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Budget 2021 Update: To incentivise digital transactions and to reduce the compliance burden of the person who is carrying almost all of their transactions digitally, it is proposed to increase the limit for tax audit for persons who are undertaking 95% of their transactions digitally from Rs. 5 crores to Rs. 10 crores.
Update: The threshold limit of Rs 1 crore for a tax audit has been increased to Rs 5 crore with effect from AY 2020-21 (FY 2019-20) if the taxpayer's cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer's cash payments are limited to 5% of the aggregate payments.
Update: The due date for filing of Tax Audit Return for AY 2020-21 is 31st December 2020

What is Audit?

Audit means an independent examination and inspection of Financial Statements of an entity by some officials or some specified persons for the purpose of establishing the fact that the accounting records present a true and fair view.

Audit can further be classified as:

Tax Audit under sec 44AB of the Income Tax Act

Statutory Audit ↲↳ Tax Audit

Statutory audit is a compulsory audit for a Company governed by Companies Act, a Trust governed by Trust Act, Bank by RBI Act etc. by an external auditor to examine full accounting records of the organization.

A Tax Audit is an audit, made compulsory by the Income Tax Act if the annual gross turnover/receipts of the assessee exceed the specified limit. The tax audit is conducted in Sec 44AB of the Income Tax Act by a Chartered Accountant. Simply Tax Audit means, an audit of matters related to tax.

What is the purpose of a Tax Audit?

Such audit is conducted with certain objectives:

  • Ensures correctness and maintenance of Financial Statements
  • Reporting of inconsistencies observed by Auditor while conducting audit
  • In order to report information as required by Income Tax Act like Tax Depreciation etc

What is the Tax audit limit under section 44AB?

Tax Audit Limit in the case of a Business: Rs.1Crore.

It means an assessee needs to be audited under Sec 44AB if his annual gross turnover/receipts in business exceeds Rs. 1 Crore. The tax audit limit is applicable from F.Y. 2016-17 (A.Y. 2017-18)

Tax Audit Limit for AY 2020-2021

As per the latest amendments made in Sec 44AB of the Income Tax Act. The tax audit limit for AY 2020-2021 is as follows:

The tax audit limit of Rs 1 crore has been increased to Rs 5 crore with effect from AY 2020-21 (FY 2019-20) if the taxpayer's cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer's cash payments are limited to 5% of the aggregate payments.

 

Tax Audit Limit in the case of a Profession: Rs.50 Lakh.

It means an assessee needs to be audited under Sec 44AB if his annual gross receipts in profession exceed Rs. 50 Lakh. This tax audit limit is applicable from F.Y. 2016-17 (A.Y. 2017-18)

What is the Presumptive Taxation Scheme under Sec 44AD of the Income Tax Act ?

• Sec 44AD provides special provision for computing profits and gains of business on presumptive basis.

• You need not to maintain proper accounting. Your net income is estimated to be @8% of your gross receipt/turnover.

○ From F.Y. 2016-17, net income is calculated as @6% of gross receipts are received through digital mode of payments and @8% of gross receipts are received in cash.

• Businesses, whose annual gross turnover/receipt does not exceed Rs. 2 Crore are eligible for this scheme.

Furthermore, To discourage the taxpayers from misusing the scheme, the government has attached the following additional conditions: If an assessee is opting for the presumptive scheme, he/she must-

a. File presumptive scheme for at least 5 years in continuation.

b. If the assessee decides to show and file profits as per ITR-3 before the end of these 5 years, the assessee will lose presumptive benefits and will be disallowed from presumptive taxation for the subsequent 5 years.

Note: 5 years shall be counted starting the year in which you first file usual taxes for such business.

You need to file ITR 4 (previously ITR4S) in F.Y. 2016-17 to avail these schemes.

What are the various constituents of the Tax Audit Report?

Tax Auditor is required to submit tax audit report in a prescribed form which could be either via 15CA or 15CB where:

Form No. 15CA: When a person is carrying on business or profession where audit of books accounts is already mandatory under other law.

Form No. 15CB : When a person is carrying business or profession where audit of books of accounts is not mandatory under any other law and where it is mandatory obtain a certificate from Chartered Accountant

Now a big controversy arises,

My Income from business exceeds Rs. 1 Crore but below Rs. 2 Crore in F.Y. 2016-17 (A.Y. 2017-18). Do I need to audit under section 44AB ?

It depends on several things, such as

• If you are a Commission agent, Company, or L.L.P., then you need to audit u/s 44AB as you are not eligible for sec.44AD. So, you need to be audited u/s 44AB.

• If you are a resident in India and you are an Individual / HUF / Partnership firm, then if your annual gross turnover exceeds Rs. 1 Crore but below 2 Crore, you need to calculate your Net income u/s44AD and file ITR 4 in F.Y. 2016-17 (A.y. 2017-18) to avoid such audit. Remember your Net Income should not be below @8%.

• If your Net income is below @8% of your annual gross turnover/receipt, then you must be audited u/s 44AB even if your gross turnover is below 1 Crore.

• If you are eligible for sec. 44AD but want to declare income less than 8% or not want to claim the benefit of sec 44AB then you should be audited u/s 44AB.

 

According to CBDT Press release regarding clarification on threshold limit of tax audit u/s 44AB and u/s 44AD,

"Section 44AB of the Income-tax Act (‘the Act') makes it obligatory for every person carrying on business to get his accounts of any previous year audited if his total sales, turnover or gross receipts exceed one crore rupees. However, if an eligible person opts for a presumptive taxation scheme as per section 44AD(1) of the Act, he shall not be required to get his accounts audited if the total turnover or gross receipts of the relevant previous year does not exceed two crore rupees. The higher threshold for non-audit of accounts has been given only to assessees opting for presumptive taxation scheme under section 44AD."

Please note: The tax audit limit of Rs 1 crore has been increased to Rs 5 crore with effect from AY 2020-21 (FY 2019-20) if the taxpayer's cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer's cash payments are limited to 5% of the aggregate payments.

Click here to read CBDT press release on 20.06.2016

 

So in simple words, If your annual gross turnover/receipts from business exceed Rs. 1 Crore, you need to be audited u/s 44 AB. But you may avoid such audit u/s 44AD if your annual gross turnover/receipt is below 2 Crore.

Some FAQs

How and when to file a Tax Audit Report?

A Tax Audit report can be uploaded via the Income Tax E-filing website only.

Step 1: Person is required to add the Chartered Accountant to his/hers e-filing portal
Step 2: Before upload audit report 'CA' must generate a UDIN no. from UDIN official website
Step 3: Chartered Accountant of the person has to upload the Tax Audit report( Form No. 15CB) from his/her Chartered Accountant profile (Already Added by the person) on Income Tax e- filing website.
Step 4: After uploading the required Tax Audit Report, it will be reflected on the assessee's e-filing portal which the assessee is required to approve after cross verifying all the details mentioned in the report.

A Tax Audit Report is required to be filed on or before the due date of filing of returns i.e.

• In case assessee entered into International Transaction due date - 30th November
• In all other cases due date - 30th September

Penalty on non-filing or delay in filing Tax audit report

If any taxpayer who is required to get theaudit done but fails to do so, the least of the following may be levied as a penalty:

  1. 0.5% of the total sales, turnover or gross receipts
  2. Rs 1,50,000
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