What is a Tax Audit?
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’. A tax audit is the process of verification and inspection of the accounts of a taxpayer to confirm their adherence to the provisions of the Income Tax law.
Objectives of Tax Audit
Tax audit is conducted to achieve the following objectives:
- Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor.
- Reporting observations/discrepancies noted by tax auditor after a methodical examination of the books of account.
- To report prescribed information such as tax depreciation, compliance of various provisions of income tax law, etc.
- All these enable tax authorities in verifying the correctness of income tax returns filed by the taxpayer. Calculation and verification of total income, claim for deductions etc., also becomes easier.
Who is mandatorily subject to Tax Audit?
A taxpayer is required to have a tax audit carried out if the sales, turnover or gross receipts of business exceed Rs 1 crore in the financial year. However, a taxpayer may be required to get their accounts audited in certain other circumstances. We have categorized the various circumstances in the tables mentioned below:
| Category of person | Threshold |
| Business | |
| Carrying on business (not opting for presumptive taxation scheme*) | Total sales, turnover or gross receipts exceed Rs.1 crore in the FY If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for tax audit is increased to Rs.10 crores (w.e.f. FY 2020-21) |
| Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB | Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme |
| Carrying on business eligible for presumptive taxation under Section 44AD | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit. |
| Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when the presumptive tax scheme was opted | If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for |
| Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD | If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for |
| Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD | If the total sales, turnover or gross receipts does not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses. |
| Profession | |
| Carrying on profession | Total gross receipts exceed Rs 50 lakh in the FY |
| Carrying on the profession eligible for presumptive taxation under Section 44ADA | 1. Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme 2. Income exceeds the maximum amount not chargeable to income tax |
| Business loss | |
| In case of loss from carrying on of business and not opting for presumptive taxation scheme | Total sales, turnover or gross receipts exceed Rs 1 crore |
| If taxpayer’s total income exceeds basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme) | In case of loss from business when sales, turnover or gross receipts exceed 1 crore, the taxpayer is subject to tax audit under 44AB |
| Carrying on business (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below basic threshold limit | Tax audit not applicable |
| Carrying on business (presumptive taxation scheme under section 44AD applicable) and having a business loss but with income exceeding basic threshold limit | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit |
What constitutes an audit report?
Tax auditor shall furnish his report in a prescribed form which could be either Form 3CA or Form 3CB where:
- Form No. 3CA is furnished when a person carrying on business or profession is already mandated to get his accounts audited under any other law.
- Form No. 3CB is furnished when a person carrying on business or profession is not required to get his accounts audited under any other law.
In case of either of the aforementioned audit reports, the tax auditor must furnish the prescribed particulars in Form No. 3CD, which forms part of the audit report.
How and when tax audit reports shall be furnished?
The tax auditor shall furnish a tax audit report online by using his login details in the capacity of ‘Chartered Accountant’. Taxpayers shall also add CA details in their login portal.
Once the tax auditor uploads the audit report, the same should either be accepted/rejected by the taxpayer in their login portal. If rejected for any reason, all the procedures need to be followed again till the audit report is accepted by the taxpayer.
You must file the tax audit report on or before the due date of filing the return of income. It is 30th November of the subsequent year in case the taxpayer has entered into an international transaction and 30th September of the subsequent year for other taxpayers. The subsequent year itself is the assessment year.
Penalty of non-filing or delay in filing tax audit report
If any taxpayer is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty:
- 5% of the total sales, turnover or gross receipts, or
- Rs 1,50,000
However, if there is a reasonable cause of such failure, no penalty shall be levied under section 271B.