The tax audit under Section 44AB of the Income Tax Act, 1961 is a mandatory audit that needs to be conducted by a Chartered Accountant (CA) for taxpayers, typically businesses or professionals, whose income exceeds specified limits or who fall under certain categories. The purpose of this audit is to ensure that the taxpayer has maintained books of accounts as required by the Income Tax Act and that the return of income is accurate and complies with the provisions of the law.

1. Section 44AB – Overview:

Section 44AB mandates a tax audit for the following categories of taxpayers:

• Section 44AB(a): If the taxpayer is carrying on business (except those opting for presumptive taxation under Section 44AD, 44ADA, or 44AE) and their turnover or gross receipts exceed ₹1 crore in a financial year.
• Section 44AB(b): If the taxpayer is carrying on a profession (prescribed under Section 44AA(1)) and their gross receipts exceed ₹50 lakh in a financial year.
• Section 44AB(c): If the taxpayer is claiming a presumptive taxation scheme under Section 44AD, but the income exceeds the threshold limit (currently ₹2.5 lakh for businesses with income under the presumptive scheme).
• Section 44AB(d): If the taxpayer is opting for a presumptive taxation scheme under Section 44AE, 44ADA, or 44AD, the threshold limits would apply as per respective sections.

2. Objectives of a Tax Audit under Section 44AB:

The tax audit aims to verify:

• True and Fair View: Whether the taxpayer’s books of accounts represent a true and fair view of the financial position and profit/loss.
• Compliance: Whether the taxpayer has complied with all provisions of the Income Tax Act.
• Verification of Income: To verify that the income is correctly reported, and the correct taxable income is assessed.
• Claimed Deductions: Whether any deductions or exemptions (like under Section 80C, 80D, etc.) are properly claimed.
• Audit of Books of Accounts: Whether the taxpayer has maintained proper books of accounts and other documents required under the Income Tax Act.

3. Key Steps for Conducting a Tax Audit under Section 44AB:

Step 1: Appointment of Tax Auditor:

• A Chartered Accountant (CA) must be appointed to conduct the audit.
• The CA must obtain a Form 3CA/3CB (depending on whether the taxpayer is under presumptive taxation or not).

Step 2: Review of Books of Accounts:

• The auditor must first review the taxpayer’s books of accounts to ensure that they are maintained as per the requirements of the Income Tax Act, 1961.
  • The taxpayer is required to maintain books of accounts (Section 44AA) and documents such as:
    • Cash Book and Bank Book
    • Sales Register and Purchase Register
    • Journals and Ledger
    • Stock Register (for inventory)
    • Bills and vouchers supporting income and expenditure
• The auditor should verify that the books have been maintained regularly and in the prescribed manner.

Step 3: Verification of Turnover/Gross Receipts:

• The auditor verifies the turnover or gross receipts of the taxpayer to confirm whether it exceeds the prescribed limits for mandatory audit.
• If the turnover exceeds ₹1 crore (or ₹50 lakh for professionals), then the audit is applicable.
• The auditor checks invoices, receipts, and vouchers to confirm the turnover reported.

Step 4: Income Verification:

• The auditor reviews the profit and loss statement to verify the income reported by the taxpayer.
• Ensure that:
  • The taxpayer has reported correctly the business income.
  • The income is consistent with the sales, purchases, and expenses recorded in the books of accounts.

Step 5: Compliance with Income Tax Provisions:

• TDS (Tax Deducted at Source): Ensure that the taxpayer has complied with TDS provisions. The auditor should verify whether TDS has been deducted on applicable payments (such as salaries, contractors, etc.) and deposited with the government within the due date.
• GST Compliance: The auditor should check for GST compliance (if applicable), including ensuring the correct input tax credit (ITC) claims, filing of returns, and payment of taxes.
• Deductions and Exemptions: The auditor should verify that the deductions (like under Section 80C, 80D) or exemptions (like on agricultural income) are properly claimed and substantiated.

Step 6: Depreciation:

• Verify whether the depreciation has been claimed in the correct manner and the correct rates under the Income Tax Act.

Step 7: Reporting of Audit Findings:

• The auditor must provide an audit report in the prescribed Form 3CA/3CB, depending on the nature of the taxpayer.
  • Form 3CA: If the taxpayer is maintaining books as per the provisions of the Income Tax Act.
  • Form 3CB: If the taxpayer is not maintaining books as per the Income Tax Act or is under a presumptive taxation scheme.
• Form 3CD: A detailed statement (known as Form 3CD) must be prepared, which includes disclosures about the taxpayer’s business operations, compliance with tax laws, and audit findings.

Step 8: Filing of the Audit Report:

• The audit report in Form 3CA/3CB along with Form 3CD is to be filed electronically with the Income Tax Department before the due date (usually September 30th of the assessment year).
• In case of an extension, the same must be filed within the extended time.

4. Audit Report and Form 3CD:

The Form 3CD is the core part of the tax audit report and includes the following key disclosures:

• Particulars of the taxpayer: Business details, address, and other identifying information.
• Taxpayer’s method of accounting: Whether the taxpayer follows cash basis or mercantile basis for accounting.
• Inventory details: Whether the taxpayer has maintained inventory records (for trading businesses).
• Particulars of deductions/expenses: Break-up of income, expenditure, and any adjustments made during the year.
• Specific disclosures: Any discrepancies, adjustments, or violations of the Income Tax Act.

5. Consequences of Non-Compliance with Section 44AB:

If the taxpayer fails to get their accounts audited as required under Section 44AB, the following consequences may arise:

• Penalty under Section 271B: A penalty of 0.5% of the turnover (or gross receipts) may be imposed, subject to a maximum of ₹1.5 lakh.
• Inaccurate Return Filing: If the audit is not done, there may be incorrect reporting of income, and the return could be considered as defective.

6. Due Date for Filing Tax Audit Report:

• The due date for filing the tax audit report under Section 44AB is typically September 30th of the assessment year.
• For taxpayers requiring the audit under Section 44AB, failure to file the report within the prescribed time may result in penalties and the disallowance of certain claims.