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).

Section 44AB

Section 44AB of the Income Tax Act is applicable for individuals who meet certain requirements and have to get their accounts audited by a Chartered Accountant. There is a specific set of forms to be submitted for this.

Section 44AB of the Income Tax Act deals with the audit of accounts of certain individuals. In other words, if certain individuals meet the requisites as prescribed under Section 44AB, then these individuals will have to ensure that their accounts are audited by a certified Chartered Accountant. This practice is done solely to help the Assessing Officer with the calculation and computation of the total taxable income of the individual in question.

Tax Audit Applicability

Every person who earns income from any business or profession has to maintain his books of accounts and get a tax audit done except those who opted for presumptive taxation under section 44AD, 44ADA, 44AE of the income tax act 1961 or if their turnover stands behind certain threshold limits.

The taxpayers who need to get a tax audit done are:

Business taxpayers having total sales, turnover, or gross receipts exceeding Rs.1 crore during a financial year or Rs.10 crore, if the cash transactions do not exceed 5% of the total transactions.
Professional taxpayers having gross receipts exceeding Rs.50 lakhs in a financial year.
Taxpayers opting for presumptive taxation schemes under sections 44AD, 44ADA and 44AE and declare profits less than the prescribed rates or incur losses.
Taxpayers eligible for presumptive taxation under section 44AD but have opted out of the scheme for consecutive 5 years.
Cooperative societies having income exceeding the basic exemption limit.

Who is Required to do an Income Tax Audit under Section 44AB

Category of Person	Threshold for Tax Audit
Business
Carrying on a Business (not opting for a presumptive taxation scheme)	Total sales, turnover or gross receipts exceed Rs. 1 crore in the Financial Year (or) If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for a tax audit is increased to Rs 10 crores (w.e.f. Financial Year 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
– 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
In case of loss from carrying on business and not opting for a presumptive taxation scheme	Total sales, turnover or gross receipts exceed Rs. 1 crore. If the taxpayer’s total income exceeds the basic threshold limit but he has incurred a loss from carrying on a business (not opting for a presumptive taxation scheme)
Carrying on business (opting for presumptive taxation scheme under section 44AD) and having a business loss but with income below the 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 the basic threshold limit	Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit

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.

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.

FAQs

What are the due dates for a income tax audit?

Under Section 44AB, the tax audit report needs to be submitted before 30th September.

What is the difference between Section 44AA and Section 44AB?

Section 44AA states the regulations related to when books are required to be maintained by the assessee. On the other hand, Section 44AB defines the regulations related to circumstances wherein an audit is required to be done or when an audit report is needed to be furnished.

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