Tax Audit Under Section 44AD, 44AB & 44ADA - Business Turnover 1 Crore - 2 Crore in FY 2017-18 / AY 2018-19

What is Audit?

Audit means an inspection of books of accounts by some officials or some specified persons for the purpose of establishing the fact that the accounting records present a true and fair view.

Types of Audit

There are two types of audit, namely statutory audit and Tax audit.

What is Statutory 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.

What is Tax Audit ?

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. 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.

Limits of Tax Audit (Sec44AB) under Income Tax Act

According to Section 44AB of the Income Tax Act 1961 the Tax Audit limit for

For Business:

Rs. 1 Crore. It means an assessee need to be audited under Sec.44AB if his annual gross turnover/receipts in business exceeds Rs. 1 Crore. This provision is applicable from F.Y. 2016-17 (A.Y. 2017-18) & onwards. It means the limit of Tax Audit u/s 44AB is Rs. 1 Cr. for Business in FY 2017-18 / AY 2018-19.

Profession:

Rs. 50 Lakh. It means an assessee need to be audited under Sec 44AB if his annual gross receipts in profession exceeds Rs. 50 Lakh. This provision is applicable from F.Y. 2016-17 (A.Y. 2017-18) & onwards. It means the limit of Tax Audit u/s 44AB is Rs. 50 Lakh for Profession in FY 2017-18 / AY 2018-19.

What is Presumptive Taxation Scheme (Sec 44AD)?

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 exceeds Rs. 2 Crore are eligible for this scheme.

Click here to read official details about Section 44AD on Income tax Website

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

Now some Queries about Section 44AD:

My Income from business exceeds Rs. 1 Crore but below Rs. 2 Crore in F.Y. 2017-18 (A.Y. 2018-19). 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. 2017-18 (A.Y. 2018-19) to avoid tax audit. Remember your Net Income should not 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 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 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."

Can anyone declare higher income i.e. income above 8% under Presumptive Income Scheme (44AD)?

Yes, you can declare higher income (@8%) under sec 44AD. But income should not below 8%.

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