What Is Section 44AB of Income Tax?

Quick Overview

• Section 44AB mandates tax audit for specified businesses and professionals.
• The audit must be conducted by a Chartered Accountant.
• Turnover and gross receipts limits determine applicability.
• The basic turnover threshold for businesses is ₹1 crore (subject to conditions).
• The threshold for professionals is ₹50 lakh under section 44AB(b) of the Income Tax Act.
• Higher limits apply where digital transactions are predominant.
• The audit report must be filed electronically before the due date.
• Non-compliance may attract a penalty under Section 271B.
• Certain reasonable causes may protect taxpayers from penalty.

Section 44AB of the Income Tax is one of the most important provisions in the Income Tax Act, 1961, that requires some types of taxpayers to have their accounts audited by a Chartered Accountant. As a business owner or a professional, you need to learn about Section 44AB of the Income Tax so that you can comply and not face the penalties.

This is an elaborate guide as to what Section 44AB of the Income Tax Act is, its applicability, limits of turnover, audit procedure, penalties and some of the main compliance requirements.

What Is Section 44AB of the Income Tax Act?

The specified taxpayers who are in business or profession are required by Section 44AB of Income Tax to have their accounts audited by a Chartered Accountant in case they exceed the prescribed limits of their turnover, gross receipts or the income they generate by business or profession. 

The audit performed under this section is often referred to as a tax audit.
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Purpose of Introducing Section 44AB

The provision was introduced to:

• Make sure that there is accuracy in the income reported.
• Maintain transparency in financial records.
• Reduce tax evasion
• Normalise the reporting requirements.
• Help to assess taxes successfully.

To put it in simple terms, the government may want to have the books of accounts of taxpayers independently verified when they cross some limits with regard to their financial conditions.

What Is a Tax Audit Under the Income Tax Act?

Tax audit refers to an investigation of financial documents by a Chartered Accountant to determine whether income and deductions, as well as tax compliance, have been duly reported according to the provisions of the Income Tax Act.

It ensures that:

• Books of accounts are kept in good order.
• Income is calculated properly.
• Taxation is deductible, and exemptions are claimed legally.
• Compliance with various provisions of the Act is followed

The audit report should be produced in the form of prescribed forms to the Income Tax Department.

Objectives of Tax Audit Under Section 44AB

• Verification of Legal and Tax Compliance

The audit ensures that there is compliance with provisions like TDS, depreciation rules, disallowances, and reporting requirements.

• Accuracy of Books of Accounts

The auditor determines whether the books of accounts contain true and fair financial information.

• Prevention of Tax Evasion

Independent audit scrutiny discourages under-reporting of income or inflation of expenses.

• Enhancing Transparency in Financial Reporting

Standardised reporting through Form 3CD improves transparency.

• Facilitating Effective Tax Administration

The Income Tax Department relies on audit reports for assessment and risk profiling.

• Risk Mitigation for Taxpayers

Tax audit helps identify discrepancies early, reducing the risk of penalties and notices.

Applicability of Section 44AB of the Income Tax Act

Section 44AB applies to individuals, firms, LLPs, companies, and other entities engaged in business or profession, subject to turnover or income limits.

It also applies in specific cases where taxpayers opt out of presumptive taxation schemes under Sections 44AD, 44ADA, or 44AE and their income falls below the prescribed percentage.

Who Is Liable for Tax Audit Under Section 44AB?

Businesses Covered Under Section 44AB

Businesses must get their accounts audited if:

• Total sales, turnover, or gross receipts exceed ₹1 crore in a financial year.
• The threshold may increase to ₹10 crore if:
• Aggregate cash receipts do not exceed 5% of total receipts, and
• Aggregate cash payments do not exceed 5% of total payments.

Businesses opting out of presumptive taxation under Section 44AD may also require an audit if income is below the prescribed limits.

Professionals Covered Under Section 44AB

Under section 44ab(b) of the Income Tax Act, professionals must undergo a tax audit if:

• Gross receipts exceed ₹50 lakh in a financial year.

Professionals include doctors, lawyers, architects, accountants, consultants, and other notified professions.

Turnover and Income Limits for Tax Audit Under Section 44AB

Turnover Limit for Business Assessees

• ₹1 crore – Standard limit
• ₹10 crore – If cash transactions do not exceed 5% of total receipts and payments

Gross Receipts Limit for Professionals

• ₹50 lakh as per section 44ab(b) of income tax act

Higher Threshold for Digital Transactions

To promote digital payments, the government increased the audit threshold for businesses primarily dealing in digital transactions to ₹10 crore.

Scenarios Requiring Tax Audit Under Section 44AB

Tax audit is required in the following situations:

• Business turnover exceeds specified limits
• Professional gross receipts exceed ₹50 lakh
• Assessee declares lower income than prescribed under presumptive taxation schemes
• Assessee opts out of presumptive taxation before completion of 5 years (in certain cases)
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Income Tax Audit Under Section 44AB Explained

The audit involves:

• Examination of books of accounts
• Verification of profit and loss account
• Checking compliance with TDS, GST, and other laws
• Reporting specified financial details in Form 3CD
• Certification by a Chartered Accountant

The audit report must be submitted electronically before the due date.

Cases Where Accounts Are Audited Under Other Laws

In some cases, accounts are already audited under other statutes.

Companies Act Audit

Companies are mandatorily audited under the Companies Act, 2013. In such cases, the tax audit report is submitted in Form 3CA along with the statutory audit report.

LLP Act Audit

Limited Liability Partnerships exceeding prescribed limits must be audited under the LLP Act, 2008.

Cooperative Societies and Other Statutory Audits

Cooperative societies and certain entities are audited under their respective governing laws. Even then, a tax audit under section 44ab of the Income Tax may still be required.

Who Can Conduct a Tax Audit Under Section 44AB?

Only a Chartered Accountant holding a valid Certificate of Practice can conduct a tax audit under Section 44AB. The audit must be conducted as per standards issued by the Institute of Chartered Accountants of India (ICAI).

Who Is Not Eligible to Be Appointed as a Tax Auditor?

The following persons cannot be appointed:

• An internal auditor of the entity
• A person disqualified under the Chartered Accountants Act
• A person having a substantial interest in the business

Independence of the auditor is mandatory.

What Constitutes a Tax Audit Report Under Section 44AB?

The tax audit report consists of prescribed forms.

Form 3CA Explained

Form 3CA is used when the taxpayer’s accounts are already audited under another law (e.g., Companies Act).

Form 3CB Explained

Form 3CB is used when the taxpayer is not required to get accounts audited under any other law.

Form 3CD and Its Importance

Form 3CD is a detailed statement containing particulars such as:

• Depreciation details
• Disallowances under various sections
• TDS compliance
• Related party transactions
• GST information

Form 3CD forms the core of the tax audit report.

How and When to File a Tax Audit Report Under Section 44AB

Tax Audit Due Date

The due date for filing the tax audit report is generally:

• 30th September of the assessment year (subject to amendments by the government).

For taxpayers involved in transfer pricing cases, the due date may be 31st October.

Mode of Filing Audit Report Online

The audit report must be filed electronically through:

• The Income Tax e-filing portal
• Digital signature of the Chartered Accountant
• Acceptance by the taxpayer online

Paper filing is not permitted.

Penalty for Non-Compliance With Section 44AB

Penalty for Failure to Get Accounts Audited

If a taxpayer fails to get accounts audited as required, a penalty under Section 271B may apply.

The penalty is:

• 0.5% of total turnover or gross receipts
• Maximum limit of ₹1,50,000

Penalty for Delay in Filing Tax Audit Report

Failure to furnish the audit report within the due date may attract the same penalty.

Situations Where Penalty Under Section 44AB Is Not Levied

Penalty may not be imposed if the taxpayer proves “reasonable cause” under Section 273B, such as:

• Natural calamities
• Sudden resignation of the auditor
• Loss of records due to theft or fire
• Serious illness

Each case is examined individually.

Common Mistakes Made in Section 44AB Compliance

• Ignoring turnover calculation rules
• Missing digital transaction conditions
• Delayed appointment of the auditor
• Incorrect reporting in Form 3CD
• Failure to accept the audit report on the portal
• Misunderstanding presumptive taxation provisions

Careful planning helps avoid such errors.
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Difference Between Tax Audit and Statutory Audit

Basis	Tax Audit	Statutory Audit
Governing Law	Conducted under Section 44AB of the Income Tax Act, 1961. The provisions, forms, limits, and penalties are governed by income tax rules.	Conducted under statutes such as the Companies Act, 2013, LLP Act, 2008, Banking Regulation Act, Cooperative Societies Act, or other applicable laws, depending on the entity type.
Primary Objective	To ensure compliance with income tax provisions. It verifies the correctness of income, deductions, exemptions, and tax liability.	To ensure that financial statements present a true and fair view of the financial position and performance of the entity.
Focus Area	Focuses on tax-related reporting, disallowances, depreciation as per the Income Tax Act, TDS compliance, and specific tax disclosures.	Focuses on accounting standards, financial controls, corporate governance, and the overall financial reporting framework.
Applicability	Mandatory only if turnover, gross receipts, or income exceeds limits prescribed under Section 44AB.	Mandatory based on the legal constitution of the entity (e.g., every company must undergo a statutory audit regardless of turnover).
Threshold Limits	Businesses: ₹1 crore (₹10 crore if cash transactions ≤5%).Professionals: ₹50 lakh under section 44AB(b).	Companies: Mandatory irrespective of turnover.LLPs: Required if turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh.Other entities: As per governing law.
Who Conducts the Audit	Only a Chartered Accountant (CA) holding a valid Certificate of Practice.	Also conducted by a Chartered Accountant appointed as a statutory auditor under applicable law.
Audit Report Format	Report filed in Form 3CA or 3CB along with detailed Form 3CD.	Auditors issue audit reports in prescribed format under the Companies Act or relevant law (e.g., Form AOC-4 attachments for companies).
Reporting Authority	Submitted electronically to the Income Tax Department through the e-filing portal.	Submitted to shareholders, Registrar of Companies (ROC), or other regulatory authority, depending on the law.
Scope of Examination	Limited to tax compliance matters, tax adjustments, and specified financial disclosures.	Broader scope covering financial statements, internal controls, compliance with accounting standards, and fraud risk assessment.
Penalty for Non-Compliance	Penalty under Section 271B – 0.5% of turnover/gross receipts (maximum ₹1,50,000).	Penalties are governed by respective laws (the Companies Act may impose fines on the company and officers).
Frequency	Required only if Section 44AB conditions are met in a financial year.	Required annually if applicable under the governing statute.
Relationship With Each Other	May rely on statutory audit data but focuses on tax adjustments and compliance.	Form the base financial statements that may later be used for a tax audit.

Importance of Section 44AB for Businesses and Professionals

Understanding what section 44ab of the Income Tax Act is is critical because:

• It ensures accurate income reporting
• Reduces risk of tax notices
• Promotes financial discipline
• Builds credibility with lenders and stakeholders
• Helps in long-term compliance planning

For growing businesses and professionals, timely compliance under Section 44AB of the Income Tax Act avoids costly penalties.
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Conclusion: Understanding Section 44AB of the Income Tax Act

Section 44AB of the Income Tax plays a vital role in maintaining financial transparency and tax compliance for businesses and professionals in India. Mandating audits beyond certain financial thresholds strengthens the integrity of the tax system.

If you cross the prescribed turnover or receipt limits, ensure the timely appointment of a Chartered Accountant and file the audit report before the due date. Proper compliance with section 44ab of the Income Tax not only avoids penalties but also builds a strong foundation for responsible financial management.

Frequently Asked Questions

What is Section 44AB of the Income Tax Act?

Section 44AB mandates tax audit for specified businesses and professionals whose turnover or gross receipts exceed prescribed limits.

Is a tax audit mandatory every year?

Tax audit is mandatory only if turnover, gross receipts, or income conditions specified under Section 44AB are satisfied for that financial year.

What is the turnover limit for tax audit under Section 44AB?

For businesses, the limit is ₹1 crore (₹10 crore in case of limited cash transactions). For professionals, the limit is ₹50 lakh under section 44ab(b) of the Income Tax Act.

Who is responsible for filing the tax audit report?

The Chartered Accountant uploads the report, and the taxpayer must approve it on the income tax portal.

What happens if a tax audit is not conducted on time?

Penalty under Section 271B may apply, up to ₹1,50,000 or 0.5% of turnover, whichever is lower.