Introduction
According to Section 44AB of the Income Tax Act 1961, some individuals must have a qualified accountant review their accounts. Ensuring that high-income or high-turnover taxpayers accurately declare their income to the tax authorities is the aim of Section 44AB.
This article will provide the knowledge necessary to comprehend Section 44AB, regardless of whether you pay income taxes or are just curious about how they operate.
Did you know?
The following individuals must have their accounts audited under section 44AB: A person is considered to be in business if their annual gross sales, turnover, or gross receipts (as applicable) total more than ₹1 crore.
What Is a Tax Audit?
The word "audit" is defined in the dictionary as a check, review, inspection, etc. Numerous types of audits are mandated by numerous laws, including those about corporate law, cost accounting, and other legislation, among others.
The audited accounts must be reported using the necessary forms by a Chartered Accountant. The audit report should contain the findings, observations, and other details.
An audit that conforms with Section 44AB must be reported using Form 3CB, and Form 3CD must be used to submit the audit's specifics. People who must submit tax audit reports in Forms 3CA/3CB and reveal the information in Forms 3CD are those whose accounts must be audited by the IRS or another regulatory body.
When the chartered accountant sends the tax audit report, the taxpayer must authorise the online filings using their e-filing account.
Objectives of Tax Audit
A tax audit is done to achieve the following objectives:
- Please ensure the books of accounts are kept well and are right, and have a tax auditor sign off on them.
- Reporting notes or differences found by the tax auditor after a careful look at the books of account
- To give required information, like tax depreciation, compliance with different parts of the income tax law, etc.
- These things help tax authorities check if a taxpayer's income tax return is right. It also becomes easy to figure out and check total income, claims for deductions, etc.
What Is Section 44AB?
According to Section 44AB of the Income Tax Act 1961, every person who engages in business or profession and whose total sales, turnover, or gross receipts in the prior fiscal year exceeded or exceeded one crore must have his accounts audited by an accountant before the deadline and provide the audit report to the Income Tax Department.
Purpose and Scope
- Accounts for specific people and businesses must be audited according to Section 44AB of the Income Tax Act.
- Individuals, Hindu Undivided Families (HUFs), partnerships, limited liability partnerships (LLPs), and businesses that fulfil the required income and turnover levels are all covered by this rule.
Threshold Limits
- Different threshold restrictions may apply depending on the type of business or profession.
- The firm's threshold limit is Rs. 1 crore in sales or gross receipts.
- The threshold for professionals is Rs—50 lakhs in gross receipts.
- The Income Tax Act may be updated, changing these caps.
Audit Requirements
- A certified chartered accountant must audit taxpayers' accounts under Section 44AB.
- The income tax return must be submitted with the audit report.
Applicability Of Section 44AB
The following circumstances give rise to a Section 44AB income tax audit of a person's accounts:
- Regardless of their turnover from prior fiscal years, persons whose overall income or turnover for the fiscal year exceeds the allowable taxable limit.
- Individuals whose personal income is below the taxation threshold but whose company revenue exceeds the threshold.
- In exceptional circumstances where the individual's income is below the taxable threshold, the Assessing Officer requests an audit of the individual's accounts. Only the Assessing Officer is authorised to take this action by issuing an order under Section 142(2A) of the Income Tax Act.
Individuals Obliged to Conduct Income Tax Audits Under Section 44AB
According to Section 44AB, the following people must have their accounts audited subject to an income tax audit per the regulations prescribed thereunder.
Any Individual or Person Having a Business
Tax audits are required for anybody earning over Rs. 1 crore yearly. Sec 44ab(a) of the income tax act demands this.
- A chartered accountant (CA) audit verifies taxpayers' income and expenses.
- People and companies who claim to have income below the tax-exempt amount but have earnings or gains above the firm's taxable threshold are audited.
- They're subject to a tax audit because their scenario resembles Section 44AD's.
- The Income Tax Department needs the tax audit report by September of the assessment year. This report should include the taxpayer's income, spending, taxable income calculation technique, and other audit-related information.
- Sec 44ab(a) of the income tax act statute requires the tax audit report to communicate specific facts accurately.
Any Individual or Person Exercising a Profession
An income tax audit of their records will be required if the individual or person in issue carrying on a profession earns gross income or receipts from their profession above Rs 25 lakhs during any year before the relevant assessment year under Section 44ab(e) of the income tax act.
Any person or person named in other sections of the Income Tax Act
According to Section 44AB of the Income Tax Act, any person or individual who falls under one of the following categories is also subject to having their accounts audited.
These are the sections:
- 44AD
- 44AE
- 44AF
- 44BB
- 44BBB
What Is the Audit Procedure Under Section 44AB?
Section 44AB's audit process is essential. The taxpayer must hire a qualified chartered accountant (CA) to conduct the audit.
The CA looks at their financial statements, books of accounts, and other pertinent records to determine if the taxpayer complies with tax rules. The auditor verifies that financial records are correct and follow accounting standards.
The audit report details taxpayers' income, expenses, claimed deductions, and tax compliance. The Income Tax Department must receive the report by the deadline, summarising the taxpayer's finances and simplifying tax liability.
Forms Needed to Be Filled Out and Filed Per Section 44AB
The following forms must be used by the person or persons in question when an audit of their finances is conducted under Section 44AB. Rule 6G of the Income Tax Act mainly refers to these forms when discussing income tax audits carried out per Section 44AB.
The following forms must be used by those engaged in business or practice whose accounts must be audited per any applicable legal requirements.
- Form Number 3CA - Audit Form
- Form Number 3CD - Statement containing pertinent information
The following forms must be used for people or individuals whose accounts are not obliged to be audited by the provisions indicated under any law except income tax laws:
- Form Number 3CB - Audit Form
- Form Number 3CD - Statement containing pertinent information
Income Tax Audit for Non-Compliance with Section 44AB
People or individuals obligated to have their accounts audited under section 44AB of the income tax act who fail to do so will be held responsible for paying a fine or fee equal to 0.5% of the total turnover they generate during the relevant financial year. This fine cannot, however, be greater than Rs 1.5 lakhs.
Section 271B penalties are only assessed if the person can have their accounts audited for a reasonable reason.
Section 44AB permits the following income tax audit failure reasons:
- If the licensed chartered accountant or auditor's resignation caused the income tax audit's failure or delay.
- If a chartered accountant or auditor died unexpectedly, the income tax audit would fail or be postponed.
- If the chartered accountant or auditor couldn't access the person's accounts, the income tax audit failed or was postponed—theft, strikes, rioting, etc.
- If an unexpected natural disaster or other calamity caused the income tax audit's failure or delay.
Conclusion
In conclusion, Section 44AB of the Income Tax Act ensures that individuals and businesses pay their taxes. Understanding threshold limits and audit standards helps taxpayers avoid fines and legal complications.
Forms 3CA, 3CB, and 3CD under Section 44AB standardise financial data reporting and accounting principles. Be aware of Income Tax Act changes to ensure compliance.
Consult a professional accountant to navigate Section 44AB's intricacies. Maintaining accurate records, filing audit reports, and paying taxes on time support an open and accountable tax system. Section 44AB guides you through income tax with knowledge, compliance, and assurance.
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