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Income Tax Audit Under Section 44AB of the Income Tax Act

Tax Audit Under Section 44AB of the Income Tax Act

The dictionary meaning of the term “audit” is check, review, inspection, etc. There are various types of audits prescribed under different laws like company law requires a company audit, cost accounting law requires a cost audit, etc. The Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law.

Section 44AB gives the provisions relating to the class of taxpayers who are required to get their accounts audited from a chartered accountant. The audit under section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfillment of other requirements of the Income-tax Law. The audit conducted by the chartered accountant of the accounts of the taxpayer in pursuance of the requirement of section 44AB​ is called tax audit.

The chartered accountant conducting the tax audit is required to give his findings, observation, etc., in the form of audit report. The report of tax audit is to be given by the chartered accountant in Form Nos. 3CA/3CB and ​3CD.

What Is tax audit?

A tax audit is an examination or review of accounts carried out by taxpayers from an income tax viewpoint. It ensures proper maintenance and correctness of books of accounts and certification by a tax auditor.

The audit report helps verify the correctness of income tax returns filed by the taxpayer.

 

What is the objective of tax audit?

The objectives of a tax audit are multifaceted and aim to ensure the integrity and accuracy of the financial statements and tax compliance. Here are the key objectives:

  1. Ensure Proper Maintenance and Correctness of Books of Accounts: A tax audit verifies that the taxpayer has maintained books of accounts accurately and as per the provisions of the Income Tax Act
  2. Certification by a Tax Auditor: The audit process involves the certification of the books of accounts by a tax auditor, which adds credibility to the financial statements presented by the taxpayer.
  3. Reporting Observations/Discrepancies: The tax auditor reports any discrepancies or observations noted during the examination of the books of account. This helps in identifying any unintentional errors or omissions by the taxpayer.
  4. Verification of Correctness of Income Tax Returns: The tax audit facilitates the tax authorities in verifying the correctness of the income tax returns filed by the taxpayer. It ensures that the income, deductions, and other relevant details are accurately reported.
  5. Facilitate Calculation and Verification of Total Income and Claims for Deductions: The tax audit makes the process of calculation and verification of total income and claims for deductions easier for both the taxpayer and the tax authorities.
  6. Detect Tax Evasion and Non-Compliance: One of the objectives is to detect any instances of tax evasion or non-compliance with tax laws and regulations. This helps in maintaining the integrity of the tax system.
  7. Promote Taxpayer Compliance: By ensuring that the financial statements are audited, taxpayers are encouraged to comply with the tax laws and maintain transparency in their financial dealings.
  8. Ensure Fairness and Equity: The tax audit aims to ensure fairness and equity in the tax system by making sure that all taxpayers are following the same rules and regulations.
  9. Provide Data for Tax Policy Development: The findings from tax audits can provide valuable data for the development of tax policy and the assessment of tax law effectiveness.
  10. Identify Areas of Potential Tax Planning and Tax-Saving Opportunities: The tax audit can also help in identifying potential areas for tax planning and tax-saving opportunities for the taxpayer

Who Are Mandatory Required of Tax Audit?

Under Section 44AB of the Income Tax Act, a tax audit is mandatory for certain categories of taxpayers.

  1. Businesses:
    • If the total sales, turnover, or gross receipts of a business exceed Rs 1 crore in any previous year, a tax audit is required.
    • However, there’s an amendment: Finance Act 2020 increased the threshold limit to Rs 5 crore if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the cash payments are also limited to 5% of the aggregate payments
    • As of Finance Act 2021, the threshold limit is further increased to Rs 10 crore if cash transactions do not exceed 5% of the total transactions
  2. Professionals:
    • If the gross receipts in a profession exceed Rs 50 lakhs in any previous year, a tax audit is mandatory.
  3. Deemed Profits and Gains:
    • If the profits and gains from a business are deemed to be the profits and gains of the taxpayer under section 44AE, 44BB, or 44BBB, and the taxpayer has claimed income lower than the deemed profits, a tax audit is required.
    • Similarly, The taxpayer claims that profits from the profession are lower than the profits computed under Section 44AD and 44ADA, and the total income exceeds the maximum exemption limit.

 

What Constitutes a Tax Audit Report?

Tax auditor shall furnish his report in a prescribed form which could be either Form 3CA or Form 3CB where:

  • Form 3CA-3CD:
    • This form is used for tax audit in the case of a taxpayer having business or profession income who is mandatorily required to get accounts audited under any other Act (other than the Income Tax Act).
    • Form 3CA contains auditors’ information, while Form 3CD provides details of the tax audit.
  • Form 3CB-3CD:
    • This form is used for tax audit in the case of a taxpayer having business or profession income who is not required to get accounts audited under any other Act (other than the Income Tax Act).
    • Similar to Form 3CA-3CD, Form 3CB contains auditors’ information, and Form 3CD includes details of the tax audit.

 

How And When Tax Audit Report Shall Be Furnished?

tax audit report must be filed on or before the due date of filing the return of income. Here are the details:

  1. Due Date:

    For the Assessment Year 2024-25, the due date for furnishing the tax audit report is as follows:

    • Company: If you’re a company, the due date is 30th September 2024.
    • Other taxpayers: If you’re not a company but are obliged to furnish the tax audit report, the due date is also 30th September 2024.
    • For an international transaction, the due date is 31st October of the assessment year.
  2. Filing Process:

    To furnish the report, you need to:

    • Authorize and appoint a Chartered Accountant (CA) from your e-filing account.
    • The CA will file the audit report in Form 3CA/3CB and provide particulars in Form 3CD in JSON format on the Income Tax Department’s website using their digital signature.
    • These forms should be accompanied by the audited financial statements.
    • You’ll need to approve these forms from your e-filing account. The date of approval by you is considered the date of filing of the audit report.
    • If you don’t accept/approve, the tax audit report will be considered pending as if it hasn’t been filed.

 

Penalty of Non Filing or Delay in Filing Tax Audit Report

The penalty for non-filing or delay in filing the tax audit report under Section 44AB of the Income Tax Act can be quite significant. If a taxpayer fails to get their accounts audited or does not furnish the tax audit report by the due date, they may be subject to a penalty.

The penalty is 0.5% of the total sales, turnover, or gross receipts for the year or

₹1,50,000, whichever is lower

However, as per Section 273B, if the taxpayer can provide a reasonable cause for such failure, then no penalty shall be levied.

Reasonable causes might include situations like:

  • Resignation of the tax auditor leading to delay.
  • Death or physical inability of the partner in charge of the account.
  • Natural calamities or other situations beyond the taxpayer’s control.

Frequently Asked Questions

Whether a non-resident conducting business shall be subject to audit under Section 44AB?

Section 44AB does not differentiate between residents and non-residents. Therefore, a non-resident assessee must also get his accounts audited if his turnover/sales/gross receipts exceed the prescribed limits. This audit, however, would be confined only to the Indian operations carried out by the non-resident assessee.

Is a salaried employee required to get accounts audited if he is also doing trading in derivatives (futures and options)?

The gains or losses arising from trading in F&O are always taxable under the head ‘Profits and Gains from Business or Profession’. Income or loss from dealing in F&O shall be deemed as normal business income (non-speculative business) even though delivery is not affected in such transactions.

To check the applicability of tax audit in such cases, the turnover from trading in derivatives must be computed first. The computation of turnover is an essential factor, as the applicability of a tax audit is determined based on turnover. If total sales, turnover, or gross receipt from the business during the previous year exceeds Rs. 1 crore, the tax audit shall be required in such cases. However, the increased threshold limit of Rs. 10 crores shall be applicable if cash receipts and cash payments during the year do not exceed 5% of the total receipt or payment, as the case may be. In other words, more than 95% of business transactions should be done through banking channels.

For example, during the year, Mr A has earned salary income and incurred losses from trading in futures and options (F&O). The details of his transactions are as follows:

Transaction Buy Value Sell Value Realised P&L Computation of Turnover
Transaction 1 40,00,000 50,00,000 10,00,000 10,00,000
Transaction 2 60,00,000 30,00,000 (30,00,000) 30,00,000
Transaction 3 75,00,000 60,00,000 (15,00,000) 15,00,000
Transaction 4 3,20,00,000 2,00,00,000 (1,20,00,000) 1,20,00,000
Transaction 5 2,30,00,000 1,30,00,000 1,00,00,000 1,00,00,000
Total 7,25,00,000 4,70,00,000 (55,00,000) 2,75,00,000

The turnover, in this case, shall be Rs. 2,75,00,000, and the loss from F&O shall be Rs. 55,00,000. The tax audit requirement arises if the business turnover from F&O exceeds Rs. 1 crore. However, the tax audit shall not be required if more than 95% of business transactions are done through banking channels and turnover is less than Rs. 10 crores. Since in F&O transactions, the trading shall be through digital means only, the enhanced limit of Rs. 10 crores shall apply to determine the applicability of tax audit. Thus, the tax audit shall not be required in this case.

 

Is a tax audit required if turnover exceeds the specified limit, but total income is below the maximum exemption limit?

Yes, the tax audit is mandatory. Section 44AB does not exempt an assessee from the tax audit simply because its total income does not exceed the maximum exemption limit.

The objective of tax audit under section 44AB is to assist the Assessing Officer in computing the total income of an assessee in accordance with different provisions of the Act. Therefore, even if the total income of a person is below the maximum exemption limit, he will get his accounts audited and furnish the audit report if any condition prescribed under Section 44AB is satisfied.

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