Income tax audits play a critical role in ensuring compliance with tax laws and maintaining transparency in financial reporting. Under Section 44AB of the Income Tax Act, specific taxpayers are required to undergo an income tax audit. This blog will guide you through the essential aspects of the income tax audit, including the criteria for applicability, the audit report process, and the penalties associated with non-compliance.

What is an Income Tax Audit?

An income tax audit is a thorough examination of the accounts of a business or profession conducted by a chartered accountant (CA). The purpose is to ensure that the financial statements reflect a true and fair view of the income and expenses, and to confirm that the taxpayer has complied with the provisions of the Income Tax Act.

While there are various types of audits under different laws, the income tax audit specifically focuses on verifying the accuracy of the income declared and the deductions claimed by the taxpayer.

Objectives of an Income Tax Audit

The primary objectives of conducting an income tax audit under Section 44AB are:

1. Ensuring Accuracy: To verify that the books of accounts are properly maintained and reflect accurate financial information.
2. Reporting Discrepancies: To identify and report any discrepancies or non-compliance with the tax laws.
3. Facilitating Tax Calculation: To make the process of income computation and tax return filing easier for both the taxpayer and the tax authorities.
4. Compliance Verification: To ensure that the taxpayer has complied with various provisions of the income tax law, including the correct calculation of deductions and tax liabilities.

Criteria for Income Tax Audit under Section 44AB

The requirement for an income tax audit under Section 44AB is based on the turnover, gross receipts, or income of a taxpayer. The criteria are as follows:

1. For Businesses:
   • General Threshold: A taxpayer carrying on a business is required to get their accounts audited if the total sales, turnover, or gross receipts exceed Rs. 1 crore in a financial year.
   • Higher Threshold: With effect from April 1, 2021, the threshold limit increases to Rs. 10 crore if cash transactions (receipts and payments) do not exceed 5% of the total transactions.
2. For Professions:
   • Threshold: Professionals are required to undergo an income tax audit if their gross receipts exceed Rs. 50 lakh in a financial year.
3. Presumptive Taxation Scheme:
   • Taxpayers who opt for presumptive taxation under Sections 44AE, 44BB, 44BBB, or 44AD and declare income lower than the prescribed limits are required to get their accounts audited if their income exceeds the basic exemption limit.
4. Business Loss: If a taxpayer incurs a loss from carrying on a business and the turnover exceeds Rs. 1 crore, they are also subject to an income tax audit if their total income exceeds the basic exemption limit.

The Income Tax Audit Report: Forms and Submission

The tax auditor must furnish the audit report in a prescribed format, which varies depending on whether the taxpayer is subject to other types of audits under different laws:

1. Form 3CA: Used when a taxpayer is already required to get their accounts audited under another law (e.g., a company audit).
2. Form 3CB: Used when the taxpayer is not subject to any other audit requirements.
3. Form 3CE: Used for non-residents and foreign companies receiving royalties or fees for technical services from the government or Indian entities.

In all cases, the tax auditor must also furnish a detailed statement of particulars in Form 3CD, which is a part of the audit report.

Deadlines for Income Tax Audit

The deadline for completing the income tax audit and submitting the audit report is crucial for avoiding penalties:

1. General Deadline: The audit report must be filed by September 30th of the assessment year (AY).
2. Transfer Pricing Cases: For taxpayers involved in international transactions, the deadline is extended to October 31st of the AY.

Penalties for Non-Compliance

Failure to get the accounts audited or to submit the audit report within the stipulated time can attract penalties under Section 271B. The penalty can be the least of the following:

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

However, no penalty is levied if the taxpayer can demonstrate a reasonable cause for the delay, such as natural calamities, the resignation of the tax auditor, or other unavoidable circumstances.

Conclusion

An income tax audit under Section 44AB is not just a legal requirement; it is an essential process that ensures the accuracy and compliance of a taxpayer’s financial records. At Asire Consulting – A Top CA Firms in India, our team of experienced chartered accountants is committed to providing comprehensive audit services that help businesses and professionals navigate the complexities of tax compliance.

Whether you’re a business owner, a professional, or a taxpayer under the presumptive taxation scheme, our experts are here to guide you through the audit process and ensure that your tax obligations are met efficiently and accurately. Contact us today to learn more about our tax audit services and how we can help you stay compliant with the latest tax regulations.