Tax Audit Under Income Tax Act: Complete Guide (Sections, Turnover Limits, Penalties & Latest Updates)

Introduction

Tax Audit under the Income Tax Act, 1961, is a mandatory compliance requirement for businesses and professionals whose turnover or gross receipts exceed specified limits. It ensures proper maintenance of books of accounts and accuracy in tax filings, helping curb tax evasion.

Who Needs to Get a Tax Audit?

A Tax Audit is mandatory for the following categories of taxpayers:

1. Businesses (Under Section 44AB)

• If total sales, turnover, or gross receipts exceed ₹1 crore in a financial year.
• However, the limit increases to ₹10 crore if cash transactions (both receipts and payments) do not exceed 5% of total transactions.

2. Professionals (Under Section 44AB)

• If total gross receipts exceed ₹50 lakh in a financial year.

3. Businesses or Professionals Opting for Presumptive Taxation (Under Sections 44AD, 44ADA, 44AE, etc.)

• If a taxpayer declares income lower than the prescribed rate under presumptive taxation and total income exceeds the basic exemption limit.

Relevant Sections of Tax Audit (Under Section 44AB)

1. Section 44AB – General Tax Audit Requirement

Mandates tax audit for businesses and professionals exceeding turnover limits.

2. Section 44AD – Presumptive Taxation for Small Businesses

• Businesses with turnover up to ₹2 crore can opt for presumptive taxation.
• If opting out before 5 years or declaring lower income, tax audit is required.

3. Section 44ADA – Presumptive Taxation for Professionals

• Applies to professionals like doctors, lawyers, architects, etc., with receipts up to ₹50 lakh.
• If lower income is declared, tax audit is required.

4. Section 44AE – Presumptive Taxation for Transporters

• Applicable to taxpayers owning up to 10 goods vehicles.
• Tax audit is required if income is declared lower than the presumptive rates.

Who Can Conduct a Tax Audit?

Only a Chartered Accountant (CA) in practice is eligible to conduct a tax audit. The tax audit report must be filed online using Form 3CA/3CB and Form 3CD on the Income Tax e-filing portal.

Due Date for Tax Audit Filing

• For taxpayers liable to audit: 30th September of the assessment year.
• For businesses under Transfer Pricing (TP) audit: 31st October of the assessment year.

Penalties for Non-Compliance (Under Section 271B)

Failure to comply with tax audit requirements can attract a penalty of lower of the following:

• ₹1,50,000, or
• 0.5% of turnover/gross receipts. However, if the taxpayer has a reasonable cause for non-compliance, no penalty may be levied.

Tax Audit Updates from Budget 2024 & Budget 2025

Budget 2024 Updates

1. Turnover Limit for Tax Audit:
   • Increased to ₹10 crore for businesses with less than 5% cash transactions.
   • No change in the limit for professionals.
2. Presumptive Taxation Scheme Changes:
   • Threshold under Section 44ADA for professionals proposed to increase to ₹75 lakh.
   • Threshold under Section 44AD for small businesses may be revised to ₹3 crore.

Budget 2025 Expectations & Possible Changes

1. Further simplifications in tax audit compliance for MSMEs and professionals.
2. Additional digital transaction incentives to encourage cashless transactions.
3. More AI-driven scrutiny mechanisms to reduce tax evasion and automate compliance checks.

Conclusion

Tax Audit is a crucial compliance requirement for businesses and professionals in India. Understanding the turnover limits, applicability, and penalties ensures smooth compliance with tax regulations. With Budget 2024 changes and potential Budget 2025 updates, businesses should stay informed and consult professional advisors for accurate tax audit filing.

For professional assistance, consult a Chartered Accountant (CA) to ensure hassle-free tax compliance and avoid penalties.

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