Tax Audit

A tax audit involves examining and reviewing the tax returns submitted by an individual or business to determine the accurate amount of income tax payable. Understanding the rules, forms, and penalties related to Tax Audits in India is crucial, as this process ensures precise calculation of tax liabilities for both individuals and organizations.

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Overview of Tax Audit

The Government of India mandates various types of audits under different laws, including statutory audits under company law, cost audits, stock audits, and more. Similarly, the Income Tax Act has made "Tax Audit" mandatory. A tax audit involves reviewing the accounts of businesses or professionals to streamline the computation of income and facilitate the accurate filing of income tax returns.

Under the Income Tax Act, tax audits are required when the annual gross turnover or receipts exceed a specified threshold. These audits are conducted by a Chartered Accountant as outlined in Section 44AB of the Income Tax Act, 1961. In essence, a Tax Audit is an examination of matters specifically related to taxation.

Objectives of Tax Audit

A tax audit is mandated under the provisions of the Income Tax Act. The Chartered Accountant conducting the audit is responsible for submitting findings and observations in a formal audit report, using the prescribed formats of Form 3CA/3CB and Form 3CD.

The primary objectives of a tax audit include:

Ensuring the accurate maintenance of books of accounts and certifying their correctness by the tax auditor.
Highlighting observations or discrepancies identified during a detailed examination of the accounts.
Reporting specific information, such as tax depreciation, adherence to various provisions of income tax laws, and other required details.

These objectives help tax authorities in India verify the accuracy of the taxpayer's filed income tax returns. The process also simplifies the verification and calculation of total income, deduction claims, and compliance with tax regulations.

Applicability of Section 44AB

The following taxpayers are required to undergo a tax audit with the assistance of a Chartered Accountant:

Section 44AB(a) – Any individual or entity conducting business, if the annual gross turnover exceeds Rs. 1 crore.
Amendment:
- Effective from AY 2020-21, this limit is raised to Rs. 5 crore if, during the previous year:
  1. The total amount received in cash (including for sales) does not exceed 5% of the total receipts.
  2. The total amount paid in cash (including for expenses) does not exceed 5% of the total payments.
Section 44AB(b) – A person engaged in a profession whose gross receipts exceed Rs. 50 lakh in the previous year.
Section 44AB(c) – A person engaged in business or profession eligible for presumptive taxation under Sections 44AE, 44BB, or 44BBB, who claims profits or gains lower than the prescribed limit under the presumptive taxation scheme and has income exceeding the maximum amount not chargeable to tax.
Note:
- Section 44AE: For businesses involving the plying, hiring, or leasing of goods carriages with 10 or fewer vehicles.
  - For heavy vehicles: Rs. 10,000 per ton of gross vehicle weight or unladen weight per month.
  - For other vehicles: Rs. 7,500 per vehicle per month.
  - If actual earnings exceed these amounts, the actual income is considered.
- Section 44BB: For non-residents providing services or facilities for mineral oil extraction or production, 10% of the total amount received.
- Section 44BBB: For foreign companies involved in civil construction, plant erection, or commissioning in connection with a Central Government-approved turnkey power project, a sum equal to 10% of the amount paid or payable.
Section 44AB(d) – A person in a profession with deemed profits and gains, where actual taxable income is lower than the deemed profits but exceeds the maximum amount not chargeable to tax.
- Section 44ADA: A resident professional with gross receipts up to Rs. 50 lakh can deem 50% of the gross receipts as income for tax purposes.
Section 44AB(e) – A person engaged in business with deemed profits and gains, where actual taxable income is lower than the deemed income but exceeds the maximum amount not chargeable to tax.
- Section 44AD: A resident individual or partnership firm in business may deem profits as:
  - 8% of gross receipts, or
  - 6% if receipts are made through account payee cheques, bank drafts, electronic clearing systems, or prescribed electronic modes like UPI payments.

Tax audit to be conducted by

Tax audits can only be performed by Chartered Accountants who possess a valid certificate of practice and are engaged in full-time practice. The tax auditor (CA) conducts a thorough and systematic review of the books of accounts in accordance with the provisions outlined in Section 44AB.

Contents of Tax Audit Report

The tax auditor must submit the audit report in one of the prescribed forms: Form 3CA, Form 3CB, or Form 3CE, depending on the situation:

Form 3CA is used when a business or professional is already required to have their accounts audited under any other law. This applies to entities like companies, which are also mandated to undergo an audit under the Companies Act.
Form 3CB is used when a business or professional is not required to have their accounts audited under any other law. This applies to entities like individuals who are not subject to audits under other laws.
Form 3CE is used for non-resident individuals or foreign companies receiving royalty or technical service fees from the Indian government or any Indian entity.

In all cases, the tax auditor must also provide the required details in Form 3CD, which is part of the audit report.

The due date for Tax Audit

Any person subject to Section 44AB must have their accounts audited before the deadline for filing the income tax return, which is on or before September 30th of the relevant assessment year.

Penalty u/s 44AB

If a taxpayer covered under Section 44AB fails to complete the audit by the specified due date, they will be subject to a penalty. The penalty amount will be 0.5% of the turnover or gross receipts, with a maximum limit of Rs. 150,000.

Prescribed Audit Forms

The audit report must be submitted in the following form: Form 3CA. This form is applicable to taxpayers engaged in a business or profession who are already required to have their accounts audited under any law other than the Income Tax Act. For example, a company that is mandated to have its accounts audited under the Companies Act, 2013, will submit Form 3CA, along with Form 3CD.

Contents of Form 3CA

The audit report must include the following details:

Information about the assessee, such as their name, address, PAN, etc.
Date of the audit report.
Annexures, including the audited balance sheet, profit and loss account, and Form 3CD.
A declaration by the auditor confirming that all details provided in Form 3CA and its annexures are true to the best of their knowledge.
Any audit observations or qualifications noted in Form 3CD.
The auditor’s name, address, membership number, and FRN number, along with their signature and seal/stamp.

Form 3CB and its applicability.

Under Section 44AB, the tax audit limit for a business or profession applies to individuals or entities who are not required to have their accounts audited under any other law. Such taxpayers must submit the audit report in Form 3CB (i.e., under a law other than the Income Tax Act).

In Form 3CB, the Chartered Accountant declares that they have reviewed the financial statements of the assessee for the relevant period. The auditor then provides an opinion on whether the financial statements present a true and fair view. Additionally, any observations, comments, discrepancies, or inconsistencies discovered during the audit are reported.

Details to be furnished in form 3CB

The audit report must include the following information:

Details of the assessee, such as their name, address, and PAN.
Date of the audit report.
Annexures, including the balance sheet, profit and loss account, and Form 3CD.
A declaration by the auditor confirming that they have obtained all necessary information for the audit.
A report of any observations or discrepancies as mentioned in Form 3CD.
A statement confirming that the accounts are maintained at both the branch and head office.
A declaration that the details provided by the auditor are true to the best of their knowledge.
The auditor's name, address, membership number, and FRN number, along with their signature and seal/stamp.

Form 3CD and its applicability

Form No. 3CD is the format used to provide the statement of particulars for a tax audit. This form consists of 44 clauses, where the auditor must report on various aspects specified within it (2 of these clauses are suspended until March 31, 2021). The responsibility for preparing the statement of particulars, as required under Section 44AB of the Income Tax Act, 1961, lies with the assessee. This statement is to be submitted in Form No. 3CD.

Frequently Asked Questions

The tax audit limit for Businesses is Rs. 1 crore. The tax audit limit for profession is Rs. 50 lakhs.
The maximum number of tax audits that can be performed by a Chartered Accountant (CA) is limited to 60. In case of a firm the restriction on tax audit limit applies to each of the partners.
The primary aim of Tax Audit is to ensure that the books of Accounts have been maintained as per the provisions of the Income Tax Act. Tax Audit also assures that the Accounts are properly presented to the Assessing Officers.
The following are the causes that prompt a tax audit: Having higher than average income Taking deductions that are disproportionate to the income Claiming of business losses every year. Taking irrelevant deductions.
If there is any error in the books of accounts, generally it gets corrected by the CA. In case there is any mistake then penalty will be charged which may lead to paying of more tax amount.
Some of the examples of tax evasion are false tax returns and smuggling to fake documents and bribery.
While auditing if you do not have any receipt, the auditor may accept any other documentation and in case you fail to present the same the auditor will not accept the entry in the books of accounts.
Section 44AB gives the provisions relating to the class of taxpayers like businesses or professions or self employed persons who are required to get their accounts audited from a Chartered Accountant. The audit under section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfillment of other requirements of the Income-tax Law. The audit conducted by the chartered accountant of the accounts of the taxpayer in pursuance of the requirement of section 44AB is called tax audit.
Individual/Proprietorship Hindu Undivided Family Company Partnership Firm Association of Person Local Authority.
Any business having a total sales turnover of over Rs. 1 crore must complete a compulsory tax audit by a Chartered Accountant (CA). And in case of profession if the profession has total gross receipts of more than Rs. 50 lakhs, then it is mandatory to conduct tax audit by a Chartered Accountant.
In case of loss, since there is no income, therefore it does not exceed the maximum amount not chargeable to tax and so the second condition mandating tax audit u/s 44AB r/w section 44AD is not satisfied and therefore the assessee is not required to get the accounts audited u/s 44AB.
An audit, which is required by the statute (law) is known as a Statutory audit. Tax Audit is an audit made compulsory by the Income Tax Act if the turnover of the assessees reaches the specified limit. Statutory Audit is performed by external auditors whereas tax audit is conducted by a practising Chartered Accountant.
It makes sure that books of accounts are maintained properly and correctly and certified by the tax auditor. Once methodical verification of books of accounts is done it is necessary to report observation or discrepancies observed by the tax auditor. Tax audit can prove financially beneficial for a business. An audit gives credibility to an information published for employees, customers, suppliers, investors, and tax authorities
Income Tax Act has made it mandatory for maintaining books of accounts It is necessary to compute profit or gain under Chapter IV Income is taxable or loss allowable In tax return file mention show taxable income and allowable loss.
Tax auditor presents his report in the specified form which could be either Form 3CA or Form 3CB where: Form No. 3CA is presented when a person involved in business or profession is already mandated to get his accounts audited under any other law Form No. 3CB is presented when a person is involved in business or profession does not need to get his accounts audited under any other law.