Tax Audit Applicability- Section 44AB of Income Tax Act 2022

Tax Audit Applicability for Assessment Year 2022-23 (F.Y. 2021-22)

Section 44AB of the Income Tax Act, 1961

Every person i.e., an individual, firm, company, or others as defined in section 2(31) of the Act is covered under this section carrying on business or profession. If a trust (included in the definition of a person) is not carrying a business then it is not covered in this section.
Now, the initial test is to see that the person shall be liable for audit if sales, turnover, or gross receipts exceed ‘mentioned limits’ specified u/s 44AB (a) or 44AB (b) or falls under other sub-section criteria.

In this article, we will discuss section 44AB of the Income Tax Act, 1961 clause by clause to check the applicability of Tax audit.

Clause by clause analysis of Section 44AB of Income Tax Act, 1961

Clause (a) of Section 44AB

  • As per this clause, every person carrying on business shall get Tax Audit done of his/its books of accounts if his total sales, turnover, or gross receipts from business Rs. 10 Crore in the previous year i.e., relevant financial year.
  • However, in the following situations Limit of Rs 1 crore will apply instead of Rs 10 crore, if
  • Cash receipts exceed 5% of the aggregate of all receipts including those received for sales, turnover or gross receipts or loans, capital, etc. during the previous year OR
  • Cash payments exceed 5% of aggregate of all payments including the amount incurred for expenditure, repayment of the loan, withdrawal of capital, etc. during the previous year.

In simple words, Tax Audit Applicability for Assessment Year 2022-23 (F.Y. 2021-22) will come under this clause if both i.e., the aggregate of receipts in cash AND aggregate of payments in cash are less than 5% of the aggregate receipts and payments respectively then the limit for tax audit would be Rs. 10 crores.

Further, for the purposes of this clause, all “non-account payee cheque or draft” received or paid shall be deemed to be payment or receipt in cash and thus shall be included in the 5% bracket for calculating the tax audit limit.

Clause (b) of Section 44AB

  • This clause is applicable to every person carrying on the profession if his gross receipts in profession exceed Rs 50 lakh in the previous year i.e., current FY.

So, Tax Audit Applicability for Assessment Year 2022-23 (F.Y. 2021-22) will fall under this clause if the above criteria is met.

Clause (c) of Section 44AB

  • This clause is applicable to those persons who are carrying on the business in the specified business covered u/s 44AE, 44BB, or 44BBB and claiming their income to be lower than the profits or gains so deemed to be the profits and gains of his business in any previous year.

         Brief about Section 44AE/ 44AB/ 44BBB

  • Section 44AE – Person engaging in the business of plying, hiring or leasing of goods carriage and owns not more than 10 goods carriages at any point in the previous year.
  • Section 44BB – Non-Resident engaging in the business of providing services or facilities in connection with or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils
  • Section 44BBB – Non-Resident engaging in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf.

Therefore, Tax Audit Applicability for Assessment Year 2022-23 (F.Y. 2021-22) will be covered in clause (c) if the above criteria is met.

Clause (d) of Section 44AB

  • This clause applies to those persons who are
  • carrying profession specified u/s 44AA(1) and
  • declaring his Income u/s 44ADA i.e., presumptive taxation and
  • calming income to be lower than the profits and gains so deemed to be the profits and gains of his profession and
  • his income exceeds the maximum amount which is not chargeable to income tax in any previous year i.e., basic exemption limit if any.

So, Tax Audit Applicability for Assessment Year 2022-23 (F.Y. 2021-22) will come under this clause only if above criteria is met.

Brief about Section 44ADA

  • Individual and firm excluding LLP has the option to declare their income (profit) 50% of their sale/turnover/gross receipts and pay the tax on such 50% income.
  • They can opt for this section if their sale/turnover/gross receipts from profession specified u/s 44AA such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified, etc is upto Rs 50 lakh in the previous year i.e., relevant FY.

Clause (e) of Section 44AB

  • This is applicable to those assessees (being an individual, HUF, or firm excluding LLP)
  • carrying business and attracts section 44AD (4) i.e., opts out of presumptive taxation in any one financial year out of a lock-in period of 5 years and
  • his income exceeds the maximum amount which is not chargeable to income tax i.e. basic exemption limit if any in any previous year i.e., relevant FY

Penalty for not getting done Tax Audit

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

  • 5% of the total sales, turnover, or gross receipts
  • Rs 1,50,000

Non-applicability

  • If an individual, HUF or a firm (excluding LLP) has opted for presumptive taxation i.e., section 44AD then he/it shall not be liable Tax Audit u/s 44AB even if Turnover is more than Rs. 1 Cr but is less than Rs. 2 Cr.
  • In this case, the question of the calculation of payment/receipt in cash will not arise.
  • However, if the person opted Section 44AD in one year and in any next 5 years he opted out from section 44AD and declared his income less than deemed income then section 44AD(4) shall get attracted and he shall be liable for Tax Audit u/s 44AB(e) if his total income exceeds the maximum amount not chargeable to Tax i.e., total income exceeds basic exemption limit if any.

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