Income Tax Audit under Section 44AB – Criteria, Audit Report, Penalty

A tax audit refers to a technical evaluation in which the financial records, statements, and tax returns of an individual or company are examined and verified by the concerned tax authority to ensure compliance with regulations. It verifies whether the reported income and claimed expenditure of the taxpayer have been declared appropriately and duly followed by tax legislation. Primarily, tax audit aims to reveal discrepancies and under-reporting or fraudulent activity in tax submissions. It encourages and also has a role to play in encouraging voluntary compliance among taxpayers. In many countries like India, some sections of income tax law provide for tax audits when the gross income or turnover of the taxpayers exceeds a certain threshold. Also, a tax audit helps to ascertain correct tax liability and, at the same time, helps the treasury to obtain a very good collection while preventing tax fraud.

Objectives of An Income Tax Audit

Income tax audits constitute an important means by which transparency, accountability, and compliance with tax laws are achieved. They are a rigorous examination of an individual’s or corporation’s finances and their records, including accounts and returns, to prove the authenticity and accuracy of all revenues, deductions, and taxes declared. Beyond compliance checking, income tax auditing assumes even greater importance as an incentive to promote transparency, discourage fraud, prevent accurate assessments of taxes, and thereby improve the entire system’s working of tax. The privilege of income tax audit safeguards the rights of tax administrations and honest taxpayers alike, paving the way towards effective and equitably placed taxing.

1. Validation of Financial Data Accuracy – The primary aim of an income tax audit is to validate all the financial records. It is a very significant aspect because it ensures that all reported income and the expenses claimed therein are correctly reflected and calculated taxes also are accounted for with sufficient documentary evidence.
2. Voluntary Tax Compliance – Audit is also an action that prevents tax evasion; and, at the same time, encourages the voluntary compliance of taxpayers with the tax laws. The mere fact that their tax accounts can be audited will motivate individuals and corporations to file correct returns and maintain good books of account.
3. Encouraging Proper Recordkeeping – Tax audits require taxpayers to keep proper books and records according to income tax laws. This enhances systematic record keeping and reduces chances of inaccurate reporting.
4. Maximising Efficiency in Tax Administration – Audits of income taxes allow taxing authorities to bestow maximum scrutiny where it counts, while guarantees are made regarding the collection of reliable taxes. Audits maximize efficiency by preventing regular inspections of taxpayers and thus putting maximum control over audits. They focus on high-risk or violative cases where checks are undertaken.
5. Detection of Tax Evasion and Fraud – Tax audits have proved effective in discovering financial discrepancies, hidden income, false deductions, and fraudulent actions. They help tax agencies detect and pursue intentional tax evasion.
6. Facilitating Standardisation and Regular Reporting – The audit process encourages consistency in financial reporting in the form of standardised formats and disclosures. This is done to ease comparison of financial information across diverse taxpayers and economic activities.
7. Better Tax Planning and Policy Making – Tax audit information makes possible a better understanding of tax housing practices and compliance trends, as well as the most effective designing of tax policy and reform. Such insights can help tax administrators and policymakers make informed decisions.
8. Building Public Confidence in the Tax System – It creates confidence among the public that the tax system is indeed a fair and just system. The compliant taxpayers are reassured that all will be treated equally, while the deviant ones will be punished.

Criteria And Applicability Of Section 44ab Income Tax Audit

Section 44AB makes it obligatory for taxpayers or persons carrying on a business or profession to have a considerable monetary ceiling on business or professional income to maintain proper records and get tax audits done for the firm so as to comply with the various provisions of the tax law. Section 44AB also serves as a deterrent against taxpayers who would otherwise misreport or underreport their income under the presumptive taxation scheme. It is essential that the taxpayer learn about and comply with this section to avoid penalties and penalty proceedings under income tax law.

The Income Tax Act of 1961 stipulates in Section 44AB provisions for tax audits in India. It provides for the cases and the amounts which these tax audits will be applicable under the income tax regulations. It lays down the specific individuals, professional men, and companies, which will be carrying out the audit pertaining to accounts by a chartered accountant and will be submitting the audit report in prescribed formats.

Applicability of Tax Audit under Section 44AB:

Tax audits will be applicable under the following conditions:

1. Business: Turnover-Based Threshold

• Tax audits are required in the case of a business where the total sales, turnover, or gross receipts exceed ₹1 crore in a financial year.
• However, if cash transactions do not exceed 5% of the total receipts and payments, then the threshold of ₹1 crore will be increased to ₹10 crore, as per the amendment in the Finance Act of 2021.

2. Profession: Gross Receipts Threshold

• An individual is required to have his accounts audited if his gross receipts exceed ₹50 lakhs in a financial year.

3. Presumptive Taxation: Section 44AD

• A tax audit is required under Section 44AB if the taxpayer is an eligible assessee under the presumptive income scheme provided under Section 44AD such that the taxpayer declares less than 8% (or 6% in the case of digital receipts) of turnover/gross receipts and the total income exceeds the basic exemption limit.

4. Presumptive Taxation: Section 44ADA.

• The provisions of a tax audit shall apply if the professional declares gross receipts of less than 50% and exceeds the basic exemption ceiling.

5. Under Sections 44AE, 44BB, or 44BBB.

• If a taxpayer earns profits lower than the levels of presumed income under these sections, a tax audit is required if the total income exceeds the exemption limit.

Audit Report Under Section 44AB

An audit report is a formal evaluation or certification issued by a Chartered Accountant (CA) that comes forth after scrutinising the company’s financial statements as well as accounting records and related documents. The main purpose of an audit report is to affirm that the financial information and claim made by the taxpayer is true, complete, as well as adheres to all relative tax laws and accounting principles.

In simple words, the audit report would ensure integrity and compliance with the tax obligations. It gives a systematic and thorough evaluation of all the financial transactions of the entity, confirming that all tax-related documents are filed correctly. Penalties and legal actions can be avoided only through proper submission of the audit report within the time and format necessary.

In particular, an audit report is known as a document under Section 44AB that pertains to validating reported income, expenses claimed regarding compliance, and others under different provisions of the Income Tax Act 1961.

Contents of Tax Audit Report – Section 44AB

There are two main parts in the audit report, which will be in Forms 3CA/3CB and 3CD.

1. Form 3CA / 3CB:

• Form 3CA will be submitted in case the taxpayer is already required to audit his accounts under other laws, such as the Companies Act 2013 or the Co-operative Societies Act 1912.
• Form 3CB will be used if a taxpayer is being audited solely for income tax purposes and is not covered under any other legal requirement.

The form contains the name of the taxpayer, some details of his/her business or profession, auditor’s evaluation regarding financial records and tax compliance, a declaration on proper maintaining books of accounts and any relevant observations or qualifications.

2. Statement of Particulars – Form 3CD:

Form 3CD comprises a detachable, which acts as the essence for slab formulation in tax auditing reports. It comprises several clauses (currently 44) requiring certain particulars such as:

• Business or professional particulars
• Method of accounting and valuation
• Loans and deposits
• Deductions or disallowances
• TDS/TCS compliance status
• Information about depreciation, capital assets, and inventories
• Payments to specified persons (u/s 40A(2)(b))
• GST, turnover, profit reconciliation.

Filing Procedure for Audit Report

1. A Chartered Accountant will file an audit report by electronic means via e-filing under Income Tax.
2. The auditor will submit either Form 3CA or Form 3CB.
3. Complete Form 3CD (Annexure) and upload it.
4. Finally, accept the audit report in your income tax account to finalize the filing process.

This will, however, assist the tax authority on the examined income as to what one would have been taxable and its inconsistencies.

Audit Report Filing Deadlines

1. Most taxpayers must submit the Tax Audit Report in Forms 3CA/3CB & 3CD latest by September 30th of the assessment year.
2. If an audit becomes applicable, ITR must be filed by October 31st of the assessment year, barring extensions permitted by the CBDT.

The government can always change these deadlines from time to time. Thus, it is better to refer to the latest circulars and notifications issued by CBDT.

Penalties For Delayed Or Late Filing And Non-Compliance Of Section 44AB

Non-compliance with Section 44AB can lead to financial penalties, loss of tax advantage, and possibly other legal effects. In genuine delays, proper documentation is the harbinger to reduce penalties under Section 271B.

If a taxpayer is liable for audit under Section 44AB and the audit is either not done or is not submitted by the prescribed date, the penalties in Section 271B of the Income Tax Act will apply.

Section 271B outlines penalties enforceable under the Act. They have been given to the Assessing Officer to impose a penalty for failure to abide by the conditions, which shall amount to 0.5 percent of total turnover or gross receipts subject to a maximum of ₹1,50,000.

Example: The failure of a taxpayer having a turnover of ₹3 crores to submit the audit report will incur a penalty calculated like this – 0.5% of Rs. 3 crores, that is, ₹1.5 lakh. The penalty shall be subject to the final ceiling limit: one lakh fifty thousand only.

However, there are instances when this penalty might be exempted. Penalties under Section 271B are not levied against the taxpayer if the taxpayer presents indisputable evidence confirming that he had a reasonable cause for the non-compliance. Some examples of reasonable grounds are:

1. Severe illness of taxpayer or auditor
2. Natural calamities
3. Loss of data due to fire, theft, or system failure
4. Delay in appointing an auditor.
5. Technical issues with the filing portal, or
6. Any other extremely severe difficulty

Thus the taxpayer can file an explanation, which may be granted under the discretion of the Assessing Officer.

Consequence of delay or non-filing

Penalties in cash, forfeitures of deductions or exemptions, increased attention by the Income Tax Department, late filing of Income Tax Return (ITR), and interest under Sections 234A, 234B, and 234C will take effect if failing to file a tax audit report in due time. It can also lead to disqualification from particular presumptive schemes or benefits under income tax legislation.

Conclusion

Generally, Section 44AB seeks to enhance transparency, accountability, and accuracy towards accounting in the interest of businesses/professionals. It imposes tax audits on entities that exceed certain turnover or gross receipt thresholds and thereby gives strength to taxpayers and tax authorities to maintain financial discipline in tax aspects. Timely and correct audit reporting is helpful in genuine assessments of tax in that it helps taxpayers defend themselves against penalties, secrecy, and legal actions. It also encourages voluntary compliance and acts as a deterrent to tax evasion and otherwise unlawful activities. Thereby, the applicability of the section needs to be understood, audit requirements implemented, and audit reports filed within the prescribed timelines to further effective tax administration and good financial governance.