Tax Audit
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About Tax Audit
Tax Audit is a detailed examination of your tax filings conducted by the government. Think of it as a financial checkup to ensure that your reported income and deductions are accurate. While the process may seem daunting, staying organized and working with a qualified tax professional can make it smooth and hassle-free.
Objectives of a Tax Audit
The main objectives of a tax audit are to:
- Ensure proper maintenance and accuracy of books of accounts and financial records.
- Report observations, discrepancies, and specific information (such as tax depreciation and compliance with various Income Tax provisions) to the tax authorities in a structured format.
- Assist tax authorities in verifying the correctness of Income Tax Returns, saving time during routine checks.
- Deter tax evasion and promote transparency and accountability in financial reporting.
Types of audits
Understanding Tax Audit Under Section 44AB
There are various types of audits prescribed under different laws. For example, company law mandates a company audit, while the Cost Accounting Law requires a cost audit. Similarly, the Income-tax Law requires taxpayers to get the accounts of their business or profession audited from the viewpoint of income tax compliance.
Section 44AB outlines the provisions for the class of taxpayers who must have their accounts audited by a Chartered Accountant (CA). The objective of a tax audit under Section 44AB is to ensure compliance with various provisions of the Income-tax Law and fulfill other statutory requirements. An audit conducted by a CA under Section 44AB is referred to as a tax audit.
The CA conducting the tax audit is required to present findings and observations in the form of an audit report. The report must be submitted using Form Nos. 3CA/3CB and 3CD.
One of the primary objectives of the tax audit is to accurately ascertain, derive, and report information required in Form Nos. 3CA/3CB and 3CD. Beyond reporting, a proper tax audit ensures that books of accounts and other records are well-maintained, truly reflect the taxpayer’s income, and that claims for deductions are correctly made. It also helps in detecting fraudulent practices and facilitates proper administration of tax laws by presenting accounts clearly to tax authorities.
Additionally, a thorough tax audit significantly saves the time of Assessing Officers in routine verifications, such as checking totals or confirming that purchases and sales are properly documented. The time saved can then be focused on more critical and investigational aspects of a case.
As per section 44AB, the following persons are compulsorily required to get their accounts audited :
A person carrying on a business is required to undergo a tax audit if their total sales, turnover, or gross receipts for the year exceed ₹1 crore. However, this provision does not apply to individuals who opt for the presumptive taxation scheme under Section 44AD, provided their total sales or turnover do not exceed ₹2 crores.
Note:
Updated Thresholds for Tax Audit
With effect from Assessment Year 2020-21, the threshold limit for a person carrying on a business has been increased from ₹1 crore to ₹5 crore, provided that cash receipts and payments during the year do not exceed 5% of total receipts or payments. In other words, more than 95% of the business transactions should be conducted through banking channels.
For a person carrying on a profession, a tax audit is required if gross receipts for the year exceed ₹50 lakhs.
An assessee who declares profit under Section 44AD and reduces profit in any of the subsequent five assessment years below the profit computed as per Section 44AD, where the income exceeds the non-taxable limit, will be subject to tax audit.
If an eligible assessee opts out of the presumptive taxation scheme within the specified period, they cannot revert to the scheme for five assessment years thereafter.
Similarly, a person eligible under Section 44ADA who declares profits or gains lower than those computed under the presumptive taxation scheme, and whose income exceeds the non-taxable limit, will also require a tax audit.
(*) For detailed provisions of Section 44AD, refer to the tutorial on “Tax on presumptive basis in case of certain eligible businesses.”
Penalty
Penalty for Non-Compliance with Tax Audit (Section 271B)
As per Section 271B, if a person required to comply with Section 44AB fails to get their accounts audited for any year or fails to furnish the audit report as mandated, the Assessing Officer may impose a penalty.
The penalty shall be lower of the following amounts:
Penalty Amount Under Section 271B
The penalty for non-compliance with Section 44AB is determined as follows:
- 0.5% of the total sales, turnover, or gross receipts in business, or of the gross receipts in profession for the relevant year(s).
- A maximum of ₹1,50,000.
However, as per Section 271B, no penalty shall be imposed if the person can demonstrate a reasonable cause for the failure to get accounts audited or to furnish the audit report.