A brief summary of section 44AB

Date: 12-9-2015

As regular everyday individuals and retail investors, we are generally bothered about taxes which are based on the income we earn through our jobs, i.e. salaries. But slowly and steadily, there are many opportunities where an individual is offering services like an independent professional and hence needs to look at taxation from different perspectives.

And that is because the people having business income or professional income exceeding certain thresholds are mandatorily required by the government to be audited.

Now for a salaried person, filling taxes with Form 16 is the only major requirement when it comes to taxation. But if you are a professional of the kind of lawyer, doctor, etc. and your gross income exceeds Rs 25 lacs, you are liable to get a tax audit conducted. And this rule is applicable even for small businesses with a turnover exceeding Rs 1 crore.

This audit is mandatory, and whenever the term tax audit is used, it is supposed to be referring to audit to be done under Section 44AB. Once you cross these above mentioned income limits, you are required to hire a chartered accountant and get your books audited. The chartered accountant will file the audit under Form 3A/3CB and 3D.

The purpose of this audit is to verify that the books reflect the real revenues and the deductions related claims are correct. These audits help in checking fraudulent practices and also save time for the Assessing Officer in conducting routine verifications.
Specifically, the fulfillment of the following conditions warrant audit under 44AB:

1) A person carrying business with total sales /revenues exceeding Rs 1 crore Rs. 2) A person carrying profession with gross receipts exceeding Rs 25 lacs Rs. 3) A person eligible for presumptive tax under Section 44AD, but does not do so and claims that the income from the business is lower than the deemed profits and gains computed under the relevant section. (Section 44AD is applicable to consultants)

4) A person eligible for presumptive tax under Section 44BB and section 44 BBB but does not do so and claims that the income from the business is lower than the deemed profits and gains computed under the relevant section. (Section 44BB is applicable for non-resident taxpayers in business and section 44BBB is applicable to foreign companies in specific businesses liable to pay taxes in India)

If a person is even liable to be audited under any other sections, this tax audit’s reports are sufficient to prove that the books are in order.

A person to be audited under this section should complete the audit and filing before the due date, i.e. 30th September of the assessment year. For example, the tax audit report for the financial year 2012-13 corresponding to the assessment year 2013-14 should be obtained on or before 30th September 2013. This due date may change for people under other requirements.

If this audit is not conducted within the specified time frame and a reasonable cause is not provided to the Income Tax department, a penalty of 0.5% of the total sales / receipts in business or profession will be applicable or a flat penalty of Rs 1.5 lacs will be slapped.

So, if you are a self-employed individual and seek to maintain proper books of accounts, then it makes sense to consult your chartered accountant for details of these audits and act accordingly.