Tax Audit
An audit is an official review or impartial examination of a company’s financial statements or reports, conducted by an independent entity. Various audits exist under different laws, including company audit, statutory audit, cost audit, and stock audit. Similarly, an audit mandated under income tax regulations is known as a ‘Tax Audit.’ It involves the examination of a taxpayer’s accounts to ensure accurate income reporting for filing Income Tax Returns (ITRs).
Objectives of Tax Audit
- Ensuring proper maintenance and accuracy of tax records, with validation by an auditor.
- Reporting key details such as tax evasion, compliance with income tax provisions, etc.
- Identifying and documenting discrepancies found during a thorough audit of accounts.
- Assisting tax authorities in verifying the accuracy of filed income tax returns.
- Determining total income and facilitating deduction claims.
Mandatory Tax Audit Requirements
| Category | Threshold Limit |
|---|---|
|
Business
|
|
|
Engaged in business but not opted for the presumptive taxation scheme
|
Total sales, gross receipts, or turnover exceed ₹1 crore in the Financial Year
|
|
Business under presumptive taxation u/s 44AE, 44BB, or 44BBB
|
Claims profits lower than the specified limit under the presumptive taxation scheme
|
|
Business under presumptive taxation u/s 44AD
|
Declares taxable income below the specified limit under the presumptive tax scheme and has income exceeding the basic threshold limit
|
|
Business previously under presumptive taxation u/s 44AD but opted out during the lock-in period (5 consecutive years)
|
If income surpasses the maximum non-taxable limit in the next 5 consecutive years after opting out of presumptive taxation
|
|
Business under presumptive taxation u/s 44AD and reporting profits
If total sales, gross receipts, or turnover is less than ₹2 crore in the Financial Year, tax audit is not applicable
|
Business previously under presumptive taxation u/s 44AD but opted out during the lock-in period (5 consecutive years)
|
| Profession | Threshold Limit |
|---|---|
|
Practicing a profession
|
Total gross receipts exceed ₹50 lakh in the Financial Year
|
|
Profession under presumptive taxation u/s 44ADA
|
1. Claims profits lower than the specified limit under the presumptive taxation scheme. 2. Income surpasses the maximum non-taxable limit.
|
| Business Loss | Threshold Limit |
|---|---|
|
Business with a loss (not under
the presumptive taxation scheme)
|
Total sales, gross receipts, or turnover exceed ₹1 crore
|
|
Business loss with total income exceeding the basic threshold limit
|
If sales, gross receipts, or turnover exceed ₹1 crore, a tax audit is mandatory u/s 44AB
|
|
Business under presumptive taxation
u/s 44AD
with a loss and income
below the basic threshold limit
|
Tax audit not applicable
|
|
Business under presumptive taxation u/s 44AD with a loss and income exceeding the basic threshold limit
|
Declares taxable income below the specified limit under the presumptive tax scheme and has income exceeding the basic threshold limit
|
Tax Audit Report Filing Process
A Chartered Accountant (CA) conducting a tax audit for an individual or firm must submit the tax audit report online using their valid login credentials.
- The taxpayer must provide details of the appointed CA in their login portal.
- Once the CA uploads the tax audit report, the taxpayer must either accept or reject it on their portal. If rejected, the process must be repeated until the taxpayer confirms the report.
- The tax audit report must be filed before the deadline:
- 30th November of the assessment year for taxpayers engaged in international business.
- 30th September of the assessment year for all other taxpayers.
Rules for Tax Audit
Taxpayers must adhere to the following tax audit rules:
- If engaged in multiple businesses, a tax audit is mandatory if the total turnover from all businesses exceeds ₹1 crore.
- If engaged in multiple professions, a tax audit is required if the total gross receipts from all professions exceed ₹50 lakhs.
- If engaged in both business and profession, turnover from both is not combined to determine audit applicability. A tax audit is required if:
- Business turnover exceeds ₹1 crore (audit for business accounts).
- Gross receipts from the profession exceed ₹50 lakhs (audit for professional accounts).
- If business turnover is ₹90 lakhs and professional gross receipts are ₹40 lakhs, no audit is required.
- Sale of fixed assets (e.g., vehicles or immovable property) does not count as business or professional income and is excluded from turnover or gross receipts.
- Tax audit reports cannot be reversed, but if accounts are revised due to legal amendments or interpretations post-AGM approval, the audit report can be updated.
Forms Required for Tax Audit
- Form 3CB – For tax audit reports prescribed under Section 44AB of the IT Act, 1961.
- Form 3CD – Used to report details in Form 3CB.
- Form 3CA & Form 3CD – Applicable when accounts are audited under any law other than Section 44AB, with details reported in Form 3CD.
Penalty for Non-Compliance with Tax Audit
If a taxpayer fails to conduct a required tax audit, the penalty will be the lower of:
- 5% of total sales
- 5% of total turnover
- 5% of gross receipts
- ₹1,50,000
Waiver of Tax Audit Penalty
A penalty may be waived if the taxpayer proves reasonable cause for non-compliance, such as:
- Delay due to withdrawal by the appointed tax auditor.
- Delay caused by the death or disability of the partner responsible for accounts.
- Delay due to labor issues like strikes or lockouts.
- Delay caused by loss of accounts due to theft, fire, or uncontrollable events.
- Natural disasters.