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Introduction: 

While filing income tax returns, it is important to note Section 44AB which deals with computation of tax audit under the Income Tax Act.

To provide context, an audit requires an independent team to scrutinize an organization’s data and business processes. Alternatively, it can be called a systematic review or survey.. In contrast, a tax audit involves auditing the taxpayer’s financial records to ensure that up-to-date and accurate records and books of accounts are maintained

In this blog you will get an insight into the computation of income tax governed by Section 44AB of the Income Tax Act. Before delving into section 44AB, let us first apply the concept of “Audit”.

Tax Audit:

There are various types of audits conducted under different laws, including company audits or statutory audits conducted under company law provisions, cost audits, stock audits, and more. Similarly, income tax law also requires a specific audit known as a ‘Tax Audit.’

Objectives Of The Tax Audit:

Tax audits are conducted to achieve the following objectives:

• Ensure the proper maintenance and accuracy of books of accounts, certified by a tax auditor.
• To report prescribed information, such as tax depreciation and compliance with various provisions of income tax law
• Reporting observations or discrepancies noted by the tax auditor following a thorough examination of the books of account
• All of these functions enable tax authorities to verify the income tax returns filed by the taxpayer, making it easier to calculate and verify gross income, deductions, and other items.

Applicability of Section 44AB:

• A tax audit involves examining taxpayers’ books of accounts or gross income to ensure that records are maintained properly. Tax authorities also ensure compliance with specific requirements such as accurate declarations and timely filing of income tax returns (ITRs).
• Section 44AB of the Income Tax Act contains provisions on income tax audit to facilitate maintenance of detailed information regarding income tax deductions for each assessee thereby minimizing the potential for fraudulent practices.
• Taxpayers engaged in businesses earning gross income or annual income exceeding Rs. 2 crore income tax is mandatory for tax audit under Section 44 AB. However, individuals who elect the presumptive taxation  plan are not covered by this requirement.
• Some assessees opt for Section 44AD and 44ADA, but claim that their gross income is less than the amount of profits computed under the presumptive tax, while their income exceeds the taxable limit accordingly The standards of the ICT Act are correct. In such cases, these taxpayers should have their tax returns audited.
• Some taxpayers elect to avail of the provisions under sections 44BB, 44AE and 44BBB, and claim that their gross income is less than the amount of benefit calculated under this section. In such cases, they are obliged to make a tax audit as per Section 44 AB of the Income Tax Act.

Key Features of Section 44AB:

The main features of Section 44AB are as follows.

• Section 44AB applies to individuals assessable to tax under the heads “income from business” or “income from profession.”
• The audit should be done in accordance with the provisions of the Income Tax Act and the auditor’s report should be included with the income tax returns
• The assessee’s accounts must be audited by a chartered accountant.
• Failure of the assessee to audit its accounts and include the auditor’s report in the return will result in payment of penalties and interest.

Who Needs to Have Their Accounts Audited:

• As per Section 44AB, different categories of taxpayers with different tax limits are mandated to go for tax audit.
• A person engaged in business whose total sales, turnover, or gross receipts for the year exceed Rs. 1 crore.
• A person carrying on a business whose profits and gains have been assessed under Section 44AD of the Income Tax Act claims that his income is less than the taxable limit prescribed for business profits and gains. However, their income exceeds the maximum exemption limit for income tax in any previous year.
• A participant in a business, for which profits and gains are treated as personal under Section 44AE, Section 44BB, or Section 44BBB of the Income Tax Act, declares if his income is less than limit taxes prescribed for operating profits and any gains for the previous year are paid .
• A person engaged in a particular profession should be audited if the gross income in that business exceeds Rs 25 lakh in the previous year.
• A person engaged in a particular business which is eligible for a presumptive tax scheme under section 44ADA, claiming that the profits and gains from such business are less than those computed in a notional tax scheme , when their income exceeds the tax-exempt income.

Forms Used To Report The Tax Audit:

A chartered accountant must file the tax audit report on the specific form prescribed by the Tax Department.

Form 3CA:

If a person carries on a trade or business and has already audited his accounts under a law other than the Income Tax Act.

Form 3CB:

If a person is engaged in a business or profession and is not obligated to have their accounts audited under any other law.

Form 3CD:

It is a comprehensive statement of particulars that must be completed along with either of the aforementioned forms.

Due Date To Submit The Tax Audit Report: 

A person covered by Section 44AB must be audited and the audit report must be received before the date on which the tax return is due, ie. on or before 30th September of the relevant assessment year.

A Chartered Accountant has to submit the tax audit report electronically to the Income Tax Department. Thereafter, the taxpayer has to approve the report from his/her e-filing account on the website of the Income Tax Department (i.e. www.incometaxindiaefiling.gov.in).

Consequences of the  non-compliance of section 44 AB:

• If a taxpayer obligated to undergo a tax audit fails to adhere to the provisions of Section 44AB, they may face penalties. The penalty for the  non-compliance is 0.5% of the total sales, turnover, or gross receipts, with a maximum limit of Rs. 1,50,000.
• Under section 44AB, taxpayers who meet certain criteria are required to undergo a tax audit by a chartered accountant. The main objective of a tax audit is to ensure that the taxpayer has maintained true and complete books of accounts and other documents as required by law, thereby verifying the accuracy and completeness of the information furnished in the audit in.
• In addition to the penalties for non-compliance mentioned earlier, the Income Tax Act also provides for other penalties, such as interest on unpaid taxes, penalties for default proper or concealed customs, and penalties for failure to collect or file taxes
• It is important to acknowledge that the provisions of section 44AB are designed to ensure that taxpayers observe proper bookkeeping standards and comply with tax laws. Tax audits can also help identify specific areas for improving a taxpayer’s accounting practices, enabling them to make informed decisions about their business or career.

Documents required:

While filing your Income Tax Return (ITR) under Section 44AB of the Income Tax Act 1961, you need to produce certain documents for auditing 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 are necessary for the audit. However, these documents are not required to be submitted to the income tax authorities; they are only needed by the Chartered Accountant for audit purposes.
• You may also need to include copies of bank statements showing all transactions for the year along with other relevant documents as requested.

Conclusion:

Tax audits are different from other types of audits because they require absolute accuracy down to the last cent. This means that no rounding is allowed, and the auditor or chartered accountant who has signed the report must be absolutely sure that any figures stated on the tax audit forms are correct.