Comprehensive Analysis of Tax Audit : Forms 3CA, 3CB, 3CD & 3CE

Different types of audits are prescribed under various laws, like company audits under company law, cost audits under cost accounting law, etc. Certain taxpayers must get the books of accounts of their business/profession audited under the Income Tax Act, 1961, known as a tax audit. A tax audit means a Chartered Accountant reviews a business's accounts and checks their compliance with the Income Tax laws.

The Chartered Accountant conducts a tax audit of the taxpayer’s accounts under Section 44AB. Certain businesses and professionals are legally required to mandatorily carry out regular audits under Section 44AB of the Income Tax Act. 

Latest Update

The threshold limit of Rs.1 crore for a tax audit is increased to Rs.5 crore from AY 2021-22 and further to Rs.10 crore with effect from AY 2022-23 (FY 2021-22) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments. 

The reporting under clause 30C and clause 44 of the tax audit report (form 3CD) was suspended until 31 March 2022.

What is a Tax Audit?

Tax audit is a cross-examination of the books of accounts of the taxpayer by a Chartered Accountant (holding full-time Certificate of Practice) under the Income Tax Act 1961. The auditor has to furnish the audit report in the specified audit form along with the detailed particulars.

Section 44AB deals with the conditions under which Tax audit becomes mandatory for some taxpayers. The main purpose of a tax audit is to verify the accuracy of the financial records and avoid any fraud or tax evasion.

What is a Tax Audit Report?

The person conducting a tax audit has to provide the findings in a report using specified ‘Audit Forms’ prescribed by the income tax department. Section 44AB prescribes Forms 3CA and 3CB. Along with these two forms, the auditor has to furnish a form 3CD. Let us discuss these forms in detail.

The Chartered Accountant will file the tax audit report electronically to the Income Tax Department. After the filing of the report by the Chartered Accountant, the taxpayer must approve the tax audit report from his/her Income Tax e-fling account. 

Applicability of Tax Audit Under Section 44AB

Tax audit is applicable for the following businesses and professionals:

• Businesses where the total sales, turnover or gross receipts exceeds Rs.1 crore in the previous year. This limit has been increased Rs.5 crores from AY 2021-22 and further to Rs.10 crore with effect from AY 2022-23 (FY 2021-22) provided - 
  • Cash receipts are below 5% of the gross receipts or turnover
  • Cash payments are below 5% of the aggregate payments
• Professionals whose gross receipts from profession exceed Rs.50 lakh in the previous year 

For more details on the applicability of tax audits for businesses opting for presumptive taxation, click here.

Prescribed audit forms under Section 44AB

The audit report has to be furnished in either of the following forms: 
(i) Form 3CA and (ii) Form 3CB

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). The Form contains the auditor’s report and the particulars of the audit conducted.
For instance, A company is required to get its accounts audited compulsorily under the 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. The Form contains the auditor’s report and the particulars of the audit conducted.
A proprietorship entity or partnership firm with a turnover of more than 1 crore and not opting for the presumptive income scheme is not required to get its accounts audited under any other law except income tax. So, it will furnish Form 3CB.  

Along with either of the forms mentioned above, the tax auditor shall also furnish Form 3CD which forms part of the audit report and contains the prescribe particulars.

Particulars of Form 3CA

Point 1

• Name and address of the taxpayer along with Permanent Account Number.
• Name of the Auditor (Individual/ Firm as the case may be).
• Law under which accounts have been audited (eg: Companies Act).
• Date of Audit Report.
• Period of Profit & Loss Account/ Income & Expenditure Account. (Beginning Date & End Date)
• Date of Balance Sheet.

Point 2

• Declaration of attaching Form 3CD along with the audit report.

Point 3

• Audit Observations/ Qualifications found in the details related to Form 3CD.

Point 4

• Place & Date of signing audit report.
• Name, Address, and Membership Number of the Auditor.
• Stamp/ Seal of the Auditor.

Particulars of Form 3CB

Point 1

• Date of Balance Sheet.
• Period of Profit & Loss Account/ Income & Expenditure Account. (Beginning Date & End Date).
• Name and address of the taxpayer along with Permanent Account Number.

Point 2

• Address, where the books of accounts are kept
• Address of branches (if books are kept at branches also).

Point 3(a)

• Audit Observations/ Qualifications/ Comments/ Discrepancies.

Point 3(b)

• Declaration by the auditor regarding –
  • Obtaining all the information and explanations necessary for the audit.
  • Assurance that the organization (including branches) maintains proper books of accounts.
  • Balance sheet and Profit & Loss Account gives a true and fair view.

Point 4

• Declaration of attaching Form 3CD along with the audit report.

Point 5

• Audit observations/ discrepancies found in the details related to Form 3CD.

Point 6

• Place & Date of signing audit report.
• Name, Address, and Membership Number of the auditor.
• Stamp/ Seal of the auditor.

Particulars of Form 3CD

Form 3CD is a 44-points detailed statement of particulars. All the details related to various aspects of the business and transactions have to be filled at appropriate places. A detailed explanation of each point of Form 3CD can be seen here.

Form 3CE – Audit Report in Respect of Non-Residents and Foreign Companies

Non-residents and foreign companies receiving royalty or fees for technical services from the government or an Indian concern have to get their accounts audited. The auditor will furnish the report in Form 3CE along with an annexure mentioning the particulars.

Particulars of Form 3CE

Point 1

• Name and address of the non-resident along with Permanent Account Number,
• Financial year, for which the auditor has conducted the audit,

Point 2

• Declaration about obtaining all the information and explanations necessary for the audit,

Point 3

• Certification about the permanent establishment/ fixed place of the profession in India,

Point 4

• Declaration of the income from royalty/ fees for technical services under section 44DA for the relevant assessment year,

Point 5

• Signature and name of the Auditor along with stamp/ seal

Details relating to income by way of royalty or fees for technical services will have to be mentioned in the Annexures that are a part of this form.

Due Date of Obtaining the Audit Report

A taxpayer has to obtain the audit report on or before 30th September of the relevant assessment year unless otherwise extended. 

However, due to the pandemic situation, the audit report for AY 2021-22, the due date for submitting the audit report was extended to 15th Jan 2022.

Penalty for Not Filing the Audit Report

The assessing Officer may impose a penalty u/s 271B if the taxpayer doesn’t get his accounts audited or file the audit report. A minimum penalty can be 0.5% of the total sales, turnover or gross receipts, which can go up to Rs.1,50,000. However, no penalty will be imposed if the taxpayer gives reasonable cause for non-compliance, such as the following:

• Delay caused by the death or physical inability of the partner responsible for accounts
• Delay caused by resignation of the tax auditor
• Delay caused by labour issues such as strikes or lock-outs
• Natural calamities
• Delay caused by loss of accounts due to theft or fire, or incidents that are not under the taxpayer’s control