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December 17, 2020

Penalty for failure to get Tax Audit completed before due date of 31 December 2020

by CA Shivam Jaiswal in Income Tax

Penalty for failure to get Tax Audit completed before due date of 31 December 2020

There are various kinds of audits being conducted under different laws such as company audit, statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’. Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity.

As per these provisions, tax audit shall be conducted by a Chartered Accountant who ensures that the taxpayers have maintained proper books of account and complied with the provisions of the Income-tax Act. Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department in Form no. 3CA/3CB and Form no. 3CD along with the income tax return.

What is Tax Audit under section 44AB?

  • Tax Audit refers to the independent verification of the books of accounts of the assessee to form an opinion on the matters related to taxation compliances carried out by the assessee.
  • While preparing the books of accounts of the business or profession for the purpose of income tax filing, the assessee has to comply with the provisions of Income-tax Act, 1961.
  • Tax audit can be conducted by a Chartered Accountant who holds the certificate of practice and is in full-time practice.
  • However certain classes have been defined who cannot conduct tax audit under section 44AB. 
  • The tax auditor (CA) carries out a systematically examination of books of account as per the formats prescribed by the department. 

Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department as follows:

The audit report has to be furnished in either of the following forms:

  • Form 3CA – In respect of a taxpayer carrying on a business or profession and who is already mandated to get his accounts audited under any other law (i.e. law other than income tax law). A company is required to get its accounts audited compulsorily under Companies Act 2013. So, it will furnish Form 3CA.
  • Form 3CB – In respect of a taxpayer carrying on a business or profession but who is not required to get his accounts audited under any other law. A proprietorship entity or partnership firm, having turnover of not more than 1 crore and not opting for presumptive income scheme, is not required to get its accounts audited under any other law except income tax. So, it will furnish Form 3CB.
  • Form 3CD – The statement of particulars would be as per Form 3CD. This Form various clauses where the auditor has to report on the various matters contained therein. These clauses have been divided into two parts – Part A covers the basic factual details about the assessee and Part B contains the particulars of various compliances under the income tax laws that need to be furnished

What is the effect when tax audit is not conducted under section 44AB?

Section 271B of the Income Tax Act imposes a penalty on taxpayers for not getting accounts audited or failure to furnish a tax audit report. The penalty under Section 271B is imposed on defaulting taxpayers for not getting the accounts audited or failure to submit to the Income Tax Department the report furnished by the tax auditor. The penalty is applicable exclusively if the taxpayer is unable to state a reasonable cause for the lapse.

What is the penalty under section 44AB?

If the taxpayer commits a default under Section 44AB, the assessee shall be penalized with a penalty which is equal to 0.5% of the total sales, turnover or gross receipts in business or of the gross receipts in the profession of the particular previous year or Rs 1,50,000, whichever is less.

What assessee’s are required to get their accounts audited?

Category of personThreshold limit exceeding which tax audit is mandatory
The person carrying on businessTotal sales / turnover / gross receipts exceed Rs 1 Crore in any previous year.
The person carrying on professionGross receipts exceed Rs 50 Lakhs in any previous year.
The person carrying on business covered under section 44AE or section 44BB or section 44BBBIncome claimed by the person is lower than the deemed profit under respective sections in any previous year.
The person carrying on profession covered under section 44ADAIncome claimed by the person is lower than the deemed profit and income exceeds the specified threshold exemption limit in any previous year.
The person carrying on business to whom provisions of section 44AD (4) are applicableIncome exceeds the specified threshold exemption limit in any previous year.

In order to avoid the penalty under section 271b, the specified categories of person are required to get their accounts audited and are also required to furnish the tax audit report within the prescribed time limit.

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