Income Tax Audit Under Section 44AB

You may have heard about the “Income tax audit process,” but what is S. 44AB of the Income Tax Act, 1961? If you are not too sure, this article will take you through everything you need to know about S. 44AB.

When you are filing your income tax return, there is a section you need to be mindful of and that is S. 44AB. This section of the Income Tax Act deals with the concept of income tax audits.

To provide context, an audit is a comprehensive review of an organization’s data and operational procedures by an independent body. It may also be termed a systematic analysis or evaluation. We will cover income tax audits in the next section.

On the other hand, a tax audit is a review of a taxpayer’s financial records. This examination is done to ensure the taxpayer has kept their records and books of accounts up to date.

If you are an individual and if your gross receipts, sales, turnover, or the gross amount of your professional fees exceeds ₹ 1 crore in a financial year, or your taxable income exceeds ₹ 50 Lakhs, then you are required to be audited under S. 44AB of the Income Tax Act 1961. If you are a Company or firm and your sales exceed ₹ 1 crore in any financial year, the same applies. However, companies are also required to be audited as per the Companies Act irrespective of the turnover.

Objective and Purpose of Section 44AB

This section aims to ensure that income-tax assessees who are engaged in business or profession make proper and timely disclosures of their income. They can also claim the tax credit to which they are entitled. This is done through audit reports. These reports help the Income Tax Department determine whether an assessee has declared all their income or not under the provisions of the Income-tax Act.

This section aims to detect and prevent tax evasion by business and professional assessees. The Income Tax Department uses the information in the audit reports to identify assessees who have not declared their income and take appropriate action against them.

Key Features of Section 44AB

The key features of S. 44AB are as follows:

1. S. 44AB applies to individuals who are assessable to tax under the head “income from business” or “income from profession.”

2. The assessee must get his accounts audited by a chartered accountant.

3. The accounts must be audited following the Income-tax Act provisions, and the auditor’s report must be filed along with the return of income.

4. If the assessee fails to get his accounts audited and file the auditor’s report along with the return, he will be liable to pay the penalty and interest.

Revisions to the aforementioned clause:

Finance Act 2020: The threshold for a tax audit for entities with an annual turnover of ₹ 1 crore is proposed to be raised to ₹5 crore for the Financial Year 2019-20 onwards, provided the cash receipts in the course of such turnover do not exceed 5% and the aggregate cash payments are also constrained to 5%

Finance Act 2021: Beginning April 1, 2021, the threshold of ₹5 crore shall be raised to ₹10 crore, provided that cash transactions do not account for more than 5% of the total transactions.

Eligibility Criteria as per section 44AB

Certain criteria must be fulfilled to be eligible for the audit under S. 44AB. If you qualify as a presumptive taxpayer, you must meet all the following conditions:

• Your total sales, turnover, or gross receipts in business or profession must not exceed ₹2 crore in the particular financial year.

• If you are pursuing a career and the gross profits in any preceding year are above ₹ 50,00,000

• A chartered accountant must audit the books of accounts of the business or profession in practice, and an income tax audit report under S. 44AB must be furnished by the due date specified.

• You must have obtained a Permanent Account Number (PAN) as per provisions of the Income Tax Act and furnished the same to every person from whom payments are received exceeding the prescribed limit.

• You must deposit all taxes due for each quarter of the financial year before filing a return of income.

• You should file your return of income (ROI) in form ITR-6 if you are eligible and opting to get the audit done under S. 44AB. However, getting your business audited under this section is optional if you come within the presumptive taxation scheme under S. 44AD/44ADA/44AE.

There are certain organisations, like cooperative societies, that do not fall under the compulsion of this section. Other sections take over these entities.

Documents required for filing Tax Returns u/s 44AB?

When filing your Income Tax Return (ITR) under S. 44AB of the Income Tax Act 1961, you must submit certain documents for audit purposes. These include:

· A copy of the balance sheet, profit and loss account, vouchers related to all transactions during the financial year, and other documents such as books of accounts (These docs are not required to be submitted with the income tax authorities. only required by CA for audit).

· You may also have to submit copies of bank statements showing all transactions for the year and all other relevant documents as required.

How to comply with the tax provision of section 44AB?

To comply with S. 44AB of the Income Tax Act, you must keep accurate accounts and proper records of income and expenditure, which should be updated and maintained regularly. Also, it is important to declare your correct income in your tax return.

In addition, you should document all your transactions so they can be presented while filing or when an audit is conducted. You can also retain the supporting records such as printouts, photographs or receipts, along with maintaining a ledger of all the transactions.

Filing returns on time is another important factor that should be followed. It helps maintain a good reputation with the tax authorities and keeps you updated with the latest laws and regulations about taxation. You must also ensure that your deductions are per prescribed limits as prescribed in S. 44AB so that there are no discrepancies or miscalculations in your filed returns.

 Scenarios for exemption from section 44AB

 There are a few scenarios outlined, regarding who can be exempted from S. 44AB.

If you are earning your business income from professions like legal, medical, engineering, architecture, accountancy or running a business with an aggregate turnover of less than ₹ 1 crore, in such cases, you would not need to do an income tax audit.

Businesses with an aggregate turnover of more than ₹ 1 crore are required to get a tax audit done by a qualified chartered accountant but are allowed to claim an exemption if:

• Profits and gains from the current year arise exclusively from one or more of the following sources: technical consultancy service, royalty income arising out of foreign operations, and interest other than interest on securities

• You have not accepted any monetary funds other than those specified in S. 269SS & 269T and have not made any payment over the prescribed limits in S. 40A(3) & 194A

• Your overall income does not exceed the maximum amount not chargeable to tax.

 Section 44AB vs Section 44AD

S. 44AB specifies the circumstances under which an assessee must have his accounts audited. It prohibits a person from having his books of account audited if he chooses a tentative taxation scheme under S. 44AD. This is applicable, provided the business turnover does not exceed ₹ 2 crores.

 Common errors to be avoided while complying with Section 44AB

When complying with S. 44AB, it is important to avoid some common mistakes.

• Keep accurate records of the transactions made throughout the year. This could include everything from invoices to bills related to transactions or expenses. This is a must since discrepancies can be easily sorted out through bookkeeping and audited accounts.

• Ensure that all returns filed under S. 44AB are timely and accurate. Filing errors or missing information in your tax return could lead to fines and penalties and delays in processing the return.

• When it comes to IT assessments and surveys, be sure to provide all the required documents for verification purposes without fail. This includes income proofs, salary slips, bank statements, PAN card details etc. Any non-compliance with this requirement will be considered a serious offence by the Income Tax Department of India and can lead to hefty penalties.

• Finally, it is important to remember that if you are found guilty of violations under S. 44AB, you must pay penalties within 30 days or face criminal prosecution and stringent punishment as prescribed in the law.

If you are still confused about S. 44AB here is a brief recap of the basics.

  • S. 44AB requires business owners to get their books of accounts audited if their income exceeds the threshold limits.
  • This helps the government verify whether your income matches your declared tax. This is also necessary if you want to claim deductions related to business expenses.
  • Hence, S. 44AB requires you to submit a report from a qualified chartered accountant in your ITR.

FAQs

Is it necessary for me to audit every year?

No, one has to undergo a tax audit only when the sales, gross receipts or turnover of the business exceeds ₹1 crore in any financial year. But there are also certain circumstances when you have to undergo a tax audit, like introducing amendments or continued business loss.

What will be the consequence of filing my ITR without getting my tax audit done?

If you are liable to get your tax audit done but fail to do sofiled your ITR without getting your tax audit done, then a penalty under S. 271B can be levied upon you. You would have to pay a penalty of 0.5% of the turnover or gross receipts, subject to a maximum limit of ₹ 1,50,000. And if your due date is over for filing your tax audit, in that case, the same penalty will also be levied.

What are the various forms required for completing the audit process u/s 44AB?

The audit report concerning S. 44AB should be prepared in form no. 3CB and the specifics should be reported in form 3CD.

Do I need to pay additional charges to get my audit done?

The Indian Revenue Service (IRS) does not charge you for the tax audit, but if you are personally hiring a tax lawyer for tax auditing, then they would charge you accordingly.

What is the last date to file my tax audit?

The due date to file your tax audit report under S. 44AB of Income Tax Act, 1961 is 30th September of the assessment year.
These are some basic questions that will help you understand S. 44AB better. One must always comply with the rules and regulations of the Income Tax act 1961 and act accordingly.

Credit Principal at Wint Wealth

Vaibhav is Chartered Accountant by profession, having experience of 4+ years in banking & finance sector.
Since past one year associated with Wint Wealth as Credit Principal. Previously worked with Northern Arc Capital for 2 years in FI-Credit Team and AU Small Finance Bank for 1 year in LAP-Credit Team.

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