UNDERSTANDING TAX AUDITS U/S 44AB
Introduction: There are various kinds of audits being conducted under different laws such as company audit/statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’.
As the name itself suggests, tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax viewpoint. It makes the process of income computation for filing of return of income easier.
Objectives of tax audit
- Tax audit is conducted to achieve the following objectives:
- Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor
- Reporting observations/discrepancies noted by tax auditor after a methodical examination of the books of account
- To report prescribed information such as tax depreciation, compliance of various provisions of income tax law, etc.
- All these enable tax authorities in verifying the correctness of income tax returns filed by the taxpayer. Calculation and verification of total income, claim for deductions etc., also becomes easier.
WHAT CONSTITUTES AN AUDIT REPORT?
Tax auditor shall furnish his report in a prescribed form which could be either Form 3CA or Form 3CB where:
- Form No. 3CA is furnished when a person carrying on business or profession is already mandated to get his accounts audited under any other law.
- Form No. 3CB is furnished when a person carrying on business or profession is not required to get his accounts audited under any other law.
In case of either of the aforementioned audit reports, the tax auditor must furnish the prescribed particulars in Form No. 3CD, which forms part of the audit report.
WHO IS MANDATORILY SUBJECT TO TAX AUDIT?
A taxpayer is required to have a tax audit carried out if the sales, turnover or gross receipts of business exceed Rs 1 crore and in case of profession exceed Rs 50 lakhs in the financial year. However, a taxpayer may be required to get their accounts audited in certain other circumstances. We have categorised the various circumstances in the tables mentioned below:
Amendments in the above provision:
Finance Act 2020: The threshold limit of Rs 1 crore turnover for a tax audit is proposed to be increased to Rs 5 crore with effect from AY 2020-21 (FY 2019-20) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments.
Finance Act 2021: With effect from 1st April 2021, the threshold limit of Rs 5 crore is increased to Rs 10 crore in case cash transactions do not exceed 5% of the total transactions.
We present the various categories of taxpayers below:
| Category of Person | Threshold |
|---|---|
| Business | |
| Carrying on business (not opting for presumptive taxation scheme*) | Total sales, turnover, or gross receipts exceed Rs.1 crore in the FY (or) If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for tax audit is Rs.10 crores (w.e.f. FY 2020-21) |
| Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB | Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme |
| Carrying on business eligible for presumptive taxation under Section 44AD | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit |
| Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when the presumptive tax scheme was opted | If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for |
| Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD | If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted |
| Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD | If the total sales, turnover, or gross receipts do not exceed Rs 2 crore in the financial year, then such business has the option to declare the profits as per section 44AD on a presumptive basis. |
| Profession | |
| Carrying on profession | Total gross receipts exceed Rs 50 lakh in the FY |
| Carrying on the profession eligible for presumptive taxation under Section 44ADA | 1. Claims profits or gains lower than Rs. 75 Lakhs and declare the profits as per 44ADA under the presumptive taxation scheme 2. Income exceeds the maximum amount not chargeable to income tax |
| Business Loss | |
| In case of loss from carrying on of business and not opting for presumptive taxation scheme | Total sales, turnover, or gross receipts exceed Rs 1 crore |
| If taxpayer’s total income exceeds the basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme) | In case of loss from business when sales, turnover or gross receipts exceed Rs 1 crore, the taxpayer is subject to tax audit under 44AB |
Penalty of non-filing or delay in filing tax audit report
If any taxpayer is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty:
- 0.5% of the total sales, turnover or gross receipts
- Rs 1,50,000
However, if there is a reasonable cause of such failure, no penalty shall be levied under section 271B.
So far, the reasonable causes that are accepted by Tribunals/Courts are:
- Natural Calamities
- Resignation of the Tax Auditor and Consequent Delay
- Labour problems such as strikes, lock-outs for an extended period
- Loss of Accounts because of situations beyond the control of the Assesses
- Physical inability or death of the partner in charge of the accounts
Conclusion: While the prospect of a tax audit may seem daunting, being prepared and knowledgeable about the process can help alleviate stress and ensure a smoother resolution. Remember to maintain accurate records and cooperate with tax authorities to facilitate the audit process.
If you have any questions or concerns about tax audits, don’t hesitate to reach out to our team for assistance.