The Complete Guide to Tax Audit (Section 44AB): Applicability, Forms, and Automation

If you run a business or profession in India, the term "tax audit" can cause a mix of confusion and deadline anxiety. It's more than just checking your books; it's also important to ensure that your financial records are completely compliant with the Income Tax Act.

At Sepfust, we believe compliance shouldn't be a bottleneck. This guide breaks down the Tax Audit into simple terms, helps you check if you are liable, and explores how automation can save you from penalties.

What is a tax audit?

A tax audit is the examination of a taxpayer's books of account. The primary goal is to ensure that the taxpayer's income tax returns accurately reflect their income and that deduction claims are made correctly. It also saves time for the assessing officer by ensuring that totals are correct and vouchers are verified before the file reaches them.

Who Needs a Tax Audit? (Applicability & Limits)

Section 44AB of the Income Tax Act defines the rules for conducting tax audits.Section 44AB of the Income Tax Act defines the rules for conducting tax audits. The application is based on your "turnover" or "gross receipts."The application is based on your "turnover" or "gross receipts."

1. For Business Owners

Audits are required for businesses with sales, turnover, or gross receipts exceeding ₹1 Crore in the previous year.

The "Digital" Exception (Rs. 10 Crore Limit):

To encourage digital transactions, the government sets a higher threshold. Audits are not required for businesses with a turnover of ₹10 crore or less if:

1. Cash Receipts: The aggregate of all amounts received in cash does not exceed 5% of the total amount.
2. Cash Payments: The aggregate of all payments made in cash does not exceed 5% of the total payment.

2. For Professionals

If your gross receipts exceed ₹50 lakhs and you work in a profession such as engineering, law, or architecture, you must undergo an audit.

• Businesses with cash receipts below 5% of gross receipts have a higher limit of ₹75 lakhs.

Quick Applicability Check

Pro Tip: When calculating turnover, remember to exclude items such as trade discounts (if listed on the invoice) and GST (if credited to a separate account).

Form 3CA vs. Form 3CB: Which one is for you?

When you know you are liable, the next step is to file the report. The audit report isn't one-size-fits-all; it comes in two varieties, depending on your company structure.

• Form 3CA is for taxpayers who are already required to have their accounts audited under another law (for example, a private limited company audited under the Companies Act).
• Form 3CB is for taxpayers who do not require an audit under any other law (such as a sole proprietorship or partnership).

Regardless of whether you file 3CA or 3CB, you must attach Form 3CD, which is a detailed Statement of Particulars.

The Complexities of Form 3CD

Form 3CD is the centerpiece of the tax audit. It contains 44 distinct clauses requiring the auditor to report specific compliances. This is where finance teams frequently struggle with manual data extraction.

1. The GST Breakdown (Clause 44)

This is currently one of the more difficult requirements. Clause 44 requires you to provide a breakdown of your total expenses into:

• Expenditure relating to entities registered under GST.
• Expenditure relating to entities falling under the composition scheme.
• Expenditure relating to exempt goods/services.
• Expenditure relating to entities not registered under GST.

Manually sorting through thousands of line items in your SAP or ERP system to categorize vendors and expenses for Clause 44 is both error-prone and time consuming.

Sepfust Solution: Don't let GST categorization slow you down. Our automated tool handles this split instantly.

Check out the Clause 44 Cockpit to automate your GST audit reporting.

2. TDS Compliance (Clause 34 & Clause 21b)

You must report whether you correctly deducted tax (TDS) and deposited it on time. If you fail to deduct TDS, 30% of your expenses may be disallowed, increasing your tax liability.

Reconciling your books with Form 26AS is critical to ensuring that the TDS claimed matches government records.

Sepfust Solution: Ensure your TDS data matches perfectly before the audit begins.

Explore our 26AS Cockpit for seamless reconciliation.

Real-World Case Study: The 5% Cash Trap

Let's look at an example to understand the importance of the 5% cash limit.

Scenario:

ABC & Co., a partnership firm, had a turnover of ₹8 crores. They thought they were safe from audit because they were under the ₹10 Crore limit.

The Data:

• Total Receipts: ₹8 Crores
• Cash Receipts: ₹30 Lakhs (0.37% - Safe)
• Total Payments: ₹6 Crores
• Cash Payments: ₹35 Lakhs (0.58% - Safe)

Wait, let's look closer. Suppose their cash payments were actually ₹35 Lakhs out of a reduced total payment base, or perhaps they made a mistake in calculation.

If their cash payments had been ₹31 Lakhs out of a total payment of only ₹60 Lakhs (hypothetically), that would be more than 50%, making them liable for audit.

Actual Illustration from Guidelines:

In a case where a firm had receipts of ₹981.3 Lakhs and cash receipts were only 4.72% (safe), but their cash payments were 5.54% of total payments, they could not avail the ₹10 Crore benefit. Because they failed the payment condition, and their turnover exceeded ₹1 Crore, a tax audit became mandatory.

Lesson: You must monitor both receipts and payments.

Penalties for Non-Compliance

Missing the tax audit deadline or failing to get audited when liable is expensive. The penalty under Section 271B is the lower of:

1. 0.5% of total sales/turnover/gross receipts.
2. ₹150,000.

However, no penalty is imposed if you can prove a "reasonable cause," such as a natural calamity, resignation of the tax auditor, or loss of accounts due to theft.

Conclusion

A tax audit is a comprehensive review of your company's compliance. With clauses becoming more data-intensive, particularly those involving GST and TDS, relying on manual Excel sheets is an unacceptable risk for modern businesses.

Prepare early, keep your books clean, and use automation to handle Form 3CD's heavy lifting.

Ready to streamline your audit process?

Visit Sepfust today to see how we automate your SAP finance and tax workflows