Under the provisions of the Income Tax Act, 1961, certain persons are required to have their books of accounts audited before submitting their income tax return. Businesses and professionals whose turnover crosses the prescribed threshold must undergo a tax audit in accordance with Section 44AB.
The infographic below will help explain when a tax audit becomes applicable.
What is a Tax Audit?
A tax audit refers to the review or verification of the books of accounts of a business or profession from the perspective of income tax. Any business entity or individual surpassing the turnover limit set by law is required to get their accounts audited under the Income Tax Act. Just as other laws mandate audits such as statutory/company audit, cost audit, or stock audit, the income tax law also requires a specific audit known as the ‘Tax Audit’.
Objectives of a Tax Audit
The main purposes of conducting a tax audit are:
- Ensuring that books of accounts are properly maintained, accurate, and certified by a Chartered Accountant (tax auditor).
- Reporting findings or discrepancies observed by the auditor after a detailed examination of accounts.
- Providing prescribed details like tax depreciation and compliance with relevant income tax provisions.
- Simplifying the computation of tax liability and applicable deductions.
- Validating the accuracy of income, taxes, and deductions reported in the income tax return.
Through this process, tax authorities can verify the correctness of the returns filed, making it easier to assess total income and claims for deductions.
What is the Turnover Limit for Income Tax Audit?
A tax audit becomes mandatory when a taxpayer’s business turnover or gross receipts go beyond ₹1 crore in a financial year. However, if cash transactions (both receipts and payments) are limited to 5% or less of the total transactions, the threshold rises to ₹10 crores (effective from FY 2020-21). For professionals, a tax audit is compulsory if their gross receipts exceed ₹50 lakhs during the year. Apart from these, there are certain other cases where a tax audit is also required.
Tax Audit Applicability under Section 44AB of the Income Tax Act, 1961
| Category of Person | Income Tax Audit Limit |
| BUSINESS | |
| Carrying on business (not under presumptive taxation) | Turnover/gross receipts above ₹1 crore in the FY, or above ₹10 crores if cash transactions are ≤5% of total receipts/payments |
| Business under presumptive taxation (Section 44AE, 44BB, 44BBB) | If profits declared are lower than the limits prescribed under presumptive taxation |
| Business under presumptive taxation (Section 44AD) | If taxable income is lower than prescribed limits and exceeds the basic exemption (₹2.5 lakhs) |
| Opted out of presumptive taxation under Section 44AD within 5 years | If income exceeds the basic exemption limit during the 5-year restriction period |
| PROFESSION | |
| Carrying on profession | Gross receipts exceed ₹50 lakhs in the FY |
| Profession under presumptive taxation (Section 44ADA) | If profits declared are below 50% of total receipts and income exceeds the basic exemption limit |
| BUSINESS LOSS | |
| Loss from business (not under presumptive taxation) | Turnover/gross receipts above ₹1 crore |
| Loss with income above basic exemption | If turnover exceeds ₹1 crore, even in case of loss, tax audit applies |
Audit under Other Laws
If the accounts are already audited under another law, a separate audit for income tax is not required. The same audit report can be used, provided it is submitted within the due date of filing the income tax return.
What Constitutes an Audit Report?
A tax auditor is required to issue the audit report in a prescribed format, which may be Form 3CA or Form 3CB, depending on the case:
- Form 3CA – Applicable when a person engaged in business or profession is already required to have their accounts audited under any other law.
- Form 3CB – Applicable when a person engaged in business or profession is not required to have their accounts audited under any other law.
- Form 3CE – Applicable for non-residents or foreign companies receiving royalties or fees for technical services from the government or an Indian entity.
Along with either of the above, the auditor must also submit Form 3CD, which contains the prescribed particulars forming part of the audit report.
What is the Due Date for Income Tax Audit?
For FY 2024-25 (AY 2025-26), the due date for completing the tax audit is 30th September 2025.
For assessees falling under transfer pricing provisions, the deadline is extended to 31st October 2025.
How and When Should a Tax Audit Report be Furnished?
The tax audit report must be filed online by the Chartered Accountant using their login credentials. The taxpayer is required to add the CA’s details in their own login account.
Once uploaded by the auditor, the report must be accepted or rejected by the taxpayer through their login. If rejected, the process needs to be repeated until the report is accepted.
The final due date for submitting the audit report is:
- 31st October of the assessment year – for cases involving international transactions (transfer pricing).
- 30th September of the assessment year – for all other taxpayers.
What is the Penalty for Non-Filing or Delay in Filing a Tax Audit Report?
When a taxpayer is required to undergo a tax audit but fails to do so, a penalty may be imposed. The penalty will be the lower of the following:
- 0.5% of total sales, turnover, or gross receipts, or
- ₹1,50,000.
However, no penalty will be charged under Section 271B if the taxpayer can prove a reasonable cause for the failure.
Some instances accepted by Tribunals and Courts as reasonable causes include:
- Natural disasters
- Resignation of the tax auditor causing delay
- Resignation of accountant or key staff
- Labour issues such as strikes or lockouts for a long duration
- Loss of accounts due to circumstances beyond the assessee’s control
- Death or physical incapacity of the partner responsible for accounts
Conclusion
Under the Income Tax Act, 1961, a tax audit is compulsory for businesses and professionals crossing the prescribed turnover or receipt limits. Understanding the rules helps in avoiding penalties, disallowances, and legal consequences. Staying compliant ensures smoother tax filing and prevents unnecessary complications.
Frequently Asked Questions on Income Tax Audit (Section 44AB)
Q1. What is the due date for completing the income tax audit?
For FY 2023-24, the last date for filing the tax audit report has been extended by 7 days, making the new due date 7th October 2024.
Q2. What happens if a tax audit is not conducted?
Failure to conduct a mandatory tax audit attracts a penalty under Section 271B. The Assessing Officer may impose a penalty of the lower of:
- ₹1.5 lakh, or
- 0.5% of turnover.
In some cases, prosecution may also apply. Additionally, non-filing of the audit report may render the return defective.
Q3. What is Form 3CA–3CD?
- Form 3CA: The report filed by a Chartered Accountant certifying that the audit has been conducted in line with Section 44AB.
- Form 3CD: A detailed statement of particulars submitted with Form 3CA and the income tax return, containing details of deductions, compliance, and other prescribed information.
Q4. What is the turnover threshold for a tax audit in business?
- ₹1 crore – standard limit for businesses.
- ₹10 crores – if cash receipts and payments do not exceed 5% of total transactions.
Q5. What if the audit report is not furnished by the due date?
If the audit report is not filed on time, a penalty will be levied at the lower of:
- 0.5% of turnover/gross receipts, or
- ₹1.5 lakh.
Q6. Who is authorized to conduct a tax audit under Section 44AB?
Only a Chartered Accountant holding a valid Certificate of Practice (COP) is permitted to carry out a tax audit under Section 44AB, as per Section 288(2).
Q7. What documents are examined in a tax audit?
The auditor reviews financial records such as the cash book, ledger, journals, bank statements, stock registers, and sales/purchase invoices to certify the financial position as of the end of the financial year.
Q8. Is tax audit applicable to professionals as well?
Yes. Professionals are required to undergo a tax audit if their gross receipts exceed ₹50 lakhs in a financial year.
Q9. Can a taxpayer be exempt from penalty for not filing a tax audit report?
Yes. If the taxpayer proves that the failure was due to a reasonable cause (e.g., natural calamities, auditor resignation, labour strikes), no penalty will be levied under Section 271B.
Q10. How is a tax audit report filed?
The report is uploaded online by the Chartered Accountant using their credentials. The taxpayer must then approve it through their own income tax portal.
Q11. What is the difference between tax audit and statutory audit?
A statutory audit is conducted under company law to ensure accuracy of financial statements, whereas a tax audit is carried out under the Income Tax Act to ensure compliance with tax laws.
Q12. Does presumptive taxation exempt a business from tax audit?
A business under presumptive taxation (Section 44AD, 44ADA, etc.) does not require a tax audit unless it declares income below the prescribed limits or exceeds the basic exemption threshold.
