Section 44AB of Income Tax Act, 1961 defines the rules and regulations for the tax audit of an entity or a firm. This tax audit is conducted to ensure that the taxpayer has offered all the required details about his income, taxes, deductions, etc. Note, this tax audit is run by a Chartered Accountant (CA).
What is Section 44AB of Income Tax Act
The Income Tax Act 1961 defines the regulations and provisions associated with tax audits under section 44AB. This section outlines the specific regulations for maintaining proper books of accounts and essential financial records by the taxpayer.
This section is useful for recording complete information about a taxpayer’s income, tax, deductions, etc.
Once the audit is completed by a Chartered Accountant, he forwards the audit report to the income tax department.
Applicability of Sec44AB of Income Tax Act
Every individual earning an income from a business or profession is required to maintain books of accounts and get a tax audit done except those who have chosen for presumptive taxation under section 44AD, 44ADA, 44AE of the Income Tax Act or if their turnover remains behind the threshold limits.
Below-mentioned are the taxpayers who are required to fulfil tax audit applicability stipulations-
Provided, if the
(i) the aggregate of all amounts received, including the amount received for sales, turnover, or gross receipts during the previous year, in cash, does not exceed 5% of the said amount; and
(ii) Aggregate of all payments made, including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment: Threshold limit would be 10 crores instead of Rs 1 crore (from 1 April 2021, for Financial Year 2021-22 - Rs 5 crores)
- A person in a certain profession with a gross receipt of more than Rs 50 lakhs during the previous year
- An individual who has opted for Sections 44ADA and Section 44AD but claims his income is lower than the profits calculated under presumptive taxation and income is more than the taxable amount
- An individual who has opted for Sections 44AE, 44BB, 44BBB but claims that his/her income is lower than the profits calculated under the said sections in any previous year.
Who is Required to do an Income Tax Audit under Section 44AB
Section 44AB requires the following persons to have an income tax audit completed on their accounts
Category of Person | Threshold for Tax Audit |
Business | |
Carrying on a Business (not opting for a presumptive taxation scheme) | Total sales, turnover or gross receipts exceed Rs. 1 crore in the Financial Year (or) If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for a tax audit is increased to Rs 10 crores (w.e.f. Financial Year 2020-21) |
Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB | Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme |
Carrying on business eligible for presumptive taxation under Section 44AD | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit |
Carrying on business and not eligible to claim 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 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 which is declaring profits as per presumptive taxation scheme under Section 44AD | If the total sales, turnover, or gross receipts do not exceed Rs. 2 crore in the financial year, then tax audit will not apply to such businesses. |
Profession | |
- Carrying on profession | Total gross receipts exceed Rs. 50 lakh in the FY. |
- Carrying on the profession eligible for 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 case of loss from carrying on business and not opting for a presumptive taxation scheme | Total sales, turnover or gross receipts exceed Rs. 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 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 applicable) and having a business loss but with income exceeding the basic threshold limit | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit |
What is Constituted in an Audit Report
A tax auditor is supposed to provide his report in a prescribed form i.e. Form 3CA or Form 3CB wherein-
- Form No 3CA is furnished when an individual carrying on business/profession is already mandated to get his accounts audited under any other law.
- Form No 3CB is furnished when an individual carrying on business or profession is not required to get his accounts audited under any other law.
In the case of either of the above-mentioned audit reports, the tax auditor must furnish the prescribed particulars in Form No. 3CD.
When Tax Audit Reports Should Be Furnished
For all taxpayers | Due date is 30th September of the assessment year |
For an international transaction | Due date is 31st October of the assessment year |
Objectives of Income Tax Audit
Here are the primary objectives for conducting a tax audit-
- Proper maintenance of books of accounts without any fraud and malpractice and certification of the same by an auditor
- For reporting any kind of discrepancies noted by proper examination and analysis of the books of accounts
- For simplifying the computation of taxes and deductions to support auditing
- For reporting information such as tax depreciation, provision compliance regarding income tax law, etc
- For verifying the details filed in the income tax return regarding income, tax, and deductions, etc.
Penalty for Non-Compliance of the Tax Audit Under Section 44AB
Persons or individuals who need to have their accounts audited under Section 44AB but fail to do so face a penalty or charge of 0.5% of their total turnover amount earned during the relevant fiscal year. This penalty, however, cannot exceed Rs. 1.5 lakhs.
If the person or individual is unable to have their accounts audited for a justifiable reason, no penalty will be imposed under Section 271B. Section 44AB considers the following circ*mstances to be reasonable causes of income tax audit failure:
- If the income tax audit failed or was delayed because the authorized chartered accountant or auditor resigned from his or her position.
- If the income tax audit failed or was delayed owing to the untimely death of the chartered accountant or auditor.
- Suppose the income tax audit failed or was delayed because the authorized chartered accountant or auditor did not have access to the individual's accounts. This involves thievery, strikes, and rioting, among other things.
- If the failure or delay in the income tax audit was caused by an unforeseeable natural disaster or calamity.
