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Before understanding what is tax audit, let us understand the term ‘audit’. Dictionary meaning of the term ‘Audit’ suggests that it is an official inspection of an organisation’s accounts and production of report, typically by an independent body. It is also referred to a systematic review or assessment of something.

What is tax audit?

There are various kinds of audit 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’. As the name itself suggests, tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax viewpoint. It makes the process of income computation for filing of return of income easier.

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?

Following categories of taxpayers are required to get tax audit done:

Category of person

Threshold

Carrying on business (not opting for presumptive taxation scheme*)

In case of loss from carrying on of business and not opting for presumptive taxation scheme

Taxpayer’s income exceeding basic threshold limit but taxpayer incurs loss from carrying on business (not opting for presumptive taxation scheme)

Total sales, turnover or gross receipts exceed Rs 1 crore

Total sales, turnover or gross receipts exceed Rs 1 crore
Even in case of loss from business when sales, turnover or gross receipts exceed 1 crore, taxpayer is subject to audit

Carrying on business (opting presumptive taxation scheme under section 44AD

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
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 profession Gross receipts exceed Rs 50 lakhs
Carrying on business eligible for presumptive taxation under Section 44AE Claims profits or gains lower than the prescribed limit under presumptive taxation scheme
Carrying on the profession eligible for presumptive taxation under Section 44ADA Claims profits or gains lower than the prescribed limit under presumptive taxation scheme and income exceeds maximum amount not chargeable to tax
Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting for presumptive taxation in one tax year and not opting for presumptive tax for any of the subsequent 5 consecutive years If income exceeds maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the tax year where presumptive taxation is not opted for

 

What happens if a person is required to get his accounts audited under any other law for eg. statutory audit of companies under company law provisions ?

In such cases, the taxpayer need not get his accounts audited again for income tax purposes. It is sufficient if accounts are audited under such other law before the due date of filing the return. The taxpayer can furnish this prescribed audit report under Income tax law.

What constitutes 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, tax auditor must furnish the prescribed particulars in Form No. 3CD, which forms part of audit report.

How and when tax audit report shall be furnished?

The tax auditor shall furnish tax audit report online by using his login details in the capacity of ‘Chartered Accountant’. Taxpayer shall also add CA details in their login portal. Once the tax auditor uploads the audit report, same should either be accepted/rejected by 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 30 November of the subsequent year in case the taxpayer has entered into an international transaction and 30 September of the subsequent year for other taxpayers.

Consequences of non-compliance

If any taxpayer who is required to get the tax audit done but fails to do so, the least of the following may be levied as a penalty:

1. 0.5% of the total sales, turnover or gross receipts

2. Rs 1,50,000

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