Section 44AB: Income Tax Audit
Updated: Oct 1
In today's dynamic business environment, compliance with tax regulations is more critical than ever. One such key compliance requirement for businesses and professionals in India is the income tax audit mandatory under Section 44AB of the Income Tax Act. This section ensures that the financial records of businesses and professionals are accurate, transparent, and compliant with tax laws, safeguarding the interests of both taxpayers and the government.
The tax audit under Section 44AB is not just an obligation but a crucial tool that enhances accountability and credibility in financial reporting. It applies to individuals, companies, firms, and other entities whose gross receipts or turnover exceed specified thresholds. Conducted by a qualified chartered accountant, the audit verifies that the income declared and taxes paid are in accordance with the provisions of the Income Tax Act.
In this blog, we will explore the eligibility, process, and significance of the tax audit under Section 44AB.
Table of content
What is Section 44AB of the Income Tax Audit, 1961?
44AB of the Income Tax Act, 1961, outlines provisions related to tax audits, aiming to ensure the accuracy and transparency of financial records maintained by taxpayers. Enforced to curb fraudulent practices, the section mandates the proper maintenance of books of accounts and other relevant financial documents.
Under this provision, a tax audit is conducted by a practicing chartered accountant who thoroughly examines the taxpayer's financial records. The objective is to verify the accuracy of the reported income, tax liability, and deductions claim. This process aids in promoting fair and honest financial practices, ultimately contributing to the integrity of the tax system.
What is a Tax Audit?
A tax audit is a process where a qualified chartered accountant examines a taxpayer’s books of accounts to ensure that all income, deductions, and tax liabilities are reported accurately. It involves a detailed review of financial statements, including ledgers, invoices, and other documents, to assess compliance with the provisions of the Income Tax Act. The purpose of a tax audit is to authenticate the financial details provided by taxpayers and identify any discrepancies that may lead to non-compliance. It is mandated for businesses and professionals that exceed a particular threshold in their turnover or gross receipts, as outlined in Section 44AB, and aims to streamline tax filings, enhance transparency, and reduce tax evasion.
Objectives of tax audit
1. Verification of Compliance:
The primary objective of a tax audit is to verify the compliance of businesses and professionals with the provisions of the Income Tax Act. This involves a meticulous examination of their books of accounts, financial statements, and other relevant records to ensure adherence to tax laws, rules, and regulations. By scrutinizing transactions related to income, expenses, and deductions, the audit aims to identify any discrepancies or non-compliance issues.
2. Accuracy of Financial Statements:
Ensuring the accuracy of financial statistics is a crucial aspect of tax audits. The audit process comprises a thorough evaluation of the financial statements to ensure that they correctly represent and fairly show the financial status of the business or profession. This rigorous scrutiny improves the reliability of financial reporting and increases the overall credibility of financial data provided to interested parties such as the government, investors, and lenders. The audit provides credibility to the financial information provided to the stakeholders.
3. Prevention of Tax Evasion:
A key objective of tax audits is to prevent tax evasion and ensure that taxpayers fulfill their tax obligations honestly. By scrutinizing the financial transactions and reporting practices of businesses and professionals, tax audits act as a deterrent to potential tax evasion schemes. Identifying and rectifying discrepancies helps maintain the integrity of the tax system, promoting fairness and equity among taxpayers.
4. Enhancing Transparency:
Tax audits contribute significantly to enhancing transparency in financial dealings. Through a systematic examination of financial records, the audit process sheds light on the organization's economic activities. This transparency is essential not only for tax authorities but also for other stakeholders, fostering trust and confidence in the financial system.
5. Facilitating Effective Tax Administration:
Tax audits aim to facilitate tax administration by providing tax authorities with accurate and reliable information. This enables tax authorities to assess and collect the appropriate taxes owed by businesses and professionals. The information obtained through audits also assists in formulating and implementing tax policies that are responsive to the evolving economic landscape.
6. Risk Mitigation for Taxpayers:
While tax audits are often viewed as a compliance mechanism, they also serve as a risk mitigation tool for taxpayers. Identifying and rectifying potential issues during the audit process can prevent future disputes with tax authorities, reducing the likelihood of penalties, fines, or legal complications. This proactive approach helps businesses and professionals maintain financial stability and compliance.
What is Income Tax Audit under Section 44AB?
Under Section 44AB of the Income Tax Act, 1961, a Tax Audit becomes mandatory for businesses or professionals whose total turnover or gross receipts exceed the prescribed limit. As of my last knowledge update in January 2022, the turnover threshold is Rs. 1 crore for businesses and Rs. 50 lakhs for professionals. A qualified chartered accountant conducts the audit, verifying compliance with tax laws and ensuring accurate financial reporting. The audit report and the prescribed forms must be submitted by the specified due date. Non-compliance with the income tax audit requirement may result in penalties. The Income Tax Audit under Section 44AB aims to enhance transparency, curb tax evasion, and promote accurate reporting in the Indian taxation system.
What Constitutes a Tax Audit Report?
The audit report, a crucial component of the auditing process, is governed Rule 6G of the Income Tax Rules. This report is prepared and electronically filed by a chartered accountant, who conducts the tax audit. The specific details of the audit report are outlined in Form 3CD.
Sometimes, the tax auditor must furnish the report in one of two forms: Form 3CA or Form 3CB.
Form 3CA:
Under Section 44AB of the Act, auditing of books of accounts is compulsory for taxpayers who meet the specified criteria, ensuring clarity regarding the finances and fulfillment of the provisions under taxation laws. In this case, Form 3CA will be used when the books of the assessee are audited under any other law also. The form helps in aligning the audit processes under different regulations pertaining to the same financial information, ultimately adding credibility and thoroughness to financial reporting. The key to staying compliant and out of legal mistakes lies in understanding the requirements.
Form 3CB:
Form 3CB is utilized when the audit of books of accounts under any other law for access involved in a business or profession is optional. In cases where external regulations allow discretion regarding audit requirements, the tax auditor prepares Form 3CB. Some people do an audit even though they don’t have to. This indicates they are concerned with being truthful and prudent in handling their money. The audit verifies a person’s financial records to ensure accuracy and reliability.
The meticulous preparation and submission of the audit report in either Form 3CA or Form 3CB contribute to the effectiveness of the income tax audit procedure, ensuring that the appropriate format aligns with the specific circumstances and legal obligations applicable to the assessee's business or profession.
Who is Mandatorily Subject to Tax Audit? Turnover Limit for Tax Audit
A taxpayer is mandatorily subject to a tax audit if their business sales, turnover, or gross receipts surpass Rs 1 crore in the financial year. Amendments in the Finance Acts 2020 and 2021 raised the threshold to Rs 5 crore and Rs 10 crore, respectively, based on cash transaction percentages.
Category of person | Threshold |
Carrying on business (not selecting a presumptive tax scheme) | Total sales, turnover, or gross receipts exceed Rs. 1 crore in FY If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for a tax audit is increased to Rs. 10 crores (w.e.f. FY 2020-21) |
Carrying a business qualified for presumptive taxation under Section 44BB, 44AE, or 44BBB | Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme |
Carrying on business qualified 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 the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out of presumptive taxation in any one financial year of the lock-in period. | 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 income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive years from the financial year when the presumptive taxation was opted |
Carrying on business, which is declaring profits as per presumptive taxation scheme under Section 44ADA | If the total sales, turnover, or gross receipts do not exceed Rs 2 crore in the financial year, then tax audits will not apply to such businesses. |
Category of person | Threshold |
Carrying on profession | Total gross receipts exceed Rs 50 lakh in the FY |
Carrying on a 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 the event of loss from carrying on of business and not opting for a presumptive taxation scheme | Total sales, turnover, or gross receipts exceed Rs 1 crore |
If the taxpayer's total income exceeds the basic threshold limit but he has incurred a loss from carrying on a business (not opting for a presumptive taxation scheme) | In case of loss from business when sales, turnover, or gross receipts exceed 1 crore, the taxpayer is subject to tax audit under 44AB |
Carrying on business (opting for a presumptive taxation scheme under section 44AD) and having a business loss but with income below a basic threshold limit | Tax audits are not applicable |
Carrying on business (presumptive taxation scheme under section 44AD appropriate) and having a business loss but with income exceeding the basic threshold limit | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit |
Penalty of Not Filing Tax Audit Report
Failing to file a tax audit report as required by tax authorities can result in a cascade of penalties and consequences, significantly impacting individuals and businesses. These repercussions, which vary across jurisdictions, underscore the critical importance of adhering to tax compliance regulations.
1. Monetary Penalties:
Among the most immediate consequences is the imposition of monetary penalties. Tax authorities often levy fines calculated as a percentage of the tax liability or income subject to audit. These penalties can be substantial, amplifying the financial burden of non-compliance.
2. Disallowance of Deductions:
The failure to submit a tax audit report may lead tax authorities to disallow certain deductions or exemptions claimed on the tax return. This disallowance can result in a higher overall tax liability, as the taxpayer loses the benefits associated with these deductions.
3. Interest Charges:
The accrual of interest charges on any unpaid tax liability arising from the absence of a tax audit report is another consequence. The interest rate and calculation method vary by jurisdiction, further adding to the financial repercussions of non-compliance.
4. Legal Action:
In the event of repeated non-compliance, tax authorities may initiate legal action. This could involve additional fines, penalties, and, in some circumstances, criminal charges. Legal consequences underscore the gravity of failing to meet tax obligations.
5. Loss of Tax Benefits:
Non-filing of a tax audit report may lead to a loss of entitlement to various tax benefits or incentives. Businesses and individuals may forfeit opportunities to reduce their tax burden or access specific tax advantages available under the law.
6. Audit:
Non-compliance triggers the likelihood of a tax audit. Tax authorities may thoroughly review financial records and tax returns, initiating a time-consuming and potentially costly process. An audit not only places a strain on resources but also heightens scrutiny of the taxpayer's financial affairs.
7. Impact on Credit Rating:
In certain jurisdictions, tax authorities can report tax debts to credit agencies. Consequently, non-compliance may have a detrimental impact on the taxpayer's credit rating, affecting their ability to secure loans or other financial arrangements.
8. Injunctions and Seizures:
In extreme cases, tax authorities may pursue legal measures such as obtaining court orders to place liens on assets, garnish wages, or seize property. These measures aim to satisfy unpaid tax debts, highlighting the seriousness with which tax authorities treat non-compliance.
Income Tax Audit Last Date: Latest Update
The government has recently extended the deadline for completing the income tax audit for the financial year 2023-24 by seven days. The revised due date is now 7th October 2024, instead of the previous deadline of 30th September 2024. This extension applies to assessees who are required to complete a tax audit under Section 44AB. For those covered under the provisions of transfer pricing audits, the last date for submitting the tax audit report remains unchanged, i.e., 31st October 2024.
How and When to Furnish Tax Audit Reports
A tax audit report must be submitted online by a qualified Chartered Accountant (CA) through their login credentials on the income tax e-filing portal. Taxpayers are also required to add the CA’s details in their own login accounts to facilitate this process.
Once the tax auditor has uploaded the audit report, the taxpayer is required to either accept or reject it within their login portal. If the taxpayer rejects the report, the entire process must be repeated until the report is accepted.
The final deadline for submitting the tax audit report is linked to the due date for filing the Income Tax Return. For assessees involved in international transactions, the due date is 31st October of the assessment year. For all other taxpayers, the deadline is typically 30th September of the assessment year.
Conclusion
In the ever-changing world of taxation, the role of the Income Tax Audit under Section 44AB remains crucial. As we conclude this discussion, it’s clear that the purpose of tax audits goes far beyond mere compliance. These audits act as safeguards of financial integrity, ensuring accuracy, transparency, and fairness in the tax system. They help businesses and professionals meet legal requirements, mitigate risks, foster trust, and maintain a fair and consistent tax environment. In an era of shifting regulations, Section 44AB is key to sound financial management, with transparency today ensuring compliance and stability tomorrow.
For expert guidance on tax audits, connect with the tax professionals at TaxBuddy. Experience the ease of simplified tax filing with India’s most trusted platform.
FAQs
Q1. What is an income tax audit under Section 44AB?
Tax audit section 44AB is an audit conducted by a chartered accountant to verify the books of accounts and other documents of the assessee. It is applicable to individuals, HUFs, firms, etc. with gross receipts exceeding Rs 1 crore in business or Rs 50 lakhs in profession. The purpose is to authenticate the accounts, verify compliance with income tax provisions, and submit a tax audit report with the Income Tax Return.
Q2. Who is required to get a tax audit done under Section 44AB?
The following persons need to get a tax audit done if their income exceeds the specified threshold -
Person carrying on business - If turnover/gross receipts from business exceed Rs 1 crore
Person carrying on the profession - If gross receipts from the profession exceed Rs 50 lakhs
Persons covered under presumptive taxation schemes under Sections 44AD, 44ADA, 44AE, etc. need to get a tax audit done if their income exceeds the maximum amount not chargeable to tax.
Q3. What are the due dates for a tax audit?
The tax audit report under Section 44AB needs to be submitted electronically by the due date for filing Income Tax Return, which is October 31st for individuals and firms not subject to tax audit. For corporations and persons needing tax audits, it is September 30th.
Q4. What documents are audited under Section 44AB?
The CA audits the books of accounts like the cash book, ledger, journals, bank statements, stock records, and sales/purchase invoices. Other documents like audit reports, balance sheets, profit/loss accounts, and notes to accounts are also audited.
Q5. What are the consequences of not getting a tax audit done?
If a tax audit is applicable but not conducted, it attracts penal consequences under Section 271B. The Assessing Officer can levy a penalty of Rs 1 lakh or 0.5% of turnover, which is lower. Prosecution can also be initiated. Non-submission of audit reports makes the return defective, and provisions for faulty returns apply.
Q6. Can a salaried individual be subject to a tax audit?
Tax audits for salaried persons are generally not subject to a tax audit. However, if one has income from any other source, like professional fees exceeding Rs 50 lakhs or business income exceeding Rs 1 crore, a tax audit may be applicable. Having turnover/gross receipts from business/profession exceed the limits makes one liable for a tax audit.
Q7. What is Form 3CA-3CD?
Form 3CA is the tax audit report filed by the Chartered Accountant. It certifies that the audit was conducted as per the provisions of Section 44AB. Form 3CD is the statement of particulars in a prescribed format that needs to be submitted along with Return and Form 3CA. It provides details of deductions claimed, compliance, etc.
Q8. What are the consequences of errors/omissions in a tax audit report?
Any wrong or inadequate disclosure in the tax audit report can be considered concealment of income. The Assessing Officer may levy penalties/interest for any deficiencies. Hence, utmost care needs to be taken in preparation for the tax audit report.
Q9. Can the Assessing Officer ask for additional documents during the assessment if a tax audit is conducted?
Yes, despite the tax audit, the AO can call for further documents and evidence to examine books of accounts in detail during regular assessments. The scope of enquiry by AO is not limited by the tax auditor's report.
Q10. Who can conduct a tax audit under Section 44AB?
Only a Chartered Accountant holding a valid Certificate of Practice (COP) can conduct a tax audit as per Section 44AB. Retired partners of firms can also perform tax audits for 3 years post-retirement.
Q11. Can an audit under Section 44AB be conducted on a voluntary basis?
No, a tax audit under Section 44AB is mandatory if the specified turnover or gross receipts threshold is crossed. Voluntary audits are not required under this section but may be carried out by businesses for their internal purposes.
Q12. What is the relationship between Section 44AB and Section 44AD?
Section 44AD is a presumptive taxation scheme for small businesses. If a taxpayer opts for Section 44AD but reports income lower than the presumptive rates (8% for non-digital and 6% for digital transactions) and their total income exceeds the basic exemption limit, they are required to get a tax audit under Section 44AB.
Q13. Can an individual with multiple sources of income be liable for a tax audit?
Yes, if an individual has income from various sources (such as business and profession) and the total turnover or gross receipts from these sources exceed the specified thresholds (Rs 1 crore for business and Rs 50 lakh for profession), they would be subject to a tax audit under Section 44AB.
Q14. What are the penalties for submitting a delayed tax audit report?
If the tax audit report is submitted after the due date, penalties under Section 271B apply. The penalty is either Rs 1.5 lakh or 0.5% of total turnover or gross receipts, whichever is lower.
Q15. Can a tax audit under Section 44AB be revised?
Yes, a tax audit report can be revised if there are genuine errors or omissions. The revision must be done before the due date for filing the Income Tax Return or when the original report was submitted, whichever is earlier.
Q16. Is it necessary for businesses with zero or negative income to undergo a tax audit?
Yes, if the turnover or gross receipts exceed the specified limits (Rs 1 crore for business or Rs 50 lakh for profession), the business is required to get a tax audit done even if there is no profit or a loss in the financial year.
Q17. Are non-resident businesses subject to a tax audit under Section 44AB?
Yes, non-resident businesses that have income accruing or arising in India and cross the turnover threshold for business (Rs 1 crore) or profession (Rs 50 lakh) are required to get a tax audit under Section 44AB.
Q18. Can a partnership firm get a tax audit under Section 44AB?
Yes, partnership firms are also liable to get a tax audit under Section 44AB if the turnover or gross receipts exceed the prescribed limits for businesses or professions.
Q19. What is the difference between a statutory audit and a tax audit?
A statutory audit is conducted to ensure that the financial statements of an entity present a true and fair view, as required by the Companies Act. A tax audit, on the other hand, is specifically conducted to ensure compliance with the Income Tax Act provisions and is governed by Section 44AB.
Q20. Can digital payments affect the applicability of a tax audit?
Yes, under Section 44AD, businesses that conduct transactions digitally can avail a lower presumptive rate of 6% instead of 8%. If such businesses report lower income or their turnover exceeds Rs 1 crore, they will be required to undergo a tax audit under Section 44AB.
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