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Income tax audit under Section 44AA, 44AB, 44AD, 44AE and 44ADA: All you need to know

  • Highlights

  • Section 44 AB reveals when an audit of accounts is needed

  • Section 44 AA of Income Tax Act shows how to maintain accounts

  • Section 44AD of Income Tax Act is about presumptive taxation

  • Section 44AE is applicable to small businesses claiming depreciation

You are required to file income taxes every financial year and so you may look up tips for filing income tax or learn how to calculate taxable income. Doing your bit diligently is an important part of helping the government secure a better economic future and as part of this, you may be required to get a tax audit and keep your books of accounts up to date. Take a look at what a tax audit is and the role it plays in determining your tax liability.

What is tax audit?

To put it simply, a tax audit is a legal way of verifying your income and expenditure basis the claims you make. As per the Indian Income Tax guidelines, any company or person earning an income as specified by certain sections of Income Tax Act is eligible to undergo a tax audit. This means you will first have to understand whether your gross income and expenditure in one financial year qualifies you for an audit or not. Then, as per the requirements of the section under which you qualify, you will have to abide by certain protocols, maintain accounts, and have them reviewed by a CA.

Who is liable to get a tax audit done?

As per the income tax laws if your turnover during a financial year exceeds Rs.1 crore then you are liable to get your tax audit done by a chartered accountant. Additionally, following amendments proposed during FY 16–17, if as a professional your gross income is beyond Rs.50 lakh, then you will have to get a tax audit done as well. Moreover, if you own a business that has a lower turnover and finds a mention in Section 44BB, Section 44BBB, Section 44AD, Section 44ADA, Section 44AE, or Section 44AF, you will need to get an audit done as well.

Look at all you need to know about tax audits and maintenance of books under a few such sections of the Income Tax Act.

Section 44AB

Under Section 44 AB of Income Tax Act, audit of accounts is compulsory if:
- Your business’ gross turnover exceeds Rs.1 crore in any preceding year or if your profession’s gross receipts are more than Rs.50 lakh in any preceding year.
- Your business or profession is presumptively covered under Sections 44ADA/44AE/44BB/44BBB and your profit is less than the specified limit.
- If you have more than one business or profession, the turnover for all need to be summed up to determine if an audit is necessary.

The tax audit date for this section is 30th September of the assessment year. In order to file the audit report, you will have to make use of form 3CA and form 3CD, which is a statement acknowledging the particulars you have stated in form 3CA.

Section 44AA

Section 44 AA of Income Tax Act gives directives on how to maintain the accounts while carrying out a business or profession.
- In case you are a professional practicing in a field such as medicine, law, engineering, architecture, accountancy, technical consultancy, interior decoration or film industry specific work and your gross income is less than Rs.1,50,000 in all 3 years preceding the most recent year, then you need to maintain prescribed books such as a cash book, journal, ledger, daily case registers, and stock register.
- If you do not have a specified profession and your receipts of gross income exceeds Rs.10,00,000 in any of the 3 years preceding the most recent year, then you will have to maintain books of accounts. These books need to be the ones that enable the assessing officer to compute your total income.
- If you are covered under Section 44ADA/44AF/44BB/44BBB and your income is lesser than the specified limit, then maintaining books to support your claim is optional.

In order to reduce the burden of taxation on small businesses, the government has offered presumptive taxation as an option. Under this scheme, a business isn’t required to maintain regular accounting books. Instead, it can declare its income at a set rate. You can opt in or out of this scheme if you eligible for the same. However, if you opt out of this scheme you will not be able to opt in again for at least 5 years. The presumptive tax was framed using two sections i.e. Section 44AD and Section 44AE of the Income Tax Act. If you opt for the presumptive taxation scheme your business income goes beyond the set limit, you will need to have an audit conducted to confirm the same.

Section 44AD

AIf your turnover from the previous year does not exceed the Rs.2-crore limit, then under Section 44AD of Income Tax Act, you can opt for presumptive taxation. However, to do that you need to be:
- An Indian resident
- A resident of a Hindu Undivided Family
- A resident partnership firm

This means that if you do not fall in one of these three categories you cannot apply for presumptive taxation. It is important to remember that Limited Liability Partnership firms are not eligible to apply for presumptive taxation. Further, if you have made a claim for deductions under Section 80HH to 80RRB, 10A, 10B, 10AA or 10BB of the Income Tax Act, you cannot apply for presumptive taxation.

If you are availing presumptive taxation, then your income will be computed at the presumptive rate of 8% or 6% and you will not be allowed to claim the various allowances and disallowances specified by the law. You will also not be able to claim a separate deduction for depreciation.

In an instance where you are opting for presumptive taxation, and your income exceeds the basic threshold limit, you will need to maintain books as well. If you are declaring profit that is not in accordance with Section 44AD for any of the 5 consecutive years adding up to the recent year, then you will not be able to claim the benefits of this provision for 5 subsequent years starting from the year of declaration.

Section 44AE

As per the eligibility criteria put in place, Section 44AE is only applicable for small businesses that conduct activities like hiring, plying or leasing goods carriages. Your business must not have more than ten goods carriage vehicles and you cannot claim deductions for expenditures such as depreciation. 

Section 44ADA

The presumptive taxation scheme added a new section, Section 44 ADA, with effect from 1 April 2017, to reduce the burden of taxation on smaller businesses. This section too abolishes the need to maintain books as tax is calculated as a percentage of total sales. To be eligible for this scheme you need to be an Indian resident who is an individual, HUF or represents a partnership but not a Limited Liability Partnership. Further, your business needs to fall under categories such as:
1. Engineering
2. Legal
3. Architectural
4. Accountancy
5. Medical
6. Technical consultant
7. Interiors
Other professionals such as authorised representatives, film artists, certain sports-related persons and company secretaries are also part of this list.

Under Section 44ADA of Income Tax Act, you can opt in and out of the presumptive scheme without the five-year restriction. However, Section 44 AA of the Income Tax Act also mentions that you will need to maintain books if you are claiming lower profit than that specified under Section 44ADA, or if your total income exceeds the basic exemption limit.

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