Tax audit guide for businesses and professionals:Rules, limits and pitfalls

As tax filing deadlines for audit cases approach, experts break down who is at risk of a tax audit, common misconceptions, and tips to stay compliant

The deadline for ITR filing for audit cases is drawing close. It falls on October 30. But not all small businesses and professionals are aware about rules around tax audits. Especially those around filing ITR-3 or ITR-4 are often misunderstood. Experts offer some insight.

 

Mandatory audits: Who falls under the scanner?

Shefali Mundra, chartered accountant & tax expert at ClearTax, explains, “Under Section 44AB, businesses

 

and professionals must get their accounts audited if turnover or gross receipts cross specified thresholds. For businesses, the standard audit limit is Rs 1 crore, which rises to Rs 10 crore if cash receipts and payments do not exceed 5 per cent of total transactions. Professionals such as doctors, lawyers, architects, or consultants face a Rs 50 lakh threshold, rising to Rs 75 lakh for predominantly cashless transactions.”

 

 

Vishwanathan Iyer, senior associate professor - finance & accreditation at Great Lakes Institute of Management Chennai, adds, “Small businesses under presumptive taxation (Sec 44AD) and professionals under Sec 44ADA are generally exempt, unless income exceeds the basic exemption limit or profits fall below prescribed rates.”

 

Common misconceptions

Experts say misinterpretation is widespread:

 

• Many assume “digital transactions” only include UPI or card payments, ignoring non-account payee cheques.

 

• Some believe presumptive taxation removes audit obligations entirely. As Mundra notes, “If a business under Sec 44AD reports profits below 6-8 per cent of turnover, or a professional under 44ADA below 50 per cent of gross receipts, an audit becomes mandatory.”

 

• Frequent switching between presumptive and regular taxation is restricted and can disqualify exemptions, says Pratima Verma, professor & area chair – HRM, Alliance School of Business.

 

 

Consequences of missing an audit

 

The risks are significant. Iyer explains, “Without a timely audit report, a valid ITR cannot be filed. Penalties under Sec 271B can reach Rs 1.5 lakh or 0.5 per cent of turnover. Interest under Sec 234A/B/C and late fees may apply, and such cases are often flagged for deeper scrutiny in subsequent years.”

 

Mundra shares a real-life scenario, “A trader with Rs 5 crore turnover, mostly digital, who skipped the audit could not file the ITR properly, leading to penalties and questioning of deductions and carry-forward benefits.”

 

Cost vs compliance

While audit fees may seem burdensome, experts emphasise that non-compliance costs more. “Think of an audit like an insurance policy,” says Verma. “The fees are usually far less than penalties, interest, or stress from scrutiny.” Iyer adds, “An audit also enhances record-keeping discipline and strengthens credibility with lenders and investors.”

 

 

Digital businesses: Higher thresholds, but caution needed

The government allows audit-free limits of up to Rs 10 crore for mostly digital businesses and Rs 75 lakh for professionals. Mundra advises, “Monitor cash transactions carefully, document digital receipts, and run internal checks well before filing. Even small deviations beyond 5 per cent cash can pull you back to lower thresholds.”

 

Verma echoes this, “Maintain clear digital trails and avoid mixing cash and digital business. Otherwise, benefits may be revoked, triggering audit requirements.”

 

By understanding these rules, taxpayers can navigate audits efficiently, avoid penalties, and ensure their filings remain compliant.