Section 44AB of the Income Tax Act mandates a tax audit for certain businesses to ensure adherence to income tax regulations. This audit process is designed to verify the accuracy of financial records, detect potential tax evasion or fraud, and ultimately bolster tax compliance. By scrutinizing accounts and income calculations, tax authorities aim to optimize tax revenue collection and maintain a fair tax system. The Indian government has always focused on accounting transparency by ensuring that the income earned by businesses and professionals is accounted for annually. This is only possible through an audit process. Hence, the Indian government added a section in the Income Tax Act 1961 that requires businesses and professionals to maintain accounting books and have them audited annually.
If you are a business owner or a professional, you may be liable to have your accounting books audited by a Chartered Accountant, making it vital to understand the provisions of section 44AB of the Income Tax Act.
This article will help you understand everything about section 44AB of the Income Tax Act and how you can adhere to its provisions for better taxation compliance.
What is Section 44AB of the Income Tax Audit, 1961?
As per Section 44AB of the Income Tax Act, 1961, entities with a total turnover or gross receipts exceeding the prescribed limit are mandated to undergo a tax audit. As of January 2022, this limit stands at Rs. 1 crore for businesses and Rs. 50 lakhs for professionals. A qualified Chartered Accountant conducts this audit, verifying adherence to tax laws and ensuring accurate financial reporting. The audit report, along with the requisite forms, must be submitted by the designated deadline. Non-compliance with the tax audit requirement can lead to penalties. The primary objective of the Section 44AB tax audit is to foster transparency, deter tax evasion, and encourage accurate financial reporting within the Indian tax system.
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What is a tax audit?
A tax audit is a rigorous examination conducted by a qualified chartered accountant to verify the accuracy of a taxpayer's financial records. This process entails a comprehensive review of financial statements, including ledgers, invoices, and other relevant documents, to ensure strict adherence to the provisions of the Income Tax Act. The primary objective of a tax audit is to authenticate the financial information provided by taxpayers and identify any potential discrepancies that may lead to non-compliance. As mandated by Section 44AB, businesses and professionals exceeding specific turnover or gross receipts thresholds are required to undergo a tax audit. This process is designed to streamline tax filings, promote transparency, and deter tax evasion.
Objectives of tax audit
Here are the objectives of tax audit under section 44AB for businesses and professionals:
1. Verification of compliance
One of the main motives for introducing section 44AB in the Income Tax Act 1961 is to ensure that Indian businesses and professionals comply with taxation laws mentioned in the Income Tax Act. The Chartered Accountant hired for audit ensures verification of compliance by extensively analysing and reviewing the accounting and financial records of the business or the professional. The process ensures adherence to rules, regulations, and tax laws by examining deductions, expenses, and income transactions. The CA addresses any non-compliance issues or discrepancies in the process, if any.
2. Accuracy of financial statements
One of the objectives of income tax audit section 44AB is to determine if the financial statements of the business or the professional are accurate without any discrepancies. When a business or professional hires a CA to start the tax audit, the CA thoroughly evaluates the financial statements and records to ensure that they are recorded with correct dates and amounts. The financial records should match the actual financial transactions for utmost accuracy, which is the objective of the CA within the tax audit process. The accuracy of financial statements is also important for investors, lenders, shareholders, or third parties attached to the business or professional service.
3. Prevention of tax evasion
An important objective of the Indian government mandating a tax audit under section 44AB is to prevent tax evasion through the amount earned by a business or a professional. A tax audit ensures that the business or the professional has adhered to all the tax liabilities under applicable income tax sections and has paid relevant taxes. Since businesses and professionals know that they have to get their accounts audited as per their annual turnover exceeding the threshold limit, they already ensure that they have adhered to all the taxation laws, reducing tax evasion and increasing tax collection for the government.
4. Enhancing transparency
The objectives of a tax audit, such as those mandated under section 44AB, focus on enhancing transparency in financial reporting. By requiring businesses and professionals to have their accounts audited, tax authorities ensure accurate income reporting, correct computation of tax liabilities, compliance with tax laws, and detection of any discrepancies or fraud. This transparency is essential for all the stakeholders involved in the business or profession and for the Indian government.
5. Facilitating effective tax management
Tax authorities get reliable information about the financial statements and tax compliance of a business and professional through the submitted audit report. Using the tax audit report, the Indian government and the tax authorities can easily assess if the tax laws have been adhered to and relevant taxes have been paid by the business or the professional. This helps facilitate effective tax management and adjust or create new and improved tax laws.
6. Risk mitigation for taxpayers
Although most tax audits are considered part of the compliance process, they can also reduce the risk for taxpayers. During an audit process mandated under section 44AB, the CA extensively reviews the financial and accounting records and identifies any potential issues. The identification is followed by rectification, preventing any tax compliance and disputes with the tax authorities. Since issues are rectified before the audit report is submitted, it significantly reduces non-compliance and other regulatory risks for businesses and professionals.
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Applicability of Sec44AB of Income Tax Act
Individuals deriving income from a business or profession are generally obligated to maintain accurate books of accounts and undergo a tax audit. However, this requirement is waived for taxpayers opting for presumptive taxation under Sections 44AD, 44ADA, or 44AE of the Income Tax Act, or those whose turnover falls below specified thresholds.
The following categories of taxpayers are subject to tax audit compliance:
- Turnover threshold exceeding Rs. 10 Crores: Taxpayers whose total receipts, including sales, turnover, or gross receipts, and total payments, including expenses, exceed 5% of the respective amounts in cash during the previous year.
- Professionals with gross receipts exceeding Rs. 50 lakhs: Individuals engaged in specific professions whose gross receipts surpass Rs. 50 lakhs in the preceding year.
- Taxpayers opting for presumptive taxation with lower claimed income: Individuals who have chosen presumptive taxation under Sections 44ADA or 44AD but claim a lower income than the presumptive amount, and their actual income exceeds the taxable limit.
- Taxpayers opting for presumptive taxation under Sections 44AE, 44BB, or 44BBB with lower claimed income: Individuals who have opted for these sections but claim a lower income than the presumptive amount in any previous year.
What is income tax audit under section 44AB?
Under section 44AB, if a business's turnover or gross receipts are above Rs. 1 Crore and Rs. 50 lakh for a professional, they are liable to have their accounts audited by a Chartered Accountant. Once the threshold is exceeded, the provisions of section 44AB apply, mandating that an audit report be submitted to the Indian government. For the same purpose, the section is also known as income tax audit section 44AB.
Businesses and professionals hire a chartered accountant to review and analyse every financial record to verify compliance and tax laws. Once the accounts are audited, the CA provides the audit report to the business or professional. As per the section, the business or professional is mandated to submit the audit report to the government before the specified date. Non-compliance with submitting the audit report may lead to penalties.
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What constitutes a Tax Audit report?
A tax audit report, governed by Rule 6G of the Income Tax Rules, is an essential part of the audit process. It is prepared and filed electronically by a chartered accountant who conducts the audit. The audit report’s specifics are detailed in Form 3CD.
Depending on the taxpayer's circumstances, the tax auditor may use one of two forms:
Form 3CA
Used when a taxpayer’s books are already audited under another law, this form under Section 44AB aligns tax audit requirements with other applicable regulations. This ensures consistency in financial reporting across various auditing standards, enhancing transparency and compliance.
Form 3CB
Form 3CB is employed when the audit of financial records is discretionary under external regulations. In such cases, tax auditors prepare this form to document the audit process. While not mandatory, opting for an audit demonstrates a commitment to financial transparency and accuracy. The audit procedure rigorously examines financial records to verify their reliability and adherence to accounting standards.
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Who is liable to get a tax audit done under section 44AB?
Section 44AB mandates tax audits for the following two types of taxpayers:
1. Businesses
If a business's annual turnover or gross receipts exceed Rs. 1 Crore during a financial year, it must conduct a tax audit and submit the audit report to the government. However, the threshold limit is Rs. 10 Crore in case up to 5% of the total gross receipts and payments are cash transactions.
2. Professionals
Professionals are liable to conduct a tax audit and submit the report to the government if their annual turnover or gross receipts are above Rs. 50 lakh during a financial year.
Here is a detailed table describing the situations that mandate a tax audit under section 44AB of the Income Tax Act:
| Category of person | Threshold for tax audit |
| Businesses not opting for Presumptive Taxation Scheme under section 44AD | Annual turnover and gross receipts exceeding Rs. 1 Core during a financial year |
| Businesses eligible for presumptive taxation under sections 44AE, 44BB, or 44BBB | Claiming gains or profits below the prescribed limit mentioned under the Presumptive Taxation Scheme |
| Businesses eligible for presumptive taxation under section 44AD | Declaring income below the prescribed limit listed under the Presumptive Taxation Scheme while having income higher than the basic threshold limit |
| Businesses not eligible for presumptive taxation under section 44AD due to opting out of the section during the lock-in period | If the income is higher than the maximum amount, which is not subject to tax in the subsequent five years from the financial year in which the opting out from the section happened. |
| Businesses under the Presumptive Taxation Scheme (section 44AD) | Exemption from a tax audit if the annual turnover or gross receipts is lower than Rs. 2 Crore during the financial year |
| Professionals not opting for Presumptive Taxation Scheme under section 44AD | Annual turnover or gross receipts exceeding Rs. 50 lakh during a financial year |
| Professionals opting for Presumptive Taxation Scheme under section 44ADA | If the income is higher than the maximum amount, it is not subject to income tax.Claiming gains or profits below the prescribed limit mentioned under the Presumptive Taxation Scheme |
| Business loss in the absence of presumptive taxation | Higher than Rs. 1 Crore in total sales, gross receipts, or turnover. Holding a tax audit is mandatory if the total income is higher than the basic threshold limit, but the business has incurred a loss from operations |
| Business loss under presumptive taxation as per section 44AD | No requirement for a tax audit if the income is below the threshold limit |
| Business loss (presumptive taxation under section 44AD) | Declaring the taxable income below the prescribed limits mentioned under the Presumptive Taxation Scheme and the income is higher than the threshold limit. |
What constitutes a tax audit report?
The auditor (generally CA) provides the audit report either as Form 3CA or Form 3CB:
- The auditor uses Form 3CA if the taxpayer carrying out a business or profession is already required to get their accounts audited under any other Indian law.
- The auditor uses Form 3CB if the taxpayer carrying out a business or profession is not required to get their accounts audited under any other Indian law.
The auditor is required to provide the prescribed particulars through Form 3CD, which forms part of the mandated audit report.
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Penalty for not filing a tax audit report
Failure to file a tax audit report as required by tax authorities can lead to severe consequences for individuals and businesses. Here are key repercussions:
- Monetary penalties
Tax authorities may impose fines, often calculated as a percentage of the tax liability or income subject to audit. These penalties can create a significant financial burden for non-compliance. - Disallowance of deductions
Failure to file a tax audit report may result in the disallowance of deductions or exemptions claimed on the tax return, leading to an increased tax liability. - Interest charges
Interest on unpaid tax liability due to a missing tax audit report may accrue, with rates and calculations varying by jurisdiction, further adding to financial costs. - Legal action
Persistent non-compliance can trigger legal action, involving additional fines, penalties, and potentially criminal charges, emphasizing the importance of tax obligations. - Loss of tax benefits
Non-filing of a tax audit report can result in a loss of eligibility for certain tax benefits or incentives, reducing opportunities to lower tax liabilities. - Increased likelihood of audit
Non-compliance increases the likelihood of a tax audit, subjecting the taxpayer’s financial records to intensive review, which is time-consuming and costly. - Impact on credit rating
In some jurisdictions, tax debts are reported to credit agencies, potentially harming the taxpayer’s credit score and affecting their access to financial products. - injunctions and asset seizure
In extreme cases, authorities may pursue liens on assets, wage garnishments, or asset seizures to settle unpaid taxes, underscoring the seriousness of tax compliance.
Types of penalties for not filing tax audit report
Failure to comply with tax audit report filing requirements can result in significant penalties and legal consequences. Depending on the specific jurisdiction and applicable tax laws, these repercussions may include:
- Monetary fines: Tax authorities may impose substantial financial penalties for non-compliance.
- Disallowance of claims: Certain deductions and exemptions may be disallowed, increasing overall tax liability.
- Interest charges: Interest may accrue on unpaid taxes arising from the non-filing of the audit report.
- Legal proceedings: In severe cases, legal action, such as fines, penalties, and potential criminal charges, may be initiated.
- Loss of tax benefits: Tax benefits and incentives may be forfeited due to non-compliance.
- Tax audits: Tax authorities may conduct audits to scrutinise financial records and tax returns.
- Credit rating impact: Non-compliance may adversely affect credit ratings in certain jurisdictions.
- Injunctions and seizures: In extreme cases, tax authorities may seek court orders to enforce payment, including asset liens, wage garnishment, or property seizure.
It is crucial to adhere to tax audit report filing obligations to mitigate these risks and maintain compliance with tax laws.
Cases where accounts are audited under any law other than the Income Tax Act
Individuals subject to statutory audits under laws other than the Income Tax Act, such as companies under company law, are exempt from a separate tax audit. However, they must ensure that the statutory audit report is furnished in the prescribed Income Tax format and submitted before the tax return filing deadline.
All taxpayers are required to comply with Section 44AB of the Income Tax Act, 1961, which mandates an audit of their books of accounts to accurately reflect their income, deductions, and tax liabilities. This audit ensures transparency and accountability in tax compliance.
How and when to submit tax audit reports
A tax audit report must be filed online by a qualified Chartered Accountant (CA) through their account on the income tax e-filing portal. To enable this, taxpayers must add their CA’s details in their own accounts.
After the CA uploads the report, the taxpayer needs to review and either accept or reject it through their login portal. If rejected, the process must be repeated until the report is accepted.
The deadline for submitting the tax audit report aligns with the due date for filing the Income Tax Return. For assessees involved in international transactions, the due date is October 31 of the assessment year. For other taxpayers, it is usually September 30 of the assessment year.
Conclusion
Tax audits are crucial for the Indian government and tax authorities to ensure that Indian businesses and professionals have adhered to all the taxation and compliance laws. Section 44AB is that section of the Income Tax Act 1961 that mandates tax audit if a business's total sales, turnover, or gross receipts exceed Rs. 1 Crore (Rs. 10 Crore for up to 5% cash transactions) in a financial year. For professionals, the threshold limit is Rs. 50 lakh annually. If you are a professional or own a business and you exceed these threshold limits, it is compulsory that you get your accounts audited and submit the audit report to the Indian government to avoid various penalties.
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