Tax Audit under section 44AB: Limit, Due date, Penalty

Lets understand Tax Audit under section 44AB – Limits, Tax Audit Report, Due date & Penalty.

Taxpayers carrying on Business or Profession were the Turnover or Gross Receipts exceed the prescribed limit have to get their books of accounts audited by a Chartered Accountant. Tax Audit report is furnished in form 3CA& 3CD or form 3CB & 3CD. Due date of filing Tax Audit is 30th September of the Assessment Year.

Tax Audit under section 44AB

Audit

Audit in simple terms means examination or inspection of books of accounts of an organization by an independent body- in India statutory audits and tax audits are undertaken by Chartered Accountants. This inspection is done to ensure that the books of accounts reflect a true and a fair few of the business and related compliance of statute has been met fairly.

Tax Audit under section 44AB

Tax Audit which is also known as Income tax audit is undertaken to ascertain whether the return filed by the assessee correctly reflects his tax liability as per the provisions of the Income Tax Act. The Chartered Accountant conducting the tax audit is required to furnish the tax audit report in form 3CA or form 3CB and form 3CD.

Below are the categories of taxpayers who are required to get their books of accounts audited

Categories of Taxpayers Threshold limit for Tax Audit
The person carrying on a Business If the Total Sales/Turnover>₹ 1 crore during the previous year
The person carrying on a Profession If the Gross receipts >₹ 50 Lakhs during the previous year
A person covered under section 44AD

(presumptive taxation)

If the Total Turnover/Gross Receipts>₹2 crores
A person covered under section 44AD

(presumptive taxation)

Income claimed by the assessee is less than 8% or 6% of the turnover/gross receipts and his total income exceeds the maximum amount which is not chargeable income tax
A person covered under section 44ADA (presumptive taxation) Income claimed by the assessee is less than 50% of the gross receipts and his total income exceeds the maximum amount which is not chargeable income tax
Persons covered under section 44AE,44BB,44BBB (presumptive taxation) Income claimed by the assessee is less than the deemed profits under these sections in the relevant previous year

Presumptive Taxation

Under the presumptive tax scheme, the taxpayers are relieved from the maintenance of books of accounts and audit of accounts. For taxation purpose, income is calculated as a prescribed percentage of the turnover or gross receipts or the deemed profits

Section 44AD: Profits and Gains from Business on Presumptive basis

Eligible Assessee: Resident Individual, HUF and Partnership firms (excluding LLP) who has not claimed a deduction under section 10AA or deductions under any provisions of Chapter VIA under the heading “C – Deductions in respect of certain income” for the relevant previous year.

  • This section is applicable to any Business except 
  • The business of plying, hiring, leasing goods carriage covered under section 44AE
  • Agency Business
  • Commission & Brokerage business

Turnover: Total Sales Turnover/ Gross receipts should not exceed ₹2 crores

Books of Accounts: Books of Accounts not required to be maintained

Income computation: Business Income computed as 8% of Total turnover/Gross receipts 6% of Total turnover/Gross receipts if are realized through Account Payee cheque, DD or Electronic payment through bank account up to the due date of filing of return.

Exceptions to Sec 44AD: Presumptive taxation scheme under sec 44AD shall not be applicable and the assessee would be required to maintain all the books of accounts and provisions of section 44AB of compulsory tax audit would be applicable – 

If the Turnover/Gross Receipts exceeds ₹2 crore then the income of the business would be calculated as per the normal provisions of the Income Tax Act (i.e. Revenue fewer expenses). 

If the Assessee declares income as per 44AD for any previous year, and he doesn’t declare income as per sec 44AD in any of the 5 consecutive  financial years, then he shall not be eligible to claim the benefits of sec 44AD for 5 years subsequent to the year in which the assessee did not declare income as per sec 44AD.

If Income claimed by the assessee is less than 8% or 6% of the turnover/gross receipts and his total income exceeds the maximum amount which is not chargeable income tax

Advance Tax: Advance tax shall be paid by the assessee in one installment only i.e. 15th March of the Financial Year

Section 44ADA – Profits and Gains from Profession on Presumptive basis

Eligible Assessee: Resident Assessee engaged in any of the following professions

  • Medical
  • Legal
  • Accountancy
  • Film Artist
  • Engineering
  • Technical Consultancy
  • Architectural
  • Interior decorator
  • Company Secretary
  • Any other profession notified by CBDT

Gross Receipts: Gross receipts should not exceed ₹ 50 lakhs

Books of Accounts: Books of Accounts not required to be maintained

Income computation: 50% of Gross Receipts

Exceptions to sec 44ADA: If the Assessee declares income lower than 50% of Gross Receipts and his Net Taxable income is greater than the basic exemption limit, he is required to maintain books of accounts and get them audited.

Advance Tax: Advance tax shall be paid by the assessee in one installment only i.e.15th March of the Financial Year

Other Tax Audits under the presumptive basis

Section Categories of Businesses Presumed Income from business
Sec 44 AE Assessee engaged in the business of hiring, plying, leasing of goods carriage. 

(Assessee owns a maximum of 10 vehicles during any time in the previous year)

Heavy goods vehicles-₹1000 per ton of gross vehicle weight or unladen weight as the case may be for every month or part thereof.

Others Vehicles- ₹7500 for every month or part thereof.

Sec44B Non-resident engaged in the shipping business 7.5% of freight
Sec44BBA Non-resident engaged in the aircraft business 5% of freight
Sec44BB Non-resident engaged in the business of supplying services or hiring plant and machinery for extraction, prospecting, and production of minerals, oil 10% of (Amount received in India or outside India for the activity carried in India + Amount received in India for the activity carried outside India)
Sec44BBB Foreign Co. engaged in the business of turnkey projects 10% of the amount received in India or outside India

Tax Audit Procedure to be followed by Chartered Accountants:

Apart from the routine audit procedures like vouching, ledger scrutiny the auditor has to take into consideration the tax compliance requirements to be disclosed in form 3CD. The auditor has to conduct the tax audit keeping in mind those requirements.

A few of the audit areas which are referred to in form 3CD and which are to be covered by the auditor are enumerated below. 

1. Obtain all the books of Accounts of the client for the relevant previous year for which audit is to be undertaken

2. In case of a partnership, business verifies the partnership deed for the names of the partners and their profit sharing ratio.

3. Obtain the list of business activities (principal as well as discontinued during the previous year)

4. In case of a person carrying on any profession ensure whether specified books as per Rule 6F are maintained such as

  • Cash Book
  • Journal – if accounts are maintained as per mercantile system
  • Ledgers
  • Carbon copies of bills exceeding ₹50/-
  • In case of medical practitioners verify whether additional books such as daily case registers & medical inventory register are maintained.

5. Verify the sale and purchase of Fixed assets, inventory, conversion of any Fixed asset into stock in trade and vice versa

6. Verify if any land or buildings has been transferred during the previous year. Obtain the stamp duty value of such property from the copy of the registered document. Report if the property has been transferred for a consideration lower than the stamp duty value.

7. Obtain the depreciation schedule and verify the following details

  • WDV at the beginning of the year, assets acquired during the year 
  • Segregation of assets acquired during the year as assets put to use for more than 180 days and less than 180 days
  • Adjustments on account of exchange rate fluctuation and grant/subsidy received 
  • Deductions during the year representing sale proceeds of the assets sold
  • Rates of depreciation

8. Obtain a schedule of deductions admissible under the relevant sections (Sec 33AB Sec 33ABA, Sec 33AC, Sec 35, Sec 35CCA, Sec 35CCB, Sec 35D, Sec 35E) indicating separately the amounts debited to profit and loss and amounts not debited to the profit and loss account. Review the computation of the amounts admissible as deductions

9. For verifying the deduction claimed under sec 36(1)(ii) obtain a schedule giving details of sums paid to employees as bonus or commission for services rendered and review the bonus or commission paid.

10. For ascertaining the deduction claimed under sec 36(1)(VA) obtain a schedule of the contribution received from employees towards Provident Fund, Superannuation fund,  the due date of payment and the actual date of payment to the authorities.

11. In the case of general deductions under sec 37, the auditor should ensure the following

  • Expenses are wholly incurred for Business or Profession
  • Expenses are revenue in nature
  • Expenses of a personal nature are not charged to the Profit & Loss Account
  • Advertisement in brochures and pamphlets of political parties are not allowed.
  • Penalties if a breach of the law – not allowed, Penalty if a breach of contract (contract is revenue in nature) – allowed.

12. Verify if the payments where TDS is deductible have been made after deduction of TDS and TDS has been deposited on or before the due date of filing the return

13. Obtain a schedule of cash payments or payment made by a cross cheque exceeding ₹10000/- (If payment made to the transporter the limit is ₹35,000/-). Such payments other than those allowed under rule 6DD must not be allowed.

14. Verify any provisions for payment of gratuity. Provisions for payment of gratuity is disallowed, only payment to approved gratuity fund and payment of actual gratuity during the year shall be allowed as a deduction

15. Ensure that the following expenses are allowed only when actual payment is made

  • Any taxes, duties, and cess
  • Employer’s contribution to Statutory Provident Fund, Approved Gratuity Fund, Approved Superannuation Fund or any fund as per law
  • Bonus & Commission to employees
  • Interest on loan to Public Financial Institution, State Financial corporation
  • Leave encashment to employees

Due date of tax audit: 30th September of the Assessment Year (i.e. Next year of the year when income is earned)

Income Tax Audit

Forms to be submitted for Tax Audit Report under Sec 44AB

Books of Accounts required to be audited under any law other than the Income Tax Act Books of Accounts not required to audit under any law except The Income Tax Act
Audit Form Form No.3CA Form No.3CB
Disclosure Form Form No.3CD Form No.3CD
Particulars to be furnished in the Audit form Name, PAN, Address of   Assessee 

Name of Auditor (Individual/Firm)

Date of Audit Report

Beginning and end date of P/L A/c.

Balance Sheet Date

Declaration by the auditor that the particulars in form 3CD are true and correct

Audit observations and Qualifications found in form 3CD

Auditor’s name, address, membership no., signature, stamp with the seal

 

Name, PAN, Address of   Assessee

Beginning and end date of P/L A/c.

Balance Sheet Date

Address of the head office and branches where the books of accounts are maintained

Declaration by the auditor that the particulars in form 3CD are true and correct

Audit observations and Qualifications found in form 3CD

Declaration of attaching form3CD

Auditor’s name, address, membership no., signature, stamp with the seal

Particulars to be furnished in a disclosure form Form 3CD is a statement of particulars to be furnished with regards to section 44AB under Income tax ACT

Part A contains the basic details of the assessee

Part B contains the particulars of tax compliances

Penalty: If the taxpayer in spite of the requirement to get the books of accounts audited under section 44AB fails to get his books of accounts audited then he shall be liable to penalty under section 271B.

Penalty shall be

0.5% of Turnover or Gross Receipts

Or

₹1,50000/- 

Whichever is lower.

Conclusion: Tax Audit ensures that the assessee has followed all the tax compliance requirements with regards to income from business or profession and provide for a truly fair view of the business or profession.

2 thoughts on “Tax Audit under section 44AB: Limit, Due date, Penalty”

Leave a Comment