Tax Audit Under Section 44AB of Income Tax Act 1961

Income Tax makes it compulsory for organisations to audit their books in certain cases before filing income tax returns, which comes under the purview of Tax audit. It is compulsory for certain people to have an income tax audit, and as per the law, these are the categories that must participate in a tax audit: Any business where the total sales, turnover, or receipts are in excess of Rs. 1 crore in a year.

A tax audit shall be conducted as per these provisions by a Chartered Accountant who ensures that the taxpayers have maintained proper books of account and complied with the provisions of the Income Tax Act. The CA is to give the report of the tax audit in Form 3CA / 3CB and Form 3CD.

If a Tax Audit is done on a Non-resident or foreign company, the report is given in Form 3CE. If any charitable or religious trust is being audited, the report of such audit is submitted in Form 10B. As per section 44AB, the following persons are compulsorily required to get their accounts audited: A person carrying on business if his total sales, turnover, or gross receipts (as the case may be) for the year exceed Rs. 1 crore.

Objectives of Tax Audit

To do a tax audit is mandated as per the provisions of the Income Tax Act. The Chartered Accountant performing the tax audit is required to make the submission of all its findings and observations in the form of an audit report. The audit report is given in the format available in the form numbers 3CA/3CB and 3CD.

A tax audit is performed to achieve the following objectives:

• Ensure complete maintenance and correctness of the book of accounts and certification of the same by a tax auditor.
• Reporting observations/ discrepancies that are noted by tax auditors after a methodical analysis of the book of accounts.
• Reporting prescribed information like tax depreciation, compliance with different provisions of income tax law, etc.

All of these enable the tax audit in India authorities to verify the accuracy of income tax returns that are filed by the taxpayer. Verification and calculation of total income, claim for deductions, etc also becomes quite easier.

Applicability of Section 44AB

The following taxpayers are mandatorily applicable to perform a Tax Audit with the assistance of a Chartered Accountant:

For Business or Profession

• Section 44AB(a) – A person or an individual carrying business if the annual gross turnover in business for the year exceeds Rs. 1 crore.
  • Amendment:

W.e.f AY 2020-21, the limit has been raised to 5 crores if, during the previous year: (a) the aggregate of all amounts received in cash, including the amount received for sales, does not exceed 5% of the total receipts. (b) the aggregate of all payments made in cash, including expenditure, does not exceed 5% of the total payments,

• Section 44AB(b) – A person carrying on a profession, if his / her gross receipts in profession exceed Rs. 50 lakhs during the previous year relevant to the assessment year
• Section 44AB(C) – A person carrying on the business/profession eligible for presumptive taxation u/s 44AE,44BB,44BBB and claims profits or gains lower than the prescribed limit under the presumptive taxation scheme and has income exceeding the maximum amount not chargeable to tax.

(Note: Section 44AE – Plying, hiring or leasing goods carriages, having 10 vehicles or less: (a) For heavy vehicles, Rs. 10,000 per ton of gross vehicle weight or unlade weight per month (b) For other than heavy vehicles, Rs. 7,500 per vehicle per month (c) Amount actually earned from such vehicles, if the amount is higher  Section 44BB – A non-resident, providing services or facilities (including supplying plant and machinery on hire) for prospecting, or extraction or production of mineral oils – 10% of aggregate amount as defined. Section 44BBB – foreign company, civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government on this behalf, a sum equal to 10% of the amount paid or payable)

• Section 44AB(d) -If the Person is engaged in the profession, with deemed profits and gains and when the actual taxable income is lower than such profits and gains so deemed and such actual taxable income exceeds the maximum amount not chargeable to tax. Deemed income shall be computed as per Section 44ADA – A resident in India who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to 50%
• Section 44AB(e) – If the Person is Carrying on business, with deemed profits and gains and when the actual taxable income is lower than such profits and gains so deemed and such actual taxable income exceeds the maximum amount not chargeable to tax. Deemed income shall be computed as per Section 44AD – A resident in India, individual or partnership firm, who is engaged in a business, profit or gains as deemed as under: (a) 8% of the gross receipts from business [OR] (b) 6% of the gross receipts, if the receipt is received through an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed [UPI Payments]

Tax audit to be conducted by:

Tax Audits can be conducted by Chartered Accountants who hold a certificate of practice and is in full-time practice. The Tax auditor (CA) carries out a systematic examination of books of account as per the prescribed Applicability of Section 44AB

Contents of Tax Audit Report:

The tax auditor shall furnish the report in a prescribed form, which could be Form 3CA, 3CB or 3CE, where:

• Form 3CA is furnished when a person carrying on business or profession is already mandated to get his accounts audited under any other law. This will be applicable for entities like a company where it is also required to be audited under the Companies Act.
• Form 3CB is furnished when a person carrying on business or profession is not necessary to get his accounts audited under any other law. This will be applicable for entities like individuals where they are not required to be audited under any other act.
• Form 3CE is furnished where a person is a non-resident or foreign company who receive royalty or technical service fees from the Indian government or any Indian concern.
• Also, in case of either of the above-mentioned audit reports, tax auditor must furnish the prescribed particulars in Form 3CD, which forms part of an audit report.

The due date for Tax Audit

Any person covered u/s 44AB should get the accounts audited before the due date of filing the return of income. The due is on or before 30th September of the relevant assessment year.

Penalty u/s 44AB

If a taxpayer falling u/s 44AB fails to get their audit done on or before the due date specified, then they will be liable for a penalty of which may be a sum equal to 0.5% of the turnover or the gross receipts subject to a maximum of Rs. 150,000.

Prescribed Audit Forms

The audit report has to be furnished in  the following forms Form 3CA

In respect of a taxpayer carrying on a business or profession who is already mandated to get his accounts audited under any law (i.e. law other than income tax law).

A company is required to get its accounts audited compulsorily under the Companies Act 2013. So, it will furnish Form 3CA, along with Form 3CD

Contents of Form 3CA

1. Details of the assessee, such as name, address, PAN, etc.

2. Date of Audit Report,
3. Annexure (Audited Balance Sheet, Profit and loss Account, Form 3CD),
4. A declaration by the auditor that all the details filled in Form No. 3CA and the annexure attached are true to his knowledge,
5. Audit observations and qualifications found in form 3CD,
6. The auditor’s name, address, membership number, and FRN number are listed below. And signature with seal/stamp.

Form 3CB and its applicability.

The tax audit limit for business and profession of the accounts under section 44AB, in case of a person who carries on business or profession and who is not required under any other law to get his accounts audited, shall file such audit report in Form 3CB (i.e. Law other than Income Tax Law)

In Form No. 3CB, the chartered accountant gives a declaration that he has examined the financial statement of the assessee for the period under consideration and forms an opinion on such audited financial statements that these statements reflect the true and fair view and reports the observations/comments/ discrepancies/ inconsistencies figured out, if any.

Details to be furnished in form 3CB:-

1. Details of the assessee, i.e. Name, address, PAN;
2. Date of audit report;
3. Annexure (Balance Sheet, Profit and Loss Account, Form 3CD)
4. A declaration by the auditor that they have obtained all the information required for the Audit;
5. Reporting of detailed observations discrepancies mentioned in form 3CD;
6. A declaration that the accounts are maintained at the branch and head office;
7. A declaration that the details filled in by the auditor are true to his knowledge;
8. The auditor’s name, address, membership number, and FRN number are listed below. And signature with seal/stamp

Form 3CD and its applicability

Form No. 3CD is the format in which the statement of particulars of tax audit is required to be furnished. This form has a total of 44 clauses where the auditor has to report on various matters contained therein. (2 clauses are kept in abeyance till 31 March 2021)

The assessee is responsible for the preparation of the statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961 – Form No. 3CD