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

By Mohammed S Chokhawala

Updated on: Nov 22nd, 2024

5 min read

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. In this blog, let us understand the following about Income tax audit:

Meaning of Tax Audit
Objectives of Tax Audit
Turnover Limit for Tax Audit
Tax Audit Requirement under other laws
Applicable forms for furnishing Tax Audit Report
Last Date for Income Tax Audit
How and When to furnish Tax Audit Report
Penalties for Non-filing or delay in filing Tax Audit Report

Latest Update
The income tax department has extended the date for filing audit report for FY 2023-24 by 7 days till October 7, 2024.
In a circular, the department stated that this extension is in response to difficulties taxpayers have encountered with electronic filing on the income tax portal , moving the deadline from September 30 to October 7.

What is a 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. Any company or an individual exceeding certain limits of turnover is liable to get the accounts audited within the Income tax Act, 1961. 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 of certain taxpayers called as ‘Tax Audit’.

What are the 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 Chartered Accountant(tax auditor)
Reporting observations/discrepancies noted by the 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.
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.

These enable tax authorities to verify the correctness of income tax returns filed by the taxpayer. Calculating and verifying total income, claims for deductions, etc., also becomes easier.

What is the Turnover Limit for Income 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 in a financial year or Rs 10 crore in case cash transactions do not exceed 5% of the total transactions (i.e., Cash receipts/payments does not exceed 5% of the total receipts/total payments). In case of profession, a tax audit is mandatory if gross receipts exceeds Rs 50 lakhs in the financial year. However, a taxpayer may be required to get their accounts audited in certain other circumstances also. We have categorized the various circumstances in the tables mentioned below:

Under section 44AB of the Income Tax Act, 1961, Categories of taxpayers who are mandatorily required to conduct tax audit of their records:

Category of person	Limit for Income Tax Audit
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 and opted for the same in previous year	Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme.
Carrying on business eligible for presumptive taxation under Section 44AD and opted for the same in previous year	Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic exemption limit (i.e., Rs. 2.5 lakhs).
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 basic exemption limit in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted.
Profession
Carrying on profession	Total gross receipts exceeds Rs 50 lakh in a year
Carrying on the profession eligible for presumptive taxation under Section 44ADA	1. Claims profits or gains lower than 50% of the total receipts from such profession and 2. Income exceeds the basic exemption limit
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 basic exemption 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 1 crore, the taxpayer is subject to tax audit under 44AB

Cases where the Accounts of a Person are Required to be Audited Under Other Laws

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.
Form No. 3CE is furnished when Non-residents and foreign companies receive royalties or fees for technical services from the government or an Indian concern.

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.

What is the Income Tax Audit Last Date?

The government has extended the last date for completion of income tax audit by 7 days i.e. 7th October 2024 from 30th September 2024 for the FY 2023-24. In case of assessees covered by the provisions of transfer pricing audit, last date for completion of tax audit will be 31st October 2024.

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.

Last date for filing of income tax audit report 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.

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 is the 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 for delay in filing tax audit report are:

Natural Calamities
Resignation of the Tax Auditor and Consequent Delay
Resignation of Accountant/key employees.
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

As per the Income Tax Act,1961, tax audit is mandatory for businesses/professions exceeding a certain limit of turnover to ensure compliance with the law. An understanding of the provisions can be helpful to avoid penalties, disallowances and legal action. By staying updated, business owners and professionals can minimize their tax outgo and avoid complications.

Form 3CD- Explanation and Applicability

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

Books of Accounts and Audit Requirements

Frequently Asked Questions

What is an income tax audit under Section 44AB?

Tax audit under section 44AB is an audit conducted by a chartered accountant to verify the books of accounts and other documents of the assessee. It is applicable to individuals, HUFs, firms, etc. with gross receipts exceeding Rs 1 crore in business or Rs 50 lakhs in profession. The purpose is to authenticate the accounts, verify compliance with income tax provisions, and submit a tax audit report with the Income Tax Return.

What is the last date for the income tax audit?

The last date for filing the income tax audit for the FY 2023-24 has been extended by 7 days i.e. 7th October 2024.

What documents are audited under Section 44AB?

The CA audits the books of accounts like the cash book, ledger, journals, bank statements, stock records, and sales/purchase invoices. Authenticates the state of affairs of business as on the last date of the financial year.

What are the consequences of not getting a tax audit done?

If a tax audit is applicable but not conducted, it attracts penal consequences under Section 271B. The Assessing Officer can levy a penalty of Rs 1.5 lakh or 0.5% of turnover, which is lower. Prosecution can also be initiated. Non-submission of audit reports makes the return defective, and provisions for faulty returns apply.

Can a salaried individual be subject to a tax audit?

Tax audits for salaried persons are generally not subject to a tax audit. However, if one has income from any other source, like professional fees exceeding Rs 50 lakhs or business income exceeding Rs 1 crore, then in that case tax audit may be applicable. Having turnover/gross receipts from business/profession exceeding the limits makes one liable for a tax audit.

What is Form 3CA-3CD?

Form 3CA is the tax audit report filed by the Chartered Accountant. It certifies that the audit was conducted as per the provisions of Section 44AB. Form 3CD is the statement of particulars in a prescribed format that needs to be submitted along with the Return and Form 3CA. It provides details of deductions claimed, compliance, etc.

Who can conduct a tax audit under Section 44AB?

Only a Chartered Accountant holding a valid Certificate of Practice (COP) can conduct a tax audit as per Section 44AB as per Section 288(2).

If a person is required to get its account audited under any other law, then is it compulsory to get the accounts audited under Section 44AB also?

As mentioned above, 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 is the turnover limit for the applicability of income tax audits to businesses?

Turnover limit for applicability of tax audits to businesses is Rs. 1 crore. However, the limit should be increased to Rs. 10 crores if the cash receipts / cash payments does not exceed 5% of the total receipts / total payments.

What is the due date for furnishing of tax audit report in case of applicability of transfer pricing report u/s92E?

In that case, the due date for furnishing tax audit report is 31st October of the Assessment year.

What if I fail to get tax audit report furnished before the due date?

In that case penalty will be imposed at the lower of:

0.5% of total turnover or receipts; or
Rs. 1.5 lakhs.

About the Author

Mohammed S Chokhawala

Content Writer

I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

Quick Summary

Tax audit is an official examination of an organization's accounts carried out by taxpayers to ensure compliance with the Income Tax Act, 1961. It is mandatory for businesses/professions exceeding specific turnover limits. The last date for FY 2023-24 audit report has been extended to October 7, 2024. Failure to conduct tax audit may lead to penalties. Tax audit aims to verify income, deductions, and claims made by the taxpayer.