Section 44AB of Income Tax Act- All about Tax Audit

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Section 44AB of the Income Tax Act contains provisions pertaining to the tax audit under the Income Tax Audit. Tax audit refers to the independent verification of the books of accounts of the assessee form an opinion on the matters related to taxation compliances undertaken by the assessee. While preparing the books of accounts of the business or profession for the purpose of income tax filing, the assessee has to comply with the provisions of Income Tax Act.

Objective of Tax Audit

Tax audit is conducted to achieve the following objectives:

  1. Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor.
  2. Reporting observations/discrepancies noted by tax auditor after a detailed examination of the books of account and facilitating the administration of tax laws by a proper presentation of accounts before the tax authorities.
  3. To report prescribed information such as tax depreciation, compliance of various provisions of income tax law etc.

Who is required to get the tax audit performed under section 44AB?

As per section 44AB, following persons are compulsorily required to get their accounts audited
  • A person carrying on business, if the total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore. This provision is​ not applicable to the person, who opts for presumptive taxation scheme under section 44AD​ and his total sales or turnover doesn’t exceeds Rs. 2 crores.

Amendment to section 44AB w.e.f. Assessment Year 2020-21 , the threshold limit, for a person carrying on business is increased from Rs. 1 Crore to Rs. 5 crore provided that in case of that person:

(a) aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount; and

(b) aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the said payment.

In other words, more than 95% of the business transactions should be done through banking channels.

  •  person carrying on profession, if the Gross receipts exceed Rs. 50 lakhs during the year.
  • A person carrying on business eligible for presumptive taxation under Section 44AD or Carrying on the profession eligible for presumptive taxation under Section 44ADA but claims profits or gains lower than the prescribed limit under presumptive tax scheme and has income exceeding the basic threshold limit/ amount which is not chargeable to tax.
  • A person carrying on the business declares profit for any Previous Year in accordance with Section 44AD and he decreases profit lower than the profit computed as per section 44AD, for any of the 5 Assessment Year subsequent to the Previous Year and his income exceeds the amount which is not chargeable to tax. In other words, carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one year of the lock in period and income exceeding basic threshold limit.
  • A person carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB but claims profits or gains lower than the prescribed limit under presumptive taxation scheme.

What constitutes Audit report?

Tax auditor shall furnish his report in a prescribed form which is Form No. 3CA/3CB and the prescribed particulars are to be reported in Form No. 3CD which forms part of audit report.
    • 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.

Who is permitted to perform a tax audit under section 44AB?

A Chartered Accountant who holds the certificate of practice and is in full-time practice may perform tax auditing. The tax auditor (CA) performs a thorough analysis of account books according to the department’s specified formats in form no. 3CA/3CB and Form no. 3CD along with the income tax return.

Penalty of non filing or delay in filing tax audit report

Section 271B of the Income Tax Act is a penalty provision, which penalizes the assessee who fails to get the accounts audited or who fails to furnish the tax audit report within the prescribed time limit. If any taxpayer who is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty:

    1. 0.5% of the total sales, turnover or gross receipts or,
    2. Rs 1,50,000

However, according to section 271B​, no penalty shall be imposed if reasonable cause for such failure is proved.

Due date by which a taxpayer should get his accounts audited

​​​​​​​​​​Any person covered by section 44AB should get his accounts audited and should obtain the audit report on or before 30th September of the relevant assessment year. For an example Tax audit report for the FY 2019-20 corresponding to the AY 2020-21 should be obtained on or before 30th September, 2020.

Due to the pandemic Covid-19, the due date for the tax audit is pushed back by a month – from September 30, 2020 to October 30, 2020 for FY 2019-20.

Point to Note

If the assessee is liable/ needed to have his account books audited under some other legislation ( say Statutory audit in compliance with the requirements of the Companies Act, 2013), in such a situation, the taxpayer need not get his accounts audited again for income tax purposes. It is sufficient if accounts are audited under such other law before the due date of filing the return and also a report by the chartered accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD

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