Tax audits play a significant role in income tax compliance in India, governed by Section 44AB of the Income Tax Act, 1961. Businesses with sales or turnover exceeding Rs 2 crore, professionals with gross receipts exceeding Rs 50 lakh, and taxpayers opting for specific taxation schemes need to mandatorily get their accounts audited.
A significant component of income tax compliance is the tax audit as per the Section 44AB of the Income Tax Act, 1961. Introduced in 1984, this section mandates audits for businesses or professionals whose sales, turnover, or gross receipts surpass particular thresholds.
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Who needs a tax audit under Section 44AB of IT Act?
Certain entities are compelled to have their accounts audited as per Section 44AB. This includes businesses whose total sales, turnover, or gross receipts exceed Rs 2 crore in a financial year. However, this doesn’t apply to those opting for the presumptive taxation scheme under Section 44AD and whose total sales or turnover don’t exceed Rs 2 crore. Also, the threshold limit is Rs 10 crore if cash transactions don’t exceed 5 per cent of total turnover, ensuring more than 95 per cent of business transactions occur through banking channels.
Professionals whose gross receipts surpass Rs 50 lakh in a year also need to get their accounts audited.
Taxpayers who are declaring profit as per Section 44AD, but reducing profit for any of the next five assessment years below the computed profit, and whose income exceeds the non-taxable limit will also need to mandatorily have their accounts audited.
Eligible assessees who opt for the presumptive taxation scheme under Section 44ADA, but claim profits lower than those computed under the scheme, and their income exceeds the non-taxable limit are also covered within Section 44AB.
However, it must be noted that these provisions do not apply to those who choose to opt for the presumptive taxation scheme under sections 44AD and 44ADA.
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What is the procedure for tax audit?
A Chartered Accountant conducts these audits, ensuring the accuracy of the books of accounts, reporting observations, and preparing the tax audit report. The report is obtained in Form No. 3CA/3CB, and Form 3CD provides the required particulars.
Entities such as companies or co-operative societies, which are required to have their accounts audited under their respective laws, do not require a separate audit under Section 44AB of the Income Tax Act. Instead, the audit report accompanied by Form 3CA/3CD considered as valid compliance.
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What is the deadline for tax audit?
Those covered by Section 44AB must have their accounts audited and obtain the audit report by September 30 of the relevant assessment year. For example, the tax audit report for the financial year 2022-23, corresponding to the assessment year 2023-24, should be obtained by 30 September 2023. The report must be electronically filed by the Chartered Accountant to the Income-tax Department. Afterward, the taxpayer has to approve the report from their e-filing account with the Income-tax Department.
What are the Penalties for Non-compliance?
Failing to adhere to Section 44AB tax audit requirements can lead to penalties. The penalty for non-compliance is the lower of 0.5 per cent of the total sales, turnover, or gross receipts, or Rs 1,50,000. However, no penalty is levied if a reasonable cause for such failure is provided.
