Tax Audits as per Income Tax Act

Introduction

Audit in general would refer to check, review, inspection etc. There are various types of audits prescribed under different laws such as company audit, cost audit, etc. The Income Tax act requires a taxpayer to get books of accounts of his business / profession audited from a Chartered Accountant from the point of view of Income Tax

Section 44AB defines the provisions relating to the class of taxpayers who are required to get their books of accounts audited. The audit conducted by Chartered Accountant of the taxpayer as per the provision of Sec 44AB is called tax audit.

Objective

  1. To report the requirement of form 3CA/3CB and 3CD

  2. To ensure that the books of accounts and other records are properly maintained

  3. To ensure that the books of accounts reflect true income and claims of deductions are correctly made by the tax payer

  4. Facilitate the administration of tax laws by proper presentation of accounts before tax authorities.

Who are required to get audited ?

Sec 44AB lists following persons who are required to get audited

      1. A person carrying on business (and not opting for presumptive taxation under Sec 44AD), if his total sales, turnover or gross receipts in business for the year exceed or exceeds Rs. 1 crore. The threshold limit of Rs 1 Crore has been increased to 5 crore with effect from FY 2020-21, subject to taxpayer’s cash receipt are limited to 5% of total gross receipts and cash payments are limited to 5% of total aggregate payments.

      2. A person carrying on profession, if his gross receipts in profession for the year exceed Rs. 50 lakhs.

      3. If an eligible assessee opts out of the presumptive taxation scheme, within the aforesaid period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter.

      4. A person who is eligible to opt for the presumptive taxation scheme of section 44AD but he claims the profits or gains for such business to be lower than the profit and gains computed as per the presumptive taxation scheme and his income exceeds the amount which is not chargeable to tax.

      5. A person who is eligible to opt for the presumptive taxation scheme of section 44ADA but he claims the profits or gains for such profession to be lower than the profit and gains computed as per the presumptive taxation scheme and his income exceeds the amount which is not chargeable to tax.

      6. A person who is eligible to opt for the presumptive taxation scheme of sections 44AE but he claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of sections 44AE.

      7. A person who is eligible to opt for the taxation scheme prescribed under section 44BB or section 44BBB but he claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections.

Due date

  1. A person covered by section 44AB should get his accounts audited and should obtain the audit report on or before the due date of filing of the return of income, i.e., on or before 30th September of the relevant assessment year.

  2. In case of a taxpayer who is required to furnish a report in Form No. 3CEB​​ under section 92​ in respect of any international transaction or specified domestic transaction, the due date of filing the return of income is 30th November of the relevant assessment year.

Consequences of Non-compliance

According to section 271B, if any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB or furnish such report as required under section 44AB​, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:

  1. 0.5% of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such year or years.

  2. Rs. 1,50,000.

However, according to section 271B​, no penalty shall be imposed if reasonable cause for such failure is proved.