Tax Audit Under Section 44AB
What is a Tax Audit?
A tax audit is an examination or review of a taxpayer’s financial accounts from an income tax perspective. This process aims to ensure that the taxpayer’s income and deductions are accurately reported in accordance with tax laws, making it easier to compute and file the income tax return.
Objectives of a Tax Audit
The primary objectives of a tax audit are:
Accuracy and Maintenance: Ensure that books of accounts are properly maintained and certified by a Chartered Accountant (tax auditor).
Discrepancy Reporting: Report any discrepancies or observations noted during the examination of the books of account.
Compliance Reporting: Provide information on tax depreciation and compliance with income tax laws.
Verification: Verifying the accuracy of information filed in the income tax return.
These objectives help tax authorities verify the correctness of income tax returns, making it easier to calculate total income and verify claims for deductions.
Turnover Limits for Income Tax Audit
A tax audit is required if a taxpayer’s sales, turnover, or gross receipts exceed certain thresholds:
For Business:
- Total sales, turnover, or gross receipts exceed Rs. 1 crore.
- If cash transactions are up to 5% of total gross receipts and payments, the threshold is Rs. 10 crores (effective from FY 2020-21).
- If opting for presumptive taxation under Sections 44AE, 44BB, or 44BBB, and claiming profits lower than prescribed limits.
- If opting for presumptive taxation under Section 44AD and declaring taxable income below the prescribed limits but exceeding the basic exemption limit (Rs. 2.5 lakhs).
- If not eligible for presumptive taxation under Section 44AD due to opting out during any financial year of the 5-year lock-in period, and income exceeds the basic exemption limit in the subsequent 5 years.
For Profession:
- Total gross receipts exceed Rs. 50 lakh.
- If opting for presumptive taxation under Section 44ADA and claiming profits lower than 50% of total receipts while exceeding the basic exemption limit.
Business Loss:
- If there is a loss from business (not under the presumptive taxation scheme) and the total sales, turnover, or gross receipts exceed Rs. 1 crore.
- If total income exceeds the basic exemption limit but the taxpayer has incurred a loss, tax audit is mandatory under Section 44AB
What Constitutes an Audit Report?
Tax auditors must furnish their reports in prescribed forms:
Form 3CA: For taxpayers who are already required to get their accounts audited under another law.
Form 3CB: For taxpayers not required to get their accounts audited under any other law.
Form 3CE: For non-residents and foreign companies receiving royalties or fees for technical services from the government or Indian concerns.
The tax auditor must also complete Form 3CD, which is part of the audit report.
Deadlines for Income Tax Audit
For the financial year 2023-24, the deadline for completing the income tax audit is 30th September 2024. For assessees subject to transfer pricing audit, the deadline is 31st October 2024.
Penalty for Non-Filing or Delayed Filing of Tax Audit Report
If a taxpayer fails to get a tax audit done when required, the penalty may be:
- 0.5% of the total sales, turnover, or gross receipts, or
- Rs. 1,50,000 (whichever is less).
However, no penalty will be imposed under Section 271B if there is a reasonable cause for the failure. Accepted reasons for delay
include:- Natural calamities
- Resignation of the tax auditor and resulting delays
- Resignation of key employees or accountants
- Labour issues such as strikes or lock-outs
- Loss of accounts due to uncontrollable circumstances
- Physical inability or death of the partner responsible for accounts
