Income Tax Audit

What is a Tax Audit?

Under Section 44 AB of the Income Tax Act, 1961, provision of Income Tax Audit is covered. Income Tax Audit is a way to examine an individual’s organization tax returns by any outside agency. Income Tax Audit done to verify all income, get the deduction information or about expenditures incurred. To do tax audit is mandated as per the provisions of the Income Tax Act. This act states that all the taxpayers are required to do an audit of all the accounts of their business or organization.

As per Section 44AB, the audit aim is to ascertain the factual veracity of the returns filed and the accomplishment of other requirements as per applicable rules.

The Chartered Accountant performing the tax audit is required to do the submission of all its findings and observations in the form of an audit report. The audit report is given as per format available in the form numbers 3CA/3CB and 3CD.

Section 44AB

Section 44 AB concerned with those classes of taxpayers who are liable to get their audit done from Chartered Accountant.

What is the objective of the Tax Audit?

  • If there is a proper system of doing tax audit, then it becomes possible for all businesses to do maintenance of books of accounts and other revenue or expense records properly.
  • Proper tax audit ensures that total income and claims for deduction should be correctly and accurately done by the businessman.
  • The chances of fraudulent practices reduce with the tax audit.
  • Tax laws help in facilitating the administration of tax laws with proper presentation of accounts in front of tax authorities. It also saves loads of time of Assessing officers who are engaged in carrying out routine verification.

Who all are covered under the Tax Audit?

Tax Audit is applicable for all those classes of individuals that are mentioned under Section 44B of the Income Tax Act. According to the regulations of Section 44B of the Income Tax Act, 1961, the list is mentioned below that states class of people who are mandated to get Income Tax Audit done.

  • An individual who is doing business and has an annual turnover of up to Rs 1 Crore and above.
  • An individual who is engaged in any profession and getting income receipts in a year  up to 50 Lakh and above.
  • An individual who is being qualified for the presumptive taxation scheme under Section 44AD but later claims that the profit of that said business should be lower than the profit calculated following the presumptive taxation scheme. It happens in those cases where the income on record exceeds the amount that comes under the 'tax free' category.
  • An assessee who gets qualification under the presumptive taxation scheme but opts for the scheme after a specific period, in that case, he would lose the ability to revert to the presumptive taxation scheme for a continuous terms of 5 assessment years after the decision to opt-out is taken.
  • An individual who qualifies to presumptive taxation scheme as per Section 44AE but then claims that profit for such business are lower than profit calculation in accordance with presumptive taxation scheme of Section 44AE.

What are the forms under 3CA, 3CB and 3CD?

Tax Audit reports that are conducted by a Registered Chartered Accountant are to be presented in a prescribed format. As per Section 44AB of the Income Tax Act, form which is prescribed for the audit report is known as Form No. 3CB and prescribed are reported in Form no. 3CD.

In some cases, when a person who wishes to get an account audited under any law other than 44AB, then, in that case, the form used for the audit report is Form no. 3CA and prescribed are reported in Form No. 3CD.

What is the due date for doing Income Tax Audit?

Any individual or persons covered under Section 44AB get their account audited and should also obtain audit reports on or before 30th September for financial year 2020-21.

For instance, the Tax audit report for Financial Year 2020-21 corresponding to the assessment year 2021-22 should be obtained before 30th September 2021.

Tax Audit Report to be filed Electronically by the chartered Accountant to the Income Tax Department. After filing the Income Tax report by the Chartered Accountant, the taxpayer needs to approve the submitted reports using an E-filing account with the Income Tax Department.

What is the Penalty for not getting Accounts Audited?

As per Section 271B, if a person who is required to comply with the Section 44AB is not able to get their accounts audited, then the penalty will be imposed on that person:

  1. Fine charged to a business with an amount of Rs 150,000.
  2. 0.5% of the total sales in case of a business organization or 0.5% of the total receipts in case of the profession of the current financial year.

However, according to section 273B, no penalty would be imposed on the person if a valid reason for such failure is proved.

Thus, tax audit mandates for individuals. Failure to comply with the income tax rules would attract the penalty and individuals wishing to avoid any penalty should ensure full compliance with all the rules of the income tax audit.