Section 44AB

5paisa Research Team

Last Updated: 30 May, 2024 03:19 PM IST

SECTION 44AB
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This guide explains everything you need to know about income tax audits under Section 44AB of the Income Tax Act, 1961.

What is Section 44AB?

Section 44AB mandates tax audits for certain taxpayers in India. It requires taxpayers whose business or professional income (turnover or gross receipts) exceeds a specified limit in a financial year to get their accounts audited by a chartered accountant. This audit verifies the accuracy of their income and deductions reported in the tax return, ensuring compliance with tax regulations.

Who Are Liable To Get A Tax Audit Done Under Section 44AB?

The Income Tax Act mandates tax audits for two main categories of taxpayers:
 

Businesses: A tax audit becomes compulsory if a business's gross turnover exceeds Rs. 1 crore in the preceding financial year. However, there's an exception: If cash transactions represent up to 5% of total gross receipts and payments, the turnover threshold for a tax audit is raised to Rs. 10 crores (effective from FY 2020-21).

Professionals: Professionals whose gross receipts surpass Rs. 50 lakh in the preceding financial year are liable for a tax audit.

The table below summarizes other circumstances that necessitate a tax audit:

Category of Person Threshold for Tax Audit
Businesses (not opting for presumptive taxation scheme) Exceeding Rs. 1 crore in total sales, turnover, or gross receipts during the fiscal year.
Businesses eligible for presumptive taxation under Sections 44AE, 44BB, or 44BBB Claiming profits or gains below the prescribed limit under the presumptive taxation scheme.
Businesses eligible for presumptive taxation under Section 44AD Declaring taxable income below the prescribed limits under the presumptive tax scheme while having income exceeding the basic threshold limit.
Businesses not eligible for presumptive taxation under Section 44AD due to opting out during the lock-in period If income exceeds the maximum amount not subject to tax in the subsequent 5 consecutive tax years from the fiscal year when opting out of presumptive taxation.
Business under the presumptive taxation scheme (Section 44AD) Tax audit exemption if total sales, turnover, or gross receipts do not exceed Rs. 2 crore in the fiscal year.
Professionals (non-presumptive taxation scheme) Crossing Rs. 50 lakh in total gross receipts during the fiscal year.
Presumptive taxation under Section 44ADA 1. If profits or gains are lower than the prescribed limit under the presumptive taxation scheme. 2. If income surpasses the maximum amount not subject to income tax.
Business Loss (without opting for presumptive taxation) Crossing Rs. 1 crore in total sales, turnover, or gross receipts. A tax audit is required if the taxpayer's total income exceeds the basic threshold limit but incurs a loss from business operations (without opting for presumptive taxation).
Business Loss (presumptive taxation under Section 44AD) and income below the basic threshold limit No tax audit is required.
Business Loss (presumptive taxation under Section 44AD) and income exceeding the basic threshold limit Declaring taxable income below the prescribed limits under the presumptive tax scheme and having income exceeding the basic threshold limit.

What Are The Objectives Of The Income-Tax Audit?

The primary objectives of conducting a tax audit are:

  • To ensure proper maintenance of books of accounts without fraudulent activities and to have them certified by a qualified auditor.
  • To identify and report discrepancies noted during a thorough examination of the books of accounts.
  • To report various information such as tax depreciation and compliance with income tax law provisions.
  • To simplify the calculation and verification of total income, deductions, and tax liability.
  • To verify the information filed in the income tax return regarding income, tax, and deductions claimed by the taxpayer.

What Constitutes A Tax Audit Report?

The tax auditor furnishes a report in a prescribed form, either Form 3CA or Form 3CB:

  • Form 3CA is used when a person carrying on business or profession is already mandated to get their accounts audited under any other law.
  • Form 3CB is used when a person carrying on business or profession is not required to get their accounts audited under any other law.

In both cases, the tax auditor must furnish the prescribed particulars in Form No. 3CD, which forms part of the audit report.
 

Period To Get A Tax Audit Report Furnished

The tax auditor electronically submits the tax audit report using their login details in the capacity of a ‘Chartered Accountant’. Taxpayers must also add the CA's details in their login portal.

Once the tax auditor uploads the audit report, the taxpayer needs to either accept or reject it in their login portal. If rejected for any reason, all the procedures need to be followed again until the audit report is accepted by the taxpayer.

Due Date for Filing Tax Audit Report:

You must file the tax audit report on or before the due date of filing the return of income. Here's a breakdown of the due dates:

31st October of the subsequent year: This applies if the taxpayer has entered into an international transaction.

30th September of the subsequent year: This applies to all other taxpayers.

The subsequent year itself is known as the assessment year.

Penalty Of Not Filing Tax Audit Report

If a taxpayer is required to get a tax audit done but fails to do so, the following penalty may be levied under Section 271B:

Least of the following:

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

However, no penalty shall be levied under Section 271B if there is a reasonable cause for such failure. Here are some examples of reasonable causes accepted by Tribunals/Courts:

  • 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 Assessees
  • Physical inability or death of the partner in charge of the accounts
     

Conclusion

Understanding tax audit requirements is crucial for businesses and professionals in India. This guide has provided a comprehensive overview of tax audits under Section 44AB, including who is liable, the objectives, report format, filing deadlines, and penalties for non-compliance. Remember, timely completion of tax audits avoids penalties. If you have any further questions or require assistance with tax audits, consult a qualified Chartered Accountant.

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Frequently Asked Questions

A tax audit under Section 44AB is an audit conducted by a chartered accountant to verify the books of accounts and other documents of the assessee (taxpayer). It applies to individuals, HUFs (Hindu Undivided Families), 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.

The tax audit report under Section 44AB needs to be submitted one month before the due date for filing Income Tax Return, i.e., September 30th.

The CA audits the books of accounts like the cash book, ledger, journals, bank statements, stock records, and sales/purchase invoices. They authenticate the state of affairs of the business as on the last date of the financial year.

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 1.5 lakh or 0.5% of turnover, whichever is lower. Prosecution can also be initiated. Non-submission of audit reports makes the return defective, and provisions for faulty returns apply.

Tax audits for salaried persons are generally not required. However, if someone 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 exceeding the limits makes one liable for a tax audit.

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 the Return and Form 3CA. It provides details of deductions claimed, compliance, etc.
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 as per section 228(2).

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