Tax Audit U/s 44AB of Income Tax Act, 1961

Tax audit was introduced in the year 1984. The main purpose was to ensure the accuracy of books of accounts maintained, which forms the basis of computation of income of the assessee. In tax audit inspection of books of accounts are done by an independent qualified person (in India qualified person is a chartered accountant) for the purpose of establishing the fact that the accounting records present a true and fair view of the entity.

In this article we will be discussing the following key points related to Tax Audit:

What is Tax Audit

A tax audit is an examination of an organization’s tax return to verify that financial information is being reported correctly.  Tax audit is conducted if the annual gross turnover/receipts of the assessee exceeds the specified limit. Tax audit is conducted under Sec 44AB of the Income Tax Act by a Practicing Chartered Accountant.

Section 44AB of the Income Tax Act, 1961, lays down the provisions for an income tax audit of any organisation in India. An external agency (Practicing Chartered Accountant) is to be appointed to assess the ITR Return filed by the company for the financial year and submitting the different tax audit forms with the income tax authorities.

Applicability of Tax Audit

Category of Persons Threshold Limit
Business Sales/Turnover or Gross Receipt Exceeds Rs. 1 Crore
Profession Gross Receipts Exceeds Rs. 50 Lakhs
Business u/s 44AD Sales/Turnover or Gross Receipt Exceeds Rs. 2 Crore. Also, any person enrolled under the presumptive taxation scheme who claims that the profits of the business are lower than the profits calculated in accordance with the presumptive taxation scheme would be required to obtain a tax audit report from CA.
Profession u/s 44ADA Declaring his income at amount less than 50% of his gross receipts and whose income exceeds the basic exemption limit for relevant previous year.

What information/ books of accounts are required for a tax audit ?

Specified books of account as per Rule 6F of Income Tax Act

  • Cash book is a record of day to day cash receipts and payments which shows cash balance at the end of the day or at best at the end of each month and not more than that.
  • A journal is prepared according to the mercantile system of accounting. A journal is basically a log of all day to day transactions. It is a record of the entries, in accounting terms, where we follow the double entry system of accounting i.e. each debit entry has a corresponding credit entry and vice versa.
  • A ledger is used to prepare the financial statements where all entries flow from the journal and has details of all the accounts.
  • Photocopies of any bills or receipts issued by you which are of value of more than Rs 25.
  • Original bills of expenditure incurred by you which are of value of more than Rs 50.

Purpose of Tax Audit

A tax audit of a company’s Income Tax Returns fulfills the following purpose:

  • It is an evaluation of the accuracy of the ITR filed by the company or an individual.
  • It reports the accuracies, errors or irregularities in the tax return filed by a taxpayer.
  • It reports the information relating to the tax depreciation, compliances, etc. as per the tax laws.
  • It reports frauds and malpractices in filing ITR of the taxpayer.

Process Of Tax Audit Report Filing

The tax audit report of a company or other taxpayers can be done in the following way:

  • The tax audit report is prepared by a Chartered Accountants who holds a certificate of practice and is in full-time practice.
  • The tax auditor furnishes the tax audit report in a prescribed form i.e. Form 3CA, 3CB or 3CE.
  • Form 3CA is filed when a person carrying on business or profession is already mandated to get his accounts audited under any other law. This form is applicable for entities like a company where it is also required to be audited under the Companies Act.
  • Form 3CB is filed when a person carrying on business or profession is not necessary to get his accounts audited under any other law. Form 3CB is applicable for entities like individuals where they are not required to be audited under any other act.
  • Form 3CE is furnished where a person is a non-resident or foreign company who receive royalty or technical service fees from the Indian government or any Indian concern.

Due Date For Filing Tax Audit

A company or any other taxpayer that has to compulsorily get its accounts audited must file company tax audit report on or before September 30 of the relevant assessment year.

Penalty for Filing Tax Audit Report

If a taxpayer fails to get their tax audit done on or before September 30, then they will be liable for a penalty of a sum equal to 0.5% of the turnover or the gross receipts subject to a maximum limit of Rs. 150,000.

However, this penalty can be waived off by the tax authorities if there is a reasonable cause for such delay or non-filing. The reasonable cause may be:

  • The Tax Auditor has resigned.
  • Death or physical inability of the partner in charge of the Accounts has occurred.
  • The company is facing labor disputes such as strikes, lock-outs for a long period.
  • The company has faced losses due to fire or theft.
  • There have occurred some natural calamities.

How and when tax audit report has to be furnished?

Tax auditor shall furnish tax audit report online on the income tax website by using his login details in the capacity of ‘chartered accountant’. Taxpayer shall also add his Chartered Accountant details in their login portal. Once audit report is uploaded by tax auditor, same should either be accepted/rejected by taxpayer in their login portal. If the taxpayer rejects it for any reason, all the procedures need to be followed again till the audit report is accepted by the taxpayer.

Tax audit report shall be filed on or before the due date of filing the return of income i.e., 30 November of the subsequent year in case taxpayer has entered into an international transaction and 30 September of the subsequent year in case of other taxpayers.

E-filing of tax audit report

As per notification No. 34 dated 01/05/2013 tax audit report is to be e-filed mandatory from the assessment year 2013-14 onwards . As per Rule 6G, Tax Audit Report is to furnished in Form 3CA or Form 3CB and the particulars are required to be furnished in Form 3CD.

What is the maximum number of tax audits that can be certified by CA

The ICAI has restricted the maximum no. of tax audit assignments by Chartered Accountant under section 44AB to 60. Therefore, if a firm of Chartered Accountants has 4 partners, the maximum no. of Tax Audits that can be taken by that firm would be 240 (60×4).

Amendment by finance Bill, 2020 in tax audit applicability

The finance Bill, 2020 has brought a major amendment to section 44AB of Income Tax Act, 1961.

In Budget 2020, Govt introduces one more slab of turnover of INR 5 Cr for the person, whose ​CASH RECEIPTS & CASH PAYMENTS  does not exceeds 5% of such payments, and straightway exempted such category from Tax Audit.​ Please note that 44AB limit is still 1 crore (except above specified), and 44AD has ​​limit of Rs. 2 crores.

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