021-22 onwards.
However, the increased threshold limit of Rs. 10 crores shall be applicable only if cash receipts and cash payments during the year does not exceed 5% of the total receipt or payment, as the case may be. In other words, more than 95% of business transactions should be done through banking channels. Any payment or receipt by cheque or bank draft should be considered a cash transaction if such cheque or draft is not an account payee. Thus, to illustrate, any payment or receipt by a bearer or crossed cheque (not being an account payee cheque) would be considered as payment or receipt in cash.
It may be noted that conditions in respect of ‘amounts received’ and ‘payments made’ should be fulfilled separately. It means, if one of the conditions is not satisfied, then proviso would not apply. A threshold limit of 5% is prescribed separately for receipts/payments and ought to be applied accordingly.
The onus would be on the assessee to prove that he is eligible for an increased threshold limit for not getting his accounts audited. He needs to ensure that his aggregate cash receipts and payments are within the limit of 5%. If he fails to do so, the consequences would be a penalty under Section 271B for failure to get accounts audited. However, if there is reasonable cause, in terms of Section 273B, such a penalty may not be imposed.
For example, Mr. A is engaged in the business of trading of readymade garments. He has a turnover of less than Rs. 10 crores during the financial year 2020-21. He made the following transactions during the relevant year:
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 2020-21 is up to Rs. 10 crores. He shall not be liable for tax audit if his cash receipt and payment during the year does not exceed 5% of 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% |
Though the payment made in cash during the year does not exceed 5% of total payments, the percentage of cash receipts exceeds the limit of 5%. Thus, Mr. A is not entitled to the benefit of the increased threshold limit of Rs. 10 crores for the tax audit. Hence, a tax audit is applicable.
FAQ 5. Can the professionals avail the benefit of the enhanced turnover limit of Rs. 10 crores for the tax audit?
Ans. Clause (a) of Section 44AB talks about a person carrying on business, whereas clause (b) talks about a person carrying on a profession. The proviso to Section 44AB providing the enhanced turnover limit of Rs. 10 crores for the tax audit is placed below clause (a) to section 44AB. Thus, the persons engaged in the profession are not entitled to claim an enhanced turnover limit of Rs. 10 crores for the tax audit.
Dive Deeper:
FAQs on Due Date & Process to file Tax Audit Report | A.Y. 2021-22
FAQ 6. Whether a person opting for a presumptive taxation scheme under section 44AD shall get his accounts audited?
Ans. Section 44AB of the Income-tax Act prescribes the conditions under which an assessee is required to get his accounts audited. It excludes a person from getting books of account audited if he opts for a presumptive taxation scheme under Section 44AD provided turnover of business does not exceed Rs. 2 crores.
Clause (e) of Section 44AB states that a person, who has opted for the presumptive taxation scheme under Section 44AD in any of the last 5 previous years but does not opt for the same in the current previous year, shall be liable to get his accounts audited if his total income exceeds the maximum amount not chargeable to tax.
Clause (a) of Section 44AB provides for an audit of books of account if a person is engaged in a business and the turnover of such business exceeds Rs. 1 crore. The Finance Act, 2020 has extended the threshold of turnover to Rs. 5 crores if cash receipt and cash payment do not exceed 5% of total receipt and payment respectively. This limit of Rs. 5 crores has been further enhanced to Rs. 10 Crores by the Finance Act 2021.
If an assessee is covered under both the clauses, that is, clause (a) and clause (e) of Section 44AB, whether he will be liable to get the books of account audited?
For example, if the turnover of an assessee is more than Rs. 1 crore and his cash payment and receipt is less than 5%, is he liable to tax audit?
Let’s understand this with the help of the table below:
Situation* | Turnover | Whether liable for a tax audit? |
The assessee has opted for Section 44AD in any of the last 5 years but not opting for the same in the current year | Up to Rs. 1 crore | Yes, if income is more than the maximum amount not chargeable to tax [Section 44AB(e)] |
Up to Rs. 2 crores | ||
More than Rs. 2 crores but up to Rs. 10 crores | No [Proviso to Section 44AB(a)] | |
More than Rs. 10 crores | Yes | |
The assessee has not opted for Section 44AD in any of the last 5 years and not opting for the same during the current year as well. | Upto Rs. 10 crores | No [Proviso to Section 44AB(a)] |
More than Rs. 10 crores | Yes |
* Assuming cash receipt or payments does not exceed 5% of the aggregate amount received or paid during the year.
It should be noted that Clause 8 of the Form 3CD requires the auditor to provide the relevant clause under which the tax audit has been conducted.
Read More about the Presumptive Scheme for Businesses under Section 44AD Here
FAQ 7. Analysis of the applicability of tax audit under different scenarios in the case of professionals:
Case | Gross Receipts | Profit | Whether tax audit applicable? | Reason |
Case 1 | 40 Lakhs | 25 Lakhs | No | The gross receipt is less than Rs. 50 lakhs, and presumptive profit under Section 44ADA is more than 50% of the gross receipts. |
Case 2 | 40 Lakhs | 10 Lakhs | Yes | The presumptive profit under Section 44ADA is lower than 50% of total gross receipts and total income exceeds the maximum exemption limit. |
Case 3 | 40 Lakhs | 2 Lakhs | No | The total income is less than the maximum exemption limit. |
Case 4 | 70 Lakhs | 50 Lakhs | Yes | Gross receipts exceed Rs. 50 lakhs. |
Case 5 | 70 Lakhs | 15 Lakhs | Yes | Gross receipts exceed Rs. 50 lakhs. |
Case 6 | 7 Crores | 2 Crores | Yes | Gross receipts exceed Rs. 50 lakhs. The limit of 10 Crores only applies in the case of business. |
FAQ 8. Whether the provisions of tax audit applicable to the business income of NGOs under Section 11(4A)?
Ans. Nothing in the statute suggests that the tax audit under Section 44AB shall apply to business under Section 11(4A). Sections 11 to 13 are independent of the five heads of income. As long as the registration under section 12AA/12AB is intact, the income cannot be computed under the five heads of income. Tax Audit is a specific requirement of the assessee having income under the head “Business and Profession”.
Read More about the Computation of Income under Section 11 and 12 Here
[1] Goodyear India Ltd. v. CIT [2009] 112 Taxman 419 (Delhi)
[2] Section 13 of the Finance Act, 2021 has increased the turnover limit from 5 crores to 10 crores with effect from Assessment Year 2021-2022.
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Whether tax audit u/s 44AB is applicable for the asst. year 2021-22 for an individual assessee whose total turnover is Rs. 2 crores and net taxabale income from business is 1.20 crores and cash receipts is 1.50 crores and cash payments is 50 lakhs?
Yes, since, though his turnover does not exceed the limit of 2 crores in the case of an individual, his receipts and payments exceed 5% of the turnover, therefore tax audit will be applicable.
Assessee has option to opt for presumptive scheme under section 44AD because his turnover is upto 2 Cr. to avoid tax audit.
One person have 2 businesses and one cross 1 crore and other not cross, than audit will be done in both or in one firm and in other firm presumptive audit. It can be Done or not, please suggest
one can opt for presumptive scheme if business is eligible and turnover less than 2 core and for other go for audit.
Hi,
I have business income of Rs. 1 . 5 crores and I’m an individual and i have less than 2 crores turnover and i have more than 5% cash receipts and cash payments. i have paid job work expenses more than Rs. 50 lacs with out deducting TDS iam paying because i have opted for 44AD
Is there any disallownaces for not deducting the TDS??, Is it applicable for 44AD??
and for me Tax Audit is applicable??
one can claim 44AD only till the turnover is up to 2cr, on exceeding the limit of 2cr one can not avail the benefit of sec 44ad, thus normal provisions will be applicable for them where the general limit is 1 cr which extends to 10cr if the cash receipt and payment are up to 5%. For 44AD cases, audit is required only when income lower than presumptive % is declared and such income exceeds the basic exemption level of Rs 2,50,000.00
So turnover being less than 2cr u are eligible for 44ad and assuming that u declare the income as per the presumptive scheme, you don’t need to get your books audited.
further when 44ad is being applied, the tds requirements are relaxed and there is no disallowance
Hiiii
If My Turnover is Upto 2 crore and Cash Receipt Less Than 5%, Can I go For Non Audit Upto 10 Crore Section or I require to Compulsory 44AD Audit , Which option will Be beneficial?
You are not liable to audit upto 10cr if cash receipt and cash payment is <= 5%.
If I not opt for section 44AD till now and also my turnover is not crossing 1 Cr. limit, can I declare my income less than 8% or loss without tax audit u/s 44AB.
no audit even if <8/6
You can declare your income less than 8% or in Loss WIthout tax audit u/s 44ab
I am Salaried Person. I have a Salary Income of Rs. 13 Lakh and F & O Loss of Rs.49000. F & O Turnover is Rs. 11 Lakh. Which ITR need to be file. Is Tax audit applicable? My Last ITR was ITR-2.. Please advice.
Hi Dhaval, Income from trading in derivatives is treated as regular business income. Thus, you have to file ITR-3. Tax Audit will not be available in your case as turnover is not exceeding the limit as prescribed under section 44AB of the Income-tax Act, 1961.
In case where turnover is 8 crs and all in non cash but there is loss. Whether Tax Audit is applicable?
No, If you did not opt 44ad in any of the last 5 previous years.
I am Salaried Person. I have a Salary Income of Rs. 13.5 Lakh and F & O Loss of Rs.1.6L. F & O Turnover is Rs. 7Cr. Which ITR need to be file. Is Tax audit applicable to carry forward losses? Please advice.
In case where turnover is 5 crs and all in non cash but there is loss. Whether Tax Audit is applicable?
Sir,
I have an F&O turnover of Rs. 3.5crore and a loss of 11 lacs through transactions done completely through FNO banking channels in FY21-22. Will I need to get a tax audit done?
Useful article.
It will be more useful if you could kindly clarify the following three things:
1) Is the requirement of tax audit for businesses having below 6% NP on Sales (where 95% receipts/payments are in non-cash) removed now?
2) What constitutes a ‘turnover’ for derivative transactions – since the notional values are huge and cannot be treated as turnover?
3) Are Professionals having gross receipts below Rs50lakhs (eligible for presumptive taxation but not opting for it) require tax audit if they declare less than 50% but more than 6% (all non-cash receipts and payments) of sales as taxable income?
This will be beneficial for many, for sure. Thank you.
MY BUSINESS TURNOVER IS LESS THAN 5 CRORES ANNUALLY, CASH EXP IS LESS THAN 5% AM I APPLICABLE FOR TAX AUDIT.
No tax audit
Is tax audit applicable for AY 2022-23 in the case of F&O Turnover is more than 1cr and loss of 1.5 lakhs and Salary income of 4.5 lakhs?
MY PARTNERSHIP FIRM TURNOVER IS RS.55,00,000/- AND PROFIT IS RS.1,50,000/- AFTER DEDUCTING PARTNERS REMUNERATION AND INTEREST ON CAPITAL RS. 3,50,000/-. IS IT 44AB AUDIT COMPULSARY IN THIS CASE. CAN I FILE WITHOUT CA SIGNATURE WITH BOOKS OF ACCOUNTS .
If my Business Turnover is less than 2 crore and i opt in 44AD and my F&O turnover exceed 2 Crore did Tax Audit applicable on me ?
Proprietorship Turnover 5.2 Crores and net profit in 10 Lakhs only Tax Audit Applicable in this case for the FY 21-22. ( 100% all digital banking Transactions.)
In your case audit turnover limit is 10cr therefor audit is not applicable