Examination of an organization’s or individual’s tax returns done by an external agency in order to verify that all the declarations made regarding expenditure, income, and deductions are correct and filed properly. The income tax act 1961, section 44AB covers the provisions for an income tax audit. Income tax audits have been made mandatory by the provisions of the act stating all taxpayers to get their business or account audited on the act’s guidelines.
The audit is performed by a chartered accountant and is supposed to submit all the documents related to finding and observations as an audit report. The audit report is submitted as forms 3CA/CB and 3CD.
What is section 44AB?
Section 44AB contains the provisions related to class of taxpayers for whom getting their accounts audited by a chartered accountant is mandatory.
Tax audit objectives
Following are the objectives of tax audits:
1. A structured tax audit ensures all the organizations and businesses are mapped on similar grounds as far as financial transparency is concerned.
2. It ensures all businesses maintain account books and records relating to revenue and expenses
3. It ensures that total income and deductions are claimed accurately and to the best of everyone’s knowledge.
4. It nullifies the chances of any possible fraudulent practices.
Who all are covered under tax audit rule?
Following is the list of people or class of people who compulsorily need to get their accounts audited:
1. An individual engaged in any form of business with turnover more than Rs. 1 crore.
2. Any professional with annual income more than Rs. 50 lakhs
3. Any individual covered under section 44AD, presumptive taxation rule but later on claims and proves that the profits are lower than as calculated for the taxation purpose. Same is the case with an individual who’s on record income is more than the amount which is tax-free.
4. Anybody who earlier qualified under the presumptive taxation rule but later on opted out of it. He/she would lose the option to revert back to the rule for a straight 5 assessment years span.
5. Individual who qualifies for presumptive taxation scheme but later on claims the actual profits are lower than the calculated ones under the section 44AE.
6. Individual who qualifies for presumptive taxation schemes but later on claims that the actual profits are lower than the calculated ones under section 44BBB.
What is the last date or due date for getting the tax audit done?
Any individual falling under the section 44AB should get their business or accounts audited latest by 30th September of the given year which is the same date as the due date for filing an income tax return.
For example, if Aman is a business owner with turnover above 5 crores for the year 2017-18, he should get his accounts audited by 30th September 2018 for the assessment year 2018-19.
The chartered accountant electronically files the tax report to the income tax department which needs to be approved by the taxpayer through the e-filing account of the income tax department.
What if I do not get my account audited?
If you fall under the section 44AB and it is mandatory for you to get account audited, failing this you are up for a heavy penalty under section 271B which could be any of the following:
1. In the case of business organization- 0.5% of the total sales
2. In the case of the professional- 0.5% of the total receipts
3. A fine of Rs. 1.5 lakhs can also be imposed upon a business
Note: if the professional or business owner represents a valid reason for failure in conducting the audit, no fine is imposed.
Hence, it is very important to conduct a tax audit in a timely manner to ensure the transparent and hassle-free running of the business. Any failure in doing so attracts heavy fines and penalty. Being vigilant regarding the financial declarations and filings is important for the smooth running of the business as well as business owner’s mental peace.