What is Tax Audit & Who Needs to Get It Done?

Tax compliance is an essential aspect of financial management for businesses and professionals. One such compliance requirement under the Income Tax Act, 1961, is the tax audit, which ensures transparency and accuracy in tax reporting.

A tax audit is conducted to verify whether an individual or entity has complied with the provisions of tax laws and has maintained proper books of accounts. It is governed by Section 44AB of the Income Tax Act and applies to businesses and professionals whose turnover or gross receipts exceed the prescribed limits.

In this article, we will discuss what a tax audit is, its applicability, procedure, benefits, and penalties for non-compliance in detail.

What is a Tax Audit?

A tax audit is an examination or review of an individual’s or business entity’s financial records, accounts, and transactions to ensure compliance with tax laws. The purpose of a tax audit is to ascertain whether the income tax calculations, deductions, and expenses are properly recorded and reported.

The audit is conducted by a Chartered Accountant (CA) who examines the books of accounts and prepares an audit report in Form 3CA/3CB & 3CD.

Who Needs to Get a Tax Audit Done?

As per Section 44AB of the Income Tax Act, 1961, a tax audit is mandatory for the following categories of taxpayers:

Businesses

• If the total turnover or gross receipts exceed ₹1 crore in a financial year, a tax audit is required.

• However, for businesses opting for Presumptive Taxation Scheme under Section 44AD, a tax audit is applicable if the turnover exceeds ₹2 crore.

Professionals

• If the gross receipts of a professional exceed ₹50 lakh in a financial year, a tax audit is mandatory.

• Professionals covered include doctors, lawyers, architects, consultants, and other specified professions.

Businesses Opting Out of Presumptive Taxation

• If a business opts for the Presumptive Taxation Scheme but declares income lower than the prescribed percentage (8% or 6% of turnover) and their total income exceeds the basic exemption limit, a tax audit is required.

Entities Claiming Certain Exemptions

• If an individual or business is claiming specific deductions or exemptions, such as under Section 10A, 10AA, 80HHC, etc., a tax audit may be necessary to validate these claims.

Process of Conducting a Tax Audit

The tax audit process involves several key steps:

Appointment of a Chartered Accountant: The taxpayer must engage a Chartered Accountant (CA) to conduct the audit.

Examination of Books of Accounts: The CA reviews the financial records, ledgers, and supporting documents to check for discrepancies and ensure compliance.

Verification of Tax Computations: The CA verifies the correctness of income, expenses, deductions, and tax payable.

Preparation of Audit Report: The findings of the tax audit are reported in Form 3CA/3CB & 3CD and submitted online through the Income Tax Department’s portal.

Submission of Audit Report: The tax audit report must be filed before the due date, which is usually 30th September of the assessment year.

Benefits of Tax Audit

A tax audit offers several advantages, including:

Ensures Accuracy: Helps in accurate computation of taxable income and compliance with tax laws.

Reduces Tax Scrutiny: Minimizes the chances of getting an income tax notice due to discrepancies.

Prevents Penalties: Helps taxpayers avoid penalties for non-compliance.

Identifies Financial Issues: Highlights financial mismanagement and areas for improvement.

Enhances Credibility: Strengthens the credibility of financial statements for investors and stakeholders.

Penalty for Non-Compliance

Failure to conduct a tax audit within the prescribed time can lead to penalties under Section 271B of the Income Tax Act.

• Penalty Amount: 0.5% of total sales, turnover, or gross receipts, subject to a maximum of ₹1,50,000.
• Exemption from Penalty: If the taxpayer can provide a valid reason for failure to comply, the penalty may be waived.