Income Tax Audit under Section 44AB

There are three types of auditing process. They are given below:

1. Field audit: This type of audit is conducted at your office place. Here you will have to provide all the necessary documents to ensure the auditing is done successfully. 
2. Correspondence audit: Here you will receive a letter in which documents required for the auditing process will be mentioned. Ensure to mail all the required documents to the address provided in the mail.  
3. Office audit: Here the auditing takes place in the office of the IRS. Make sure you carry all the necessary documents. You will most likely receive a letter in which it will be mentioned the documents you must carry.
   

What are the Main Objectives of Tax Audit?

A tax audit has more than one purpose. It ensures that financial reporting is accurate, consistent, and compliant with the Income Tax Act. It also helps both the taxpayer and tax authorities by streamlining the review process. Here are the main objectives:

1. Verify Proper Bookkeeping: It checks whether the books of accounts are maintained properly. A Chartered Accountant must certify them as accurate and complete. 

1. Report Essential Tax Information: A tax audit compiles key data like tax depreciation, deductions claimed, and whether tax laws have been followed. This ensures that required disclosures are made clearly and consistently.

1. Identify Errors or Gaps: Through a systematic review, the auditor highlights any mismatches or non-compliance in the records. This helps correct discrepancies before they trigger scrutiny.

1. Support Income Tax Return Accuracy: The audit cross-checks the figures declared in the tax return. It confirms that income, expenses, and tax liabilities have been reported truthfully.

1. Simplify Income Computation: With audited records, it becomes easier to calculate total income. It also streamlines the process of verifying claims like deductions or exemptions.

Who Conducts a Tax Audit?

A tax audit must be conducted by a Chartered Accountant (CA) holding a valid certificate of practice under the Chartered Accountants Act. In the case of a firm of CAs, any partner can perform the audit.

There are limits in place to ensure quality and avoid overburdening:

1. One CA can conduct a maximum of 60 tax audits in a financial year, whether individually or as part of a firm.

1. If a firm has multiple partners, each partner can sign off on 60 tax audits independently. Thus, the limit applies per CA, not per firm.

1. The CA is responsible for preparing and submitting the tax audit report in the prescribed forms (typically Form 3CA/3CB and Form 3CD), depending on whether the entity is already subject to statutory audit under other laws.

What is the Turnover Limit for Income Tax Audit in India?

In India, under the provisions of the Income Tax Act, 1961, specific taxpayers are required to undergo a tax audit based on the turnover, gross receipts, or income they earn during a financial year. The audit process is governed by Section 44AB, which is aimed at promoting transparency and compliance in financial reporting. The primary objective of the tax audit is to ensure that individuals, businesses, and professionals are maintaining accurate books of accounts and adhering to the prescribed tax laws and standards.

Tax Audit Threshold for Businesses: When Does It Become Mandatory?

Under Section 44AB of the Income Tax Act, a tax audit is mandatory for businesses that cross certain turnover limits during a financial year. This compliance requirement is based on the volume of business transactions and the mode of payment.

Standard Tax Audit Threshold

1. A tax audit is required if the total turnover or gross receipts exceed Rs.1 crore in a financial year.

Relaxed Limit for Digital Transactions

To promote a cashless economy and reduce the use of physical currency in business dealings, a higher threshold has been introduced for businesses with limited cash transactions:

1. If cash transactions (both receipts and payments) do not exceed 5% of the total transactions,

1. Then the tax audit threshold is increased to Rs.10 crores.

1. This benefit is applicable from the financial year 2020-21 onwards.

For professionals engaged in fields such as medicine, law, architecture, accountancy, consultancy, and other similar professions, the requirement for a tax audit arises if their gross professional receipts exceed Rs.50 lakhs in a financial year.

Apart from these primary thresholds, there are several specific situations where a tax audit is still necessary, even if the turnover or receipts do not cross the standard limits. These additional cases often relate to whether a taxpayer has opted for any presumptive taxation scheme, the amount of income declared, or even in the event of a business loss. Understanding these exceptions is crucial for full compliance with tax regulations.

Mandatory Tax Audit Under Section 44AB: Categories and Thresholds 

Importance of Understanding Tax Audit Requirements

The criteria under Section 44AB are not limited to high-income earners or large corporations. Even small businesses, professionals, or individuals with moderate income may fall under the purview of mandatory tax audit based on how they structure and report their income, the tax schemes they opt into, or the methods of transaction they use.

Failing to comply with tax audit requirements can result in penalties under Section 271B of the Income Tax Act. The penalty for not getting the accounts audited as required can be 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1.5 lakhs.

Therefore, taxpayers must be aware of these provisions and consult with chartered accountants or tax professionals when in doubt. Proper financial planning and maintaining up-to-date records can save individuals and businesses from unnecessary legal complications and financial penalties.

When is an Income Tax Audit Report Not Required?

In some instances, taxpayers may not need to undergo an additional income tax audit, provided they have already had their accounts audited under a different law. If an audit is required under any other legislation, and it is completed before the income tax return filing due date, the taxpayer can simply submit the audit report prepared under that law as per the Income Tax Act. This helps streamline compliance and prevent duplication of audit processes for the taxpayer.

How and When Tax Audit Reports Will Be Submitted

Tax audit reports play a significant role in ensuring that taxpayers are adhering to the Income Tax regulations and have maintained accurate financial records. Here is an elaboration on the process of furnishing the tax audit report:

1. Online Submission by Auditor: The tax audit report is submitted by the appointed auditor through the online portal using their login credentials. The auditor must be a qualified Chartered Accountant (CA). This process has been streamlined with digital tools to ensure transparency and compliance.

1. Taxpayer’s Role in Acceptance: Once the auditor submits the report, it is uploaded to the taxpayer’s login portal. The taxpayer has the responsibility to either accept or reject the report. If the taxpayer rejects the audit report, it triggers a process for revision, and the auditor will need to make necessary corrections and resubmit the report until it is accepted.

1. Timely Filing of the Report: It is essential that the tax audit report is submitted before the due date for filing the Income Tax Return (ITR). A delay in filing can result in penalties, making it crucial to adhere to deadlines. The due date for filing the audit report is generally September 30 of the subsequent financial year, or October 31 for cases involving international transactions.

Understanding the Income Tax Audit Report Forms

In compliance with the Income Tax Act, specific forms must be used to submit a tax audit. The Income Tax (7th Amendment) Rules 2014 updated these forms to ensure auditors provide additional details regarding their observations. Below are the key forms that need to be submitted for different scenarios:

1. Form 3CA: This form is applicable when the taxpayer is required to get their accounts audited under other laws, such as the Companies Act or other applicable statutes. For example, a business may need to comply with both the Companies Act and Income Tax Act regulations. In such cases, Form 3CA is used in conjunction with Form 3CD, which provides further details on the audit.

1. Form 3CB: This form is required when the taxpayer only needs to conduct an audit under the Income Tax Act and is not required to comply with any other legal obligations mandating an audit. This form is specifically for those not covered under any other law.

1. Form 3CD: This form must be filed along with Form 3CA or Form 3CB. It contains specific details about the taxpayer’s financial condition, income, and deductions. It serves as the supporting document for the auditor’s findings and the particulars of the financial audit.

Tax Audit for Multiple Legal Requirements

In situations where a taxpayer is required to conduct audits under more than one law-such as the Companies Act and the Income Tax Act-there is no need to perform multiple audits for the same year. The taxpayer can submit a single audit report for both requirements, provided the same audit report complies with the scrutiny of both laws. However, if the audits are required for different years, a separate audit under the Income Tax Act will need to be performed for each year.

Procedure for Submitting Tax Audit Reports

Tax auditors are required to submit their audit reports online, using their unique login credentials in the capacity of a "Chartered Accountant". Similarly, taxpayers must ensure that their Chartered Accountant details are correctly linked to their own login portal for seamless submission.

Once the auditor uploads the report, the taxpayer must review it and either accept or reject it through their login portal. If the report is rejected, the entire procedure needs to be repeated until the audit report is accepted by the taxpayer.

Filing Deadline for Tax Audit Reports

Taxpayers must be vigilant about filing their tax audit reports on time. The filing deadline depends on whether the taxpayer has entered international transactions or not. 

1. General Taxpayers: For most taxpayers, the last date for filing the income tax return and attaching the audit report is September 30 of the subsequent year. This is applicable to all individuals, businesses, and professionals who do not have international transactions.

1. Taxpayers with International Transactions: If the taxpayer is involved in international transactions, the last date for filing the tax audit report and ITR is October 31 of the subsequent year. These transactions are subject to additional scrutiny, which is why the extended deadline is applicable.

Rules Governing Tax Audits

There are several important rules and conditions related to tax audits that taxpayers need to be aware of. These rules are designed to ensure that businesses and professionals comply with tax regulations:

1. Multiple Businesses: If a taxpayer is running multiple businesses, the total turnover from all businesses will be considered. A tax audit is required if the aggregate turnover from all businesses exceeds Rs.1 crore. This rule is in place to ensure that larger businesses with significant income undergo a detailed review of their financial records.

1. Multiple Professions: If a taxpayer is engaged in multiple professions, a tax audit will be required if the combined gross receipts from all professions exceed Rs.50 lakh. This is meant to ensure that professionals with substantial earnings comply with tax regulations.

1. Combination of Business and Profession: If a taxpayer operates both a business and a profession, each activity is evaluated separately for tax audit purposes:
   1. If the business turnover exceeds Rs.1 crore, the business accounts must be audited.
   2. If the profession's gross receipts exceed Rs.50 lakh, the profession accounts must be audited.
   3. If the turnover for the business is below Rs.1 crore and the professional receipts are below Rs.50 lakhs, no audit is required for either activity.

1. Exclusions from Turnover or Gross Receipts: Certain types of income are not considered in the calculation of total turnover or gross receipts for the purpose of a tax audit. These include:

1. Capital gains from the sale of assets, such as shares, stocks, or real estate.

1. Rental income derived from property or assets.

1. Interest income that is unrelated to the business income.

1. Reimbursement of expenses from clients, which is not considered part of the business’s earnings.

Revising the Tax Audit Report

After the tax audit report is submitted online, it cannot be revised unless specific circumstances arise. For example, if there is a change in the accounts after the Annual General Meeting (AGM), or if there are updates due to changes in tax laws, a revised report may be necessary. The reasons for any changes to the audit report should be explicitly stated when submitting the revised report.

Penalties for Non-Compliance

Failing to comply with the tax audit requirements can lead to penalties. These penalties are outlined in Section 271B of the Income Tax Act. Here are the key penalty provisions:

1. Late Submission: If the tax audit report is not submitted by the prescribed deadline (typically September 30), a penalty of 0.5% of the turnover (up to a maximum of Rs.1.5 lakh) will be imposed.

1. Exemption for Genuine Delays: If the delay is due to a genuine reason-such as the resignation of the auditor, a natural disaster, or other unforeseen events-then the taxpayer may be exempted from penalties under Section 273B. Acceptable reasons for delay include:

1. Resignation of the tax auditor during the process.

1. Death or incapacitation of the person responsible for the accounts.

1. Strikes, lockouts, or other disruptions to the business.

1. Loss of financial records due to unforeseen incidents like theft, fire, or natural disasters.

Tax Audit Vs Statutory Audit

Here is a table outlining the key differences between a Tax Audit and a Statutory Audit: