Section 44AB of Income Tax Act

Section 44AB is a section of the Income Tax Act of 1961 that mandates that taxpayers who are professionals or run businesses must have their accounts audited by a Chartered Accountant in case their annual turnover exceeds a specified limit. The Indian government has always focused on accounting transparency by ensuring that the income earned by businesses and professionals is accounted for annually. This is only possible through an audit process. Hence, the Indian government added a section in the Income Tax Act 1961 that requires businesses and professionals to maintain accounting books and have them audited annually.

If you are a business owner or a professional, you may be liable to have your accounting books audited by a Chartered Accountant, making it vital to understand the provisions of section 44AB of the Income Tax Act.

This article will help you understand everything about section 44AB of the Income Tax Act and how you can adhere to its provisions for better taxation compliance.

What is section 44AB?

Section 44AB of the Income Tax Act details the provisions of tax audits by businesses and professionals for their income earned during a financial year. The main aim of section 44AB is to ensure that the financial records of Indian businesses and professionals are accurate and the funds are not used for illegal activities or tax evasion. Under section 44AB of the Income Tax Act, businesses and professionals are required to maintain extensive books of their accounts and have them audited by a Chartered Accountant every financial year. Once the audit is complete, the business or the professional is also liable to submit the audit report to the government before the due date.

Businesses fall under the provisions of section 44AB of the Income Tax Act if their annual turnover or gross receipts exceeds Rs. 1 Crore. On the other hand, the threshold limit for annual turnover for professionals is Rs. 50 lakh.

What is income tax audit under section 44AB?

Under section 44AB, if a business's turnover or gross receipts are above Rs. 1 Crore and Rs. 50 lakh for a professional, they are liable to have their accounts audited by a Chartered Accountant. Once the threshold is exceeded, the provisions of section 44AB apply, mandating that an audit report be submitted to the Indian government. For the same purpose, the section is also known as income tax audit section 44AB.

Businesses and professionals hire a chartered accountant to review and analyse every financial record to verify compliance and tax laws. Once the accounts are audited, the CA provides the audit report to the business or professional. As per the section, the business or professional is mandated to submit the audit report to the government before the specified date. Non-compliance with submitting the audit report may lead to penalties.

Objectives of tax audit

Here are the objectives of tax audit under section 44AB for businesses and professionals:

1. Verification of compliance

One of the main motives for introducing section 44AB in the Income Tax Act 1961 is to ensure that Indian businesses and professionals comply with taxation laws mentioned in the Income Tax Act. The Chartered Accountant hired for audit ensures verification of compliance by extensively analysing and reviewing the accounting and financial records of the business or the professional. The process ensures adherence to rules, regulations, and tax laws by examining deductions, expenses, and income transactions. The CA addresses any non-compliance issues or discrepancies in the process, if any.

2. Accuracy of financial statements

One of the objectives of income tax audit section 44AB is to determine if the financial statements of the business or the professional are accurate without any discrepancies. When a business or professional hires a CA to start the tax audit, the CA thoroughly evaluates the financial statements and records to ensure that they are recorded with correct dates and amounts. The financial records should match the actual financial transactions for utmost accuracy, which is the objective of the CA within the tax audit process. The accuracy of financial statements is also important for investors, lenders, shareholders, or third parties attached to the business or professional service.

3. Prevention of tax evasion

An important objective of the Indian government mandating a tax audit under section 44AB is to prevent tax evasion through the amount earned by a business or a professional. A tax audit ensures that the business or the professional has adhered to all the tax liabilities under applicable income tax sections and has paid relevant taxes. Since businesses and professionals know that they have to get their accounts audited as per their annual turnover exceeding the threshold limit, they already ensure that they have adhered to all the taxation laws, reducing tax evasion and increasing tax collection for the government.

4. Enhancing transparency

The objectives of a tax audit, such as those mandated under section 44AB, focus on enhancing transparency in financial reporting. By requiring businesses and professionals to have their accounts audited, tax authorities ensure accurate income reporting, correct computation of tax liabilities, compliance with tax laws, and detection of any discrepancies or fraud. This transparency is essential for all the stakeholders involved in the business or profession and for the Indian government.

5. Facilitating effective tax management

Tax authorities get reliable information about the financial statements and tax compliance of a business and professional through the submitted audit report. Using the tax audit report, the Indian government and the tax authorities can easily assess if the tax laws have been adhered to and relevant taxes have been paid by the business or the professional. This helps facilitate effective tax management and adjust or create new and improved tax laws.

6. Risk mitigation for taxpayers

Although most tax audits are considered part of the compliance process, they can also reduce the risk for taxpayers. During an audit process mandated under section 44AB, the CA extensively reviews the financial and accounting records and identifies any potential issues. The identification is followed by rectification, preventing any tax compliance and disputes with the tax authorities. Since issues are rectified before the audit report is submitted, it significantly reduces non-compliance and other regulatory risks for businesses and professionals.

Who is liable to get a tax audit done under section 44AB?

Section 44AB mandates tax audits for the following two types of taxpayers:

1. Businesses

If a business's annual turnover or gross receipts exceed Rs. 1 Crore during a financial year, it must conduct a tax audit and submit the audit report to the government. However, the threshold limit is Rs. 10 Crore in case up to 5% of the total gross receipts and payments are cash transactions.

2. Professionals

Professionals are liable to conduct a tax audit and submit the report to the government if their annual turnover or gross receipts are above Rs. 50 lakh during a financial year.

Here is a detailed table describing the situations that mandate a tax audit under section 44AB of the Income Tax Act:

Category of person	Threshold for tax audit
Businesses not opting for Presumptive Taxation Scheme under section 44AD	Annual turnover and gross receipts exceeding Rs. 1 Core during a financial year
Businesses eligible for presumptive taxation under sections 44AE, 44BB, or 44BBB	Claiming gains or profits below the prescribed limit mentioned under the Presumptive Taxation Scheme
Businesses eligible for presumptive taxation under section 44AD	Declaring income below the prescribed limit listed under the Presumptive Taxation Scheme while having income higher than the basic threshold limit
Businesses not eligible for presumptive taxation under section 44AD due to opting out of the section during the lock-in period	If the income is higher than the maximum amount, which is not subject to tax in the subsequent five years from the financial year in which the opting out from the section happened.
Businesses under the Presumptive Taxation Scheme (section 44AD)	Exemption from a tax audit if the annual turnover or gross receipts is lower than Rs. 2 Crore during the financial year
Professionals not opting for Presumptive Taxation Scheme under section 44AD	Annual turnover or gross receipts exceeding Rs. 50 lakh during a financial year
Professionals opting for Presumptive Taxation Scheme under section 44ADA	If the income is higher than the maximum amount, it is not subject to income tax.Claiming gains or profits below the prescribed limit mentioned under the Presumptive Taxation Scheme
Business loss in the absence of presumptive taxation	Higher than Rs. 1 Crore in total sales, gross receipts, or turnover. Holding a tax audit is mandatory if the total income is higher than the basic threshold limit, but the business has incurred a loss from operations
Business loss under presumptive taxation as per section 44AD	No requirement for a tax audit if the income is below the threshold limit
Business loss (presumptive taxation under section 44AD)	Declaring the taxable income below the prescribed limits mentioned under the Presumptive Taxation Scheme and the income is higher than the threshold limit.

What constitutes a tax audit report?

The auditor (generally CA) provides the audit report either as Form 3CA or Form 3CB:

• The auditor uses Form 3CA if the taxpayer carrying out a business or profession is already required to get their accounts audited under any other Indian law.

• The auditor uses Form 3CB if the taxpayer carrying out a business or profession is not required to get their accounts audited under any other Indian law.

The auditor is required to provide the prescribed particulars through Form 3CD, which forms part of the mandated audit report.

Penalty of non-filing or delay in filing tax audit report

The Indian government can levy monetary penalties or interest if you fall under the provisions of section 44AB and fail to submit the tax audit report before the due date. You can also be disallowed from claiming certain exemptions and deductions while filing taxes. After repeated non-filing or delay, you may face legal action or loss of tax benefits and may be subjected to a renewed tax audit.

Conclusion

Tax audits are crucial for the Indian government and tax authorities to ensure that Indian businesses and professionals have adhered to all the taxation and compliance laws. Section 44AB is that section of the Income Tax Act 1961 that mandates tax audit if a business's total sales, turnover, or gross receipts exceed Rs. 1 Crore (Rs. 10 Crore for up to 5% cash transactions) in a financial year. For professionals, the threshold limit is Rs. 50 lakh annually. If you are a professional or own a business and you exceed these threshold limits, it is compulsory that you get your accounts audited and submit the audit report to the Indian government to avoid various penalties.

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