This article is written by Ganesh. R, this article consists of every necessary detail about Section 44AB of the Income Tax Act of 1961, which consists of the history of the enactment, regulatory framework, key provisions, recent amendments, and applicability of the tax for businesses and professionals. This article explores every corner of the Section simply and easily, which can help a layman understand the taxing system and process of audit.
This article has been published by Shashwat Kaushik.
Table of Contents
Introduction
“Trust, but verify”
The Income Tax Act, of 1961 (hereinafter referred to as the Act) is one of the main taxation systems designed to oversee and regulate the financial status of individuals, businesses, and several other entities within the limits of Indian territories. The main duty of this Act is to ensure a fair tax system, encourage compliance, and create revenue for the government. Also, it ensures that during non-compliance with the Act, individuals or other personalities are made liable for their actions following the penalty clause of the Act. Moreover, the Income Tax Act plays a major role in the regulation of the tax process which directly helps in the development of the Indian economy and ensures the country’s financial stability.
Among its core provisions, Section 44AB plays a great role in certifying the transparency and accountability of financial statements. This portion of the Act directs a tax audit for specific individuals, businesses, and entities to maintain upright financial records and tax reports. Therefore, mandating such actions safeguards against tax avoidance and upholds the culture of compliance. This taxing process will be done by a qualified Chartered Accountant (hereinafter referred to as CA), which provides a second layer of protection and ensures the records are transparent and free from any coercion or influence. As we dig deeper into this topic, we will explore its applications and consequences of not following the obligated duty. Also, it is considered one of the fundamental Acts of the country that directly affects the economic stability and integrity of the country.
Overview of the Income Tax Act, 1961
The Income Tax Act of 1961 is one of the key fundamental legislation that governs the process of taxation in the country. This Act was enacted by the parliament to regulate the structure of evaluation, collection, and supervision of the tax imposed on individuals, corporations, and other entities. Therefore, this Act gives an outline of how to calculate the income tax of the entities based on their financial gains, salaries, and other business profits, which also includes filing tax returns.
Every income of the entities and individuals is classified into different categories, such as salaries, financial gains, business profits, and other sources. Each category of income has its own unique set of rules on which the tax is calculated and reported. For example, the salaries of the individual are calculated and governed by the slab system of income tax, while the business profits and financial gains are subject to different sets of rules. This Act also gives a set of exemptions and discounts which helps in minimising the sum of taxable income.
The exemption and deductions of the taxable income include expenses like medical insurance and investment in certain government schemes for savings. After these deductions and exemptions, the taxpayers must submit the report by the set deadline to the government, usually by July 31 of each year. These processes of tax are governed and supervised by many authorities like CA, Tax Audit Officers, and other appointed government authorities, who must ensure transparency in reporting the final report to the government and they are obligated to act in compliance with the said Act.
In summary, the Act of 1961 helps in the development of the Indian economy and assists the taxpayers by giving a clear set of rules on how the tax is calculated, the filing of reports, and the exemptions and deductions of taxable income. The government’s public services depend on the government’s taxing system because the country’s financial stability is wholly dependent on the revenue that is collected as tax from individuals, businesses, and other entities. Therefore, it is the duty of every citizen who earns to understand this Act and to regard tax payments correctly.
How salaries, business profits, and capital gains are assessed
Mastering the income tax is an important way to manage the finances effectively. Therefore, the below-mentioned aspects give a detailed understanding of how the tax works between different categories of income. Whether an individual earns money through salaries, or he runs a business or he is making investments, this guide will help to understand the crucial aspect of income tax.
Salaries
In India, the income tax of the individuals will depend on how much they earn as a salary and salaries include basic pay, dearness allowance, bonus, and other perks. These salaries are calculated and governed by different slab systems, where different tax rates are allocated to different income scales. The tax rate and the person’s income are directly proportional to each other. Also, these ranges will differ from year to year, for instance, the new tax regime ranges for the financial year 2024-25, individuals below 60 years are as follows:
| Income Range (₹) | Tax rate (%) |
| Up to ₹3 lakhs | 0% |
| ₹3 lakhs to ₹6 lakhs | 5% |
| ₹6 lakhs to ₹9 lakhs | 10% |
| ₹9 lakhs to ₹12 lakhs | 15% |
| ₹12 lakhs to ₹15 lakhs | 20% |
| Above ₹15 lakhs | 30% |
People above the age of 60 have a different set of slab rates. These taxable incomes can be reduced by the exemptions and deductions by following the procedures laid down by the Act. Such as deductions under Section 80C which deals with deductions concerning life insurance premiums, deferred annuities, contributions to provident funds, subscription to specific equity shares or debentures, etc., Section 80D, which deducts concerning health insurance premiums, and exemptions like house rent allowance can help in reducing the taxable income.
Business profits
Business profits are calculated in accordance with the financial report of the company which will be submitted to the government by fulfilling the required standards and orders given under the Act. The total income of the company or any business will be determined by the report given by the company on their total profit and loss of the year, and by that report, the tax will be levied upon them.
Also, these tax rates will change in accordance with the status of the company, if it is a domestic company, then the face base tax will be 30%, with some reduction to newly formed businesses and certain small companies. Deduction for business rates, such as salaries, rent to run the business, and necessary materials, is allowed under the Act. Therefore, the tax will be allocated after considering every expense and allowance of the company.
Capital gains
Normally capital gains are categorised into short-term capital gains (STCG) and long-term capital gains (LTCG). Short-term capital gains mainly arise when there is a sale of assets that is held for not less than 36 months for movable and 24 months for immovable property. Further, Section 111A of the Act underscores the tax rate as 15% for short-term capital gains. Similarly, long-term capital gains are known as assets that are held longer than the specified period, and they are generally taxed for 20% with some adjustment benefits under Section 112 of the Act.
If the long-term capital gains go over rupees one lakh then the tax rate will be 10% without any deduction under Section 112A of the Act. The Act also gives some exemptions under Section 54, which deals with the reinvestment in domestic property. Therefore, the holding period and the status of the property will determine the tax rates.
Income from other sources
There are different ways to spawn income for their survival, and those earnings won’t be considered as a wage or a capital boost. So, taxing such income will require special methods. Income, which includes interest income, rental income from immovable property, and dividends are some type of other source of income, and these income won’t fall under the ambit of salary, business, or capital gain.
The income of the individual will be taxed using the slab method, following the total income they have developed by renting properties, etc. Interest income, such as fixed deposits, bonds, and saving accounts, will also be taxed by the individual’s slab rate. Also, in the case of dividends, the tax is of no charge for up to ₹10 lakh under Section 115BBDA of the Act.
What is a tax audit
There are several kinds of audits, for example, company audit, statutory audit, stocks audit, cost audit, etc and every audit has its own sets of regulations and rules. Similarly, the Income Tax Act mandates the tax audit and its process. A tax audit is nothing but the examination or review of the accounts, profits, expenses, or gross receipts of businesses or professionals. This examination of the turnover can help the government to levy tax on them under their net turnover. This tax audit helps in the economic development of the country and helps restrict tax evasion.
The objective of tax audit
- Ensure full compliance;
- Accuracy in the final statements;
- Promote transparency;
- Detection of errors and non-compliance; and
- Decrease the risk of tax evasion.
Explanation of Section 44AB of Income Tax Act, 1961
Introduction and initial enactments
Section 44AB of the Income Tax Act of 1961 was initially introduced by the Finance Act of 1984. The main objective of enacting this Section was to mandate the process of audit in the taxing laws. Also, to prove obligations to certain categories of persons such as businesses and professionals. Also, to ensure they follow every rule of the tax laws and enhance transparency. This approach by the Finance Act of 1984, ensures a structural and stable financial approach in reporting and auditing tax in India.
This enactment of Section 44AB underwent several Amendments in the 1990s and early 2000s to adapt to the evolving economic condition of the country and to widen the applicability of the Act. The crucial change which was made in the provision was expanding the categories of taxpayers, who are applicable for the audit process. Further, the Finance Act of 1999 brought significant legislative changes to Section 44AB of the Act, which included adjusting the threshold limit for the audit and introducing Form 3CD, which required a detailed audit report and its findings.
Later, the Finance Act of 2014 introduced electronic filing of audit reports which helps in the effective tax process and initiates clear and simple reporting, which helps in reducing the burden on the tax authorities during the examination of the report. At the present moment, the advancement of Section 44AB concentrates on modernising the audit process and incorporating technologies for effective compliance for taxpayers.
Introducing technologies in the process of audit helps the taxpayers as well as the tax authorities to provide a legitimate and transparent financial statement. These actions and changes by the provision directly contribute to the integrity and transparency of the tax laws in India.
Section 44AB
Section 44AB of the Income Tax Act plays a crucial role in the Indian economy by mandating tax to certain individuals who are carrying professions and business. This Section is essential because it regulates the taxing system by conducting the process transparently and accurately. This directly helps in restricting tax evasion by the taxpayers and ensures compliance with the Income Tax Act of 1961. This process applies to every type of taxpayer, including individuals, businesses, and professionals.
Scope and applicability
Section 44AB of the Act regulates and manages tax rates for taxpayers whose income or turnover exceeds certain limits. If the company’s financial report exceeds rupees one crore then the company needs an audit for their businesses, but this limit was later increased to rupees 10 crore if the total transaction is less than 5%. This section is mainly introduced to encourage digital transactions rather than relying on hard cash, which lines up with the path of the government‘s scheme of going cashless economy. For professionals, the threshold is set at the limit of rupees 50 lakh.
Purpose of audit
The main purpose of the tax audit is to verify that taxpayers transparently and accurately submit their income to the government and follow every rule and regulation given in the Tax laws. It also helps in ensuring that all the benefits of deductions and exemptions are wholly claimed by the taxpayers. The audit process will be overseen by professionals such as CA and other government authorities who are considered an expert and they have to examine the taxpayer’s records, statements, and tax returns to ensure they follow every rule and comply with the Act. Also, the tax audit helps in finding the errors or omissions in the final financial statement of the taxpayers, which directly encourages clear reporting and compliance with the established rules of the Act.
Final audit report
The final audit report of the taxpayers will be examined by the CA, upon completing the report it will be submitted to the tax authorities. Also, the report will be formed in the prescribed manner and must contain details about the findings, including any issues or errors. This report is considered one of the essential things to the tax authorities to determine the correctness of the taxpayer’s financial declaration and tax returns. Therefore, the tax authorities can have a clear report, which helps point out potential areas in which it may require extra care or investigation.
Sanction for non-compliance
Lack of fulfilment or failure to comply with the Act may lead to severe consequences. The Act manages to provide necessary sanctions and penalties for the failure to comply with the audit process. For such instance, Section 271B of the Act provides a penalty of 0.5% of the total turnover and it may be subject to a maximum of rupees 1.5 lakh. Therefore, this Section imposes an obligation on the individual to comply with the audit process and to maintain a clear financial record.
Exemption
There are certain transactions and taxpayers for which the audit may be exempted. For example, Section 44AD of the Act has a different set of rules and requirements for audit. Furthermore, non-residents who are engaging in shipping operations such as carriage of passengers or goods and non-residents operating airlines will fall under the ambit of specific provisions under Section 44B and Section 44BBA, respectively, they pay a fair percentage of tax in accordance with their gross receipts without any complex accounting procedures.
In conclusion, Section 44AB of the Income Tax Act plays an important role in mandating the process of audit and the requirements for the audit. Also, this Act manages to provide obligations to businesses and professionals to comply with the rules of the provision to undergo auditing for their gross income and to provide a final report to the tax authorities. By such action, the government can have a clear and transparent report of the income statement of the taxpayers, by which they can avoid tax evasion or omission.
Relevant provisions and concepts
Section 2(13)
Section 2(13) of the Act defines the term business, in which the term business includes any trade, commerce, or manufacture. Also, any commercial activity that aims to generate a great profit will be considered a business. Therefore, understanding the status of the business will help in determining the tax rates and liabilities.
Section 2(36)
Section 2(36) of the Act defines the term profession, which includes interior decor, consultancy, accountancy, etc. In short, a profession is nothing but any specialised service or any expertise that is different from general business commercial activities. In such instances, the professionals are subjected to a unique tax system, which includes presumptive taxation schemes and different limits for tax audits. Also, the professionals must maintain separate financial records on their expenses and are required to provide a detailed record in their final tax report. This section helps to differentiate professional services from other forms of income.
Section 44AA and Section 44AB
Section 44AA and Section 44AB give a detailed explanation of the treatment of businesses and professions for tax audits. Further, it provides us with a practical application of the audit in the process of tax and it mandates the requirement for maintaining financial records and terms under which the tax audit is regulated.
Section 44AA mandates the maintenance of statements of records for both professions and businesses. The provision mentions the time durations and status under which the statement must be kept and maintained. This makes sure that there is transparency and accuracy in the report submitted by the taxpayers and also provides a basis for the examination and assessment of tax audits. The section provides an obligation to the businesses to maintain a record of their transactions, which includes expenses, sales, and purchases and for the professionals, they must maintain a record of their gross receipts, expenses, and other financial information.
Chartered Accountant’s role
A CA plays a crucial role in the process of taxing and in forming the final financial report of the taxpayers. Section 44AB of the Act provides us with the duty and obligation of the CA and underscores the importance of undergoing the process of audit with the help of a CA. The CA has the important duty to examine the financial records, account books, and receipts of the taxpayers and he must ensure that the records comply with the tax laws and principles given by the tax regulations.
Also, the CA must prepare an audit report for the taxpayers in which he must include every detail of the financial statement and findings. He must go through the records and check whether the statements and receipts are true and fair from the view of the taxpayers. The report must be filed on the Income Tax Returns. The CA’s participation in the formation of the audit report ensures that the process is done under the supervision of an expert, which helps in identifying the errors and discrepancies during the process of forming the final audit report.
Compliance deadlines
Filing deadlines
Filing the final audit report is one of the important aspects of the audit process and this will be done by the CA to ensure every benefit is utilised by the taxpayers. Under the Act of 1961 businesses and professionals must undergo the process of audit and this is mandatory under Section 44AB of the Act. The businesses and professionals must submit their report in the specified period. For instance, in the financial year of 2023-24, the specified period was September 30 of the assessment year.
This deadline ensures discipline in submitting the report and also allows the tax authorities to examine and assess the submitted report effectively. A deadline is necessary because it provides a clear timeframe for assessing and reviewing every report. Complying with the deadlines helps taxpayers avoid penalties or legal consequences.
Failure to comply
Submitting the audit report is one of the essential in the process of audit. If any businesses or any professionals refuse to submit or fail to submit the audit report under the specified period then they may face penalties and legal consequences. Section 44AB of the Act mandates the audit process, and failure to comply with the provision can invoke Section 271B of the Act, which deals with the failure to audit accounts.
Section 271B of the Act deals with the penalties for non-complying with Section 44AB of the Act. It mandates a penalty of a sum equal to one-half percent of the total turnover or receipt for the businesses, or the gross receipts in the profession, in the previous year or a fine of one lakh rupees, whichever is less. Avoiding or failing to submit the audit report or tax evasion can directly affect the economic status of the country in a bad way.
In the case of the Commission of Income Tax vs. Mathana Model Co-operative Society Ltd. (2008), the Punjab and Haryana High Court pronounced the following judgement. Firstly, the main issue in the case was based on Section 271B of the Act, which deals with the failure to audit the accounts. In this case, the assessing officer imposed a penalty on the defendant for not complying with the requirements of filing the report.
However, the defendant appealed against the order of penalty, but the appeal was dismissed, and the penalty imposed by the commission was upheld. Further, the society appeals before the income-tax appellate tribunal (ITAT). The appellate tribunals acknowledged the appeal and set aside the penalty imposed on them. The tribunal claimed that the reason for the delay is acceptable and falls under the reasonable cause. Therefore, the penalty imposed on them is set aside. After this conclusion, they filed an appeal before the High Court against the decision of the appellate tribunal. The High Court of Punjab and Haryana upheld the decision of the appellate tribunal and held that the reason for the delay in filing the report was a reasonable cause for the failure.
Similarly, in the case of CIT vs. Ashoka Dairy (2005), the issue of non-compliance in filing the audit report was discussed. In this case, the Punjab and Haryana High Court upheld the penalty imposed by the tax authorities.
Extensions and exceptions
Extensions of the period are given to the taxpayers only under special circumstances. This helps the taxpayers to fulfil their duty to submit the audit report even after the specified period. The income tax department provides an extension of the deadline in circumstances such as any technical errors or difficulties and not for any small reasons.
This extension by the tax authorities solely depends on their discretion, and the taxpayers must apply for the extension before the original deadline. Also, taxpayers who fall under Special Economic Zones and areas under natural calamities are qualified to extend the deadline. It is important for taxpayers to be notified of the situation beforehand by the tax authorities, and they must provide a declaration of record to support their request.
In the case of Hindustan Steel Ltd vs. State of Orissa (1969), the Supreme Court held that the penalties for non-compliance should not be imposed automatically until evidence of willful negligence is shown. Also, the court highlighted that a reasonable cause for non-compliance should be considered before levying penalties. If non-compliance was due to fair and genuine reasons, then the penalties can be reduced or waived. This concept of reasonable cause and principle of penalty was also discussed by the Supreme Court in the case State of Andhra Pradesh vs. Abdul Bakhi & Bros (1964). The main issue of this case falls under the ambit of the sales tax of Andhra Pradesh and the interpretation of the term ‘turnover’. The Supreme Court held there must be a reasonable and genuine cause for the failure to pay the tax, and the court highlighted that gross receipts should be included in the turnover. Therefore, this case was considered as one of the landmark judgments in relation to tax issues.
Conclusion
Section 44AB of the Income Tax Act of 1961 is considered an important provision to regulate the tax system of India. As it provides an important regulatory framework for businesses and professionals who are showing a turnover or gross receipt above the specified limit. The provision mandates that any businesses or professionals who are crossing above the fixed turnover must be subject to the audit process, and they have to submit the audit report to the respective officials before the deadline mentioned by the authorities.
This Section was initially introduced by the Finance Act of 1984 to enhance transparency and accountability of the audit process for a certain group of taxpayers. As a growing country, we need a well-versed tax system. So Section 44AB of the Act is one of the crucial provisions that helps in the management and regulation of the financial status of the country. This Section directly helps in the economic conditions of the country by obligating certain taxpayers to file an audit report on their profit and loss. By this, the government or the official authorities can impose tax on them.
As we all know, the main revenue of our country depends on the tax, and if any business or any professional evades paying tax, then it will directly reflect on the economic status of the country and can have a huge impact on the pricing of necessary products. Therefore, Section 44AB of the Act ensures fair taxation and reduces tax evasion. Over the years, Section 44AB has undergone several developments and amendments that are necessary to fulfil the modernising era of the country.
As we speak of modernising, even tax systems have undergone development by introducing modern technologies for collection and imposing tax. This development had made significant changes in the taxation laws. In summary, Section 44AB of the Act stands as a cornerstone of the Income Tax Act, ensuring that businesses and professionals comply with the given rules and regulations of the Act. As the taxing system develops concerning modernization, the country will also develop proportionally.
Frequently Asked Questions (FAQ’s)
Who are the people who must get audited under Section 44AB?
The audit process applies to businesses with a turnover or gross receipts exceeding the prescribed limit, which is rupees one crore, professionals with a gross receipt exceeding rupees 50 lakhs, and persons who fall under the low-profit presumptive taxation schemes.
What audit forms are required to be filed under Section 44AB?
There are three forms, namely Form 3CA, which applies to the persons whose account is already audited; Form 3CB, for the persons whose account was not audited by any law; and Form 3CD is a statement of particulars that has to be submitted along with the Form 3CA and Form 3CB.
Can the deadline for filing the report be extended?
Yes, the deadline for filing the audit report can be extended at the discretion of the tax authorities. If the tax authorities feel the reason for the extension is reasonable, then they have the power to extend the deadline for the taxpayer, but the application for the extension must be given before the deadline.
Reference
- https://blog.ipleaders.in/section-44ad-of-the-income-tax-Act-1961/
- https://blog.ipleaders.in/income-tax-Act/
