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

Before understanding what is tax audit, let us understand the term ‘Audit’. Dictionary meaning of the term ‘Audit’ suggests that it is an official inspection of an organization’s accounts and production of report, typically by an independent body. It is also referred to as a systematic review or assessment of something.

What is a tax audit?

There are various kinds of audits being conducted under different laws such as company audit or statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’.

As the name itself suggests, tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax viewpoint. It makes the process of income computation for filing of return of income easier.

Objectives of tax audit

Tax audit is conducted to achieve the following objectives:

• Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor
• Reporting observations/discrepancies noted by tax auditor after a methodical examination of the books of account
• To report prescribed information such as tax depreciation, compliance of various provisions of income tax law, etc.

All these enable tax authorities in verifying the correctness of income tax returns filed by the taxpayer. Calculation and verification of total income, claim for deductions etc., also becomes easier.

Who is mandatorily subject to tax audit?

A taxpayer is required to have a tax audit carried out if the sales, turnover or gross receipts of business exceed Rs 1 crore in the financial year. However, a taxpayer may be required to get their accounts audited in certain other circumstances. We have categorized the various circumstances in the tables mentioned below:

Amendments in the above provision:

Finance Act 2020: The threshold limit of Rs 1 crore turnover for a tax audit is proposed to be increased to Rs 5 crore with effect from AY 2020-21 (FY 2019-20) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments.

Finance Act 2021: With effect from 1st April 2021, the threshold limit of Rs 5 crores is increased to Rs 10 crores in case cash transactions do not exceed 5% of the total transactions.

Penalty of non-filing or delay in filing tax audit report

If any taxpayer who is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty:

• 5% of the total sales, turnover or gross receipts
• Rs 1,50,000

However, if there is a reasonable cause of such failure, no penalty shall be levied under section 271B.

So far, the reasonable causes that are accepted by Tribunals/Courts are:

• Natural Calamities
• Resignation of the Tax Auditor and Consequent Delay
• Labor problems such as strikes, lock-outs for an extended period
• Loss of Accounts because of situations beyond the control of the Assesses
• Physical inability or death of the partner in charge of the accounts