Income Tax Audit in India

The word ‘audit‘ implies that it is a formal examination of an organisation’s financial records and the creation of a report, usually by a third party. Numerous types of audits are carried out in accordance with different laws, including stock audits, cost audits, and company audits or statutory audits performed under company law provisions. Similar to this, tax audits are required by income tax law.

The term ‘tax audit‘ refers to the process by which taxpayers examine or review the financial records of any type of business or profession in terms of income taxes. It simplifies the process of computing income for the purpose of filing an income return.

Income Tax Audit Limits for FY 2023-24 (AY 2024-25)

1. A businessperson whose gross receipts/turnover/sales for the previous financial year is above Rs. 1 crore. It no longer applies to an individual who chooses presumptive taxation scheme under Section 44AD. The general income or turnover of the person is not more than Rs.2 crore.
2. A professional whose gross receipts for the previous financial year is more than Rs. 50 lakh.
3. Persons covered under Sections 44AD, 44AE, 44AF, 44BB and 44BBB, who are declaring lower profits from business than what is estimated.
4. As per the latest announcement, the persons who carry out most of the transactions (95% in this case) online, that is through digital transactions, will be eligible for an increase in the limit for tax audit.

Different Types of Tax Audits

There are three types of auditing process. They are given below:

1. Field audit: This type of audit is conducted at your office place. Here you will have to provide all the necessary documents to ensure the auditing is done successfully. 
2. Office audit: Here the auditing takes place in the office of the IRS. Make sure you carry all the necessary documents. You will most likely receive a letter in which it will be mentioned the documents you must carry.
3. Correspondence audit: Here you will receive a letter in which it will be mentioned the documents required for the auditing process. Ensure to mail all the required documents to the address provided in the mail.

What are The Main Objectives of Tax Audit?

The objectives of tax audit can be summed up as follows:

1. It ensures that the books of accounts are maintained properly and are certified by a tax auditor.
2. It helps provide the reports in regard to the recommended information such as tax depreciation, income tax law and its compliance, and so on.
3. It ensures the method-bound scrutiny of the books of accounts and the reports in terms of the observations or discrepancies pointed out by a tax auditor.
4. It helps verify the correctness of the income tax returns which are filed with the IT department.
5. It makes the task of the calculation and verification of total income, claims for deductions, and so on, easier.

When and How will Tax Audit Reports be Furnished?

Given below are the steps to know the how and when the tax audit report will be furnished:

1. A tax audit report will be furnished online by the auditor using their login credentials in the presence of a chartered accountant.  
2. Once the report has been uploaded by the auditor, it will be at the discretion of the taxpayer to either accept or reject it. If the report is rejected, then the auditing process is to begin again. 
3. Ensure the tax auditing report is filed before the due date. 

Forms Required for Tax Audit

Rule 6G of the Income Tax Act lists the forms that need to be used to submit income tax audit of business/profession under Section 44AB. The Income Tax (7th Amendment) Rules 2014 has made some changes to the forms required for income tax audit submission. The Central Board of Direct Taxes has altered Forms 3CA, 3CB and 3CD so that now the income tax auditor has to mention observations or qualifications/merits of the audit report while filling these forms.

1. If a businessperson or professional has to audit their accounts under any law other than the Income Tax Act, then Form 3CA (Audit Form) and Form 3CD (Statement of Particulars) are to be filled and submitted.
2. If a businessperson or professional has to audit their accounts only under the Income Tax Act, then they need to use Form 3CB (Audit Form) and Form 3CD.
3. If a taxpayer is mandated to conduct an audit of his business under more than one law – for example, under both the Companies Act and Income Tax Act – then s/he need not perform the audit twice in the same year. She/he can submit the same audit report for the relevant scrutiny. However, if the auditing is done for different Acts in different Accounting Years, then a tax audit has to be conducted again for the relevant year under the Income Tax Act.

Those who are mandated to audit their account books have until September 30 to file their Income Tax Return (ITR). The audit report needs to be attached while e-filing your I-T Return.

Rules for Governing Tax Audit

The following points are of note with regard to Tax Audit:

1. 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.
2. 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 lakh.
3. 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 lakh then an audit of the profession accounts is needed. But if your business turnover is Rs. 90 lakh and your profession receipts are Rs. 40 lakh, then no audit is required for either accounts.
4. If the turnover of your business or profession is below Rs. 1 crore or Rs. 50 lakh, but you have sold any fixed asset (such as vehicle, immovable property), the amount you gained 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:
   1. Assets held as investment (e.g. shares, stocks, securities)
   2. Fixed assets
   3. Rental income
   4. Income from interest, that is not part of the business income
   5. Any expense reimbursed by the client
5. 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. Reasons for change in audit report have to be explicitly mentioned while filing the revised report.

Penalty for Not Auditing

If the account books of a business or profession is not audited as per Section 44AB, then the assessee has to pay penalty as per Section 271B of the Income Tax Act.

1. A delay in completing audit and submitting the report on time (before or on September 30), then 0.5% of the turnover, a maximum of Rs. 1.5 lakh, has to be paid as penalty.
2. If there is a genuine reason for delay or non-filing of audit report, then as per Section 273B, no penalty will be applicable.
3. Among the allowed reasons are:
   1. Delay caused by resignation of the tax auditor
   2. Delay caused by death or physical inability of the partner responsible for accounts
   3. Delay caused by labour issues such as strikes or lock-outs
   4. Delay caused by loss of accounts due to theft or fire, or incidents that are not under the assessee’s control
   5. Natural calamities

A tax audit is conducted only on business or profession, and not on individual income. Auditing of accounts is a best practice that will ensure that the laws are adhered to and that there is no tax fraud or evasion. The chartered accountant in charge of audits has to ensure that the client’s accounts are in order, and is also responsible for making accurate observations and reports to the government.