A Understanding Tax Audits: Ensuring Compliance and Accuracy in 2024-25 is a review of an entity’s books of accounts to ensure compliance with the Income Tax Act. While corporate entities are required to undergo audits under the Companies Act, tax audits become necessary for businesses not mandated to have statutory audits, such as partnerships under the Partnership Act.
Key Points of a Tax Audit
- Self-Assessment: Tax calculation is generally done by the assessee based on self-assessment.
- Threshold Requirement: When businesses exceed certain turnover thresholds, a tax audit becomes mandatory.
- Proof of Compliance: Tax audits provide necessary proof of compliance with tax regulations to the Income Tax Department.
- Role of Chartered Accountants: A Chartered Accountant (CA) conducts the tax audit, examining the books of accounts from an income tax perspective.
- Purpose of Tax Audit:
- Verify correct income tax liability calculation.
- Ensure adherence to the Income Tax Act provisions.
- Provide a basis for the Income Tax Department to trust the accuracy of the submitted income return.
Difference between Tax audit and Statutory audit-
Statutory Audit
- Meaning: Mandatory audit required by law.
- Carried out by: External Auditor.
- Audit of: Full accounting records.
- Purpose: Ensures reliability and transparency of financial statements.
Tax Audit
- Meaning: Mandatory audit under the Income Tax Act if turnover/gross receipts exceed a specified limit.
- Carried out by: Chartered Accountant.
- Audit of: Tax-related matters.
- Purpose: Ensures proper maintenance of books of accounts and accurate reflection of taxable income.
Importance of Tax Audits
Tax audits are essential for non-corporate businesses to validate their tax liability computations and maintain transparency with the tax authorities. They offer an assurance mechanism for both the taxpayer and the Income Tax Department, promoting trust and compliance within the taxation framework.
Types Of Tax Audits:
1. Mail Audit:
- Description: The tax officer requests additional documents or clarifications on certain tax return declarations and deductions via mail.
- Example: Deducting charity expenses.
- Process:
- Taxpayer submits requested documents.
- If the documents satisfy the tax officer, the audit ends.
- If not, further audits like office or field audits may follow.
2. Office Audit:
- Description: An extension of the mail audit where the taxpayer visits the local tax department.
- Process:
- Bring additional documents and be prepared for questions.
- Typically, the taxpayer has an idea of the issues from the mail audit.
- It may be beneficial to bring a lawyer or accountant.
3. Field Audit:
- Description: An in-depth audit conducted at the taxpayer’s location by tax officers.
- Process:
- Tax officers examine documents and question the taxpayer onsite.
- This can be annual or triggered by specific suspicions.
- Professional assistance from a tax agent is advisable.
4. Desk Audit:
- Description: Review of documents submitted monthly or annually as per tax laws.
- Example: Monthly tax returns for salary tax, withholding tax, etc.
- Process:
- Tax officers review these documents to determine if further information or payments are needed.
- Similar to a mail audit, with possible limited follow-up.
5. Limited Audit:
- Description: An in-depth audit focusing on specific areas, performed at the taxpayer’s site or office.
- Example: Examining salary tax or withholding tax.
6. Comprehensive Audit:
- Description: Similar to a field audit, but broader in scope.
- Process:
- Tax officers inform the taxpayer about their visit and the documents needed.
- Reviews multiple areas and specific periods of tax returns.
Tax Audit Eligibility in India;
1. General Business:
- Threshold: Total sales, turnover, or receipts exceed Rs. 1 crore in a year.
- Action: Must undergo a tax audit.
2. Professionals:
- Threshold: Receipts exceed Rs. 50 lakh in a year.
- Includes: Engineers, architects, interior decorators, legal and medical professionals (Refer to Rule 6F of the Income Tax Rules, 1962 for the complete list).
- Action: Must undergo a tax audit.
3. Presumptive Taxation Scheme:
- For Businesses:
- Threshold: Sales/turnover over Rs. 2 crore.
- Action: Must undergo a tax audit.
- For Professionals:
- Condition: If profits are less than what is determined by the presumptive scheme.
- Action: Must undergo a tax audit.
4. Penalties:
- Non-Compliance: Failure to get a tax audit done when required can lead to penalties.
- Exceptions: Certain situations may allow for late filing or exemption from penalties, such as:
- Natural calamities
- Strikes or lock-outs
- Theft of documents
- Resignation of the auditor
What is Income Tax Audit under section 44AB?
BUSINESS
| Category of Person | Threshold for Tax Audit |
|---|---|
| Not opting for presumptive taxation scheme | Total sales, turnover, or gross receipts exceed Rs. 1 crore in the FY. If cash transactions are up to 5% of total gross receipts and payments, the threshold increases to Rs. 10 crores (w.e.f. FY 2020-21). |
| Eligible for presumptive taxation under Section 44AE, 44BB, or 44BBB | Claims profits or gains lower than the prescribed limit under the scheme. |
| Eligible for presumptive taxation under Section 44AD | Declares taxable income below the prescribed limits and has income exceeding the basic threshold limit. |
| Not eligible for presumptive taxation under Section 44AD due to opting out in any one year of the lock-in period (5 years) | Income exceeds the maximum amount not chargeable to tax in the subsequent 5 years from when presumptive taxation was not opted for. |
| Declaring profits under presumptive taxation scheme under Section 44AD | Total sales, turnover, or gross receipts do not exceed Rs. 2 crore in the FY. |
PROFESSION
| Profession | Threshold for Tax Audit |
|---|---|
| Carrying on profession | Total gross receipts exceed Rs. 50 lakh in the FY. |
| Eligible for presumptive taxation under Section 44ADA | 1. Claims profits or gains lower than the prescribed limit under the scheme. <br> 2. Income exceeds the maximum amount not chargeable to income tax. |
BUSINESSLOSS
| Business Loss | Threshold for Tax Audit |
|---|---|
| Loss from business not opting for presumptive taxation scheme | Total sales, turnover, or gross receipts exceed Rs. 1 crore and total income exceeds the basic threshold limit. |
| Loss from business opting for presumptive taxation scheme under Section 44AD with income below basic threshold limit | Tax audit not applicable. |
| Loss from business under Section 44AD with income exceeding basic threshold limit | Declares taxable income below the prescribed limits and has income exceeding the basic threshold limit. |
FORMS FOR TAX AUDIT
The following are the most commonly used forms which is used for tax audit:
- Form 3CA
- Form 3CB
- Form 3CD
- Form 3CE
Income Tax Audit Limits for FY 2024-25
For Businesspersons:
- Threshold: Gross receipts/turnover/sales exceed Rs. 1 crore in the previous financial year.
- Exception: Not applicable to individuals opting for the presumptive taxation scheme under Section 44AD if their turnover is not more than Rs. 2 crore.
For Professionals:
- Threshold: Gross receipts exceed Rs. 50 lakh in the previous financial year.
For Specific Sections:
- Applicable Sections: 44AD, 44AE, 44AF, 44BB, and 44BBB.
- Condition: Declaring lower profits than estimated under these sections.
Digital Transactions Benefit:
- Increased Limit: Persons conducting at least 95% of their transactions online are eligible for an increased limit for tax audit.
Penalty for Not Complying with Section 44AB
Requirement: Section 44AB mandates certain individuals and businesses to get their accounts audited.
Penalty for Non-Compliance:
- Authority: According to Section 271B, the Assessing Officer can impose a penalty if the accounts are not audited as required.
- Penalty Amount: The penalty will be the lower of:
- 0.5% of the total sales, turnover, or gross receipts in business, or of the gross receipts in profession, for the relevant year(s).
- Rs. 1,50,000.
Summary: Failure to comply with the tax audit requirement under Section 44AB can result in a penalty of up to 0.5% of the turnover or gross receipts, capped at Rs. 1,50,000.
Conclusion
A tax audit is an essential mechanism for ensuring the accuracy and compliance of financial records with tax laws. It serves as a safeguard, providing transparency and reliability in the financial reporting of businesses and professionals. By verifying that income, expenses, and deductions are correctly reported, tax audits help maintain the integrity of the tax system.
In the modern digital age, the streamlined process of electronically filing and approving tax audit reports further enhances efficiency and accountability.
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Frequently Asked Questions
Q1: What is the penalty for not getting accounts audited as required by Section 44AB?
A1: If a person required to comply with Section 44AB fails to get their accounts audited or fails to furnish the audit report, the Assessing Officer may impose a penalty under Section 271B. The penalty is the lower of:
- 0.5% of the total sales, turnover, or gross receipts in business, or of the gross receipts in profession, for the relevant year(s).
- Rs. 1,50,000.
Q2: What is the due date by which a taxpayer should get their accounts audited?
A2: A person covered by Section 44AB should get their accounts audited and obtain the audit report by 30th September of the relevant assessment year. For example, the tax audit report for the financial year 2022-23 (assessment year 2023-24) should be obtained by 30th September, 2023.
Q3: How is the tax audit report filed and approved?
A3: The tax audit report is electronically filed by the Chartered Accountant to the Income Tax Department. After the report is filed, the taxpayer must approve it through their e-filing account on the Income Tax Department’s portal (https://www.incometax.gov.in/iec/foportal).
