The income tax audit under Section 44AB is not a statutory audit under the Companies Act — it is an examination of your books of accounts by a practising Chartered Accountant, who certifies findings in Form 3CA or 3CB and submits a detailed statement in Form 3CD.
Many small business owners and professionals are unaware that the audit obligation applies to them. The penalty for non-compliance is real: 0.5% of turnover, up to ₹1,50,000.
Who Is Required to Get a Tax Audit?
Businesses — Section 44AB(a)
If your total sales, turnover, or gross receipts exceed ₹1 crore in a financial year, tax audit is mandatory.
Higher threshold of ₹10 crore (cash-lite businesses): If your cash receipts do not exceed 5% of total receipts and cash payments do not exceed 5% of total payments in the year — i.e., at least 95% of all transactions are through banking channels — the threshold is raised to ₹10 crore.
Most businesses in Pune that have moved to UPI, NEFT, RTGS, or cheque payments benefit from this higher limit. This was introduced to encourage digital transactions and most urban SMEs comfortably qualify.
Professionals — Section 44AB(b)
If your gross receipts exceed ₹50 lakh in a financial year, tax audit is mandatory.
Professionals covered: doctors, lawyers, engineers, architects, CAs, company secretaries, interior decorators, technical consultants, and others specified under Section 44AA.
Presumptive Taxation — When Audit Gets Triggered Despite Low Turnover
This is the most common source of unexpected audit obligations:
Section 44AD (Presumptive income for businesses):
- Eligible if turnover ≤ ₹3 crore (with 95%+ banking transactions) or ₹2 crore otherwise
- Declare income at minimum 8% of turnover (6% for digital receipts) — no books required
- Opt out by declaring income lower than 8%: Tax audit becomes mandatory regardless of turnover amount
Example: A contractor with ₹50 lakh turnover who declares profit at 5% (below the 8% threshold) must get a tax audit done, even though turnover is far below ₹1 crore.
Section 44ADA (Presumptive income for professionals):
- Declare minimum 50% of gross receipts as income — no books required
- Opt out by declaring income below 50%: Tax audit mandatory regardless of amount
Important restriction on 44AD opt-out: If you opt out of the presumptive scheme under Section 44AD, you cannot re-enter it for the next 5 consecutive years. Books must be maintained and tax audit done in all those years.
Current Due Date
The tax audit report (Form 3CA/3CB + Form 3CD) must be submitted by 30 September of the assessment year.
This is also the ITR due date for taxpayers who are required to get a tax audit — you need the audit report number before filing the return.
The same 30 September deadline applies for partners of firms subject to audit, and for companies (whose audit is conducted under the Companies Act but whose tax audit report is also due by 30 September for IT purposes).
CBDT sometimes extends the deadline via circulars. Always check CBDT notifications on incometax.gov.in closer to the date.
What to Prepare for Your CA
Provide the following well before the deadline — last-minute rush is the most common reason for errors in Form 3CD:
Books of Accounts
- Cash book (or petty cash book) and bank book
- Sales ledger, purchase ledger, expense ledgers
- Journal and general ledger
- Stock register (for trading/manufacturing businesses)
- Fixed asset register
Supporting Documents
- Bank statements for all accounts for the full financial year
- TDS certificates (Form 16A) from customers who deducted TDS
- All GST returns filed (GSTR-1, GSTR-3B, GSTR-9 if applicable)
- Loan statements (outstanding balances, interest, repayment schedule)
- Investment details
- Copies of major contracts or agreements
Tax Documents
- Previous year's audited accounts and ITR acknowledgement
- All advance tax and self-assessment tax payment challans
- Form 26AS and AIS from the income tax portal
What Form 3CD Covers (Key Clauses)
Form 3CD contains 44 clauses. Some frequently scrutinised ones:
- Clause 13: Method of accounting and any change from the previous year
- Clause 16: Closing stock valuation method
- Clause 17: Payments to partners, proprietors, relatives — verifying reasonableness
- Clause 21: Payments attracting TDS — whether TDS was deducted and deposited on time (any non-deduction results in 30% expense disallowance under Section 40(a)(ia))
- Clause 26: Cash payments exceeding ₹20,000 to a single person in a day — disallowed under Section 40A(3)
- Clause 31: Loans or deposits taken/given in cash above ₹20,000 — violation of Section 269SS/269T
- Clause 36A: Deemed dividend under Section 2(22)(e)
- Clause 44: MSME payment compliance — whether payments to MSME-registered suppliers were made within the prescribed period (Section 43B(h), introduced from FY 2023-24). Expenses outstanding beyond 45 days to MSME suppliers are disallowed in the year of accrual and deductible only on payment.
Section 43B(h) — MSME Payment Compliance (New, Effective FY 2023-24)
The Finance Act 2023 added Section 43B(h): if you buy goods or services from an MSME-registered supplier and do not pay within:
- 15 days (if no written agreement), or
- 45 days (if there is a written agreement under the MSMED Act)
Then the expense is disallowed for that year and allowed only when actually paid.
Your CA will verify and report all such outstanding MSME payments in Clause 44 of Form 3CD. Businesses with many small vendors must maintain a database of their suppliers' MSME registration status (Udyam Registration Certificate). The impact can be significant for businesses that routinely settle vendor bills on 60–90 day cycles.
Penalty for Non-Compliance
Section 271B: Penalty for failure to get the audit done or failure to furnish the audit report by the due date = 0.5% of total turnover/gross receipts, maximum ₹1,50,000.
The penalty can be waived if you demonstrate "reasonable cause" — illness of proprietor, natural calamity, technical failure of the Income Tax portal close to the deadline, etc. However, negligence or ignorance of the law is not accepted as reasonable cause.
If your turnover is approaching the threshold or you are unsure whether you are in the mandatory audit zone — especially if you are on a presumptive scheme and considering declaring income below the prescribed percentage — get in touch before the financial year ends. Planning ahead avoids penalties and ensures clean filings.
CA Mahesh M. Joshi (ACA) is a practising Chartered Accountant in Wakad, Pune. Thresholds and provisions reflect the Income Tax Act as currently in force. Always verify for any amendments in the latest Finance Act before concluding your audit obligations.