Income Tax

Section 44AB of Income Tax Act: Tax Audit Criteria and Penalty

As per the dictionary meaning ‘Audit’ means to check, review or inspect. It is an official process conducted by organizations. An audit is conducted under various laws however, in this blog we will be discussing Tax Audits. As the name suggests, a tax audit is the review or examination of financial records and accounts of taxpayers. Tax Audit is conducted under Section 44AB of the Income Tax Act, 1961 by a CA. Section 44AB specifies a class of taxpayers who have to get their accounts audited. Tax Audit ensures compliance with various provisions of the Income Tax Act and also verifies that the assessee has maintained proper accounts as per the guidelines laid down under the Income Tax Act, 1961^[1].

Who is compulsorily required to get his accounts audited under Section 44AB?

A tax audit is mandatorily required to be carried out when the turnover, sales, or gross receipts of the business of a taxpayer exceeds Rs. 10 crores in a Financial Year (FY). This threshold limit of Rs. 10 crores in case the cash transactions do not exceed 5% of the total transactions, was fixed by the Finance Act, 2021, and is in effect from 1^st April 2021. Before this, the threshold limit was increased by Finance Act, 2020 amending the threshold limit from Rs. 1 crore-Rs. 5 crores in case the cash transactions did not exceed 5% of the total transactions.

For Business:

Category of person	Threshold
Carrying out Business	The turnover, sales, and gross receipts exceed Rs. 10 crore in an FY and the cash transactions are up to 5% of the total gross receipts and payments.
Carrying out Business eligible for presumptive tax under Section 44AD (4)	If provisions of section 44AD(4) applies and Income exceeds the basic exemption limit.
Carrying out business eligible for presumptive tax under Section 44AE, 44BB, or 44BBB.	When the profits declared are lower than the prescribed limit under the presumptive taxation scheme.
Carrying out business and is ineligible to claim presumptive tax under Section 44AD due to opting out in any one of the FYs out of the 5 FYs when the presumptive tax was opted	If income exceeds the basic exemption limit in subsequent 5 consecutive FYs from the FY when the presumptive tax did not apply.
Carrying out business and declaring profits as per presumptive taxation scheme under Section 44AD	If income exceeds the basic exemption limit in subsequent 5 consecutive FYs from the FY when the presumptive tax did not apply. However. If turnover, sales, or gross receipts does not exceed Rs. 2 crores in an FY, then a tax audit will not be required.
If loss arises from carrying out business and the taxpayer has not opted for a presumptive tax scheme	When turnover, sales, or gross receipts exceed Rs. 1 crore.
If income exceeds the basic threshold limit but the taxpayer has incurred a loss	The taxpayer is subjected to tax audit when under section 44AB when the turnover, sales, and gross receipts exceed Rs. 1 crore.
If the business carried on under the presumptive tax scheme is incurring loss but the income is below the basic threshold limit	A tax audit is not required.
If the business carried on under the presumptive tax scheme is incurring loss but the income exceeds the basic threshold limit	When the taxable income declared is below the limits prescribed under the presumptive tax scheme.

For Profession:

Category of Person	Threshold
Professional outside the presumptive tax scheme	When the gross receipts exceed Rs. 50 lac in an FY.
Professionals falling under the presumptive tax scheme	When a taxpayer claims profit lower than the prescribed limit under the presumptive tax scheme; andWhen income exceeds the basic exemption limit

Ingredients of Audit Report – Section 44AB of the Income Tax Act

After conducting a tax audit, the chartered accountant shall furnish his report in the form prescribed either under Form 3CA or Form 3CB. Rule 6G of the Income Tax Rules, 1962 prescribes audit reports to be filed under these two forms. A tax audit report under Form 3CA is furnished when a taxpayer is already mandated to get his accounts audited under any other law whereas Tax Audit Report furnished under Form 3CB is furnished when the taxpayer is not required to get his account audited under any other law. Further, Form 3CD must be furnished under both audit reports. It also means that the audit report under Form 3CA is wider as compared to Form 3CD as it also contains audit reports under other laws apart from the tax audit report.

How and within what time tax audit shall be furnished?

A Chartered Accountant (CA) by using his login credentials furnishes the tax audit report online. After the CA uploads the tax audit report, the same should be accepted by the taxpayer. If the taxpayer rejects the report then all the procedures have to be followed again till the taxpayer accepts the audit report.

The time limit for filing a tax audit report is on or before the due date of filing the income tax return (ITR) I.e. 30^th of September of the subsequent year for a domestic transaction and the 30^th of November of the succeeding year in case of international transaction. 

What is the Penalty for the delay in filing or non-filing of a tax audit report?

If a taxpayer fails to get a tax audit done or delays in getting a tax audit filed, a penalty of up to 0.5% of the total sales, turnover, or gross receipts or Rs 1,50,000/- can be levied under section 271B. However, section 271B also provides an exemption from the penalty if reasonable cause for failure to file an audit report is shown. Some accepted reasonable causes prescribed under section 44AB as well as accepted by Courts and Tribunals in India are:

• Any Natural Calamity
• Labor disputes such as strikes, and lock-outs for an extended period.
• Physical inability or death of key personnel in charge of the accounts.
• Resignation of the tax auditor & consequent delay.
• Any other situation beyond the control of the assessee like loss of accounts, etc.

Conclusion

Tax Audit under section 44AB of the Income Tax Act includes review and inspection of books of accounts of a taxpayer having income from business or profession. It ensures the accuracy of the books of accounts and maintains efficiency of the books of accounts. However, not all taxpayers are required to get their accounts audited. The provision prescribes that requirement of tax audit depends on the turnover, sales, and gross receipts of the business or profession. The criteria are different for doing tax audits under business and profession.  It is the task of the Chartered Accountant to tax audit. However, the taxpayer has to accept the tax audit report uploaded to him for actual filing.

Also Read: FAQs on Tax Audit under section 44AB