Income Tax Audit Under Section 44AB: Who Needs It, What It Covers, and Key Deadlines

The term "tax audit" often causes anxiety among business owners and professionals. But understanding exactly who needs one, what it involves, and when it must be completed can turn a stressful obligation into a manageable compliance task.

Section 44AB of the Income Tax Act, 1961 mandates that certain businesses and professionals get their accounts audited by a Chartered Accountant and submit the audit report along with their income tax return. This is separate from the statutory audit required under the Companies Act — a company may need both.

A person carrying on business must get a tax audit if their total sales, turnover, or gross receipts exceed ₹1 crore in the financial year.

Exception — Higher threshold for digital transactions: If at least 95% of your business receipts and payments are through digital modes (banking channels, UPI, cards, etc.), the threshold is ₹10 crore instead of ₹1 crore.

A person carrying on a profession (doctor, lawyer, CA, architect, engineer, etc.) must get a tax audit if their gross receipts exceed ₹50 lakh in the financial year.

If you have declared income under the presumptive taxation scheme (Section 44AD for businesses or Section 44ADA for professionals) in a previous year, and in the current year you:

• Declare income lower than the prescribed presumptive rate, AND
• Your income exceeds the basic exemption limit

Then you must get a tax audit, regardless of your turnover.

Persons carrying on the business of plying, hiring, or leasing goods carriages who claim income lower than the prescribed amount under Section 44AE must also get a tax audit.

The tax audit report is submitted in specific forms:

Used when the accounts of the taxpayer are already required to be audited under any other law (e.g., Companies Act, LLP Act, Banking Regulation Act). The CA certifies that the accounts have been audited under the other law and provides additional particulars required under the Income Tax Act.

Used when the accounts are not required to be audited under any other law. The CA audits the accounts specifically for income tax purposes and certifies the report.

This is the statement of particulars — a detailed questionnaire that accompanies both 3CA and 3CB. It contains 44 clauses covering virtually every aspect of the taxpayer's financial affairs. Both the CA and the taxpayer must sign Form 3CD.

Form 3CD is comprehensive. Key clauses include:

Business and financial information:

• Nature of business and address of principal place of business
• Books of account maintained and method of accounting (mercantile or cash)
• Method of valuation of closing stock
• Capital asset converted to stock-in-trade (and vice versa)

Income and deductions:

• Amounts debited to P&L that are not deductible (Section 40, 40A, 43B)
• Payments to related parties (Section 40A(2))
• Amounts paid to specified persons (Section 40A(3)) — cash payments above ₹10,000
• Deductions claimed under Chapter VI-A (80C, 80D, etc.)
• Deductions under Sections 10AA, 80-IA, 80-IB, etc.

Tax compliance:

• TDS deducted and deposited — any defaults
• TCS collected and deposited — any defaults
• Advance tax paid
• Deemed dividend under Section 2(22)(e)
• Loans or deposits accepted/repaid in cash above ₹20,000

Specific transactions:

• International transactions and specified domestic transactions (for transfer pricing)
• Payments to non-residents (Section 195)
• Receipts from non-residents
• Expenditure on scientific research
• Expenditure on advertisement in foreign media

MSME payments:

• Amounts payable to Micro and Small Enterprises beyond 45 days (Section 43B(h)) — a critical clause added recently

One of the most important recent additions to Form 3CD is the reporting under Section 43B(h), which was introduced with effect from FY 2023-24.

Under this provision, any payment due to a Micro or Small Enterprise (registered under MSMED Act) must be made within:

• 15 days if there is no written agreement
• 45 days if there is a written agreement (maximum allowed under MSMED Act)

If payment is not made within these timelines, the expense is not deductible in the year of accrual — it becomes deductible only in the year of actual payment.

The tax auditor must report all such delayed payments in Form 3CD. This has significant implications for businesses that have long credit cycles with MSME suppliers.

For FY 2025-26:

• Tax audit report: September 30, 2026
• ITR filing (with audit): October 31, 2026

The tax audit report must be filed electronically on the income tax portal. The CA uploads the report using their login credentials, and the taxpayer must accept it on their portal login before it is considered filed.

The penalty for failure to get accounts audited or failure to furnish the audit report is:

Section 271B: 0.5% of total sales, turnover, or gross receipts, subject to a maximum of ₹1,50,000.

However, if the taxpayer can demonstrate "reasonable cause" for the failure, the penalty may be waived. Reasonable cause has been accepted in cases of:

• Genuine illness of the taxpayer or CA
• Natural calamities
• Disputes with the previous CA
• Technical failures on the income tax portal (near the deadline)

Note: The penalty under Section 271B is in addition to any interest under Section 234A for late filing of the ITR.

Based on our experience, these are the most frequent findings:

1. Cash payments above ₹10,000 — Section 40A(3) disallows cash payments above ₹10,000 to a single person in a day. Many small businesses are unaware of this limit.

2. TDS defaults — Failure to deduct TDS on contractor payments, rent, professional fees, or salary. The expense is disallowed to the extent of TDS not deducted (Section 40(a)(ia)).

3. Section 43B defaults — Statutory dues (PF, ESI, GST, advance tax) not paid before the due date of filing the return. These are disallowed in the year of accrual.

4. MSME payment delays — As discussed above, delayed payments to MSME suppliers are now a major audit finding.

5. Valuation of closing stock — Inconsistent valuation methods between years, or valuation not in accordance with the method declared.

6. Related party transactions — Payments to relatives or associated concerns at non-market rates (Section 40A(2)).

7. Loans in cash — Accepting or repaying loans above ₹20,000 in cash (Section 269SS and 269T).

• Finalise your books of account for the financial year
• Reconcile your bank statements with your books
• Prepare a schedule of all TDS deductions and verify deposits
• Compile a list of all payments above ₹10,000 in cash
• Identify all MSME suppliers and check payment timelines

• Engage your CA and provide all books and documents
• Prepare a schedule of all related party transactions
• Compile details of all loans accepted and repaid
• Prepare a fixed asset register with additions and deletions
• Gather all GST returns and reconcile with books

• Review the draft Form 3CD carefully — every clause has tax implications
• Accept the audit report on the income tax portal promptly
• File your ITR before the deadline

A company above the turnover threshold needs both audits — the statutory audit for the Companies Act, and the tax audit for the Income Tax Act. The same CA can conduct both.

Our team of practising Chartered Accountants handles tax audits for businesses and professionals across all sectors. We:

• Review your books and identify potential disallowances before the audit
• Prepare and file Form 3CA/3CB and Form 3CD
• Advise on corrective actions to minimise disallowances
• Coordinate with your statutory auditor where both audits are required
• File your ITR after the audit is complete

Contact us to schedule your tax audit for FY 2025-26 well before the September 30 deadline.