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Overview of Tax Audit

Government of India conducts various audits under different laws such as company audit/statutory audit carried out under company law provisions, cost audit, stock audit etc. Likewise, Income Tax law has made ‘Tax Audit’ compulsory. In tax audit, accounts of business or any profession is reviewed which makes the process of income computation for filling of return of income easier.

Income Tax Act has made tax audit compulsory on the annual gross turnover/receipts if the amount exceeds a specified limit. Chartered Accountant conducts the tax audit as defined in Section 44AB of the Income Tax Act, 1961.

In simple terms, Tax Audit is an audit of matters related to tax.

Tax Audit Applicability

Section 44AB has made tax audit a mandatory thing for the following persons:

Business: Rs 1 Crore

It means an assesse requires to be audited as mentioned in Section 44AB if his annual gross turnover increases Rs 1 Crore in business.

Profession: Rs 50 Lakh

It means an assesse has to go through tax audit under Section 44AB if his annual gross income in profession increases Rs50 lakh.

Presumptive Taxation Scheme-Section 44AD

  • Businesses whose annual turnover does not cross thelimit of Rs 2 crore are suitable for this scheme.
  • It is not necessary to maintain books of Accounts U/s 44AD
  • Net income is estimated to be @8% of your gross turnover
  • Digital mode of payment is used to receive gross receipts
  • Net income is calculated as @6% and @8% of gross receipts
  • If assesse go for Presumptive taxation u/s 44AD, then he is require to follow same section of audit for next five financial years.
  • You need to file ITR 4 to avail these scheme

Presumptive Taxation Scheme- Section 44ADA

  • Professions whose annual gross income does not exceed Rs 50lakhs are suitable for this scheme.
  • It is not necessary to maintain books of Accounts under Section 44ADA
  • Net income is evaluated to be @50% of your gross receipt.
  • If Assesse go for Presumptive taxation under Section 44ADA then he is need to follow same section of audit for next five financial years.

What should you do to be safe from a Tax Audit?

The motive behind indulging in any kind of business or professional activity is to earn financial profit. And it is crucial to remember that profit should be earned legally and appropriately. Perform the following activities that will result in healthy Tax Audit:

  • 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

Type of Accounts Come Under Tax Audit

  • Individual/Proprietorship
  • Hindu Undivided Family
  • Company
  • Partnership Firm
  • Association of Person
  • Local Authority

What is included in Turnover for Tax Audit?

  • Duty drawback received after export sales are considered as a part of Turnover in a fiscal year.
  • Income earned out of interests from income by money lender or through foreign fluctuation income by an exporter is regarded as a part of turnover in a financial year or Advance received and forfeited from customers and if excise duty included in turnover it should be debited in the profit and loss account.

What is excluded in Turnover for Tax Audit?

  • Sale or Purchase of Fixed Assets
  • Income raised from selling the assets held as investment
  • Rental Income
  • Residential or commercial Property
  • Interest income and reimbursement of expenses as receipt.

Objectives of Tax Audit

  • 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.
  • The main purpose of tax audit is to extract a report according to the requirements of form no. 3CA/3CB and 3CD. Apart from reporting needs of the above forms proper tax audit is also required that will make sure that book of accounts and records are properly maintained as they accurately show the income of the taxpayer and appropriate claim for deductions.
  • Annual audit is both time and money consuming process. Tax audit is necessary for every eligible assesses. Income Tax Act has made it mandatory. In India, tax consultant (Chartered Accountant) conducts Tax Audit.
  • 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
  • Audit gives assurance to shareholders that the figures in the accounts show a true and fair view.
  • A tax audit helps in building a healthy reputation of the company.

What Constitutes Audit Report?

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

How and when tax audit report shall be furnished?

The tax auditor submits his tax audit report online via using his login credentials. It is important for taxpayers to provide the details of CA in their login portal. Once the auditor uploads the audit report, same should either be accepted or rejected by taxpayer in their login portal. In case the report is rejected for any reason, all the steps are to be followed again till the report is accepted by the taxpayer.

Due date by which a taxpayer should get his accounts audited

It is necessary for any person/persons who is/are covered under section 44AB to get their accounts audited and also obtain the audit reports on or before 30th September of that particular year, ie, the due date of filling the return of the income.

Types of Tax Audit

  • First type of audit is known as correspondence audit. It is regarded as the simplest of all types of tax audits, in this audit, IRS send letter to you and will ask information in relation to certain area of your tax return.
  • The second type of audit is known as office audit. In this kind of audit, auditor will ask multiple detailed question and will probably consumes your whole day, if IRS requires, they will allow you more time to collect and send in required details.
  • Third type of audit is a field audit which is slight a bit inclusive than office audit. In this type of audit IRS pays a visit at the house of the taxpayer or their business place of work. They may ask the tax payer to scrutinize other things as well; they will not be limited to specific items.

Penalty of non filing or delay in filing tax audit report

If any taxpayer fails to get the tax audit done is punished with the following penalty:

  • 0.5% of the total sales, turnover or gross receipts
  • Rs 1,50,000