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44AB Of Income Tax Act

Section 44AB of Income Tax Act, 1961 contains provisions regarding tax audit for the class of taxpayers. Therefore, chartered accountants conducting audits of accounts for these taxpayers need to also give their observations and findings in their audit report. In this article, let’s know in detail about the tax audit, its objectives, class of taxpayers who needs to get their accounts audited, what should be included in the audit report, what are form number 3CA, 3CB, and 3CD, the due date for the audit of accounts and penalty applicable for not getting the tax audit done as per the provisions of 44AB of Income Tax Act.

What is a tax audit? And what are the objectives of tax audit?

Tax audit is an audit of books of account prescribed under the Income Tax Act to the taxpayers for their business/profession. As per Income Tax Law, a tax audit is compulsory for taxpayers if their annual gross turnover/receipts are above the specified limit. As per Section 44AB of the Income Tax Act, a chartered accountant conducts a tax audit. A tax audit ensures books of accounts are properly maintained, and all the taxpayer’s claims, deductions, and income are correct. A tax audit can help in finding out fraudulent practices if the taxpayer follows any. Chartered accountant needs to report all the requirements mentioned in the form number 3CA, 3CB, and 3CD.

Applicability of section 44AB

As per the provisions of section 44AB of the Income Tax Act, the following persons/taxpayers are mandatorily required to get their accounts audited:

1. Tax audit is applicable for any person carrying out business whose total sale turnover or gross receipt exceeds INR 1 Cr. However, the same provision does not apply to the person if he opts for a scheme of presumptive taxation under Section 44AD of the Income Tax Act, and also his total turnover is less than INR 2 Cr.

    • It is important to note that the threshold of INR 1 Cr is increased to INR 10 Cr. in case more than 95% of the business transactions (receipts and payments) are done through banking channels instead of cash.

2. Tax audit is applicable for any person pursuing a profession if the gross receipts in the profession exceed INR 50 lakhs.

3. Tax audit is applicable for an assessee carrying out the business that declares profit for any previous years under the scheme of presumptive taxation under Section 44AD if the income is beyond the maximum amount not chargeable to income tax in the subsequent five consecutive years from the financial year in which scheme of presumptive taxation under section 44AD has not opted.

4. Tax audit is applicable for an assessee carrying out the business eligible for presumptive taxation under Section 44BB, 44AE, and 44BBB if the profit is less than the specified limit under the scheme of presumptive taxation.

5. Tax audit is applicable for an assessee carrying out the business qualified for presumptive taxation under Section 44AD if the declared taxable income is below the prescribed limit under the presumptive tax scheme and has an income that exceeds the threshold limit.

6. Tax audit is applicable for an assessee carrying out business and not qualified for presumptive taxation under section 44AD (due to opting out of the scheme of presumptive taxation within the lock-in period of 5 consecutive tax years) if the income is beyond the maximum amount not chargeable to income tax five consecutive years from the financial year in which scheme of presumptive taxation under section 44AD has not opted.

7. Tax audit is applicable for an assessee pursuing the profession qualified for presumptive taxation under Section 44ADA if the profit is less than the specified limit under the scheme of presumptive taxation and the income declared is beyond the maximum limit not chargeable to income tax.

Let’s know in brief about the Presumptive taxation scheme.

Presumptive taxation scheme under Section 44AD

Presumptive taxation scheme under section 44AD of the Income Tax Act is applicable for below:

  1. Businesses whose annual total turnover/gross receipt does not exceed INR 2 Cr and these businesses are not required to maintain the books of account
  2. The profit of the business is estimated to be 8% of their gross receipt/turnover
  3. If gross receipts are received through banking channels (digital receipts), profit will be considered 6% (against 8% for cash receipt) of their turnover.
  4. If the assessee opts for a scheme of presumptive taxation, then the same audit section should be followed for the next five consecutive tax years.
  5. It is also important to note that the businesses or individuals engaged in plying or hiring goods carriages are not eligible to opt for a presumptive taxation scheme.

Presumptive taxation scheme under Section 44ADA

Presumptive taxation scheme under section 44ADA of the Income Tax Act is applicable for below:

  1. Professionals whose annual gross receipt does not exceed INR 50 lakhs and are not required to maintain the books of account
  2. Net income in the profession is estimated to be 50% of their gross receipt
  3. If the assessee opts for a scheme of presumptive taxation, then the same audit section should be followed for the next five consecutive tax years.

Forms for furnishing tax audit report

Tax auditor/ Chartered accountant needs to furnish a tax audit report in a specified form. Let’s look at the prescribed forms for furnishing the tax audit report under section 44AB of Income Tax Act, 1961.

  1. Form number 3CA:
    This form is applicable for only companies for the chartered accountant to furnish the tax audit report with observations and findings. Form 3CA is used when the taxpayer must carry out business or profession to get the books and records audited under any other law.
  2. Form number 3CB:
    This form is applicable for assessees other than companies for the chartered accountant to furnish the tax audit report with observations and findings. Form 3CB is used when it is not mandatory for the taxpayer carrying out business or profession to get the books and records audited under any other law.
  3. Form number 3CD:
    This form is applicable for all assessees who are to furnish the summary of tax audit and other related annexures, etc.

The due date for tax audit under section 44AB

For all taxpayers, the due date for tax audit under section 44AB of Income Tax Act, 1961 is 30th September of the assessment year. The due date for an international transaction is 30th November of the assessment year.  The tax auditor, i.e., your chartered accountant, must furnish the tax audit report to the Income Tax Department. Once the chartered accountant uploads the tax audit report, you need to assess all the details furnished in the report and then approve it through your income tax login portal.

Penalty under section 44AB

If a taxpayer is liable to get the accounts audited under Section 44AB of Income Tax Act, 1961 and fails to comply with the provisions, the taxpayer charges a penalty. Following are the penalty charged for non-compliance of audit tax under Section 44AB of Income Tax Act:

  • 5% of the total turnover, sales, or gross receipts in the current financial year
  • INR 1,50,000

If the reasonable cause for the non-compliance is proved, no penalty shall be levied as per the provisions of section 271B.

Every taxpayer needs to stay compliant and be a responsible citizen!

 

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