Income Tax Audit under Section 44AB
Income Tax Audit under Section 44AB
Section 44AB of the Income Tax Act, 1961 contains various provisions related to tax audits, aiming to ensure that taxpayers maintain the accuracy and transparency of their financial records. It is done to eradicate false tax practices. It mandates that businesses and professionals keep their financial books and other records appropriately.
This article explains tax audits under Section 44AB, their objectives, who must file an audit, how to file an audit, the tax audit due date and much more.
What is 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 the Income Tax Act, a taxpayer needs to undergo a tax audit of business accounts when they meet certain criteria. Section 44AB of income tax aims to verify the compliance of various provisions and tax fulfilment of several requirements under the income tax law.
What are the Objectives of a Tax Audit?
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, it is made clear that no tax evasion schemes are utilised.
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.
Tax Audit Applicability
| Category of Individual | Tax Audit Limit |
|---|---|
| Business | # |
| Carrying on business (not opting for the presumptive tax scheme) | Total sales or gross receipts exceed ₹1 crore in the financial year or if cash transactions are up to 5% of total gross receipts and payments. |
| Then, the threshold limit of turnover for a tax audit is raised to ₹10 crores (w.e.f. FY 2020-21) | |
| Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB | Profit or gains are claimed lower than the prescribed limit under the presumptive taxation scheme. |
| Carrying on business eligible for presumptive taxation under Section 44D | Declares taxable income lower than the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit. |
| Carrying on business and not eligible for claiming 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 the 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 that is declaring profits as per presumptive taxation scheme under Section 44AD | If the total sales, turnover and gross receipts exceed ₹2 crore in the financial year, then a tax audit will not apply for such businesses. |
| Profession | # |
| Carrying on profession | Tax audit limit for professionals when total gross receipts exceed ₹50 lakhs in the financial year. |
| Carrying on the profession eligible for the 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 events of loss carrying on business and not opting for a presumptive taxation scheme | Total sales, turnover or gross receipts exceed ₹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) |
| Carrying on business (opting for a presumptive taxation scheme under section 44AD and having a business loss but with income below the basic threshold limit | Tax audit not applicable |
| Carrying on business (presumptive taxation scheme under section 44AD) and having business loss but with income exceeding the basic threshold limit | Declares taxable income below the limits prescribed under the presumptive taxation scheme and has income exceeding the basic threshold limit. |
When is Tax Audit Limit Not Applicable
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.
Elements of Tax Audit Report
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.
How is a Tax Audit Report Filed?
Now that you have information about the tax audit turnover limit at which you need to submit a tax audit report, connect with a CA. Tax audit report is always submitted in collaboration with a practising Chartered Accountant (CA).
The first step is to assign Form 3CA—Form 3CD to the CA through the e-filing portal.
After you have transferred the forms, the CA will accept them electronically and then use an offline utility to complete them.
Once the CA fills out the forms, they will upload them and other supporting documents back to the e-filing portal for the taxpayer’s (your) review.
The final step is to 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.
Tax Audit Due Date
In 2024, the last date for completing the income tax audit is 30th September for FY 2023-24; in case assessees are covered by the provisions of the transferring pricing audit, then the last date of completion of the tax audit will be 31st October 2024.
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.
What is Tax Audit Penalty?
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 calculated based on the percentage of tax liability or income subject to tax audit. The number of such penalties can be substantial and can impact non-complaints.
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.
Summing Up
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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