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Income Tax Audit Under Section 44AB of the Income Tax Act

Updated on: 16 Jan, 2024 05:49 PM

Section 44AB of the Income-tax Act, 1961, states the regulations for the tax audit of a firm or entity. The tax audit ensures that the taxpayer has provided complete and accurate information regarding his income, deductions, and taxes. This is to be conducted by a Chartered Accountant. The entity has to maintain proper books of accounts to be audited by a Chartered Accountant. The books of accounts should comply with the rules and regulations of the Income Tax Act 1961.

What is Section 44AB of the Income Tax Act, 1961?

The provisions related to tax audits are stated under section 44AB in the Income Tax Act 1961. This section reflects the rules for properly maintaining books of accounts and other financial records by the taxpayer. This helps maintain complete information regarding tax, income, and taxpayer deductions. This section helps in the reduction of fraudulent practices. A practicing chartered accountant conducts the audit. The audit report and the income tax return are reported to the income tax department.


What is Income Tax Audit under section 44AB?

A Tax Audit is an examination and assessment of the books of accounts of an organization carrying business or profession. Tax audit helps review transactions related to income, expenses, deductions, and the organization's taxes. It eases the process of filing the income tax return for taxation purposes.


Who are liable to get a tax audit done under section 44AB?

Every person who earns income from any business or profession has to maintain his books of accounts and get a tax audit done except those who opted for presumptive taxation under section 44AD, 44ADA, 44AE of the income tax act 1961 or if their turnover stands behind certain threshold limits.

The taxpayers who need to get a tax audit done are:

  • Provided, if the (a) aggregate of all amounts received, including the amount received for sales, turnover, or gross receipts during the previous year, in cash, does not exceed five percent of the said amount; and
  • (b) Aggregate of all payments made, including amount incurred for expenditure, in cash, during the previous year does not exceed five percent of the said payment: Threshold limit would be 10 crores instead of 1 crore (from 1/4/21, for FY 2021-22 - 5 crores)
  • An individual involved in the profession with a gross receipt that exceeds Rs. 50 lakh during the previous year.
  • Any assessee who has opted for sections 44ADA and 44AD but claims his income is lower than the profits computed under presumptive taxation and income exceeds the taxable amount according to the Income Tax Act.
  • Any assessee who has opted for sections 44AE, 44BB, 44BBB but claims his income lower than the profits computed under the said sections in any previous year.
Category of Person Threshold for Tax Audit
Business
- Carrying on business (not opting for presumptive taxation scheme*) Total sales, turnover or gross receipts exceed Rs. 1 crore in the FY. If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for tax audit is increased to Rs. 10 crores (w.e.f. FY 2020-21).
- Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme.
- Carrying on business eligible for presumptive taxation under Section 44AD Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit.
- Carrying on business and not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period (i.e., 5 consecutive years from when the presumptive tax scheme was opted) If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for.
- Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD If the total sales, turnover, or gross receipts do not exceed Rs. 2 crore in the financial year, then tax audit will not apply to such businesses.
Profession
- Carrying on profession Total gross receipts exceed Rs. 50 lakh in the FY.
- Carrying on the profession eligible for presumptive taxation under Section 44ADA 1. Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme. 2. Income exceeds the maximum amount not chargeable to income tax.
Business Loss
- In case of loss from carrying on business and not opting for presumptive taxation scheme Total sales, turnover or gross receipts exceed Rs. 1 crore. If taxpayer’s total income exceeds the basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme)
- Carrying on business (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below basic threshold limit Tax audit not applicable.
- Carrying on business (presumptive taxation scheme under section 44AD applicable) and having a business loss but with income exceeding basic threshold limit Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit.

What are the objectives of the Income-tax Audit?

The major objectives for conducting tax audit are:

  • Proper maintenance of books of the account without fraud activities and certification of the same by an auditor.
  • For reporting discrepancies noted by proper examination of the books of accounts.
  • For reporting various information such as tax depreciation, compliance with the provision of income tax law, and so on.
  • Computation of tax and deductions becomes easy with auditing.
  • The major role is to verify the information filed in the income tax return regarding income, tax, and deductions by the taxpayer.

What constitutes a tax Audit report?

The report that shows the result of the entire auditing procedure is called an audit report. The audit report comes under Rule 6G of the Income Tax Rules. The tax report is prepared and electronically filed by a chartered accountant. The tax auditor furnishes the audit report according to the particulars in Form 3CD.

The tax auditor shall furnish the report in a proper manner, either in Form 3CA or Form 3CB in the following cases:

  • Form 3CA is prepared when it is mandatory to get books of accounts audited under any other law for an assessee carrying on a business or profession.
  • Form 3CB is prepared when getting books of accounts audited under any other law for an assessee carrying on a business or profession is optional.

Period to get a tax audit report furnished

With his login details, a chartered accountant can furnish a tax audit report as a tax auditor. The taxpayer has to assess the details of his chartered accountant in his login portal and accept the audit report uploaded by his auditor.

For all taxpayers, the due date is 30th September of the assessment year. For an international transaction, the due date is 31st October of the assessment year.

(However, for AY 2021-22, the due dates have been extended to 15.02.22 & 15.02.22, respectively)

(For AY 2022-23, the due dates have been extended to 07th Nov 2022 and 30th Nov 2022 for audit ITRs and Transfer Pricing report ITRs)

(For AY 2023-24, the due dates are to 30th Sept 2023 and 31st Oct 2023 for audit ITRs and Transfer Pricing report ITRs)


What is Non-compliance with Income Tax Audit?

If a taxpayer is liable to get a tax audit done but defaults, a penalty is charged to the taxpayer. The penalty that is levied on him or her is the following:

  • 0.5% of the total sales or gross receipts or turnover
  • Rs 1,50,000

However, if there is a reasonable cause of such failure, no penalty shall be levied under section 271B.

So far, the reasonable causes that Tribunals/Courts accept are:

  • Natural Calamities
  • Resignation of the Tax Auditor and Consequent Delay
  • Labor problems such as strikes, lock-outs for an extended period
  • Loss of Accounts because of situations beyond the control of the Assesses
  • Physical inability or death of the partner in charge of the accounts

Penalty of not filing tax audit report

Failing to file a tax audit report when required by tax authorities can lead to various penalties and consequences, which can vary depending on the jurisdiction and tax laws applicable to your situation. Here are some common penalties and consequences associated with not filing a tax audit report:

  • Monetary Penalties: Tax authorities may impose monetary penalties for not filing a tax audit report. These penalties are typically calculated as a percentage of the tax liability or income subject to audit, and they can be substantial.
  • Disallowance of Deductions: In some cases, tax authorities may disallow certain deductions or exemptions claimed on your tax return if you fail to file a required tax audit report. This can result in a higher tax liability.
  • Interest Charges: Interest charges may accrue on any unpaid tax liability that results from not filing a tax audit report. The interest rate and calculation method can vary by jurisdiction.
  • Legal Action: In severe cases or for repeated non-compliance, tax authorities may take legal action against you. This could involve fines, penalties, and even criminal charges in some instances.
  • Loss of Tax Benefits: Failure to file a tax audit report can also lead to a loss of tax benefits or incentives that you might be entitled to.
  • Audit: Not filing a tax audit report may trigger a tax audit by the tax authorities. During the audit, they will review your financial records and tax returns, which can be a time-consuming and potentially costly process.
  • Impact on Credit Rating: In some jurisdictions, tax authorities can report tax debts to credit agencies, which can negatively affect your credit rating.
  • Injunctions and Seizures: In extreme cases of non-compliance, tax authorities may seek court orders to place liens on your assets, garnish wages, or seize property to satisfy unpaid tax debts.

Accounts audited by any other law

If a taxpayer is required to get his books of accounts audited under any other law, for example, a statutory audit of companies under company law provisions, the individual need not conduct his audit again for taxation purposes. The taxpayer just has to get the audit report furnished according to the income tax law before the due date of filing of the return.


Conclusion

If you are a taxpayer, you must comply with the provisions of section 44AB of the income tax act 1961. This section states that all taxpayers have to get an audit report furnished after conducting an audit of their books of accounts. This is to truly reflect the taxpayers' income-related activities, deductions, and taxes.


Frequently Asked Questions

Q- What provision is stated in section 44AB?

This section states that taxpayers must audit their business or profession to furnish an audit report for taxation if they fall under those conditions.


Q- Who conducts tax audits?

A practicing chartered accountant or relevant authorities do a tax audit.


Q- What is the penalty charged for non-compliance with section 44AB?

For non-compliance with section 44AB, you will be charged a penalty of 0.5% of total sales or turnover or gross receipts or Rs. 1.5 Lakh, whichever is less.


Q- What are Section 44AA and Section 44AB?

44AA deals with when books are required to be maintained by the assessee, whereas 44AB deals with the situations or circumstances under which Audit is required to be conducted or when an audit report is required to be furnished.


Q- What is the penalty for non-filing or delay in auditing?

For non-compliance with section 44AB, you will be charged a penalty of 0.5% of total sales or turnover or gross receipts or Rs. 1.5 Lakh, whichever is less. Also, there is applicability of penalty u/s 234F.


Q- What triggers Tax Audits?

Turnover and profit percentage on turnover are the factors that lead to tax auditor some other conditions as specified in the act.


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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.