Income Tax Audit under Section 44AB, Criteria, Audit Report, Penalty

Income Tax Audit under Section 44AB: Section 44AB of the Income Tax Act, 1961, mandates an audit for certain taxpayers, like is mandatory for everyone. This tax provision is important in ensuring transparency and compliance with the laws, especially for businesses and professionals. 

Understanding this tax criterion, various clauses, audit report requirements, and penalties associated with Section 44AB are important for individuals and groups liable for the audit to work smoothly. Also, these are the things that help the auditors to do their work efficiently and correctly.

What is Income Tax Audit under Section 44AB?

Section 44AB of the Income Tax Act, 1961, requires a taxpayer who is a business or professional to undergo a tax audit under specific conditions so that he/she can work in a proper order. This audit makes sure that the taxpayer's financial records and statements follow with the provisions of the Income Tax Act. 

It is very important for businesses or professionals whose turnover or gross receipts exceed the given limits. Basically, this section's key objective is to bring about accuracy in accounting and transparency in tax reporting, which is much needed these days. 

Also, having the proper knowledge of these things is important, not only having degree is not enough. The Tax audits help both the taxpayer and the Income Tax Department verify that taxes are correctly calculated and paid.

Section 44AB Audit Criteria

Section 44AB includes various sub-sections that determine the applicability of tax audits based on the type of taxpayer and the turnover or gross receipts. Below are the key criteria:

1. Section 44AB (a) – For Business Entities

Tax audit is mandatory under Section 44AB if the gross receipts or turnover of the business exceeds ₹1 crore in a financial year. Basically, the limit is enhanced to ₹10 crore for businesses opting for the presumptive taxation scheme under Section 44AD.

2. Section 44AB (b) – For Profession

For professionals (such as doctors, lawyers, etc.), a tax audit is required if the gross receipts exceed ₹50 lakh in a financial year.

3. Section 44AB (c) – For Specified Taxpayers

Certain specified taxpayers, such as those who claim deductions under Section 80-IB or Section 80-IC, may also fall under this provision for an audit if their gross receipts surpass the stipulated thresholds.

4. Section 44AB (d) – For Other Cases

Section 44AB also applies to businesses or professionals if they claim deductions under sections like 10AA (SEZ), 80-IA, or 80-I. The specific thresholds depend on the nature of the deduction claimed.

5. Clause (e) – For Taxpayers Under the Presumptive Taxation Scheme

Taxpayers who have selected the presumptive taxation scheme under Section 44AD, 44ADA, or 44AE may also be required to undergo a tax audit under Section 44AB if they exceed certain turnover limits.

Provisions to Section 44AB

Section 44AB includes various provisos that further define when and how audits are applicable.

1. First Proviso to Section 44AB

The first proviso specifies that taxpayers who have claimed deductions under Section 35AD or under any other section related to capital expenditure are subject to audit under Section 44AB, even if their turnover is below the prescribed threshold.

2. Second Proviso to Section 44AB

It can be said that this proviso grants an exemption from tax audit under certain conditions for small businesses under the presumptive taxation scheme if the income is below ₹2.5 lakh.

3. Third Proviso to Section 44AB

Like, the third proviso to Section 44AB (also known as Section 44AB (e)) gives an exemption to taxpayers opting for the Income Tax Department’s scheme for small businesses (including MSMEs). 

This exemption applies if their total turnover does not exceed ₹2 crore in a given financial year.

Who is Liable for Audit under Section 44AB?

Taxpayers are liable for a tax audit under Section 44AB based on the following:

1. Business Entities:
   For example, If the turnover or gross receipts exceed ₹1 crore for businesses not under the presumptive taxation scheme, a tax audit is mandatory.

2. Professionals:
   Like, for professionals (such as doctors, chartered accountants, etc.), the threshold for mandatory audit is ₹50 lakh.

3. Presumptive Taxation Scheme Taxpayers:
   For taxpayers opting for the presumptive taxation scheme under Section 44AD, 44ADA, or 44AE, a tax audit is required if the turnover crosses the prescribed limits of ₹2 crore (in case of business).

4. Special Case of Deduction Claiming:
   Taxpayers who have claimed deductions under sections like 80-IB, 80-IC, or 10AA, even if the turnover is below the prescribed threshold, must undergo an audit.

Audited Balance Sheet Requirement

Taxpayers subject to the audit under Section 44AB must submit an audited balance sheet along with the Income Tax Return (ITR). The audited balance sheet must include:

• Assets and Liabilities:
  All financial assets, liabilities, and capital accounts must be listed clearly.

• Profit and Loss Account:
  The statement should reflect all sources of income and expenses incurred by the taxpayer.

• Additional Schedules:
  Specific schedules required for different taxpayers, like details of deductions, income, and expenses, need to be provided.

The tax audit report, along with the balance sheet, is to be filed before the due date for filing the Income Tax Return.

Audit Report under Section 44AB

Check below for the details of the audit report under Section 44AB. The report, prepared by a Chartered Accountant, must include the auditor's opinion, reconciliation of income, and disclosures related to loans, deductions, and exemptions. It must be filed along with the Income Tax Return for compliance:

What Should an Audit Report Include?

The audit report, required under Section 44AB, must be certified by a qualified Chartered Accountant (CA). The report should contain the following:

1. Auditor's Opinion:
   The auditor must provide an opinion on whether the financial statements reflect a true and fair view.

2. Reconciliation Statement:
   A detailed reconciliation of the income declared in the return of income with the books of accounts maintained.

3. Additional Disclosures:

• Disclosure of loans or advances given and received.

• A statement of the taxpayer’s tax liabilities, including the provisions for taxes paid in advance. And it is mandatory for everyone.

4. Section-Specific Information:
   Additional information specific to the taxpayer's claims, deductions, and exemptions under various sections.

Penalty for Non-Compliance with Section 44AB

Failure to comply with the tax audit requirements by individuals or companies under Section 44AB can result in penalties and legal consequences:

1. Penalty for Not Getting the Audit Done

If a taxpayer fails to get the audit done under Section 44AB, they are liable to pay a penalty under Section 271B, and this applies to everyone. For instance, the penalty is a sum equal to 0.5% of the total turnover or gross receipts, subject to a maximum penalty of ₹1.5 lakh. So it is always advised that companies complete their audits on time.

2. Failure to File Audit Report

The audit report must be filed along with the Income Tax Return (ITR). For example, If the audit report is not filed by the due date, the taxpayer may face penalties, i.e, whether companies or individuals. A penalty under Section 234F may be levied for the delayed filing of the ITR.

Section 44AB Audit Limits

Check below for the Section 44AB audit limits, which specify the turnover or gross receipts thresholds for businesses and professionals.

 If these limits are exceeded, taxpayers must undergo a tax audit to make sure compliance with the Income Tax Act and avoid penalties. Refer to the table for detailed limits of the taxes.