Tax Audit

There are various laws in India that govern different kinds of audit like income tax audit, stock audit, cost audit, company or statutory audit as per company law, to name a few. Section 44AB of the Income Tax Act, 1961, lays down the provisions for income tax audit.

Objectives of Tax Audit

  • An analysis of the accuracy of income tax returns filed in an assessment year by individuals and companies, and maintenance of records by the Chartered Accountant.
  • Reporting of findings by the tax auditor after a detailed analysis of accuracies/inaccuracies in tax returns filed.
  • Reporting essential details regarding compliance, tax depreciation, etc., as per the laws for income tax. This streamlines the processes for the income tax authorities in calculation and assessing the accuracy of the income tax return filed by the individual or company.
  • Checks frauds and malpractices in filing income tax returns.

Categories of Taxpayers for Whom Tax Audit is Mandatory

Tax audit is compulsory for the following categories of taxpayers:

  • A business owner, who has not opted for presumptive taxation scheme, with gross receipts or turnover or total sales exceeding Rs. 1 crore.
  • A business owner, who has opted for presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961, with gross receipts or turnover or total sales exceeding Rs. 2 crore.
  • A taxpayer whose business, which is eligible for presumptive taxation under Section 44AE, 44BB and 44BBB, claims profits that are lesser than the prescribed limit under respective presumptive taxation scheme.
  • A business owner who is not be eligible to claim presumptive taxation under Section 44AD because he or she has opted for it in a certain assessment year and not for any of the five consecutive years subsequently. This is applicable when his/her annual income is more than the maximum amount not chargeable to tax in the following 5 consecutive assessment years from the tax year.
  • An employee of an organisation whose gross receipts is more than Rs. 50 lakhs.
  • An employee of an organisation that is eligible for presumptive taxation under Section 44ADA and claims profits that are lesser than the prescribed limit under presumptive taxation scheme and income is more than the maximum amount not chargeable to tax.

Rules Governing Tax Audit

The following is the procedure for filing tax audit report:

  • The Chartered Accountant assigned for conducting tax audit of an individual or an organisation has to present the tax audit report online, using his/her official login credentials.
  • The taxpayer also has to mention the relevant information about their Chartered Accountant in their login platform.
  • Once the tax audit report is uploaded by the auditor, it has to be either accepted or rejected by the taxpayer on their login portal. If the taxpayer rejects the tax audit report, the entire process has to be repeated until the tax audit report is accepted by him/her.
  • Tax audit report has to be filed on or before the pre-determined due date of filing income return, i.e., 30th November of the subsequent assessment year for taxpayers who have engaged in an international transaction and 30th September of the subsequent assessment year for other taxpayers. Rules Governing Tax Audit

The following points are to be noted with regards to Tax Audit:

  • If you are involved in more than 1 business, you will be liable to audit your accounts if the total turnover of all your businesses is more than Rs. 1 crore.
  • If you operate more than 1 profession, you have to audit your account books in case the gross receipts of all the professions cumulatively cross Rs. 50 lakhs.
  • If you run a business as well as a profession, then tax audit is not based on total turnover from both. If your business turnover is more than Rs. 1 crore then an audit is required for the business accounts, and if the gross receipts from your profession is more than Rs. 50 lakhs then an audit of the profession accounts is needed. But if your business turnover is Rs. 90 lakhs and your profession receipts are Rs. 40 lakhs, then no audit is required for either accounts.
  • If the turnover of your business or profession is below Rs. 1 crore or Rs. 50 lakhs, but you have sold a fixed asset (such as vehicle or immovable property), the amount you gain from the sale will not be considered as part of your business or professional profits. Sale of the following items are excluded from calculation into total turnover/gross receipts of a businessperson or professional:
  • Assets held as investment (e.g. shares, stocks, securities)
  • Fixed assets
  • Rental income
  • Income from interest that is not part of the business income
  • Any expense reimbursed by the client

Once the tax audit report is filed online, it cannot be revised. But if the accounts have been revised – for example, a company account revision after acceptance at the Annual General Meeting, change in law or change in interpretation of law – then the audit report that has been filed can also be changed. The reasons for change in audit report have to be explicitly mentioned while filing the revised report.

Tax audits can be broken down into four different types:

  1. Correspondence Audit: This is the least serious type of tax audit. A correspondence audit refers to the IRS request of additional information to verify the accuracy or details of your tax return.
  2. Office Audit: An office audit refers to the in-person interview with an IRS manager to process your audit. To avoid making statements that can be used against you, it’s highly advisable to consult with an attorney or a tax professional before you attend the interview.
  3. Field Audit: This is the most serious type of audit because the IRS agents will visit you at home or business. They may ask to see things that are related to the tax you’ve reported.
  4. Random Audit: As mentioned above, tax returns can be randomly selected for an audit. A random audit is made without any particular reason. The IRS auditor will review the entire tax return to make sure the information was entered correctly.

FAQ`s

What is Statutory Audit Vs. Tax Audit

Under various legislations, including the Companies Act and Societies Registration Act, the entity may face the requirement to undergo an audit of books of account. In case the assessee is already facing a statutory obligation to get the accounts audited under a law other than the Income Tax Act, then, in such cases, there is no need to once again undergo another audit to satisfy the requirement for audit under the Income Tax Act. Hence, it shall be sufficient if the assessee’s books of accounts are audited under the other law mandating audit. However, the audit under the other law should be completed before the due date of filing the return. The taxpayer can furnish a prescribed audit report under Income tax law stating that since the accounts have been audited already in accordance with the requirements of another law, an audit under the Income Tax Act is not necessary.

Who is liable tax audit?

Under section 44AB, a compulsory tax audit is required to be completed by a Chartered Accountant if a business has total sales turnover or over Rs. 1 crore. In case of a profession, if the profession has total gross receipts of more than Rs. 50 lakhs, then tax audit by a Chartered Accountant is mandatory.

What is audit u/s 44ab?

Section 44AB of the Income Tax Act stipulates provisions pertaining to the tax audit under the Income Tax Audit. A tax audit is conducted to ensure that the taxpayer has properly maintained the books of accounts and other records, and they truly reflect the income of the taxpayer.

Is tax audit compulsory in case of loss?

Tax audit is not mandatory in case F&O trading turnover* does not exceed Rs. 1 Crore. If turnover exceeds Rs. 1 crore, Tax audit u/s 44AB will be applicable, if the net profit from such transactions is less than 6% of the turnover.

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