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Income Tax Audit in India

There are various laws in India that govern different kinds of audit like income tax audit, stock audit, cost audit, company or statutory audit as per company law, to name a few. Section 44AB of the Income Tax Act, 1961, lays down the provisions for income tax audit.

Income Tax audit, as evident from the name, is aimed at evaluating whether an individual or company has accurately filed the income tax returns of an assessment year. An external agency is mandated to assess returns filed from income, deductions and expenditures and other rules as mentioned by the Income Tax Act, 1961. The tax audit process simplifies the computation of tax returns. The Chartered Accountant of the concerned agency performing the tax audit has to submit Form 3CA or Form 3CB, and Form 3CD, as an audit report comprising of the observations.

Income Tax Audit for companies whose tax audit is not conducted under Section 44AB of the Income Tax Act, 1961

Taxpayers who have to get their accounts audited under any law other than Section 44AB of the Income Tax Act, 1961, (for instance, stock audit or statutory audit) do not have to get their accounts audited again for the purpose of income tax audit. In such cases, accounts audited under other laws can be presented as a tax audit report for income tax filing, provided it is submitted before the stipulated due date.

The following are the other sections under Income Tax Act, 1961, which also lay down regulations related to income tax audit in India. These are presumptive taxation schemes, wherein a pre-determined percentage of income is assumed to be the gain or profit meant for taxation.

Section 44BB: For Non-Resident Indians (NRIs) involved in business specialising in the mineral oils industry, like exploration

Section 44BBB: International company involved in the business of civil construction etc. in certain power projects

Section 44AD: Any business except those businesses mentioned under Section 44AE

Section 44ADA: This section focuses on the regulations regarding income tax audits for eligible professionals

Section 44AE*: Businesses specialising in leasing, hiring and plying of goods carriages

Objectives of Tax Audit

Here’s why tax audit is necessary:

  • An analysis of the accuracy of income tax returns filed in an assessment year by individuals and companies, and maintenance of records by the Chartered Accountant.

  • Reporting of findings by the tax auditor after a detailed analysis of accuracies/inaccuracies in tax returns filed.

  • Reporting essential details regarding compliance, tax depreciation, etc., as per the laws for income tax. This streamlines the processes for the income tax authorities in calculation and assessing the accuracy of the income tax return filed by the individual or company.

  • Checks frauds and malpractices in filing income tax returns.

Categories of Taxpayers for Whom Tax Audit is Mandatory

Tax audit is compulsory for the following categories of taxpayers:

  • A business owner, who has not opted for presumptive taxation scheme, with gross receipts or turnover or total sales exceeding Rs. 1 crore.

  • A business owner, who has opted for presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961, with gross receipts or turnover or total sales exceeding Rs. 2 crore.

  • A taxpayer whose business, which is eligible for presumptive taxation under Section 44AE, 44BB and 44BBB, claims profits that are lesser than the prescribed limit under respective presumptive taxation scheme.

  • A business owner who is not be eligible to claim presumptive taxation under Section 44AD because he or she has opted for it in a certain assessment year and not for any of the five consecutive years subsequently. This is applicable when his/her annual income is more than the maximum amount not chargeable to tax in the following 5 consecutive assessment years from the tax year.

  • An employee of an organisation whose gross receipts is more than Rs. 50 lakhs

  • An employee of an organisation that is eligible for presumptive taxation under Section 44ADA and claims profits that are lesser than the prescribed limit under presumptive taxation scheme and income is more than the maximum amount not chargeable to tax.

Tax Audit Report Filing Process

The following is the procedure for filing tax audit report:

  • The Chartered Accountant assigned for conducting tax audit of an individual or an organisation has to present the tax audit report online, using his/her official login credentials.

  • The taxpayer also has to mention the relevant information about their Chartered Accountant in their login platform.

  • Once the tax audit report is uploaded by the auditor, it has to be either accepted or rejected by the taxpayer on their login portal. If the taxpayer rejects the tax audit report, the entire process has to be repeated until the tax audit report is accepted by him/her.

  • Tax audit report has to be filed on or before the pre-determined due date of filing income return, i.e., 30th November of the subsequent assessment year for taxpayers who have engaged in an international transaction and 30th September of the subsequent assessment year for other taxpayers.

Rules Governing Tax Audit

The following is the procedure for filing tax audit report:

  • The Chartered Accountant assigned for conducting tax audit of an individual or an organisation has to present the tax audit report online, using his/her official login credentials.

  • The taxpayer also has to mention the relevant information about their Chartered Accountant in their login platform.

  • Once the tax audit report is uploaded by the auditor, it has to be either accepted or rejected by the taxpayer on their login portal. If the taxpayer rejects the tax audit report, the entire process has to be repeated until the tax audit report is accepted by him/her.

  • Tax audit report has to be filed on or before the pre-determined due date of filing income return, i.e., 30th November of the subsequent assessment year for taxpayers who have engaged in an international transaction and 30th September of the subsequent assessment year for other taxpayers. Rules Governing Tax Audit

The following points are to be noted with regards to Tax Audit:

  • If you are involved in more than 1 business, you will be liable to audit your accounts if the total turnover of all your businesses is more than Rs. 1 crore.

  • If you operate more than 1 profession, you have to audit your account books in case the gross receipts of all the professions cumulatively cross Rs. 50 lakhs.

  • If you run a business as well as a profession, then tax audit is not based on total turnover from both. If your business turnover is more than Rs. 1 crore then an audit is required for the business accounts, and if the gross receipts from your profession is more than Rs. 50 lakhs then an audit of the profession accounts is needed. But if your business turnover is Rs. 90 lakhs and your profession receipts are Rs. 40 lakhs, then no audit is required for either accounts.

  • If the turnover of your business or profession is below Rs. 1 crore or Rs. 50 lakhs, but you have sold a fixed asset (such as vehicle or immovable property), the amount you gain from the sale will not be considered as part of your business or professional profits. Sale of the following items are excluded from calculation into total turnover/gross receipts of a businessperson or professional:

  • Assets held as investment (e.g. shares, stocks, securities)

  • Fixed assets

  • Rental income

  • Income from interest that is not part of the business income

  • Any expense reimbursed by the client

  • Once the tax audit report is filed online, it cannot be revised. But if the accounts have been revised – for example, a company account revision after acceptance at the Annual General Meeting, change in law or change in interpretation of law – then the audit report that has been filed can also be changed. The reasons for change in audit report have to be explicitly mentioned while filing the revised report.

Penalty for Non-compliance of Tax Audit

Non-compliance of tax audit regulations by taxpayers attracts a penalty of whichever is lower from the following:

  • 0.5% of total sales or

  • Turnover or

  • Gross receipts or

  • Rs. 1,50,000

A penalty is waived only when a taxpayer is able to show a reasonable cause for non-compliance. If the account books of a business or profession is not audited as per Section 44AB, then the assessee has to pay penalty as per Section 271B of the Income Tax Act. In case of a delay in completing audit and submitting the report on time (before or on September 30), then 0.5% of the turnover, a maximum of Rs. 1.5 lakh, has to be paid as penalty. If there is a genuine reason for delay or non-filing of audit report, then as per Section 273B, no penalty will be applicable. Among the permitted reasons are:

  • Delay caused by resignation of the tax auditor

  • Delay caused by death or physical inability of the partner responsible for accounts

  • Delay caused by labour issues such as strikes or lock-outs

  • Delay caused by loss of accounts due to theft or fire, or incidents that are not under the assessee’s control

  • Natural calamities

Forms Required for Tax Audit

Tax Audit reports can be presented in two different ways by tax auditors, differing on the basis of the laws under which the accounts have been audited.

  • Form 3CB and Form 3CD: For tax audit reports presented under Section 44AB of the Income Tax Act, 1961, Form 3CB and the prescribed details have to be reported in the Form 3CD.

  • Form 3CA and Form 3CD: When a taxpayer prefers to get the accounts audited under any law other than Section 44AB, then the relevant form is Form 3CA, while the prescribed details have to be reported in the Form 3CD.

Frequently Asked Questions

What is meant by tax audit?

There are different laws in India that focus on laying down the rules and regulations unique to various types of audits – cost audit, income tax audit, stock audit, company or statutory audit as per company law, etc. Section 44AB of the Income Tax Act, 1961, lays down the provisions for income tax audit in India.

Income tax audit, as evident from the name, is aimed at analysing the accuracy of income tax returns filed by individuals and businesses in an assessment year. A tax auditor from an external agency is mandated to assess returns filed from income, expenditures and deductions and other parameters, as per Section 44AB of the Income Tax Act, 1961. The tax audit procedure streamlines the computation of tax returns. The Chartered Accountant of the agency performing the tax audit has to present their observations and findings in Form 3CA or Form 3CB, and Form 3CD.

What is tax audit limit?

As per Section 44AB of the Income Tax Act, 1961, tax audit limit for professionals, businesses and presumptive taxation scheme are:

Business: Tax audit for businesses pertains to those whose gross receipts or total business sales turnover exceeds Rs. 1 crore in the previous assessment year. The term ‘business’, under the Income Tax Act, 1961, implies to any economic activity that earns profits and gains. To quote Section 2(3), a business can be “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture.”

Profession: For a profession or professional, tax audit is applicable if gross receipt in the concerned profession is more than Rs. 50 lakhs in any of the previous assessment year. As per Rule 6F of the Income Tax Rules, 1962, this profession can be any of the following:

  • Accountant

  • Engineer

  • Architect

  • Medical Professionals like Physiotherapist, Doctor, etc.

  • Legal Professionals

  • Authorised representative

  • Film Artist – Film Director, Music Director, Actor, Editor, etc.

  • Interior Decorator

  • Technical Consultant

Presumptive Taxation Scheme: When an individual is enlisted under the presumptive taxation scheme under Section 44AD and total sales or turnover exceeds Rs. 2 crores, tax audit is considered to be mandatory.

Also, any individual enlisted under the presumptive taxation scheme who claims that the gains of the business are lower than the gains calculated as per the presumptive taxation scheme, tax audit is considered to be mandatory.

What are the types of tax audit?

Types of tax audit as per the provisions of Income Tax Act, 1961:

Section 44AB: Most taxpayers, individuals and organisations, are government by the provisions concerning income tax audit, as laid down in this section

Section 44BB: This section focuses on Non-Resident Indians (NRIs) engaged in businesses involved in the mineral oils industry, like exploration

Section 44BBB: This is for international companies engaged in the business of civil construction, etc. in certain power projects

Section 44AD: Any business except those mentioned under Section 44AE, comes under the purview of this section

Section 44ADA: This section focuses on the regulations regarding income tax audits for eligible professionals

Section 44AE: Businesses engaged in leasing, hiring and plying of goods carriages

What is tax audit under Section 44AB?

There are different laws in India that formulate and implement regulations unique to various types of audits – stock audit, cost audit, income tax audit, company or statutory audit as per company law, etc. Section 44AB of the Income Tax Act, 1961, specifies provisions for income tax audit in India.

Income Tax audit, as suggested by the name, is aimed at assessing the correctness of income tax returns filed by individuals and businesses in an assessment year. A tax auditor is mandated to evaluate returns filed from income, expenditures and deductions and other parameters, as per Section 44AB of the Income Tax Act, 1961. The tax audit procedure streamlines the computation of tax returns. The Chartered Accountant of the agency performing the tax audit has to present their observations in Form 3CA or Form 3CB, and Form 3CD.

What are some different types of audits?

Tax audit can be classified under the following categories:

  • Tax audit - This tax audit is an analysis of the tax returns submitted by an individual or business to evaluate the accuracy of income tax payment. These tax audits are especially conducted when the tax payments of individuals and businesses are unusually low.

  • Financial audit – One of the most popular types of tax audit, it analyses the authenticity of the information mentioned in the financial statements of entities. It is mandatory that this tax audit is conducted by a CPA agency that functions independently of the entity being audited.

  • Construction audit - As the name suggests, this assesses the expenses for construction projects and other essential details - contractors hired, payments made, reimbursements, changes in orders, and the deadlines within which the projects were completed. The aim of this tax audit is to check whether the expenditures incurred for these construction projects were reasonable.

  • Compliance audit - This evaluates the policies and processes of a department or entity, usually educational institutions or industries and checks whether it is compliant with the regulatory standards.

  • Investigative audit - This tax audit is an investigation of a specific area or individual when there is a suspicion of inappropriate or fraudulent activity. The intention is to find out and remedy control breaches, and collect evidence should charges be filed against someone.

  • Information systems audit – This tax audit reviews the controls over technology like data processing, software development, etc. The aim is to regulate the functioning of the IT systems, access the accuracy of results being generated and ensure data protection.

  • Operational audit - This tax audit, which can be undertaken by an internal as well as an external CPA agency, is a thorough analysis of the planning processes and results of business operations. The final report by the agency comprises of recommendations for improving business processes.

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