Tax audit season is getting started and it’s important to relook at the applicability and detailed provisions of the income tax audits. A tax audit is a detailed compliance carried on during the financial year or after it ends. The aim is to analyse the transactions of the business to determine whether they are in conformity with the provisions of the income tax law and rules and regulations made thereunder. Section 44AB of the Income Tax Act, 1961 lays down the applicability of income tax audits. Let’s understand the same.
What is Income Tax Audit?
There are different types of audits, each having its own purpose. Similarly, income tax audits are the audits conducted as per the requirement of the Income Tax Act, 1961. It involves a detailed review and examination of accounts and transactions of the assessee conducted during the year to determine whether the assessee was compliant with the provisions of the income tax law and rules made thereunder. It ensures accurate filings and reporting to the income tax authorities.
Objectives of Income Tax Audits
Following are some of the key objectives of income tax audits in India:
- To ensure that the assessee maintains proper books of accounts and records.
- To ensure that the assessee reports a true and fair view of his business, discloses actual income and financial information and does not avoid his tax obligations.
- Reporting of the discrepancies and observations that are noted by the income tax auditor and his opinion on the books of the assessee.
- To ensure that all the provisions as prescribed by the income tax law are adhered to by the assessee.
Section 44AB - Applicability of the Income Tax Audit
As per Section 44AB of the Income Tax Act, 1961, the following persons shall get their accounts audited by a Chartered Accountant (CA) and furnish an audit report duly signed and verified by such CA:
- A person carrying on business if his total sales, turnover or gross receipts in business exceeds Rs. 1 crore in any previous year. However, if the aggregate of all amounts received and all amounts paid do not exceed 5% of the total receipts and payments respectively, then the above limit should be considered as Rs. 10 crores.
- A person carrying on a profession if the gross receipts in the profession exceed Rs. 50 lakhs in any previous year.
- A person carrying on a business if the profits and gains from such business are deemed as profits and gains under section 44AE, 44BB or 44BBB and such person claims his income to be lower than the profits or gains so deemed in any previous year.
- A person carrying on a profession if the profits and gains from such business are deemed as profits and gains under section 44ADA and such person claims his income to be lower than the profits or gains so deemed in any previous year.
- A person carrying on a business if the provisions of section 44AD(4) become applicable and his income exceeds the maximum amount that is not chargeable to tax in any previous year.
Provided that the above audit requirement shall not be applicable to the person who declares profits and gains from business and profession as per Section 44AD(1) and his total sales, turnover or gross receipts do not exceed Rs. 2 crores during the previous year.
[Replaced by Finance Act 2023 w.e.f. 1-4-2024. The new proviso shall be read as follows: The above audit requirement shall not be applicable to the person who declares profits and gains from business and profession as per Section 44AD(1) or 44ADA(1)].
Due Date for Income Tax Audit
The audit of the books of accounts and the audit report shall be furnished on or before 30th September following the end of the financial year. Therefore, for the financial year 2022-23, the due date for completion of the audit and furnishing of the audit report is 30th September 2023.
Income Tax Audit Forms
As per the provisions of the income tax law, the Chartered Accountant needs to furnish the audit report in the prescribed forms. The tax audit report shall be prepared in Form No. 3CB and the particulars of the audit shall be reported in Form No. 3CD. However, those assesses who are required to be audited under any other law as well shall have their audit report prepared in Form No. 3CA. The tax audit report shall be furnished electronically by the Chartered Accountant through the e-filing portal.
Penalty Under Section 44AB
In case a person fails to get his accounts audited, then a penalty equal to lower of the following shall be imposed:
- 0.5% of the total sales or receipts of the business or profession respectively during the financial year
- An amount equal to Rs. 1.50 lakhs
