What is Tax Audit? Applicability and Penalty for Non-filing
What is tax audit?
There are various kinds of audit being conducted under different laws such as company audit/statutory audit conducted under company law provisions, cost audit, stock audit etc.
Similarly, income tax law also mandates an audit called ‘Tax Audit’. As the name itself suggests, tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax viewpoint. It makes the process of income computation for filing of return of income easier.
Objectives of tax audit
Tax audit is conducted to achieve the following objectives:
- Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor
- Reporting observations/discrepancies noted by tax auditor after a methodical examination of the books of account
- To report prescribed information such as tax depreciation, compliance of various provisions of income tax law etc.
All these enable tax authorities in verifying the correctness of income tax returns filed by the taxpayer. Calculation and verification of total income, claim for deductions etc. also becomes easier. - 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.
Who is mandatorily subject to tax audit?
A taxpayer is required to have a tax audit carried out if the sales, turnover or gross receipts of business exceed Rs 1 crore in the financial year. However, a taxpayer may be required to get their accounts audited in certain other circumstances. We have categorised the various circumstances in the tables mentioned below:
NOTE: The threshold limit of Rs 1 crore for a tax audit is proposed to be increased to Rs 5 crore with effect from AY 2021-22 (FY 2020-21) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments.
We present the various categories of taxpayers below:
Category of person | Threshold |
Business | |
Carrying on business (not opting for presumptive taxation scheme*) | Total sales, turnover or gross receipts exceed Rs 1 crore in the FY |
Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB | Claims profits or gains lower than the prescribed limit under presumptive taxation scheme |
Carrying on business eligible for presumptive taxation under Section 44AD | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit |
Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when the presumptive tax scheme was opted | If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for |
Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD | If the total sales, turnover or gross receipts does not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses. |
Profession | |
Carrying on profession | Total gross receipts exceed Rs 50 lakh in the FY |
Carrying on the profession eligible for presumptive taxation under Section 44ADA | 1. Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme 2. Income exceeds the maximum amount not chargeable to income tax |
Business loss | |
In case of loss from carrying on of business and not opting for presumptive taxation scheme | Total sales, turnover or gross receipts exceed Rs 1 crore |
If taxpayer’s total income exceeds basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme) | In case of loss from business when sales, turnover or gross receipts exceed 1 crore, the taxpayer is subject to tax audit under 44AB |
Carrying on business (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below basic threshold limit | Tax audit not applicable |
Carrying on business (presumptive taxation scheme under section 44AD applicable) and having a business loss but with income exceeding basic threshold limit | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit |
What happens if a person is required to get his accounts audited under any other law for eg. statutory audit of companies under company law provisions ?
In such cases, the taxpayer need not get his accounts audited again for income tax purposes. It is sufficient if accounts are audited under such other law before the due date of filing the return. The taxpayer can furnish this prescribed audit report under Income tax law.
What constitutes Audit report?
Form No. 3CA is furnished when a person carrying on business or profession is already mandated to get his accounts audited under any other law.
Form No. 3CB is furnished when a person carrying on business or profession is not required to get his accounts audited under any other law.
In case of either of the aforementioned audit reports, tax auditor must furnish the prescribed particulars in Form No. 3CD, which forms part of audit report.
How and when tax audit report shall be furnished?
The tax auditor shall furnish tax audit report online by using his login details in the capacity of ‘Chartered Accountant’. Taxpayer shall also add CA details in their login portal. Once the tax auditor uploads the audit report, same should either be accepted/rejected by taxpayer in their login portal. If rejected for any reason, all the procedures need to be followed again till the audit report is accepted by the taxpayer.
You must file the tax audit report on or before the due date of filing the return of income. It is 30 November of the subsequent year in case the taxpayer has entered into an international transaction and 30 September of the subsequent year for other taxpayers.
Penalty of non filing or delay in filing tax audit report
Non-compliance of tax audit regulations by taxpayers attracts a penalty of whichever is lower from the following:
- 0.5% of total sales or
- Turnover or
- Gross receipts or
- Rs. 1,50,000
A penalty is waived only when a taxpayer is able to show a reasonable cause for non-compliance. 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. In case of 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. If there is a genuine reason for delay or non-filing of audit report, then as per Section 273B, no penalty will be applicable. Among the permitted reasons are:
- Delay caused by resignation of the tax auditor
- Delay caused by death or physical inability of the partner responsible for accounts
- Delay caused by labour issues such as strikes or lock-outs
- Delay caused by loss of accounts due to theft or fire, or incidents that are not under the assessee’s control
- Natural calamities
Forms Required for Tax Audit
Tax Audit reports can be presented in two different ways by tax auditors, differing on the basis of the laws under which the accounts have been audited.
Form 3CB and Form 3CD: For tax audit reports presented under Section 44AB of the Income Tax Act, 1961, Form 3CB and the prescribed details have to be reported in the Form 3CD.
Form 3CA and Form 3CD: When a taxpayer prefers to get the accounts audited under any law other than Section 44AB, then the relevant form is Form 3CA, while the prescribed details have to be reported in the Form 3CD.
Frequently Asked Questions
Question 1: What is meant by tax audit?
Answer: There are different laws in India that focus on laying down the rules and regulations unique to various types of audits – cost audit, income tax audit, stock audit, company or statutory audit as per company law, etc. Section 44AB of the Income Tax Act, 1961, lays down the provisions for income tax audit in India.
Income tax audit, as evident from the name, is aimed at analysing the accuracy of income tax returns filed by individuals and businesses in an assessment year. A tax auditor from an external agency is mandated to assess returns filed from income, expenditures and deductions and other parameters, as per Section 44AB of the Income Tax Act, 1961. The tax audit procedure streamlines the computation of tax returns. The Chartered Accountant of the agency performing the tax audit has to present their observations and findings in Form 3CA or Form 3CB, and Form 3CD.
Question 2: What is tax audit limit?
Answer: As per Section 44AB of the Income Tax Act, 1961, tax audit limit for professionals, businesses and presumptive taxation scheme are:
Business: Tax audit for businesses pertains to those whose gross receipts or total business sales turnover exceeds Rs. 1 crore in the previous assessment year. The term ‘business’, under the Income Tax Act, 1961, implies to any economic activity that earns profits and gains. To quote Section 2(3), a business can be “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture.”
Profession: For a profession or professional, tax audit is applicable if gross receipt in the concerned profession is more than Rs. 50 lakhs in any of the previous assessment year. As per Rule 6F of the Income Tax Rules, 1962, this profession can be any of the following:
- Accountant
- Engineer
- Architect
- Medical Professionals like Physiotherapist, Doctor, etc.
- Legal Professionals
- Authorised representative
- Film Artist – Film Director, Music Director, Actor, Editor, etc.
- Interior Decorator
- Technical Consultant
Presumptive Taxation Scheme: When an individual is enlisted under the presumptive taxation scheme under Section 44AD and total sales or turnover exceeds Rs. 2 crores, tax audit is considered to be mandatory.
Also, any individual enlisted under the presumptive taxation scheme who claims that the gains of the business are lower than the gains calculated as per the presumptive taxation scheme, tax audit is considered to be mandatory.
Question 3: What are the types of tax audit?
Answer: Types of tax audit as per the provisions of Income Tax Act, 1961:
Section 44AB: Most taxpayers, individuals and organisations, are government by the provisions concerning income tax audit, as laid down in this section
Section 44BB: This section focuses on Non-Resident Indians (NRIs) engaged in businesses involved in the mineral oils industry, like exploration
Section 44BBB: This is for international companies engaged in the business of civil construction, etc. in certain power projects
Section 44AD: Any business except those mentioned under Section 44AE, comes under the purview of this section
Section 44ADA: This section focuses on the regulations regarding income tax audits for eligible professionals
Section 44AE: Businesses engaged in leasing, hiring and plying of goods carriages
Question 4: What is tax audit under Section 44AB?
Answer: There are different laws in India that formulate and implement regulations unique to various types of audits – stock audit, cost audit, income tax audit, company or statutory audit as per company law, etc. Section 44AB of the Income Tax Act, 1961, specifies provisions for income tax audit in India.
Income Tax audit, as suggested by the name, is aimed at assessing the correctness of income tax returns filed by individuals and businesses in an assessment year. A tax auditor is mandated to evaluate returns filed from income, expenditures and deductions and other parameters, as per Section 44AB of the Income Tax Act, 1961. The tax audit procedure streamlines the computation of tax returns. The Chartered Accountant of the agency performing the tax audit has to present their observations in Form 3CA or Form 3CB, and Form 3CD.
Question 5: What are some different types of audits?
Answer: Tax audit can be classified under the following categories:
- Tax audit - This tax audit is an analysis of the tax returns submitted by an individual or business to evaluate the accuracy of income tax payment. These tax audits are especially conducted when the tax payments of individuals and businesses are unusually low.
- Financial audit – One of the most popular types of tax audit, it analyses the authenticity of the information mentioned in the financial statements of entities. It is mandatory that this tax audit is conducted by a CPA agency that functions independently of the entity being audited.
- Construction audit - As the name suggests, this assesses the expenses for construction projects and other essential details - contractors hired, payments made, reimbursements, changes in orders, and the deadlines within which the projects were completed. The aim of this tax audit is to check whether the expenditures incurred for these construction projects were reasonable.
- Compliance audit - This evaluates the policies and processes of a department or entity, usually educational institutions or industries and checks whether it is compliant with the regulatory standards.
- Investigative audit - This tax audit is an investigation of a specific area or individual when there is a suspicion of inappropriate or fraudulent activity. The intention is to find out and remedy control breaches, and collect evidence should charges be filed against someone.
- Information systems audit – This tax audit reviews the controls over technology like data processing, software development, etc. The aim is to regulate the functioning of the IT systems, access the accuracy of results being generated and ensure data protection.
- Operational audit - This tax audit, which can be undertaken by an internal as well as an external CPA agency, is a thorough analysis of the planning processes and results of business operations. The final report by the agency comprises of recommendations for improving business processes.
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