What is Income Tax Audit under section 44AB?
A Tax Audit is an examination and assessment of the books of accounts of an organization carrying business or profession. Tax audit helps review transactions related to income, expenses, deductions, and the organization’s taxes. It eases the process of filing the income tax return for taxation purposes.
Section 44AB of the Income-tax Act, 1961, states the regulations for the tax audit of a firm or entity. The tax audit ensures that the taxpayer has provided complete and accurate information regarding his income, deductions, and taxes. This is to be conducted by a Chartered Accountant.
Who are liable to get a tax audit?
A taxpayer is required to have a tax audit carried out if the sales, turnover or gross receipts of business exceed Rs 1 crore in the financial year. However, a taxpayer may be required to get their accounts audited in certain other circumstances. We have categorised the various circumstances in the tables mentioned below:
With effect from 1st April 2021, the threshold limit of Rs 5 crore is increased to Rs 10 crore in case cash transactions do not exceed 5% of the total transactions.
Individual involved in the profession with a gross receipt that exceeds Rs. 50 lakh during the previous year.
Taxpayers who need to get a tax audit done are:
| Business | |
| Category of Person | Threshold |
| Carrying on business (not opting for presumptive taxation scheme*) | Total sales, turnover or gross receipts exceed Rs. 1 crore in the FY. If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for tax audit is increased to Rs. 10 crores (w.e.f. FY 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 | |
| Category of Person | Threshold |
| 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 | |
| Category of Person | Threshold |
| In case of loss from carrying on business and not opting for presumptive taxation scheme | Total sales, turnover or gross receipts exceed Rs. 1 crore. If taxpayer’s total income exceeds the basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme) |
| Carrying on business (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below 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 basic threshold limit | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit. |
What constitutes an audit report?
Tax auditor shall furnish his report in a prescribed form which could be either Form 3CA or Form 3CB where:
- Form No. 3CA is furnished when a person carrying on business or profession is already mandated to get his accounts audited under any other law.
- Form No. 3CB is furnished when a person carrying on business or profession is not required to get his accounts audited under any other law.
In case of either of the aforementioned audit reports, the tax auditor must furnish the prescribed particulars in Form No. 3CD, which forms part of the audit report.
Penalty of non-filing or delay in filing tax audit report
If any taxpayer is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty:
- 5% of the total sales, turnover or gross receipts
- Rs 1,50,000
However, if there is a reasonable cause of such failure, no penalty shall be levied under section 271B.
So far, the reasonable causes that are accepted by Tribunals/Courts are:
- Natural Calamities
- Resignation of the Tax Auditor and Consequent Delay
- Labour problems such as strikes, lock-outs for an extended period
- Loss of Accounts because of situations beyond the control of the Assesses
- Physical inability or death of the partner in charge of the accounts