Income tax audit under sections 44AA, 44AB, 44AD, 44AE, and 44ADA

Read to know more about the tax audit and the role it plays in determining your tax liability.
Business Loan
2 min read
05 October 2023

You are required to file income tax every financial year, and so you may look up tips for filing income tax or learn how to calculate taxable income. You may also be required to get a tax audit to ensure that your accounts are up to date. So, let us look at what a tax audit is and its role in determining your tax liability.

What is a tax audit?

To put it simply, a tax audit is a legal way of verifying your income and expenditure based on the claims you make. As per the Indian income tax guidelines, any company or person earning an income as specified by certain sections of the Income Tax Act is eligible to undergo a tax audit.
This means you will first have to understand whether your gross income and expenditure in one financial year qualify you for an audit or not. Then, as per the requirements of the section under which you qualify, you will have to abide by certain protocols, maintain accounts, and have them reviewed by a CA.

Who is liable to get a tax audit done?

  • Ensure compliance with tax laws and regulations.
  • Verify the accuracy of tax returns filed by taxpayers.
  • Detect and prevent tax evasion or fraud.
  • Promote fairness and equity in the tax system.
  • Educate taxpayers about their tax obligations and rights.
  • Identify areas for improvement in tax administration.
  • Enhance voluntary compliance with tax laws.

A tax audit is a process of verifying and inspecting the accounts of a taxpayer to ensure compliance with the provisions of the Income Tax Act, 1961. A tax audit is mandatory for certain categories of taxpayers in India, as per section 44AB of the Act. These include:

  • Business taxpayers whose total sales, turnover, or gross receipts exceed Rs. 1 crore in a financial year, or Rs. 10 crore if cash transactions do not exceed 5% of the total transactions.
  • Professional taxpayers whose gross receipts exceed Rs. 50 lakh in a financial year.
  • Taxpayers who opt for presumptive taxation schemes under section 44AD, 44ADA, or 44AE, but declare profits lower than the prescribed rates or have losses.
  • Taxpayers who are eligible for presumptive taxation under section 44AD, but have opted out of the scheme for 5 consecutive years or more.
  • Co-operative societies whose income exceeds the basic exemption limit.

A tax audit must be conducted by a chartered accountant who is appointed by the taxpayer. The chartered accountant must furnish a report in the prescribed format (form 3CA/3CB and form 3CD) and certify the accuracy and correctness of the accounts and income computation of the taxpayer. The report must be submitted along with the Income Tax Return of the taxpayer before the due date.

Important sections of the Income Tax Act

Here is a look at all you need to know about tax audits and maintenance of books under a few such sections of the Income Tax Act.

Income tax audit under section 44AB

Under section 44 AB of the Income Tax Act, audit of accounts is compulsory if:

  • Your business’s gross turnover exceeds Rs. 1 crore in any preceding year, or if your profession’s gross receipts are more than Rs. 50 lakh in any preceding year.
  • Your business or profession is presumptively covered under sections 44ADA/44AE/44BB/44BBB, and your profit is less than the specified limit.
  • If you have more than one business or profession, the turnover for all need to be summed up to determine if an audit is necessary.

The tax audit date for this section is 30 September of the assessment year. To file the audit report, you will have to use form 3CA and form 3CD, which is a statement acknowledging the particulars you have stated in form 3CA.

Income tax audit under section 44AA

Section 44 AA of the Income Tax Act gives these directives on maintaining your accounts while carrying out a business or profession:

  • If you are a professional practising in a field such as medicine, law, engineering, architecture, accountancy, technical consultancy, interior decoration or film industry-specific work, and your gross income is less than Rs. 1,50,000 in all 3 years preceding the most recent year, then you need to maintain prescribed books such as a cash book, journal, ledger, daily case registers, and a stock register.
  • If you do not have a specified profession and your gross income receipts exceed Rs. 10,00,000 in any of the 3 years preceding the most recent year, you will have to maintain books of accounts. These books need to be the ones that enable the assessing officer to compute your total income.
  • If you are covered under section 44ADA/44AF/44BB/44BBB, and your income is less than the specified limit, then maintaining books to support your claim is optional.

To reduce the burden of taxation on small businesses, the government has offered presumptive taxation as an option. A business is not required to maintain regular accounting books. Instead, it can declare its income at a set rate. You can opt in or out of this scheme if you are eligible for the same. If you opt out of this scheme, you cannot opt in again for at least 5 years.
Presumptive tax was framed using two sections, i.e., section 44AD and section 44AE of the Income Tax Act. If you opt for the presumptive taxation scheme and your business income goes beyond the set limit, you will need to have an audit conducted to confirm the same.

Income tax audit under section 44AD

If your turnover from the previous year does not exceed the Rs. 2 crore limit, then under section 44AD of the Income Tax Act, you can opt for presumptive taxation. However, to do that, you need to be:

  • An Indian resident
  • A resident of a Hindu Undivided Family
  • A resident partnership firm

If you do not fall in one of these 3 categories, you cannot apply for presumptive taxation. It is important to remember that limited liability partnership firms are not eligible to apply for presumptive taxation. Further, you cannot apply for presumptive taxation if you have claimed deductions under section 80HH to 80RRB, 10A, 10B, 10AA, or 10BB of the Income Tax Act.
If you are availing of presumptive taxation, your income will be computed at the presumptive rate of 8% or 6%. You will not be allowed to claim the various allowances and disallowances specified by the law. You will also not be able to claim a separate deduction for depreciation.

If you opt for presumptive taxation and your income exceeds the basic threshold limit, you will need to maintain books. Suppose you declare a profit that is not following section 44AD for 5 consecutive years, adding up to the recent year. In that case, you will not be able to claim the benefits of this provision for 5 subsequent years starting from the year of declaration.

Income tax audit under section 44AE

Section 44AE is only applicable for small businesses that conduct activities like hiring, plying, or leasing goods carriages. Your business must not have more than 10 good carriage vehicles, and you cannot claim deductions for expenditures such as depreciation.

Income tax audit under section 44ADA

The presumptive taxation scheme added a new section, section 44 ADA, with effect from 1 April 2017, to reduce the burden of taxation on smaller businesses. This section abolishes the need to maintain books as tax is calculated as a percentage of total sales.
To be eligible for this scheme, you need to be an Indian resident who is an individual, HUF, or represents a partnership but not a limited liability partnership. Further, your business needs to fall under categories such as:

  1. Engineering
  2. Legal
  3. Architectural
  4. Accountancy
  5. Medical
  6. Technical consultant
  7. Interiors

Other professionals such as authorised representatives, film artists, certain sports-related persons, and company secretaries are also part of this list.
Under section 44ADA of the Income Tax Act, you can opt in and out of the presumptive scheme without the five-year restriction. However, section 44 AA of the Income Tax Act also mentions that you will need to maintain books if you claim a lower profit than that specified under section 44ADA or if your total income exceeds the basic exemption limit.

Forms required to be submitted under Section 44AB

Section 44AB of the Income Tax Act, 1961 mandates tax audit for certain businesses. The following are the forms required to be submitted under Section 44AB:

  1. Form 3CA: For business entities who are required to get their accounts audited under any other law.
  2. Form 3CB: For business entities who are not required to get their accounts audited under any other law.
  3. Form 3CD: For all businesses whose accounts are subject to tax audit.

Filing Of Income Tax Audit Report Under Section 44AB

  • Mandatory for certain taxpayers like businesses and professionals.
  • Required if turnover exceeds specified limits.
  • Due date is generally the same as the income tax return filing due date.
  • Contains details of audited financial statements and other relevant information.
  • Helps ensure accuracy and compliance with tax laws.
  • Failure to file can result in penalties.
  • Provides transparency and accountability in tax reporting.

Non-compliance of income tax audit under Section 44AB

Section 44AB of the Income Tax Act, 1961 mandates tax audit for certain businesses. Non-compliance with this section can result in the following consequences:

  1. A penalty of 0.5% of the total sales, turnover or gross receipts, subject to a maximum of Rs. 1,50,000.
  2. Disallowance of certain expenses and/or failing to take benefits such as carrying forward losses, depreciation, etc.
  3. Imposition of interest on the tax due and not paid along with the penalty.
  4. Non-compliance can also result in scrutiny assessment, prosecution, and imprisonment.

Conclusion

Understanding the various sections of the Income Tax Act and compliance requirements is important for businesses and taxpayers in India. Tax audits, mandated by section 44AB, play a crucial role in ensuring tax compliance and detecting and preventing tax evasion and fraud.

Failure to comply with the audit requirements can lead to penalties, disallowances, interest, and legal action. By staying informed and compliant with the regulations, individuals and businesses can minimise their tax liabilities and avoid unnecessary consequences.

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Frequently asked questions

What is section 44AB of the Income Tax Act?

Section 44AB is a provision that requires certain taxpayers to get their accounts audited by a chartered accountant and furnish a report along with their Income Tax Return.

Who conducts tax audits?

Tax audits are conducted by chartered accountants who are qualified and authorised to do so under the Income Tax Act, 1961.

What is section 44AA and section 44AB?

Section 44AA deals with the maintenance of books of accounts by certain persons carrying on business or profession. Section 44AB deals with the audit of accounts of certain persons carrying on business or profession.

What is the penalty for non-filing or delay in auditing?

The penalty for non-filing or delay in auditing is the same as the penalty for non-compliance with section 44AB, i.e., lower of 0.5% of the total sales, turnover, or gross receipts or Rs. 1,50,000.

What triggers tax audits?

Tax audits are triggered by various conditions such as exceeding the threshold limit of sales, turnover, or gross receipts, claiming lower income than the presumptive income, opting out of the presumptive taxation scheme, etc.

What is the purpose of a tax audit under Section 44AB?

The purpose of a tax audit under Section 44AB is to ensure compliance with the provisions of the Income Tax Act, 1961, and detect and prevent tax evasion and fraud. It helps in assessing the accuracy and correctness of accounts and income computations, minimising tax evasion and maximising tax revenue.

What is the due date for filing the tax audit report under Section 44AB?

The due date for filing the tax audit report under Section 44AB is the same as the due date for filing the Income Tax Return. For most taxpayers, the due date is 31st July of the assessment year. However, for taxpayers who are subject to a tax audit, the due date is 30th September.

Can a taxpayer voluntarily opt for a tax audit under Section 44AB?

Yes, a taxpayer can voluntarily opt for a tax audit under Section 44AB, even if the gross receipts or turnover do not exceed the specified limits. However, once the taxpayer opts for a tax audit voluntarily, he/she is required to comply with all the procedures and requirements of Section 44AB.

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