A tax audit is a formal check initiated by a tax official at the taxpayer’s or firm’s premises, and it involves piling up income, deductions and taxes against the book of accounts in terms of financial instruments. Its objective is the verification of the accuracy of claims, income, deductions and tax liabilities against obligations and their pursuance according to tax laws. Following that, it pricks out correctly vouched claims and helps nab discrepancies, understatement or fraudulent activities. While audits may be random or surface through computerised processes, audits are typically triggered by some strained financial behaviours such as improper tax filing or unusually high incidences of deductions. Generally, income tax audits are performed using many methods that tax authorities under the Income Tax Department of India implement in an effort to ensure transparency and accountability. This is the middle of correspondence audit (by mail), office audit (conducted on premises) and field audit (conducted at the establishment premises). A tax audit plays a significant role in the economy in introducing true amounts as well as timely payments of taxes to an extension of proper reportage, which in turn serves the functions where it unmasks mistakes and usually willful nonpayment of taxes while enhancing the overall revenues of the government.
Criteria for Income Tax Audit Under Section 44AB
The Income Tax Audit under Section 44AB of the Income Tax Act, 1961 is a mandatory check-up by a taxpayer in respect of his books of accounts to verify the correctness of the return of income and fulfillment of other formality requirements of tax laws. There is a mandatory tax audit required for all people who fall into the tax audit brackets. The auditor is a Chartered Accountant, and such audit is documented by way of filing Forms 3CD/3CA or 3CB. This is in the name of transparency, as it discourages tax theft and allows people to fairly report their taxes.
Section 44AB of the Income Tax Act of 1961 provides the conditions under which an income tax audit is required, depending upon the nature of business or profession of the taxpayer and the amount of income or revenue earned. These provisions are aimed at checking tax compliance and preventing any kind of manipulation of financial statements.
- For Businesses: In case the total turnover or the gross receipts exceed ₹1 crore during a financial year, for businesses, it is mandatory to undergo a tax audit. Where the cash transactions of the taxpayer, being less than 5% of the overall transactions, undertake both receipt and payments, the threshold limit for audit turnovers increases to ₹10 crores.
- Professionals: The accounts of professionals whose gross receipts exceed ₹50 lakhs in a financial year are to be audited.
- Presumptive Taxation Scheme: Taxpayers who opt for presumptive taxation under Sections 44AD, 44ADA, or 44AE are liable for tax audit if their income is below the prescribed rate and exceeds the basic exemption limit.
- Business Loss: Tax audit is mandated for a taxpayer reporting a business loss without availing the presumptive scheme, if the turnover exceeds ₹1 crore. Moreover, businesses falling under Section 44AD that report loss but have income above the basic exemption limit also need a tax audit.
Procedure of Income Tax Audit Under Section 44AB
Section 44AB of the Income Tax Act of 1961 describes an income tax audit that is intended to scrutinise all financial records and ensure there are no breaches of tax norms. Such audits shall be made by a Chartered Accountant in the appropriate form. This strict approach ensures that the accounting records of the taxpayer are accurate and within the tax law; hence, this increases transparency and reduces the chance of penalty.
1. Appointment of Chartered Accountant (CA): The taxpayer is required to engage a Chartered Accountant to perform the tax audit. The accountant will scrutinize the accounting records, financial statements, and supporting documentation.
2. Records of financial accounts: Taxpayers must keep up-to-date and detailed financial accounts, such as a cash book and ledger, purchase and sales registers, bank statements and reconciliations, invoices and bills, expense accounts and loan and investment details.
3. Verification by the auditor: The Chartered Accountant verifies and checks the financial statements against the Income Tax Act and records in the balance sheet. It checks such elements as income, expenditure, assets, liabilities, categorisation of all elements of transactions and compliance with accounting principles and provisions of tax laws. It also checks, among other things, the deductions, exemptions, disallowances and TDS.
4. Filing the Audit Report: The CA, after verification, should make and submit the Tax Audit Report under the following forms:
(i) For taxpayers already obliged to get accounts audited by any other statute, the use of Form 3CA will be mandatory.
(ii) In cases where there is no obligation imposed on a taxpayer to have the accounts audited by any other law, then such a report needs to be made by using Form 3CB.
(iii) The detailed statement of particulars for 41 clauses is covered by Form 3CD, which incorporates turnover, depreciation, related party transactions, TDS compliance and other statutory compliance.
5. Furnishing of Audit Report: The CA should upload the audit report on the Income Tax e-filing portal by using his DSC. After uploading, the taxpayer should check in and accept the audit report by the site. Submit the report by the due date which usually falls on 30th September of the Assessment Year or October 31st if falling under transfer pricing regulations.
6. Post-Audit Compliance: After submitting the audit report, the taxpayer has to file the income tax return in a timely, in regard to audited data, keep proper paper records that can help one in time to come and lastly, implement corrective actions wherever auditors notice shortcomings.
Due Dates For Income Tax Audit Under Section 44AB
The Income Tax Act of 1961 provides time limits for filing an income tax audit report under Section 44AB, which varies on taxpayers’ categories and also depends upon certain rules like transfer pricing. There would be an additional penalty if the tax audit report is not filed within the due dates. After the tax audit report is submitted, an income tax return is to be filed. The customary deadline for submitting ITRs for audited taxpayers is October 31st of the relevant assessment year, unless the government grants an extension of the deadline.
- Due Date for Non-Transfer Pricing Cases: Taxpayers who are not involved in foreign or specified domestic transactions are expected to submit the Tax Audit Report in Forms 3CA/3CB and 3CD on or before September 30th of the relevant Assessment Year (AY). It falls on 30th September 2024 for AY 2023-24
- The due date for International and Specified Domestic Transactions Transfer Pricing Cases: This benefit is conferred on taxpayers liable for foreign or specified domestic transactions under Section 92E where the due date for furnishing a report and return of Transfer Pricing is on 31st October of the relevant Assessment Year (AY). Therefore, for FY 2023-24, this date is on 31st October, 2024
- Extension of the Due Date by the Government: The CBDT has the discretion to allow the extension of time in case of unforeseen circumstances like technical failure or natural calamities. Taxpayers are cautioned to be updated on any shift in deadlines by official announcements.
Consequences of Non-Compliance of Section 44AB
Failure to meet the criteria stipulated in Section 44AB of the Income Tax Act, 1961 would have grave consequences. The act would penalise and inflict strict penalties on taxpaying citizens in return for timely and accurate reporting of tax audit reports. Yet another failure would again deter the taxpayer’s financial situation, credibility and relationships with business. Companies may not be able to obtain loans, government contracts, or tenders that require proof of tax compliance. But if a taxpayer gives a valid reason for non-compliance, such as natural calamities, natural illness of the auditor, or technical issues, Section 273 may waive the penalty under Section 271B. Section 44AB requires taxpayers to observe the conditions of non-compliance, which, accordingly, eases tax return filing, is less likely to attract penalties, and protects the taxpayer from possible legal and financial consequences.
In cases where a taxpayer liable to get his accounts audited fails to get his accounts audited or does not furnish the audit report within the due date, a penalty under Section 271B can be levied. The penalty is either 0.5% of the total turnover or gross receipts of the business or profession for the relevant financial year or ₹1,50,000 whichever is higher. For example, if a company with a turnover of ₹5 crores does not comply, the penalty would be capped at ₹1,50,000.
Failure to submit the audit report may result in a delay in the submission of the ITR, and there may be interest charges under Sections 234A (Interest for late filing of the ITR) and 234B and 234C (Interest for failure to pay advance tax).
Non-filing would give rise to an inference that may lead to high chances of strict scrutiny by the Income Tax Department. The assessment may even involve investigation and audit, besides allowing certain expenditures. This might further increase tax liabilities.
If it is an act of intentional avoidance or even a fraudulent practice, the Income Tax Department might consider prosecution under some of the provisions, but it rarely happens when one does not submit an audit report.
Conclusion
Income Tax Audit, as stipulated in Section 44AB of the Income Tax Act, 1961, is one of the mandatory compliance measures meant to usher in transparency and accuracy in reporting. This is crucial in preventing tax evasion, documentation of financial activities and ensuring that the tax laws are followed.
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