Tax Audit under section 44AB of IT Act
Table of Content
Important Update on Tax Audit Utility (XML) Schema with regards to Form 3CD and Form 3CEB
As per the Notification issued by the CBDT on 1.10.2020, the Income Tax (22nd Amendment) Rules 2020 have been notified effective from the date of notification i.e. 1st October 2020.
According to the said notification, there were amendments in Income tax Audit Forms 3CD and Form 3CB and it was notified that a new and revised schema / utility will be released but nothing further was notified.
But now, after 21 days of issuing such notification, the Income Tax Department finally notified ‘Form 3CD Schema Changes’ under e-Filing Project and released and updated New Tax Audit utility, Schema Version 1.21. on 22nd October, 2020.
Form 3CD is an Audit report to be filed under section 44AB of the Income-tax Act,1961 in a case where the accounts of the business or profession of a person have been audited under any other law.
Amendments in Form 3CD as introduced on 1.10.2020
Amendments in Form 3CEB as introduced on 1.10.2020
It is important to note that new XML Schema for Income Tax Audit forms for 3CA, 3CD and 3CEB has been updated just 8 days before the due date.
Important Note: The due date for furnishing of various audit reports under the Act including tax audit report and report in respect of international/specified domestic transaction has finally been extended to 31st December, 2020.
What is Tax Audit?
The dictionary meaning of the term “audit” is check, review, inspection, etc. There are various types of audits prescribed under different laws like company law requires a company audit, cost accounting law requires a cost audit, etc. The Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law. The audit conducted by the chartered accountant of the accounts of the taxpayer in pursuance of the requirement of Section 44AB is called tax audit.
What is the Tax audit Section 44AB?
- The audited accounts must be reported by a Chartered Accountant in the prescribed forms. The audit report should be inclusive of the findings, observations etc.
- Audit report in respect of audit conducted under Section 44AB must be prepared in Form No. 3CB and the particulars of the audit must be reported in Form 3CD.
- Section 44AB gives the provisions relating to the class of taxpayers who are required to get their accounts audited by a chartered accountant.
- The audit under section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfillment of other requirements of the Income-tax Law.
- The tax audit limit under section 44AB is INR 1 Crores.
Important: 44AB limit is still 1 Crore (except specified below), and 44AD has limit of Rs. 2 Crores. Also, in Section – 44AD, which deals with Special provision for computing profits and gains of business on presumptive basis.
Applicability under section 44AB
- Any person pursuing business and whose total turnover or gross receipts exceed a sum of 2 Crore rupees in any previous year (However, this provision is not applicable to the persons who opts for presumptive taxation scheme).
- Any person pursuing a profession and whose gross profits exceed fifty Lakh rupees in any previous year.
- A person who is considered eligible for the presumptive taxation scheme, and who claims that the profits and gains for the respective business is lower than what is computed in accordance with the presumptive taxation scheme and his/her income exceeds the amount that is taxable. This provision is applicable to the taxpayers who opt for presumptive taxation scheme other than the one who choose the scheme under Section 44AD and whose sale or turnover is limited to Rs 2 Crores.
Detailed explanation of the applicability of section 44AB as quoted in the Income Tax Act 1961
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) in business for the year exceed or exceeds Rs. 1 Crore. This provision is not applicable to the person who opts for presumptive taxation scheme under section 44AD and his total sales or turnover does not exceed Rs. 2 Crores.
Note that With the effect of the Assessment Year 2020-21, the threshold limit, for a person carrying on business, is increased from Rs. 1 Crore to Rs. 5 Crore in case when cash receipt and payment made during the year does not exceed 5% of total receipt or payment, as the case may be. In other words, more than 95% of business transactions should be done through banking channels.
- A person carrying on profession, if his gross receipts in profession for the year exceed Rs. 50 lakhs.
- An assessee who declare profit for any previous year in accordance with section 44AD and he decreases profit for any of one 5 assessment year relevant to the previous year succeeding such previous year lower than the profit computed as per section 44AD and his income exceeds the amount which is not chargeable to tax.
- If an eligible assessee opts out of the presumptive taxation scheme, within the aforesaid period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter.
- A person who is eligible to opt for the presumptive taxation scheme of section 44ADA but he claims the profits or gains for such a profession to be lower than the profit and gains computed as per the presumptive taxation scheme and his income exceeds the amount which is not chargeable to tax.
- This provision is not applicable to the person who opts for presumptive taxation scheme under section 44AD and his total sales or turnover does not exceed Rs. 2 Crores.
- A person who is eligible to opt for the taxation scheme prescribed under section 44BB that is non-resident taxpayers engaged in the business of providing services or facilities concerning, or supplying plant and machinery on hire basis to be used in exploration of mineral oils or section 44BBB namely foreign companies engaged in the business of civil construction or erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project but he claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections.
Note: Persons like company or co-operative society are required to get their accounts audited under their respective laws. Section 44AB provides that, if a person is required by or under any other law to get his accounts audited, then he need not again get his accounts audited to comply with the requirement of section 44AB. Is such a case, it shall be sufficient if such person gets the accounts of such business or profession audited under such law and obtains the report of the audit as required under such other law and also a report by the chartered accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD.
Suggested Read: FAQs on Unique Document Identification Number (UDIN)
Table showing Applicability of Section 44AB for quick reference
Forms to be filed for Tax audit under section 44AB
These are the forms needed for use by individuals or people when an audit is done on their accounts as per section 44AB.
A) For persons or individuals conducting enterprises where accounts are to be audited as per these provisions
- Form Number 3CA – Audit Form
- Form Number 3CD – Statement showing relevant particulars
B) Individuals with accounts which are not required to be audited as per the provisions stated under any law, with the exception of income tax laws, then the forms mentioned below are applicable
- Form Number 3CB – Audit Form
- Form Number 3CD – Statement showing relevant particulars
Due date for Tax Audit under section 44AB
A person covered by section 44AB should get his accounts audited and should obtain the audit report on or before 30th September of the relevant assessment year, e.g a Tax audit report for the financial year 2019-20 corresponding to the assessment year 2020-21 should be obtained on or before 30th September, 2020. The due date for filing Tax Audit Report for AY 2020-21 has been extended from 30th September, 2020 to 31.10.2020. The same has been further extended till 31.12.2020.
The tax audit report is to be electronically filed by the chartered accountant to the Income-tax Department. After filing of report by the chartered accountant, the taxpayer has to approve the report from his e-fling account with Income-tax Department (i.e. at www.incometaxindiaefiling.gov.in).
Penalty for non filing of Audit Report under Section 44AB
If any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB or furnish such report as required under section 44AB, the Assessing Officer may impose a penalty.
- 0.5% of the total sales, turnover or gross receipts, as the case may be, in business, or of the Gross receipts in profession, in such years or years or,
- Rs. 1,50,000.
Whichever is lower of the above shall be levied as penalty on non filing of audit report under section 44AB.
However, no penalty shall be imposed if a reasonable cause for such failure is proved.
Reasons accepted in case of failure of income tax audit under Section 44AB
- Delay of the income tax audit due to the authorized chartered accountant or auditor resigning from duty.
- Failure of income tax audit due to the unforeseen death of CA or auditor.
- Failure of income tax audit due to the authorized CA or auditor not having access to the individual’s accounts. Including scenarios of theft, strikes etc.
- Delay of income tax audit happens because of natural disaster.
If you are a taxpayer, you have to comply with the provisions of the section 44AB of the income tax act 1961. This section states that all the taxpayers have to get an audit report furnished after conducting an audit for your books of accounts by a practicing chartered accountant.
Suggested Read: Know when to file Company ITR and audit reports.