Tax Audit Requirement

The term ‘audit’ refers to a check, review, verification, or inspection of a record, transaction, account, etc. A tax audit is the process of verification and inspection of the accounts of a taxpayer to confirm their adherence to the provisions of the Income Tax law.

Section 44AB of the Income Tax Act, 1961 deals with the Audit of the Accounts of a certain category of persons carrying on a business or engaged in a profession. The class of taxpayers listed under this section compulsorily have to get their accounts audited by a Chartered Accountant. The CA will check and verify that these accounts comply with the various provisions of the Income Tax law. Simply put, this audit required as per Section 44AB of the Income Tax Act, 1961 is called a tax audit.
 

Audit of accounts of certain persons carrying on business or profession.
 

44AB Every person
 

(1) Carrying on business shall, if his total sales, turnover, or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year [***]:

Provided that in the case of a person whose

(a) the aggregate of all amounts received including the amount received for sales, turnover, or gross receipts during the previous year, in cash, does not exceed five percent of the said amount; and

(b) the aggregate of all payments made including the amount incurred for expenditure, in cash, during the previous year does not exceed five percent of the said payment:

Provided further that for this clause, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which does not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash

this clause shall have effect as if for the words "one crore rupees", the words "10 crore rupees" had been substituted; or

(2) Carrying on profession shall, if his gross receipts in profession exceed fifty lakh rupees in any previous year; or

(3) Carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or

(4) Carrying on the profession shall, if the profits and gains from the profession are deemed to be the profits and gains of such person under section 44ADA and he has claimed such 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; or

(5) Carrying on the business shall, if the provisions of sub-section (4) of section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income tax in any previous year,

get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :

Provided that this section shall not apply to the person, who declares profits and gains for the previous year by the provisions of sub-section (1) of section 44AD and his total sales, turnover, or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year:

Provided further that this section shall not apply to the person, who derives income of the nature referred to in section 44B or section 44BBA, on and from the 1st day of April 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later :

CASE I

An audit of the books is required if turnover is more than Rs 5 Crore.

 CASE II

Audit of the books is required if turnover is less than or up to Rs 5 Crore but if the profits are less than 6% and total income is more than the basic exemption limit. (250000)

 Case III

Audit of the books is NOT required if turnover is less than or up to INR 5 Crore and profits higher than 6% of the turnover.