Tax Audit: All You Need to Know

Tax audit refers to the process of inspection and verification of books of accounts of a taxpayer to ensure their adherence to the provisions of the Income-Tax Act, of 1961. Section 44AB of the Act lays an obligation on certain persons mentioned thereunder carrying on business or profession, to get their accounts audited before the “specified date” by a Chartered Accountant, if their turnover exceeds the specified threshold limits or in cases where they are eligible to declare their income on a presumptive income basis as per section 44AD if they claim that their income is lower than the income so computed as per presumptive income. 

Objectives of Tax Audit

The key objectives of the tax audit are as follows-

1. It ensures that the books of accounts are maintained properly and certified by a Chartered Accountant.
2. The primary purpose of a tax audit is to prepare and submit an audit report according to the requirements of Form no. 3CA/3CB and 3CD.
3. The tax audit gives assurance to shareholders that the books of accounts are free from any discrepancies and financial statements and audit reports give a true and fair view of the business.
4. Tax audits also help in checking fraudulent practices.

Applicability of Tax Audit

Section 44AB of the Income-Tax Act, 1961 mandates an audit of books of accounts by a Chartered Accountant where businesses whose total sales/turnover/gross receipts exceed Rs. 10 crores during the previous year or professionals whose gross receipts exceed Rs. 50 lakhs (threshold limit has increased to Rs. 75 lakhs as per Budget 2023) during the previous year. 

However, an assessee may be required to get their books of accounts audited in certain other circumstances. Here are the list of circumstances that can be used to determine whether an assessee is liable to comply with provisions of Section 44AB or not:

1. Category of person- Business
2. Assessee carrying on a business but not opting for presumptive taxation scheme

Applicability-

• If total sales, turnover, or gross receipts exceed INR one crore in the previous financial year.
• If cash transactions are up to 5% of total gross receipts and payments, the threshold limit is increased to INR ten crores.

2. Assessee carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB

Applicability-

• If the profit claimed is lower than the prescribed limit under the presumptive taxation scheme

3. Assessee carrying on business eligible for the presumptive taxation under Section 44AD 

Applicability-

• If taxable income declared is below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit.

4. Assessee 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 has been opted.

Applicability-

• 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.

5. Assessee carrying on a business where declaring profits as per presumptive taxation scheme under Section 44AD

Applicability-

• 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.

6. Assessee carrying on a business where declaring profits as per presumptive taxation scheme under Section 44AD

Applicability-

• If the total sales, turnover, or gross receipts do not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses.

2. Category of person- Profession
3. Assessee carrying on the profession 

Applicability-

• If the total sales, turnover, or gross receipts do not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses.

2. Assessee carrying on a business where declaring profits as per presumptive taxation scheme under Section 44AD

Applicability-

• If the total sales, turnover, or gross receipts do not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses.

3. Category of person- Business Loss
4. Where the assessee is carrying on business with loss and has not opted for a presumptive taxation scheme under section 44AD 

Applicability-

• Where total sales, turnover, or gross receipts exceed Rs 1 crore.

2. Where the assessee’s total income exceeds the basic threshold limit but he has incurred a loss from carrying on a business and not opted for a presumptive taxation scheme under section 44AD

Applicability-

• In case of loss from business when total sales, turnover, or gross receipts exceed INR 1 crore, the assessee is subject to tax audit under 44AB

3. Where the assessee is carrying on a business (opted presumptive taxation scheme under section 44AD) and having a business loss but with income below the basic threshold limit

Applicability-

• Tax audit not applicable

4. Where the assessee is carrying on a business (opted presumptive taxation scheme under section 44AD) and having a business loss but with income exceeding the basic threshold limit.

Applicability-

• Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit

What Forms A Tax Audit Report?

An auditor, who is a Chartered Accountant, shall furnish the tax audit report in any of the following prescribed forms:-

• Form No. 3CA is furnished where an assessee is carrying on business or profession and it is already mandated to get the books of accounts audited under any other law.
• Form No. 3CB is furnished where an assessee is carrying on business or profession and it is not required to get the books of accounts audited under any other law.
• In both the case of audit reports i.e Form No. 3CA and 3CB, an auditor must furnish the prescribed particulars in Form No. 3CD, which also forms the part of the audit report.

Penalty For Delay or Non-Filing Of Tax Audit Report

If an assessee fails to comply with the provisions of section 44AB and gets his books of account audited, he will be liable to pay a penalty as per section 271B. According to section 271B, the penalty shall be lower of the following amounts:

(a) 0.5% of the total sales, turnover, or gross receipts or 

(b) Rs. 1,50,000.

Final Words

A taxpayer who is liable to get their books of accounts audited must get a tax audit conducted by a Chartered Accountant and file the income tax report before the due date, 30th September, in prescribed format i.e Form No 3CA, 3CB or 3CD.

Frequently Asked Questions (FAQs)