Income Tax Audit Under Section 44AB - Criteria, Audit Report, Penalty

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Let’s explore a detailed overview of tax audits with their objectives, types and components.

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What Is a Tax Audit?

A tax audit reviews business or professional accounts conducted by taxpayers from an income tax perspective. It is mandatory for companies or individuals to exceed certain turnover limits under the Income Tax Act of 1961. Different types of audits, such as company, statutory, cost, and stock audits, are conducted under different laws.

What Are the Objectives of a Tax Audit?

A tax audit aims to ensure the correctness and maintenance of books of accounts, report observations or discrepancies, and report prescribed information like tax depreciation and income tax law compliance. It also simplifies the computation of taxes and deductions, enabling tax authorities to verify the correctness of a taxpayer’s income tax returns.

The audit also simplifies total income calculation and deduction claims, making it easier for tax authorities to verify the accuracy of taxpayer’s returns. This auditing process is crucial for ensuring compliance with income tax laws and accurate tax computations.

How To Do a Tax Audit in India?

A tax audit in India simplifies tax return calculations by requiring a Chartered Accountant to submit an audit report, typically in the form of Form 3CA or Form 3CB, along with Form 3CD.

Form 3CA: Form No. 3CA is provided to individuals who are already required to have their accounts audited under any other law.
Form 3CB: Form No. 3CB is provided to individuals who are not required to have their accounts audited under any other law.
Form 3CD: The tax auditor must provide the required details in Form No. 3CD, which is a part of the audit report for either of the aforementioned audit reports.
Form 3CE: Form No. 3CE is provided to non-residents and foreign companies who receive royalties or fees for technical services from the government or an Indian concern.

Different Types of Tax Audits

There are three primary types of tax audits:

Field Audit: Field audits are the most comprehensive tax audits, and detailed IRS audits are conducted by IRS revenue agents who visit taxpayers at their homes or businesses to examine records. These agents are typically more skilled and knowledgeable than other representatives and may specialize in a specific industry.
Office Audit: An office audit is a type of IRS audit where the IRS addresses complex or large questions about your return, requiring you to visit an IRS office for the audit rather than a correspondence or field audit.
Correspondence Audit: Correspondence audits are the most common type of IRS audit, accounting for 75% of all audits. They involve the IRS sending a letter requesting more information about a specific part of a tax return, typically a 566 letter.

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Who Is Required To Get Accounts Audited U/S 44AB?

Section 44AB of the Income Tax Act of 1961 mandates specific categories of taxpayers to conduct tax audits of their records.

Business:

Category of Person (Business)	Limit of Income Tax Audit
Businesses are continuing to operate without utilising a presumptive taxation scheme	The tax audit threshold for a company is Rs.10 crores if cash transactions account for up to 5% of total gross receipts and payments in the fiscal year 2020-21.
Conducting business eligible for presumptive taxation under Section 44AE, 44BB, or 44BBB, as opted for the same in the previous year	The individual claims profits or gains below the prescribed tax audit limit under the presumptive taxation scheme.
Carrying on business entitled for presumptive taxes under Section 44AD and elected for it in the preceding year	The individual declares taxable income below the presumptive tax scheme limits and has income exceeding the basic exemption limit of Rs. 2.5 lakhs.
The business is not eligible to claim presumptive taxation under Section 44AD due to opting out of it in any financial year during the lock-in period, which is five consecutive years.	If income exceeds the basic exemption limit in the following five consecutive tax years from the financial year without presumptive taxation.

Profession:

Category of Person (Profession)	Limit of Income Tax Audit
Continuing with the profession	Annual gross receipts exceed Rs. 50 lakh
Carry on the occupation entitled to presumptive taxes under Section 44ADA	The profession claims profits or gains below 50% of total receipts; if income exceeds the maximum amount, it is not taxed.

Business Loss:

Category of Person (Business Loss)	Limit of Income Tax Audit
Business loss without presumptive taxation	A tax audit is necessary if a taxpayer’s income exceeds the basic threshold limit but incurs a loss from business operations exceeding Rs. 1 crore in total sales, turnover, or gross receipts.
Business loss is subject to presumptive taxation under Section 44AD and income below the basic threshold limit	No tax audit is needed

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What Are the Components of the Tax Audit Report?

The tax audit section contains various components, which are listed below:

General Information: This section contains the details of the taxpayer’s name, address, TIN, and the investigation’s time frame.

Financial Statements: The audit report typically comprises financial statements like balance sheets, income statements, and cash flow statements, which provide a detailed account of the financial activities of the reporting period.

Audit Findings: The audit findings section provides detailed information on any inconsistencies or problems discovered during the auditing process, identifying specific locations that may require adjustments or fixes.

Supporting Documents: Auditors utilise supporting documents such as bank statements, invoices, receipts, and other records to verify income and expenses listed on financial statements.

Auditor’s Opinion: The auditor’s opinion is a crucial aspect of tax compliance. It assesses your records and suggests potential non-compliance issues, either unqualified or qualified.

Due Date and Penalty for Delay in Furnishing Tax Audit Report

The tax auditor must submit the online tax audit report using their ‘Chartered Accountant’ login details, while taxpayers must add their CA details to their login portal. It is essential to consult an income tax auditor near you to understand the due date and the penalty for any delay in furnishing the tax audit report.

If taxpayers fail to complete a tax audit, they may face a penalty of 0.5% of their total sales, turnover, or gross receipts, or Rs 1,50,000. However, if there is a reasonable cause, no penalty is imposed under section 271B.

Tribunals/Courts accept reasonable causes for delay in filing tax audit reports, including natural calamities, resignations of tax auditors and key employees, labour problems like strikes and lock-outs, loss of accounts due to situations beyond the assesses’ control, and physical inability or death of the partner in charge of the accounts.

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When and How will Tax Audit Reports be Furnished?

Tax audit reports must be filed on or before the due date for filing the income tax return. For taxpayers involved in international transactions, the due date is 31st October of the subsequent year. For other taxpayers, the due date is 30th September of the assessment year.

Forms Required for Tax Audit

Form No. 3CA is required for individuals who are already required to have their accounts audited under any other law, Form No. 3CB is for those who are not required to have their accounts audited under any other law, and Form No. 3CE is for non-residents and foreign companies receiving royalties or fees for technical services from the government or an Indian concern.

Rules for Governing Tax Audit

Tax audits are mandatory for individuals running multiple businesses with a total turnover exceeding Rs. 1 crore. Additionally, individuals involved in various professions with combined gross receipts exceeding Rs. 50 lakh must have their account book audited. If both businesses and professions have a turnover exceeding Rs. 1 crore or their gross receipt exceeds Rs. 50 lakh, an audit is required. These rules are based on individual turnovers and are essential for maintaining accurate financial records.

Penalty for Not Auditing

Individuals who fail to audit their accounts under Section 44AB face a 0.5% penalty of their total turnover earned during the relevant fiscal year, which cannot exceed Rs. 1.5 lakhs. No penalty will be imposed under Section 271B if the individual cannot audit their accounts for a justifiable reason. Reasonable causes of income tax audit failure include the resignation of an authorized chartered accountant or auditor, untimely death of the chartered accountant or auditor, lack of access to the individual’s accounts due to thievery, strikes, rioting, or an unforeseeable natural disaster or calamity.

Tax Audit Vs Statutory Audit

A tax audit is a mandatory process conducted by a Chartered Accountant under the Income Tax Act 1961. It involves examining taxpayer’s accounts and expressing opinions on the audit report. The assessee must have a business or profession aiming to make a profit and maintain an account record. Chapter V of the Income Tax Act details the audit, with a minimum company turnover of over Rs. 1 crore and gross receipt of at least Rs. 25 lakhs.

The Indian judiciary considers statutory audits mandatory for corporate selectors to maintain legal accounting records. The Law of Companies Act of 2013 guides the appointment, removal, rights, duties, and remuneration of auditors. Companies can appoint auditors with shareholder approval at the annual meeting and have authority over the auditor’s remuneration. The audit applies to the organization and follows the legal guidance of the law.

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Conclusion

In conclusion, a tax audit is essential for ensuring compliance with income tax laws and maintaining accurate financial records. Understanding the requirements and procedures under Section 44AB of the Income Tax Act is important for businesses, professionals, and those involved in specific taxable activities. Anam Shaikh & Associates provides reliable and efficient income tax audit services in Mumbai, ensuring a smooth and hassle-free experience for all clients. Contact them to discover tailored solutions for your tax audit needs.