Income Tax audit u/s 44AB of accounts of business/profession

Section 44AB of Income tax act

Introduction

Some burning questions of every person carrying out a business or a profession,

"What is the relevance of section 44AB for me?"

"Why am I penalised for not getting my accounts audited?"

"When do I have to mandatorily get my accounts audited?"

"Am I carrying out a business or a profession?"

And a hell lot of questions! 

This section is damn important for you to understand if you have a business or a profession of your own or else you will land yourself in some serious trouble!

Let's start with the basics first.

What is Income Tax audit?

An income tax audit is an independent verification of the books of accounts of the taxpayer to ensure that all compliances with respect to the Income tax Act 1961 have been made and no discrepancies exist in the filing of income tax returns. Through tax audit it is ensured that the income earned by an assessee whose accounts are being audited, is paying the tax computed as per the provisions of the Act taking into consideration all the deductions allowable and non-allowable, the rates of depreciation, tax compliances on borrowed capital, treatment of bad debts, statutory methods, accounting methods etc. Further, the tax audit is also conducted in order to keep a check on whether there is proper maintenance of books of accounts in accordance with the provisions of tax laws and to ensure that the tax liability has been discharged on time and there is no concealment of income by the assessee.

Know a little bit about its background

This section 44AB was introduced by the Finance Act 1984 making it applicable w.ef 1st April 1985. It was introduced to create an obligation on the taxpayers who were carrying out a business or a profession to get their accounts audited mandatorily by a Chartered Accountant and to furnish an audit report in the required forms before due dates. If the business turnover of a taxpayer exceeded Rs 40 lakhs or if the gross receipts from profession exceeded Rs 10 lakhs, he had to get his accounts audited under this section. However, this threshold was increased to Rs 60 lakhs for business and Rs 15 lakhs for profession from the financial year 2010-11.

Why was this section introduced?

Few words from the circular dated July 6, 1984:

"A proper audit for tax purposes would ensure that the books of account and other records are properly maintained, that they faithfully reflect the income of the taxpayer and claims for deduction are correctly made by him. Such an audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of Assessing Officers in carrying out routine verifications, like checking the correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the Assessing Officers thus saved could be utilised for attending to more important investigational aspects of a case."

Thus it is clear from the above that this section is quite important for the government as it prevents tax evasion and frauds and ensures that taxpayers are complying with the relevant provisions.

Now without wasting any more time, let us come to the main point straightaway.

Who are liable to audit u/s 44AB for the A.Y 19-20?   

• Every person whose business turnover exceeds 1
  crore in the relevant previous year.
• Every person whose gross receipts from profession exceeds 50 lakhs.
• Every person who opts out of presumptive taxation scheme u/s 44AD and is liable to be audited.
• Every person whose income from business or profession computed under the presumptive scheme is greater than the actual income earned and so chooses to declare income on actual basis is liable for tax audit provided the turnover or gross receipts exceed the threshold limits as specified in the above points.

Some Frequently asked questions

A taxpayer has two businesses. One business fetches him 70 lakhs and the other business provides him 40 lakhs. Whether the person is liable to tax audit?

Yes, the person would be liable to tax audit as the section 44AB specifies provisions on the basis of a person and not as per business on a gross basis. Since the total PGBP income of the person is more than 1 crore, the person is liable for a tax audit.

Whether all companies registered under the Companies Act, 2013 are required to get their accounts audited as per Income tax Act?

To solve this confusion sec 44AB has provided further that all registered companies are required to get its accounts audited mandatorily if their turnovers exceed prescribed limits that is 1 crore in case of business and Rs 50 lakhs in case of a profession. They have to file a 3CA along with 3CD by due dates. But they have to mandatorily get their statutory audit done in accordance with Companies Act 2013. 

To know more about tax audit report forms, click here

If you opt out of presumptive taxation scheme, are you liable to audit under this section?

It depends on your business turnover whether it falls within the limits specified in the above 4 points or not. If your turnover has crossed the 2 crore criteria or 50 lakhs as the case may be depending you have a business or a profession, it is mandatory for you to carry out tax audit under this section. If your turnover remains within 2 crore or 50 lakhs but has crossed 1 crore threshold or 50 lakhs threshold, you will be liable for a tax audit.

What shall I do if I have not maintained books of accounts and is liable for tax audit because my turnover has exceeded 1 crore?

In such cases you can choose for the presumptive tax scheme provided your turnover does not exceed 2 crores. If your turnover has exceeded 2 crores, there is no option but to get your business tax audited or else you will be penalised. It will be better for you to start maintaining proper books so that you don't fall into the hassle of dealing with the income tax authorities.

To know more about the penalty click here.

How do I know if I fall under a business or a profession?

Rule 6F of the Income tax rules has specified some professions:

• Architect
• Accountancy
• Authorised representative
• Engineer
• Film Artist including cameraman, director, artist etc.
• Interior decorator
• Company secretary
• Advocate or lawyer (Legal Professional)
• Medical professionals including psychiatrists, paediatrician etc
• Technical consultants eg bloggers, digital marketing consultants etc.

In general, if you are selling goods by either manufacturing or entering into wholesaling/retailing, you have a business. But if you are selling a service, you have a profession.

If I was liable to audit under section 44AB last year due to my business turnover being more than 1 crore, do I have to still get my business audited if my business has incurred a loss this year?

The criteria for getting your accounts tax audited is Rs 1 crore. It does not matter whether your business had been audited last year or not. It only matters whether your business turnover this year has exceeded the specified limits. Hence you don't need to get your accounts audited since you had no turnover this year because of which you incurred a loss.

What if I am a Non-Resident of India. Do I still have to get my business audited?

Section 44AB does not make any distinction between NRI and ROR/NOR. The provisions will apply to you if you are earning your business income in India.

But in the following cases you as an NRI is not required to comply with the provisions:

• If you are carrying on a business of exploration etc. of mineral oils and is opting for presumptive basis under section 44BB.
• If you are carrying on a business of civil construction etc. in certain turnkey projects and is opting for presumptive under section 44BBB.
• If you are operating aircraft in India and deriving income referred to in sec 44BBA

My income from gross receipts is less than 50 percent of the gross receipts. Do I have to get my accounts tax audited?

An assessee carrying on a profession has 2 choices in which he can declare income:

• Declaration of income as per section 44ADA that is 50% of the gross receipts.
• Getting your accounts tax audited.

Thus it is obvious that if you want to declare income at less than 50% of your gross receipts, you have to get your accounts tax audited. When you don't go for presumptive, it doesn't matter what your turnover is. The same applies in case of businesses too.

If I am a charitable trust or a cooperative society and my incomes are exempt from tax, do the provisions of this section apply to me?

Yes, it does not depend on whether your income is exempt from tax. You would still have to get tax audited if your income surpasses the specified limits.

If my taxable income falls in the basic exemption limit but my business turnover has exceeded the threshold limits, do I to get my business audited u/s 44AB?

It does not depend whether your taxable income is less than the basic exemption limits or not. What matters is the turnover of your business. If your business turnover is greater than the specified limits, even though no income would be levied on your income, you still have to get your business accounts audited.

Does mandatory tax audit of my business accounts mean that there is no possibility of any sort of investigation by the Income Tax officer?

It is to be noted that tax audit u/s 44AB will not make your accounts escape the eyes of the law. If the assessing officer does not contend or demands further clarifications, he may order special audit u/s 142(2A) of the Income tax act after giving you a reasonable opportunity of being heard. Special audit demanded under this section is more like an investigation of your books of accounts at your premises as was held in Sahara India (firm) Vs CIT 2008 (Supreme Court). To avoid such scrutiny, you need to make sure that you have not entered into any transactions fraudulently in order to evade tax. You can be scrutinised when:

• Your business accounts are complex and raise suspicion
• When the Assessing officer doubts the correctness of your business accounts.
• When the number of transactions in your business are voluminous and can easily raise suspicion of money laundering.

Conclusion

So, this was all about this section 44AB of the Income tax Act which specifies the conditions of a mandatory tax audit. If you have any doubts, you can comment down and get your queries solved or you can even live chat with me!

Thanks for reading Section 44AB of the Income tax act

But hey, one more thing.....

Click to know about the presumptive taxation scheme?