Section 44AB of the Income Tax Act, 1961, outlines the rules for tax audits for businesses or individuals. A tax audit checks that the taxpayer has accurately reported their income, deductions, and taxes. This audit must be done by a Chartered Accountant. The business must keep proper accounting records that meet the Income Tax Act’s standards. This article explains everything you need to know about income tax audits under Section 44AB.
Important Update on Tax Audit Deadline
The Central Board of Direct Taxes (CBDT) has extended the deadline for filing tax audit reports for the Assessment Year 2024-25. The new deadline is now October 7, 2024, instead of the original September 30, 2024. If taxpayers miss this new deadline, they can still submit their reports, but they may face penalties and their income tax returns could be marked as defective.
What is a Tax Audit Under Section 44AB?
Various laws require different types of audits, such as company audits or statutory audits. Under the Income Tax Act, some taxpayers must undergo a tax audit. A tax audit involves checking and assessing a business’s financial records. This process reviews income, expenses, deductions, and taxes. It helps make filing income tax returns easier and more accurate.
Who Needs a Tax Audit?
Anyone who earns income from a business or profession must keep proper financial records and undergo a tax audit. However, this requirement does not apply to those who choose presumptive taxation under sections 44AD, 44ADA, or 44AE of the Income Tax Act, 1961, or if their income is below certain limits.
Who Must Undergo a Tax Audit?
Taxpayers required to have a tax audit include:
- Business Taxpayers: Those with total sales, turnover, or gross receipts over ₹1 crore in a financial year, or over ₹10 crore if cash transactions are 5% or less of total transactions.
- Professional Taxpayers: Those with gross receipts exceeding ₹50 lakhs in a financial year.
- Presumptive Taxation Taxpayers: Those using sections 44AD, 44ADA, or 44AE and declaring profits below the required rates or reporting losses.
- Taxpayers Opting Out of Presumptive Taxation: Those eligible for section 44AD but who have opted out of the scheme for five consecutive years.
- Cooperative Societies: Those with income exceeding the basic exemption limit.
Turnover Limits for Income Tax Audit
| Category of Person | Threshold for Tax Audit |
| Business | |
| Not Opting for Presumptive Taxation | Total sales, turnover, or gross receipts exceed ₹1 crore in the FY. If cash transactions are up to 5% of total gross receipts and payments, the limit increases to ₹10 crore (effective FY 2020-21). |
| Eligible for Presumptive Taxation (Sections 44AE, 44BB, 44BBB) | Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme. |
| Eligible for Presumptive Taxation (Section 44AD) | Declares taxable income below the limits set by the presumptive tax scheme and has income exceeding the basic threshold. |
| Not Eligible for Presumptive Taxation (Due to Opting Out) | If income exceeds the non-taxable limit in any of the five consecutive years after opting out of the presumptive scheme. |
| Declaring Profits Under Presumptive Taxation (Section 44AD) | If total sales, turnover, or gross receipts do not exceed ₹2 crore in the FY, a tax audit is not required. |
| Profession | |
| Professionals | Total gross receipts exceed ₹50 lakh in the FY. |
| Eligible for Presumptive Taxation (Section 44ADA) | Claims profits or gains lower than the prescribed limit and has income exceeding the non-taxable limit. |
| Business Loss | |
| Losses (Not Opting for Presumptive Taxation) | Total sales, turnover, or gross receipts exceed ₹1 crore if total income exceeds the basic threshold despite a business loss. |
| Losses (Opting for Presumptive Taxation under Section 44AD) | Tax audit not applicable if income is below the basic threshold. |
| Losses (Presumptive Taxation Under Section 44AD) | If they declare taxable income below the limits prescribed by the presumptive tax scheme but exceed the basic threshold, the audit applies. |
Objectives of an Income Tax Audit
The main goals of a tax audit are:
- Accurate Record Keeping: Ensure that the books of accounts are properly maintained without any fraudulent activities, certified by an auditor.
- Identify Discrepancies: Report any inconsistencies found during the examination of financial records.
- Provide Information: Report various details such as tax depreciation and compliance with income tax laws.
- Simplify Tax Computation: Make it easier to calculate taxes and deductions.
- Verify Taxpayer Information: Confirm the accuracy of the information provided in the income tax return, including income, taxes, and deductions.
What is Included in a Tax Audit Report?
A tax audit report summarizes the results of the audit process and follows Rule 6G of the Income Tax Rules. This report is prepared and filed electronically by a practicing Chartered Accountant.
The tax auditor provides the report using either Form 3CA or Form 3CB, depending on the situation:
- Form 3CA: Used when it is required to audit the books of accounts under another law for a business or profession.
- Form 3CB: Used when auditing the books of accounts under another law is optional for the business or profession.
- Form 3CE: Used when non-residents or foreign companies receive royalties or fees for technical services from the government.
Deadline for Income Tax Audits
A Chartered Accountant can submit a tax audit report using their login details. The taxpayer needs to check the auditor’s details in their login portal and accept the uploaded audit report.
For all taxpayers, the deadline to file the tax audit report is September 30 of the assessment year. If there are international transactions, the deadline is October 31 of the assessment year. The tax audit report must be filed before the income tax return due date. The assessment year refers to the same year in which the audit is conducted.
Penalty for Not Filing an Audit Report
If a taxpayer is required to undergo a tax audit but fails to do so, they may face a penalty. This penalty is the lower of:
- 0.5% of total sales, gross receipts, or turnover
- ₹1,50,000
However, if the taxpayer has a valid reason for not filing, no penalty will be imposed under section 271B.
Some acceptable reasons for not filing include:
- Natural Disasters
- Resignation of the Tax Auditor leading to delays
- Labor Issues such as strikes or lockouts
- Loss of Financial Records due to circumstances beyond control
- Physical Inability or Death of the partner responsible for the accounts
Types of Penalties for Not Filing a Tax Audit Report
Failing to file a required tax audit report can lead to several penalties and consequences, which may differ based on local tax laws.
Here are some common penalties:
- Monetary Penalties: Tax authorities may impose fines calculated as a percentage of your tax liability or income, which can be significant.
- Disallowance of Deductions: If you don’t file the required tax audit report, certain deductions or exemptions claimed on your tax return may be denied, resulting in a higher tax bill.
- Interest Charges: Interest may accumulate on any unpaid taxes due to not filing, with rates and calculations varying by jurisdiction.
- Legal Action: In serious cases or for repeated failures, tax authorities might take legal action, which could include fines, penalties, or even criminal charges.
- Loss of Tax Benefits: Not filing can lead to losing certain tax benefits or incentives you might normally qualify for.
- Audit Trigger: Failure to file a tax audit report may prompt a tax audit, during which authorities will review your financial records and returns, potentially leading to further complications.
- Impact on Credit Rating: In some areas, tax debts can be reported to credit agencies, negatively affecting your credit score.
- Injunctions and Seizures: In extreme cases of non-compliance, tax authorities might seek court orders to place liens on your assets, garnish wages, or seize property to recover unpaid taxes.
Auditing Accounts Under Laws Other Than the Income Tax Act
If a taxpayer is required to have their accounts audited under a different law, such as a statutory audit for companies, they do not need to conduct a separate audit for tax purposes. Instead, they just need to submit the audit report as per income tax law before the deadline for filing their tax return.
As a taxpayer, you must follow the requirements of Section 44AB of the Income Tax Act, 1961. This section mandates that all taxpayers must provide an audit report after their accounts are audited. This ensures that the taxpayer’s income, deductions, and taxes are accurately represented.
Frequently Asked Questions (FAQs)
What does Section 44AB state?
This section requires taxpayers to have their business or profession audited and to provide an audit report for tax purposes if they meet specific conditions.
Who conducts tax audits?
Tax audits are conducted by a practicing Chartered Accountant or relevant authorities.
What is the penalty for not complying with Section 44AB?
If you fail to comply with Section 44AB, you may face a penalty of 0.5% of total sales, turnover, or gross receipts, or ₹1.5 lakh, whichever is lower.
What are Sections 44AA and 44AB?
Section 44AA outlines when taxpayers must maintain their books of accounts, while Section 44AB specifies the circumstances under which an audit is required and when an audit report must be submitted.
What is the penalty for non-filing or delays in auditing?
The penalty for not complying with Section 44AB is the same as above: 0.5% of total sales or ₹1.5 lakh, whichever is less. Additionally, there may be penalties under Section 234F.
What triggers tax audits?
Tax audits are triggered by factors like turnover and profit percentage, along with other conditions specified in the law.
What is the last date for the income tax audit?
For companies required to conduct an audit, the last date to file the income tax return (ITR) is September 30 of the relevant assessment year. If the company has international or domestic transactions, the deadline is October 31.
Is a tax audit required if accounts have been audited under another law?
No, if a person’s accounts are already audited under another law, they do not need to conduct a separate audit for Section 44AB. The audit report obtained under that law, along with the necessary format (Form 3CA and Form 3CD), is sufficient. For example, if a company’s accounts are audited under the Companies Act, no additional audit is required under the Income Tax Act.
What is the due date for filing a tax audit report?
Tax audit report has to be filed on or before 30th September of the subsequent financial year. This means for the financial year 2023-24, last date of filing tax audit report is 30th September 2014. However, it has been extended to October 7, 2024.
At present, tax audit report has to be e-filed along with the return of income.
Where the assessee is required to furnish a report of a chartered accountant as referred to in section 92E relating to international transaction or specified domestic transaction the due date of filing is 30th November of the relevant assessment year.
Also Read: Income Tax Return filing due dates – For Individuals
What is the format for a tax audit report?
Rule 6G prescribes the manner of reporting and furnishing the Report of Audit of accounts to be furnished u/s 44AB.
There are two types of forms: 3CA-3CD and 3CB-3CD.
Therefore, only one of two will apply to each taxpayer.
- Form 3CA-3CD applies to a person who is required by or under any law to get its accounts audited.
- Form 3CB-3CD is applicable to a person not referred above, i.e., where accounts are not required to be audited under any other law.
Tax audit is reported to income tax department in form no 3CA/3CB and form no 3CD along with the return of income.
In case of a person whose books of accounts are required to be audited by or under any law, the auditor has to submit report in Form 3CA and statement of particulars in Form 3CD.
In all other cases, audit report has to be submitted in Form 3CB and statement of particulars in Form 3CD.
Also Read: How to choose the right ITR for tax filing
How to e-file tax audit report
In the first step, assessee is required to add a chartered accountant in full-time practice in their account with IT department by logging into it.
The chartered accountant is required to furnish report by using his professional login details. Once the report has been uploaded to the IT department’s portal, assessee can see it from their own account and accept or reject it.
If accepted, audit report for the assessee has been filed. In case of rejection, process has to be followed again.
After filing tax audit report, you are required to file return of income by mentioning auditor details in it.
What are the consequences of non-compliance with tax audit requirements?
If the assessee who is required to get his books of accounts audited under section 44AB fails to do so, then he is liable to pay a penalty at the rate of 0.5% of gross turnover or receipts or Rs. 1, 50,000 whichever is less. This means maximum penalty is Rs. 1, 50,000.
However, no penalty shall be leviable if assessee proves that there was a reasonable cause for such failure for not filing tax audit report.
Also Read: Consequences of Late or Non Filing of the Income Tax Return
What are the limitations of tax audits for Chartered Accountants?
A chartered accountant in full-time practice can take 60 numbers of tax audit assignments. This means, in a CA firm of 4 partners, maximum tax audit assignment limit is 240.
ICAI in its 331st meeting held from 10th to 12th February, 2014 has decided to increase the earlier limit of 45 to 60. As per the change, this new limit of 60 audit assignments will be effective for the audits conducted during the financial year 2014-15 and onwards. (Link to refer ICAI announcement)
Here are the prerequisites for filing tax audit form:
- The taxpayer is registered at the e-filing portal.
- Taxpayer has valid Username (PAN) and Password.
- Taxpayers should have a valid DSC, if applicable or EVC. DSC should be registered at the e-filing portal & not expired.
- Taxpayers should assign the Form to CA along with necessary documents.
If you’re unsure about tax audits or need help with tax compliance, consulting a qualified tax practitioner is a smart choice. They can guide you through tax laws, ensure accurate filings, and help avoid penalties, giving you peace of mind.
