Introduction
Tax audit is a crucial compliance requirement under the Income Tax Act, 1961, designed to ensure accuracy in the financial statements of businesses and professionals. It involves a systematic examination of financial records by a Chartered Accountant (CA) to verify whether the taxpayer has complied with tax laws.
In this guide, we will cover who needs a tax audit, the applicability of Section 44AB, the procedure, due dates, penalties, and benefits of tax audits in India.
A tax audit refers to the verification of books of accounts of a taxpayer to ensure compliance with income tax laws. It is governed by Section 44AB of the Income Tax Act, 1961, which mandates businesses and professionals to get their accounts audited if their income or turnover exceeds a prescribed threshold.
The audit report must be submitted in Form 3CA/3CB and Form 3CD by a Chartered Accountant.
Applicability of Tax Audit under Section 44AB
Tax audit is applicable based on turnover, gross receipts, and income criteria. The following categories of taxpayers must undergo a tax audit:
1. Businesses
A business entity is required to conduct a tax audit if:
- Turnover exceeds Rs. 1 crore in a financial year.
- Turnover exceeds Rs. 10 crore, if cash transactions (receipts & payments) are below 5% of total transactions.
Example: A manufacturing business with a turnover of Rs. 12 crore, with less than 5% cash transactions, must get a tax audit.
2. Professionals
- A professional (like doctors, lawyers, consultants) must conduct a tax audit if gross receipts exceed Rs. 50 lakh in a financial year.
Example: A legal consultancy firm earning Rs. 55 lakh in a year is required to conduct a tax audit.
3. Presumptive Taxation (Section 44AD & 44ADA)
Under presumptive taxation schemes, taxpayers declaring lower-than-expected profits may be subject to a tax audit:
- Business under Section 44AD:
- Declaring profits less than 6% (for digital transactions) or 8% (for cash transactions).
- Total turnover exceeds 2 crore.
- Professionals under Section 44ADA:
- Declaring profits less than 50% of gross receipts.
Example: A small trader with a turnover of Rs. 1.5 crore, who declares profit below 6%, needs a tax audit.
4. Other Cases
- If a business or professional is required to file ITR but has suffered a loss, they may need a tax audit to carry forward losses.
- A taxpayer covered under Section 92E (international transactions with related parties) must also conduct a tax audit.
Tax Audit Report & Forms
The tax audit report is prepared and filed by a Chartered Accountant (CA) in the following forms:
Form 3CA
For businesses or professionals already required to maintain books under other laws (e.g., Companies Act).
Form 3CB
For businesses or professionals not required to maintain books under any law.
Form 3CD
A detailed statement containing quantitative details of income, deductions, and tax liabilities.
The tax audit report must be filed before the income tax return (ITR) due date.
- For businesses and professionals covered under tax audit: 30th September of the assessment year.
- For transfer pricing cases (Section 92E): 31st October of the assessment year.
Penalty for Non-Compliance
If a taxpayer fails to comply with tax audit provisions, the penalty under Section 271B applies:
- 5% of total turnover or gross receipts, or
- 1,50,000, whichever is lower.
However, if a taxpayer can provide a valid reason for failure, the penalty may be waived.
Benefits of Tax Audit
Ensures Accuracy
Helps in the correct reporting of income, deductions, and tax liabilities.
Avoids Penalties
Prevents non-compliance and penalties under income tax laws.
Eases Loan Approvals
Properly audited accounts make loan and funding approvals easier.
Detects Errors & Fraud
Reduces financial discrepancies and improves internal control.
Smooth ITR Filing
Ensures correctness and facilitates smooth tax return filing.
Conclusion
A tax audit under Section 44AB of the Income Tax Act is mandatory for businesses and professionals exceeding specified turnover or receipts. Non-compliance can lead to penalties, but adherence ensures accurate tax reporting and financial discipline.
If your business or profession falls under the tax audit criteria, ensure you get your books audited by a qualified Chartered Accountant to remain compliant and avoid penalties.
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