Income Tax Audit under Section 44AB of Income Tax Act, 1962

Before we go into what a tax audit is, let’s define the term “audit.” The definition of audit in the dictionary implies that it is an official inspection of an organization’s finances and the creation of a report, often by an independent authority. A systematic review or appraisal of anything is another term for it.

Income Tax Audit under Section 44AB of Income Tax Act, 1962

The requirements for a business or entity’s tax audit are outlined in Section 44AB of the Income Tax Act, 1961. The purpose of the tax audit is to check that the taxpayer has supplied complete and correct information about his income, deductions, and taxes. This will be carried out by a Chartered Accountant. The entity must keep proper books of accounts, which must be audited by a Chartered Accountant. The books of accounts should be in accordance with the Income Tax Act, 1961.

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

Section 44AB of the Income Tax Act, 1961 contains the provisions for tax audit. This section represents the regulations governing the correct maintenance of books of accounts and other financial records by the taxpayer. This aids in the taxpayer’s ability to keep full records of his or her tax, income, and deductions. This section contributes to a reduction in fraudulent behaviors. A professional chartered accountant conducts the audit. Along with the income tax return, the audit report is sent to the income tax department.

Income Tax Audit under Section 44AB 

An Income Tax Audit is the examination and evaluation of the books of accounts of a business or profession. Tax auditing aids in the evaluation of transactions pertaining to the organization’s revenue, spending, deductions, and taxes. It simplifies the procedure of reporting income taxes for taxation purposes.

Who is subject to a tax audit under Section 44AB?

Except for those who opted for presumptive taxation under sections 44AD, 44ADA, or 44AE of the Income Tax Act, 1961, or if their turnover falls below certain threshold limits, everyone who earns income through any business or profession is required to keep books of accounts and undergo a tax audit. The following taxpayers require a tax audit:

The following taxpayers require a tax audit:

• Provided, however, that 
  • the total amount received in cash during the preceding year, including sums received for sales, turnover, or gross revenues, does not exceed 5% of the total amount; and
  • The aggregate of all cash payments made over the preceding year, including amounts expended for expenditure, does not exceed 5% of the indicated payment: The threshold limit would be 10 crores rather than 1 crore (effective 1/4/21, for FY 2021-22 – 5 crores).
• the total amount received in cash during the preceding year, including sums received for sales, turnover, or gross revenues, does not exceed 5% of the total amount; and
• The aggregate of all cash payments made over the preceding year, including amounts expended for expenditure, does not exceed 5% of the indicated payment: The threshold limit would be 10 crores rather than 1 crore (effective 1/4/21, for FY 2021-22 – 5 crores).
• An individual in the profession who earned more than Rs. 50 lakh in gross revenue the previous year.
• Any assessee who has elected section 44ADA and 44AD but says his income is less than the profits estimated under presumptive taxation and his income exceeds the amount taxed under the Income Tax Act.
• Any assessee who has elected section 44AE, 44BB, or 44BBB but claims revenue that is less than the profits computed under the abovementioned sections in any preceding year.

Who is not needed to have a tax audit performed?

The following people are exempt from having their taxes audited:

• Any assessee who earns money under section 44B.
• Any assessee who earns money under section 44BBA.
• Any assessee who has their books of accounts audited under other laws is not required to have a tax audit performed under section 44AB. A tax report, in particular, must be produced in Form 3CA, Form 3CB, or Form 3CD.
• When an assessee declares a profit under section 44AD (1) and his entire sales/turnover/gross revenues do not exceed Rs. 2 crores.

Goals of the Income Tax Audit

The following are the primary goals of tax auditing:

• Proper accounting bookkeeping without fraudulent activity, as certified by an auditor
• For reporting inconsistencies discovered by a thorough review of the books of accounts.
• For reporting different information such as tax depreciation, compliance with income tax law provisions, and so on.
• With auditing, calculating taxes and deductions becomes simple.
• The primary responsibility is to check the facts contained in the taxpayer’s income tax return about income, taxes, and deductions.

What exactly is an Audit Report?

An audit report is a report that reveals the final outcome of the auditing operation. The audit report is required under Income Tax Rule 6G. A chartered accountant prepares and electronically files the Income Tax Return. The audit report is provided by the tax auditor in accordance with the details in Form 3CD.

In the following instances, the tax auditor must provide the report in the right format, either in Form 3CA or Form 3CB:

• Form 3CA is created when an assessee who is operating on a business or profession is required by law to have his or her books of accounts audited.
• Form 3CB is created when it is not required by any other legislation for an assessee carrying on a business or profession to have his or her books of accounts audited.

Timeframe for obtaining a Tax Audit Report

As a tax auditor, a chartered accountant with his login information can provide a tax audit report. The taxpayer must review his chartered accountant‘s information on his login site and accept the audit report that his auditor has posted.

The deadline for all taxpayers is September 30th of the assessment year. The due deadline for an overseas transaction is October 31st of the assessment year.

(However, for AY 2021-22, the deadlines have been pushed back to 15.01.22 and 31.01.22, respectively.)

Non-compliance of Income Tax Audit

A penalty is imposed on a taxpayer who is required to have a tax audit performed but fails to do so. The punishment imposed on him or her is as follows:

• 0.5% of total sales, gross revenues, or 
• Rs 1,50,000

Accounts audited in accordance with any other law

If a taxpayer is compelled to have his books of accounts audited under legislation, such as statutory audits of companies under Companies Act, 2013, he does not need to undertake his audit for taxation reasons again. The taxpayer just has to receive the audit report required by income tax legislation before the return’s due date.

Takeaway

If you are a taxpayer, you must abide by the rules of Section 44AB of the Income Tax Act, 1961. This clause stipulates that all taxpayers must get an audit report following an audit of their books of accounts. This is done to accurately depict the taxpayers’ income-related activities, deductions, and taxes.

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