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

Before understanding what is tax audit, let us understand the term  ‘Audit’. Dictionary meaning of the term ‘Audit’ suggests that it is an official inspection of an organization’s accounts and production of report, typically by an independent body. It is also referred to as a systematic review or assessment of something.

What is a tax audit?

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.

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:

What happens if a person is required to get his accounts audited under any other law for eg. a statutory audit of companies under company law provisions?

In such cases, the taxpayer need not get his accounts audited again for income tax purposes. It is sufficient if accounts are audited under such other law before the due date of filing the return. The taxpayer can furnish this prescribed audit report under Income tax law.

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.

How and when tax audit reports shall be furnished?

The tax auditor shall furnish a tax audit report online by using his login details in the capacity of ‘Chartered Accountant’. Taxpayers shall also add CA details in their login portal.

Once the tax auditor uploads the audit report, the same should either be accepted/rejected by the taxpayer in their login portal. If rejected for any reason, all the procedures need to be followed again till the audit report is accepted by the taxpayer.

You must file the tax audit report on or before the due date of filing the return of income. It is 31st October of the subsequent year in case the taxpayer has entered into an international transaction and 30th September of the subsequent year for other taxpayers. The subsequent year itself is the assessment year. 

What are the objectives of the Income-tax Audit?

The major objectives for conducting tax audit are:

• Proper maintenance of books of the account without fraud activities and certification of the same by an auditor.
• For reporting discrepancies noted by proper examination of the books of accounts.
• For reporting various information such as tax depreciation, compliance with the provision of income tax law, and so on.
• Computation of tax and deductions becomes easy with auditing.
• The major role is to verify the information filed in the income tax return regarding income, tax, and deductions by the taxpayer.

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

Related Articles

Form 3CD- Explanation and Applicability

Comprehensive Analysis of Tax Audit – Forms 3CA, 3CB, 3CD & 3CE  

Books of Accounts and Audit Requirements