The Tax Audit is a comprehensive examination of an individual’s or business’s financial and tax details, ensuring compliance with the Income Tax Act, 1961. Essentially, it seeks to confirm the accuracy and completeness of the taxpayer’s filings. Chartered Accountants perform this audit and present their insights and observations through audit reports using Form Nos. 3CA/3CB and 3CD.

 

Applicability of Tax Audit

1. BUSINESSES

If the total sales, turnover or gross receipts (as the case may be) in business, for the year exceeds Rs. 1 crore. This provision is not applicable to the person, who opts for presumptive taxation scheme under section 44AD? and his total sales or turnover doesn’t exceed Rs. 2 crores.

 

 

Note: The threshold limit, for a person carrying on business, is increased from Rs. 1 Crore to Rs. 10 crores in case when cash receipt and payment made during the year do not exceed 5% of total receipt or payment, as the case may be. In other words, more than 95% of business transactions should be done through banking channels.

 

2. PROFESSION

If the gross receipts from profession for the year exceed Rs. 50 lakhs.

 

3. PRESUMPTIVE TAXATION SCHEME

1. A person who is eligible to opt for the presumptive taxation scheme of section 44ADA but he claims the profits or gains for such profession to be lower than the profit and gains computed as per the presumptive taxation scheme

 

2. A person who is eligible to opt for the presumptive taxation scheme of sections 44AE but he claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of sections 44AE.

 

3. A person who is eligible to opt for the taxation scheme prescribed under section 44BB or section 44BBB but he claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections.

 

4. An assessee who declare profit for any previous year in accordance with section 44AD? and he decreases profit for any of one 5 assessment year relevant to the previous year succeeding such previous year lower than the profit computed as per section 44AD? ? and his income exceeds the amount which is not chargeable to tax.

 

If an eligible assessee opts out of the presumptive taxation scheme, within the aforesaid period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter.

 

Note:

Section 44AD is designed to give relief to small taxpayers engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE)

Section 44ADA is designed to give relief to small taxpayers engaged in specified profession

Section 44AE is designed to give relief to small taxpayers (i.e Individual, HUF, firm, company etc) engaged in the business of plying, hiring or leasing of goods carriages.

 

 

Section 44BB is applicable to non-resident taxpayers engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire basis to be used in exploration of mineral oils.

Section 44BBB? is applicable to foreign companies engaged in the business of civil construction or erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project.

 

 

Constituents of Tax Audit Report

The Tax Audit Report has to be furnished in the forms prescribed below:

 

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Due Date of Filing Tax Audit Report

A person covered by section 44AB should get his accounts audited and should obtain the audit report on or before 30th September of the relevant assessment year.

The tax audit report is to be electronically filed by the chartered accountant to the Income-tax Department. After filing of report by the chartered accountant, the taxpayer has to approve the report from his e-fling account with Income-tax Department.

In case of taxpayers having transfer pricing and specified domestic transactions, the due date of filing audit report is 31st October of the relevant assessment year.

 

 

Penalty for Non-Compliance of Tax Audit

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

• 5% of the total sales, turnover or gross receipts
• Rs 1,50,000

 

 

 

However, if there is a reasonable cause of such failure, no penalty shall be levied. So far, the reasonable causes that are accepted by Tribunals/Courts are:

• Natural Calamities
• Resignation of the Tax Auditor and Consequent Delay
• Labour problems such as strikes, lock-outs for an extended period
• Loss of Accounts because of situations beyond the control of the Assesses
• Physical inability or death of the partner in charge of the accounts

 

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Tax Audits, as mandated by the Income Tax Act 1961, play a pivotal role in ensuring taxpayers remain transparent and compliant. It’s crucial to understand the rules, deadlines, and consequences to avoid legal complications.

Taxes play a crucial role in a nation’s development, and ensuring their proper collection is a top priority. Income Tax Audit, a term that might sound daunting, is an essential tool in this endeavour. Let’s delve deeper into the nuances of Income Tax Audit in India, exploring its meaning, objectives, applicability, forms, due dates, and the penalties associated with non-compliance.

 

Understanding Tax Audit: The Basics

At its heart, an audit is an examination or review. Different laws require different types of audits – companies undergo company audits, while cost accounting law necessitates cost audits. Under the Income-tax Law, businesses and professionals are required to have their accounts audited, focusing on compliance with income tax regulations. Section 44AB of the Income-tax Act outlines the criteria for individuals mandatorily subjected to this audit. Its purpose is to ensure adherence to tax laws and regulations, with the audit being conducted by a chartered accountant. This process culminates in an audit report presented in Form Nos. 3CA/3CB and 3CD.

 

 

 

Objectives of Tax Audit

The objectives of a tax audit are multifaceted. Primarily, it addresses the reporting requirements laid out in Form Nos. 3CA/3CB and 3CD. Additionally, a tax audit serves to validate the accurate maintenance of financial records. It verifies that the income declared by the taxpayer truly reflects their earnings and that claims for deductions are valid. This audit acts as a deterrent against fraudulent practices, bolstering the integrity of the tax system. Moreover, it streamlines the process for tax authorities, enabling them to focus on intricate assessments rather than mundane verifications.

 

Who is Subject to Tax Audit?

Section 44AB outlines the categories of taxpayers subject to mandatory tax audits:

1. Business Entities

Individuals engaged in business with total sales, turnover, or gross receipts exceeding Rs. 1 crore. Exceptions apply if one opts for the presumptive taxation scheme under section 44AD and total sales or turnover remain under Rs. 2 crores.

 

2. Professionals

Practitioners whose gross receipts from a profession exceed Rs. 50 lakhs.

 

3. Declared Profits

Taxpayers declaring profits under section 44AD, later decreasing these profits for any of the five consecutive assessment years, leading to income surpassing the non-taxable threshold.

 

4. Presumptive Scheme Opt-Out

Eligible individuals for presumptive taxation schemes under sections 44ADA or 44AE, yet opting for lower profits than the presumptive scheme.

 

5. Other Taxation Schemes

Individuals eligible for taxation schemes under sections 44BB or 44BBB, choosing lower profits than those computed under these schemes.

 

 

 

Forms and Due Dates

The audit reports are formalized through specific forms – Form Nos. 3CA/3CB and 3CD. The deadline for obtaining and filing the audit report with the Income-tax Department is September 30th of the relevant assessment year. For instance, the audit report for the financial year 2022-23, corresponding to the assessment year 2023-24, must be obtained and filed by September 30, 2023. The audit report is submitted electronically by the chartered accountant and requires approval from the taxpayer through their e-filing account with the Incometax Department.

 

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Penalties for Non-compliance

Non-compliance with the tax audit requirements as per section 44AB could result in penalties. As stipulated by section 271B, the penalty imposed will be the lower of 0.5% of total sales, turnover, or gross receipts, or Rs. 1,50,000. However, if a reasonable cause for non-compliance is established, no penalty will be enforced.

In summary, Income Tax Audit is an integral process to ensure precise financial reporting, adherence to tax laws, and prevention of fraudulent practices. While it might appear intricate, its core objectives remain transparent: promoting accountability, transparency, and equity within the tax ecosystem.

A. Criteria for Business Owners:

1. Gross Receipts or Turnover:

• Does your Gross Receipts or Turnover exceed Rs. 10 Crore?
• If Yes, Tax Audit is applicable.
• If No, proceed to the next question.

 

2. Cash Receipts and Expenses:

• Are your Cash Receipts exceeding 5% of Gross Receipts?
• Or, are expenses paid in cash exceeding 5% of total expenses?
• If Yes, move to the next question.

 

 

3. Adjusted Limit for Cash Transactions:

• If the answer to Q-2 is Yes, consider a limit of Rs. 1 crore instead of Rs. 10 Crore.
• If Yes, Tax Audit is applicable.

 

B. Inclusion of Income from Futures and Options:

1. In the above case for the purpose of calculation of Turnover Add the Favourable Positions (Profit) as well as Unfavourable Positions (Loss). The Value so derived will be considered as Turnover. For Example:

 

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As per the above example, Turnover of Future transaction would be = 1000+2000+1000= 4000

 

 

C. Is your income include income from Options?

1. In the above case for the purpose of calculation of Turnover of Option Transaction, add the premium obtained on selling the options to the absolute profit. The Value so derived will be considered as Turnover. For Example :

 

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As per the above example, Turnover of Future transaction would be = 500+6000+400+5000+600+5000= 17,500.

 

 

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Understanding whether tax audit is applicable requires considering Gross Receipts, Cash Transactions, and Income from Futures and Options. Follow the steps to determine your situation accurately and seek professional advice if needed.