Income Tax Audit under Section 44AB

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

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

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 circumstances 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.