Tax Audit Under Section 44AB

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You might have heard the word “Audit” so many times, well let us dive into this, what is “Audit”, if you go by oxford “Audit is an official examination of the present state of something, especially of a company’s financial records” but the concept doesn’t end here, there are various types of Audit conducted under various Laws and one of them is Tax Audit which is undertaken under section 44AB of Income Tax Act. As the name describes it is an official examination of a company’s financial records the basic nature is not different but the examination is done from an Income Tax viewpoint.

Meaning of Tax Audit

Tax Audit is a process that allows to verify if the books of accounts prepared by a taxpayer complies with the generally accepted accounting principles and with the provisions of the Income Tax Act. The purpose of tax audit is to ensure that the taxpayer has properly maintained books of account and also to correctly compute the real income of the taxpayer.

It is worth mentioning here that audit doesn’t give the assesse any immunity from assessment or disallowance of expenses.

Purpose of Conducting Tax Audit

Tax audit is conducted to;

  • Ensure proper reporting of expenses as tax, depreciation etc. and compliance with numerous provisions of income tax law,
  • Allow tax authorities to verify the accuracy of income tax returns filed by the taxpayer.
  • Calculation and Verification of total income, claim for deductions, etc
  • Helps in maintenance and judging the correctness of books of accounts.
  • Help the governance of tax laws by a proper display of accounts before tax authorities and save their time in carrying out regular verification.
Tax Audit Under Section 44AB

Who should get their books of account audited?

A taxpayer is required to get their accounts audited as per Tax laws if the turnover or gross receipts of their business surpass Rs 1 crore in the financial year, however with effect from AY 2021-22 to reduce the compliance burden on small and medium enterprises the Rs 1 crore threshold has been amended and increased to Rs 5 crores for those assessees whose cash payment and receipt made during the year does not exceed 5% of the total payment of receipt as the case may be.

Following are categories of Taxpayer who are required to get the Tax audit done-

Category of Assessee Threshold
Carrying on business Total sales, turnover or gross receipts exceed Rs 1 crore or Rs 5 crore as the case may be in the FY.
Carrying on business and are eligible for presumptive taxation under Section 44AE, 44BB , 44BBB or 44AD Claims profits below the prescribed limit under presumptive taxation scheme and has income exceeding the basic threshold limit.
Business assesses who are not eligible to claim presumptive taxation under Section 44AD because of opting out for presumptive taxation in any one financial year out of 5 consecutive years from when the presumptive tax scheme was opted. If income the basic threshold limit during the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted.
Business assesses who are declaring profits as per presumptive taxation scheme under Section 44AD If the total sales, turnover or gross receipts exceed Rs 2 crore in the financial year.
Assesses carrying on profession   Total gross receipts exceed Rs 50 lakh in the FY 
Professionals eligible for presumptive taxation under Section 44ADA Declares profits or gains below the prescribed limit under the presumptive taxation scheme & their Income exceeds the maximum amount not chargeable to income tax.
In case of loss making entity and not opting for presumptive taxation scheme Total sales, turnover or gross receipts exceed Rs 1 crore
Carrying on business opting presumptive taxation scheme and having a business loss but income exceeding basic threshold limit. Claims taxable income below the limits prescribed under the presumptive tax scheme but the income exceeds the basic threshold limit.

To whom does Section 44AB doesn’t apply?

Section 44AB shall not apply to

  • the person, who declares profits and gains for the previous year in accordance with the provisions of sub-section (1) of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year:
  • the person, who derives income of the nature referred to in section 44B or section 44BBA, on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later
  • in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report by an accountant in the form prescribed under this section

In which forms the tax audit report should be obtained?

Now after the audit, the Tax auditor is required to furnish his report in a prescribed format which could be either Form 3CA or Form 3CB where:

  • Form 3CA is to be furnished in case a person is into business or profession and got his accounts audited under any other law already.
  • Form 3CB is furnished where a person carrying on business or profession and is not required to get his accounts audited under any other law.

In both the above cases, the tax auditor has to furnish the prescribed particulars in Form 3CD, which forms part of the audit report.

How to furnish tax audit report to the Income tax department?

The tax audit report shall be furnished online by using login details of the tax auditor in the capacity of ‘Chartered Accountant’. The taxpayer is then required to add CA details in their login portal. 

Once the auditor uploads the audit report, the same should either be accepted/rejected by the taxpayer in their income tax portal. 

In case the report has been rejected for any reason, all the procedures need to be repeated till the audit report is accepted by the taxpayer. The tax audit report must be filed on or before the due date of filing the return of income i.e. 30th November of the subsequent year in case the taxpayer has entered into an international transaction and 30th September (extended to 31 October for AY 2020-21) of the subsequent year for other taxpayers.

Is there a penalty on late filing of Audit report?

Like every other compliance here also there is a penalty if any taxpayer is required to get the tax audit done but fails to do so, the lower of the following may be levied as a penalty: 

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

How to save yourself from a tax audit?

No doubt, the motive of every business or profession is to derive financial profits. But you should always ensure that your activities aren’t suspicious and illegal, and your records must be clean. Therefore, what you must do to save yourself are:

  • As per the Income Tax Act, 1961, you must maintain the accounts book as it is mandatory.
  • You must compute the profit or gain as it is computable under Chapter IV.
  • You should represent taxable income and allowable loss in tax return file.
  • As a taxpayer, you are supposed to file the tax audit report by 30th The earlier you will file, better it would be for you.

Conclusion

To avail the benefit of the amended threshold of Rs 5 crore you should do more than 95% of business transactions through banking channels. If any person is required to get his accounts audited under any other law before the due date of filing an income tax return for example statutory audit of a company under company law provisions, he need not require to get a tax audit done. He can just furnish a prescribed audit report under Income tax law. Businesses opting presumptive taxation scheme under section 44AD & incurring business loss but the income is below basic threshold limit are not required to get Tax audit done.

We hope this blog was helpful for you. If you have any query regarding tax audit, leave a comment below. We will very soon get back to you.

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CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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