Income Tax Audit: Due Date 30th Sept 2024
Income tax audits are a crucial aspect of ensuring compliance with tax laws in India. Under Section 44AB of the Income Tax Act, certain taxpayers are required to undergo a tax audit based on their turnover limit. Failure to conduct a tax audit when required can lead to penalties under Section 271B. The penalty can be up to ₹1.5 lakh or 0.5% of the turnover, whichever is lower. Therefore, it is crucial to adhere to the Income Tax Audit regulations. The deadline for filing the Income Tax Audit Report is October 31, 2024. If you have any questions regarding the tax audit requirements, please consult our Chartered Accountant (CA).
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Income Tax Audit under Section 44AB
Section 44AB of the Income Tax Act, 1961, outlines the regulations for conducting income tax audits in India. This provision is crucial for ensuring that taxpayers maintain accurate financial records and comply with tax laws. Here’s a comprehensive overview of the key aspects of income tax audits under Section 44AB.
What is Income Tax Audit Under Section 44AB?
An income tax audit under Section 44AB is a mandatory examination of the accounts of individuals, Hindu Undivided Families (HUFs), firms, and other entities whose total turnover or gross receipts exceed specified limits. As of the latest updates, the threshold is set at ₹1 crore for businesses and ₹50 lakhs for professionals. The audit must be conducted by a qualified Chartered Accountant (CA), who assesses the accuracy of the financial statements and ensures compliance with the Income Tax Act.
Objective of Income Tax Audit
The primary objectives of a tax audit under Section 44AB include:
- Verification of Compliance: Ensuring that the taxpayer adheres to the provisions of the Income Tax Act.
- Accuracy of Financial Reporting: Authenticating the financial records, including income, deductions, and taxes, to promote transparency and integrity in the tax system.
- Deterrence Against Fraud: Reducing the chances of tax evasion and fraudulent practices by imposing strict audit requirements.
Turnover Limit for Income Tax Audit
The turnover limit for tax audits in India is primarily governed by Section 44AB of the Income Tax Act, which specifies the thresholds that determine when a taxpayer must undergo a tax audit. Here’s a detailed overview of the turnover limits applicable for different categories of taxpayers.
1. Businesses Not Opting for Presumptive Taxation:
- The turnover limit is set at ₹1 crore for businesses whose total sales, turnover, or gross receipts exceed this amount during the financial year.
- If cash transactions constitute up to 5% of total gross receipts and payments, the turnover threshold for a tax audit increases to ₹10 crores.
2. Businesses Opting for Presumptive Taxation:
- For businesses opting for presumptive taxation under Section 44AD, the turnover limit is ₹2 crores.
- If the business declares profits or gains lower than the prescribed limit under the presumptive taxation scheme, a tax audit is mandatory.
3. Professionals:
- For professionals, a tax audit is required if their gross receipts exceed ₹50 lakhs in a financial year.
- Professionals opting for presumptive taxation under Section 44ADA must also adhere to these limits, ensuring their declared profits meet the prescribed criteria.
4. Entities with Digital Transactions:
- For businesses that primarily conduct transactions digitally, the turnover limit for tax audits can be as high as ₹10 crores, provided that cash transactions are minimal (up to 5%).
5. Business Loss Situations:
- If a business incurs losses but has sales, turnover, or gross receipts exceeding ₹1 crore, a tax audit is still required if the total income exceeds the basic exemption limit.
Summary of Turnover Limits
| Category of Taxpayer | Turnover Limit (in ₹) |
|---|---|
| Businesses (not opting for presumptive taxation) | 1 crore (10 crores if cash transactions ≤ 5%) |
| Businesses (presumptive taxation under Section 44AD) | 2 crores |
| Professionals | 50 lakhs |
| Digital Transactions (if cash transactions ≤ 5%) | 10 crores |
What is Presumptive Taxation Scheme
The Presumptive Taxation Scheme in India, governed by Sections 44AD, 44ADA, and 44AE of the Income Tax Act, is designed to provide relief to small taxpayers from the burden of maintaining detailed books of accounts and getting them audited. Under this scheme, eligible taxpayers can declare their income at a prescribed rate without the need for extensive record-keeping. Here are the key aspects of the Presumptive Taxation Scheme:
Eligibility Criteria
- Section 44AD: Applicable for resident individuals, HUFs, and partnership firms (other than LLPs) engaged in eligible businesses with a total turnover or gross receipts not exceeding ₹3 crores, provided cash receipts are less than 5% of total receipts.
- Section 44ADA: Applicable for resident individuals and partnership firms (other than LLPs) engaged in specified professions (legal, medical, engineering, accountancy, etc.) with total gross receipts not exceeding ₹75 lakhs, subject to the same cash receipt condition.
- Section 44AE: Applicable for individuals, HUFs, firms (other than LLPs), and other persons (resident or non-resident) engaged in the business of plying, leasing, or hiring goods carriages, owning not more than 10 goods carriages at any time during the year
Computation of Income
- Section 44AD: Income is presumed to be 8% (6% for digital receipts) of the total turnover or gross receipts.
- Section 44ADA: Income is presumed to be 50% of the total gross receipts of the profession.
- Section 44AE: Income is presumed based on the number and type of goods carriages owned, irrespective of the actual earnings
Benefits and Limitations
- The scheme eliminates the need for maintaining detailed books of accounts and getting them audited.
- However, taxpayers opting for the scheme are required to pay the entire amount of advance tax by March 15th of the previous year.
- If the income declared is lower than the presumptive rate, the taxpayer must maintain books of accounts and get them audited.
- Once opted, the taxpayer must continue with the scheme for the next 5 assessment years, unless the conditions for the scheme are not met.
The Presumptive Taxation Scheme aims to simplify tax compliance for small businesses and professionals while ensuring a fair assessment of their income. However, taxpayers must carefully evaluate their eligibility and the implications of opting for the scheme.
Income Tax Audit Report
The Tax Audit Report is a crucial document prepared by a Chartered Accountant (CA) following an income tax audit under Section 44AB of the Income Tax Act, 1961. This report serves to verify the accuracy of a taxpayer’s financial records and ensure compliance with tax regulations. Here are the key aspects of the Tax Audit Report:
Purpose of the Tax Audit Report
- Verification of Accounts: The primary purpose of the audit is to authenticate the books of accounts maintained by the taxpayer, ensuring that they reflect true and fair financial statements.
- Compliance Check: The report assesses compliance with various provisions of the Income Tax Act, including the correct reporting of income, deductions, and tax liabilities.
- Submission Requirement: The Tax Audit Report must be submitted along with the income tax return by the due date, which is typically September 30th of the assessment year for most taxpayers.
Forms Used in Tax Audit Reporting
- Form 3CA: This form is used when the taxpayer is required to get their accounts audited under any other law (e.g., companies act). It certifies that the audit has been conducted as per the provisions of Section 44AB.
- Form 3CB: This form is applicable when the taxpayer is not required to get their accounts audited under any other law. It is a simplified version of the audit report.
- Form 3CD: This is a detailed statement of particulars that must be submitted along with Form 3CA or 3CB. It includes comprehensive details about the taxpayer’s financials, such as deductions claimed and compliance with tax laws.
Key Dates and Submission Process
- Last Date for Audit Completion: The tax audit must be completed by September 30th of the assessment year, and for those involved in international transactions, the deadline extends to October 31st.
- Filing the Report: The CA must file the Tax Audit Report online through the Income Tax Department’s portal. The taxpayer must then accept or reject the report in their login portal. If rejected, the audit process must be repeated until acceptance.
Penalty for not filing the Income tax audit report
Failure to comply with the requirements for filing a Tax Audit Report in India can lead to significant penalties and consequences. Here’s a detailed overview of the penalties for non-compliance:
1. Penalty Under Section 271B
If a taxpayer is required to get their accounts audited under Section 44AB of the Income Tax Act and fails to do so, they are liable for a penalty under Section 271B. The penalty is calculated as follows:
- 0.5% of the total turnover or gross receipts, subject to a maximum limit of ₹1.5 lakh.
This means that if a taxpayer’s turnover is low, they might end up paying a smaller penalty, but if their turnover is high, the penalty could still be capped at ₹1.5 lakh.
2. Disallowance of Deductions
Apart from monetary penalties, not filing a Tax Audit Report can lead to the disallowance of deductions claimed by the taxpayer. This could result in a higher taxable income and, consequently, an increased tax liability.
3. Interest on Tax Due
If the disallowance of deductions results in a higher tax liability, the taxpayer may be subject to interest charges under Sections 234A, 234B, and 234C of the Income Tax Act. This interest is charged on the amount of tax that should have been paid and the delay in its payment.
4. Legal Proceedings
In cases of severe non-compliance, the Income Tax Department may initiate legal proceedings against the taxpayer. Such proceedings can be lengthy and may lead to additional penalties and fines.
Documents Required for Income Tax Audit Under Section 44AB
- Books of Accounts:
- Cash Book: Records all cash transactions.
- Ledger Accounts: Detailed accounts for all transactions.
- Journal: Records all financial transactions in chronological order.
- Bank Statements:
- Bank statements for all accounts for the financial year being audited.
- Sales and Purchase Invoices:
- Complete records of sales and purchase invoices to verify income and expenses.
- Stock Records:
- Documentation of stock levels at the beginning and end of the financial year, including stock valuation methods used.
- Fixed Asset Register:
- A detailed list of fixed assets owned by the business, including acquisition costs and depreciation calculations.
- Financial Statements:
- Balance Sheet and Profit & Loss Account for the relevant financial year.
- Tax Returns:
- Copies of filed income tax returns for the previous years, if applicable.
- Audit Reports:
- Previous audit reports, if any, which may provide context for the current audit.
- Details of Loans and Borrowings:
- Documentation related to any loans taken or given, including agreements and repayment schedules.
- Other Relevant Documents:
- Any other documents that may support the financial statements, such as contracts, agreements, and legal documents.
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FAQ's on Income Tax Audit
An income tax audit under Section 44AB is a mandatory audit conducted by a Chartered Accountant to verify the financial records of taxpayers whose total turnover or gross receipts exceed specified limits. For businesses, the limit is ₹1 crore, and for professionals, it is ₹50 lakhs. The audit ensures compliance with tax laws and the accuracy of reported income and deductions.
Taxpayers are required to undergo a tax audit if:
- Their business turnover exceeds ₹1 crore.
- Their professional gross receipts exceed ₹50 lakhs.
- Taxpayers under presumptive taxation schemes (Sections 44AD, 44ADA, 44AE) must also get audited if their income exceeds the maximum amount not chargeable to tax
The tax audit report must be submitted electronically by September 30 of the assessment year for most taxpayers. For those involved in international transactions, the deadline extends to October 31
Failure to conduct a tax audit when required can result in a penalty under Section 271B, which may be up to 0.5% of the total turnover or gross receipts, capped at ₹1.5 lakh. Additionally, the taxpayer may face disallowance of deductions and increased scrutiny from tax authorities.
Key documents required include:
- Books of accounts (cash book, ledger, journal)
- Bank statements
- Sales and purchase invoices
- Stock records
- Fixed asset register
- Financial statements (Balance Sheet and Profit & Loss Account)
- Previous tax returns and audit reports
If your income is below the prescribed threshold for tax audit (₹1 crore for businesses and ₹50 lakhs for professionals), you are not required to undergo a tax audit. However, if you have opted for presumptive taxation and your income exceeds the basic exemption limit, you may still need to get audited.
The tax audit report is submitted using:
Form 3CA: For taxpayers required to get their accounts audited under any other law.
Form 3CB: For taxpayers not required to get audited under any other law.
Form 3CD: A detailed statement of particulars that accompanies the audit report