Income Tax Audit under Section 44AB

An audit ideally means an assessment or inspection, and there are various types of audits done under different laws and regulations, such as company audits and cost audits.

As per Section 44AB of Income Tax Act, a taxpayer must undergo a tax audit of their accounts if their business or profession crosses specified turnover/gross receipt thresholds during a financial year. Section 44AB aims to verify compliance with various tax laws and ensure proper reporting of income.

Compliance Verification

The central motive of conducting tax audits for businesses and professionals is to ensure that they are adhering to income tax provisions. That is why, during the audit, a thorough examination of their financial statements is conducted to verify whether or not all tax laws are complied with.

Preventing Tax Evasion

Tax evasion is a serious problem in India that can threaten the integrity of income tax laws and negatively affect the economy. Tax audits ensure that taxpayers fulfil their obligations honestly. By examining every transaction between businesses and professionals, the department can monitor tax evasion attempts.

Moreover, when any evasion is found, actions are taken to rectify the situation, and the integrity of the tax law is maintained.

Accurate Financial Statements

Tax audits ensure the accuracy of businesses' and professionals' financial statements. Throughout the audit process, it is confirmed that all financial statements are current, accurate and fair. This helps maintain the credibility of the financial reports used by various parties, such as the government, investors, stakeholders, etc.

Easy Tax Administration

Tax audits under section 44AB of the Income Tax Act facilitate tax administration by providing accurate data to the tax authorities. The financial data collected from various businesses and individuals also helps the government formulate new policies and implement them according to the country's changing economic scenario.

Transparency

Another important objective of a tax audit is to maintain transparency in financial dealings. By examining financial records thoroughly, the audit highlights a business or professional's economic status. This information helps the tax authorities and other relevant stakeholders, such as investors and lenders.

Under Section 44AB of Income Tax Act, businesses with total sales, turnover, or gross receipts exceeding ₹1 crore in a financial year are required to have tax audits. However, if cash transactions do not exceed 5% of the total gross receipts or payments, the threshold limit of turnover for income tax audit Section 44AB is ₹10 crores.

For example, a retail cloth merchant with 50% cash transactions and an annual turnover of ₹3 crores must get his account books audited by a CA before filing the ITR. However, an e-commerce business owner with more than 95% digital payments and an annual turnover of ₹8 crores need not get his accounts audited under section 44AB.

For professionals, a tax audit under section 44AB is mandatory if their gross receipts exceed ₹50 lakhs in a financial year. For example, if a doctor is raising receipts worth ₹60 lakhs in a financial year, he needs a tax audit.

Additionally, an individual or a business may be required to get their account books audited under specific circumstances.

The table below summarises all such scenarios where a taxpayer needs to get their accounts audited under section 44AB:

Tax audit limits mentioned above are not applicable to the following taxpayers:

• A taxpayer who declares profits and gains for the previous year in accordance with the provisions of Section 44AD (1) or Section 44ADA (1).
• A taxpayer who derives income of nature referred to in Section 44B or Section 44BBA of Income Tax.

The tax audit report is a crucial element of the auditing process and is governed by Rule 6G of the Income Tax Rules. The tax auditor must furnish the report in one of these two forms.

Form 3CA

The form is employed when it becomes mandatory to audit the financial books of an assessee who is engaged in business or profession. Whenever a situation arises where external regulations or legal provisions mandate a thorough examination of financial statements, Form 3CA is the appropriate choice to present the audit report. Compliance with the external auditing requirements should be ensured to contribute to the overall transparency of the financial records.

Form 3CB

Form 3CB is used when the audit of account books under any other law for access involved in the business or profession is optional. The form is prepared by a tax auditor in events where external regulation allows discretion regarding audit requirements.

For either of the above audit reports, the tax auditor is required to provide the prescribed particulars in Form No. 3CD, which constitutes a part of the audit report.

If your annual sales, turnover, or gross receipts are above the required threshold, you must connect with a CA for a tax audit. Tax audit reports are always submitted in collaboration with practising CAs under the Chartered Accountants Act of 1949.

• The CA then prepares the audit report in Form 3CA or Form 3CB, along with Form 3CD, depending on the nature of the business
• The CA then uploads the audit report and other supporting documents to the e-filing portal for the taxpayer’s (your) review
• The taxpayer can accept and verify the electronically completed form using the digital signature certificate. This signifies that the taxpayer has accepted the report, and after the final submission, both the taxpayer and the CA will receive confirmation messages

The last date for completing the 44AB income tax audit for the Financial Year 2024-25 (Assessment Year 2025-26) is 30th September 2025. In case an assessee is covered by the provisions of the transfer pricing audit, the last date for the completion of the tax audit will be 31st October 2025.

Till now, there has been no notification for tax audit due date extension, but the government has provided extensions previously; thus, look out for the latest updates. However, it is suggested that you complete your tax audits within the due dates.

Tax audit penalties are consequences that taxpayers have to bear in case they fail to file tax audit reports within the due date. These penalties can significantly impact a business or profession.

Monetary Penalties

It is the most common type of tax audit penalty levied by government authorities. The penalty is 0.5% of the total turnover, sales, or gross receipts, or ₹1.5 lakh, whichever is lower. The number of such penalties can be substantial and can impact non-compliance.

Interest Charges

On non-compliance with tax audit rules, the authorities can charge accrual of interest on any unpaid tax liability that arises from the absence of a tax audit report. The interest charge can vary based on the jurisdiction, causing further problems.

Legal Actions

Another tax audit penalty to look out for is legal action being taken by authorities. It can include further penalties, fines or criminal charges that put the reputation of a business or professional in jeopardy.

Deductions Disallowance

Failing to file an audit within the tax audit due date can also prevent government authorities from disallowing certain deductions. It can result in higher tax liability for the taxpayer as they lose the benefit of deductions they were getting before.

Thorough Audit

Non-compliance with the tax audit rules can lead authorities to audit the financial statements of businesses or professionals with more scrutiny. Moreover, the whole procedure can add financial strain as auditing can be costly, especially when done thoroughly.

Credit Ratings

In severe cases of non-compliance with tax audits, the tax authorities inform the debit and credit card agencies. This can negatively impact the credit scores of businesses or professionals and their chances of securing loans in the future.

Property Seizure

Another severe penalty that authorities can resort to in severe cases is the seizure of property after obtaining court orders. Selling the seized properties will satisfy claims of unpaid taxes by non-compliance.

Paying income tax is the responsibility of every eligible individual in the country. If you are a taxpayer, then you must comply with the rules of tax audits under Section 44AB. Moreover, from the information provided here, you must have understood the requirements of tax audits for both businesses and professionals.

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