What is Tax Audit (Section 44AB)?
A tax audit under Section 44AB of the Income-tax Act is an audit of a taxpayer's accounts by a chartered accountant, required when business turnover or professional receipts cross specified limits. The auditor reports on tax compliance in Form 3CA or 3CB along with Form 3CD, which is filed electronically.
Who needs it
- Businesses whose turnover exceeds ₹1 crore in a year (₹10 crore where cash receipts and payments are within 5% of the total, subject to conditions).
- Professionals whose gross receipts exceed ₹50 lakh.
- Taxpayers who opt out of presumptive taxation and report income below the presumptive rate, in the cases covered by the law.
- Traders in futures and options when the turnover or loss conditions of the law are met.
- Taxpayers who claim profits below the specified percentage under Sections 44AE, 44BB or 44BBB, where audit is triggered.
Benefits
- Compliance with Section 44AB and protection from the penalty for not getting accounts audited.
- Review of items such as cash payments, TDS defaults and related-party transactions that can lead to disallowance.
- Cleaner books that support the ITR and any later assessment.
- Clear computation of turnover for audit-limit purposes.
- Support for the audit report upload and your approval on the portal.
Presumptive taxation or regular books?
Some small businesses can choose presumptive taxation under Section 44AD and some professionals under Section 44ADA. These schemes let you declare income at a prescribed percentage of turnover without keeping detailed books. The trade-off is that you cannot claim actual costs. If you declare less than the presumptive profit, you must maintain books and may need an audit. Decide each year with your numbers in hand.
Where problems usually arise in Form 3CD
The clauses that cause the most difficulty are the ones dealing with cash, with tax deducted at source, and with related parties, because each can turn an accounting entry into a disallowance.
- Cash payments above the permitted limit, which are disallowed as expenses
- Tax deducted at source that was not deducted or not deposited on time
- Payments to related parties and whether they are at market rates
- Loans and deposits taken or repaid otherwise than through banking channels
- Depreciation, unabsorbed losses and brought-forward balances
- Mismatches between GST turnover, books and the audit report
How to prepare
Close the books on time, reconcile bank, GST and TDS, and list large and unusual transactions before the audit starts. Keep vouchers organised by month and make sure the fixed asset register and the stock records are up to date. Preparing early leaves time to fix issues before the report is due.
Example: a distribution business
A distributor has a turnover of ₹2.4 crore. Most receipts and payments go through the bank, but cash is about 8% of both receipts and payments, so the ₹10 crore limit does not apply and the ₹1 crore limit does. A tax audit is required. During the audit, the auditor finds a few cash payments above the limit and a delay in depositing tax deducted at source. The business corrects its practice for the next year and discloses the issues as required by Form 3CD.
Make the audit useful
Ask the auditor for a list of issues that affect tax, such as expenses at risk of disallowance. Fix the process, for example by paying vendors by bank transfer and tracking tax deduction thresholds. A well-run audit lowers the chances of a notice and reduces next year's effort.
Documents required
- 01Trial balance, ledgers and financial statements
- 02Sales and purchase registers, GST returns and reconciliations
- 03TDS and TCS returns, challans and Form 26AS
- 04Bank statements and loan confirmations
- 05Fixed asset register and depreciation details
- 06Details of loans, deposits and cash payments above prescribed limits
- 07Previous year's tax audit report and ITR
Due dates and penalties
| Item | Due date | If missed |
|---|---|---|
| Tax audit report | 30 September of the assessment year | Penalty under Section 271B: 0.5% of turnover, up to ₹1.5 lakh |
| ITR for audit cases | 31 October of the assessment year | Late fee, interest and loss of some carry-forward benefits |
| Appointment of auditor | Before the end of the financial year, as a good practice | Delay in completion |
Dates can be extended by the CBDT. We confirm the applicable dates before the audit begins.
Mistakes to avoid
- Assuming audit is not needed without checking cash-transaction conditions.
- Ignoring TDS defaults, which lead to disallowance of expenses.
- Recording cash payments above the permitted limit, which are disallowed.
- Keeping loans and deposits without proper mode of payment.
- Not reconciling GST turnover with books and the audit report.
- Leaving audit work for September and missing the report upload.
Why PHMG
- Partner-led: a chartered accountant reviews your work, not only a junior team.
- Clear fee and scope in writing before we start.
- Deadlines tracked for you, with reminders well before the due date.
- Your documents and data are handled confidentially.
- Online service across India, with a single point of contact.
Fees depend on your case. Request a quote for a clear scope and fee.