WHAT IS A TAX AUDIT?
A tax audit is an examination of a taxpayer’s financial statements and records to ensure they comply with the provisions of the Income Tax Act, 1961. It aims to verify whether the income, deductions, and other financial details reported by an individual or business are accurate and in line with tax regulations.
While various types of audits exist under different laws such as statutory, cost, or stock audits a tax audit specifically focuses on compliance with income tax laws. It is a mandatory requirement for taxpayers whose turnover or gross receipts exceed the prescribed limits.
SECTION 44AB OF THE INCOME TAX ACT
Section 44AB of the Income Tax Act, 1961, defines the applicability of tax audits. It specifies that individuals, firms, or companies exceeding certain turnover or receipt thresholds must have their accounts audited by a Chartered Accountant.
The objective is to ensure the proper maintenance of books of accounts, accurate reporting of income, and adherence to tax regulations. Once the audit is completed, the Chartered Accountant submits the Tax Audit Report electronically to the Income Tax Department.
OBJECTIVES OF A TAX AUDIT
The tax audit serves several purposes beyond statutory compliance. Its main goals include:
- Ensuring Accuracy: To verify that books of accounts are properly maintained and reflect true financial transactions.
- Identifying Discrepancies: To detect any inconsistencies or irregularities in accounting records.
- Providing Disclosures: To disclose necessary financial and tax details, such as depreciation, deductions, and TDS compliance.
- Simplifying Tax Computation: To make tax calculation more accurate and reliable for both taxpayers and authorities.
- Cross-verifying Income Tax Returns: To confirm that the income, deductions, and taxes declared match the records.
- Supporting Efficient Tax Administration: To help authorities ensure proper tax collection and compliance.
APPLICABILITY OF TAX AUDIT – SECTION 44AB
A tax audit becomes mandatory based on the turnover, gross receipts, or profit declaration of a taxpayer. The limits vary for businesses, professionals, and those opting for presumptive taxation schemes.
For Businesses
| Category | Tax Audit Applicability |
| Business not under presumptive taxation | Mandatory if total sales/turnover/gross receipts exceed ₹1 crore in a financial year. |
| Business with cash transactions ≤ 5% of total transactions | Applicable if turnover exceeds ₹10 crore (effective FY 2020–21). |
| Business under presumptive taxation (Sections 44AE, 44BB, 44BBB) | Required if profits declared are below prescribed limits. |
| Business under Section 44AD (Presumptive Scheme) | Required if declared income is below 8%/6% (as applicable) and total income exceeds the basic exemption limit. |
| Opting out of Section 44AD within 5 years | Required if total income exceeds the basic exemption limit in any subsequent year. |
For Professionals
| Category | Tax Audit Applicability |
| Profession under normal provisions | Required if gross receipts exceed ₹50 lakh in a financial year. |
| Profession under Section 44ADA (Presumptive Scheme) | Required if declared income is below 50% of gross receipts and total income exceeds the exemption limit. |
In case of business loss
| Scenario | Tax Audit Applicability |
| Business reports a loss (not under presumptive scheme) | Required if turnover exceeds ₹1 crore. |
| Business loss with total income exceeding exemption limit | Audit required when turnover exceeds ₹1 crore. |
Summary of Tax Audit Limits
| Category | Threshold Limit |
| Business (Normal) | ₹1 crore (₹10 crore if cash transactions ≤ 5%) |
| Profession | ₹50 lakh |
| Presumptive Scheme | Based on lower profit declaration and income exceeding exemption limit |
Tax Audit Due Date (FY 2024–25 / AY 2025–26)
For the Financial Year 2024–25 (Assessment Year 2025–26):
· Tax Audit Report Due Date: 31st October 2025 (extended from 30th September 2025).
· Income Tax Return (ITR) Filing Due Date (for audited taxpayers): 31st October 2025.
Timely completion and submission of the tax audit report are essential to avoid penalties under Section 271B.
FORMS REQUIRED FOR TAX AUDIT REPORT
Depending on the nature of the audit and taxpayer, different forms are prescribed under the Income Tax Act:
| Form | Purpose / Usage | Applicable To |
| Form 3CA | For taxpayers whose accounts are already audited under another law (e.g., Companies Act). | Companies and firms with statutory audit. |
| Form 3CB | For taxpayers not audited under any other law. | Individuals, proprietors, or firms audited only under Income Tax Act. |
| Form 3CD | Annexure to 3CA/3CB containing detailed financial and tax information. | Mandatory in all tax audits. |
| Form 3CE | For non-residents or foreign companies receiving royalties or technical service fees from India. | Applicable to international taxpayers. |
WHO CAN CONDUCT A TAX AUDIT?
A Chartered Accountant (CA) in full-time practice, registered under the Chartered Accountants Act, 1949, is authorized to conduct a tax audit.
Responsibilities of the CA:
· Examine and verify the books of accounts.
· Ensure compliance with tax laws and reporting standards.
· Prepare and upload the audit report in Form 3CA/3CB with Form 3CD.
Note: An internal accountant or employee of the business cannot perform the audit it must be conducted by an independent, qualified professional.
PENALTY FOR NON-COMPLIANCE (SECTION 271B)
Failure to conduct or file the tax audit report by the due date attracts a penalty under Section 271B of the Income Tax Act.
Penalty Amount:
· Lower of 0.5% of total turnover/gross receipts or
· ₹1,50,000
Penalty Exemption: No penalty is levied if the taxpayer can justify the delay with a reasonable cause, such as:
· Auditor resignation or illness
· Data loss due to calamity or system failure
· Labour disputes or prolonged strikes
· Death or incapacity of the responsible person
APPOINTMENT OF A TAX AUDITOR
· For companies, the Board of Directors (or authorized officer) appoints the tax auditor.
· In a firm or proprietorship, the appointment is made by the partner, proprietor, or authorized person.
· Multiple auditors (joint auditors) can be appointed, and all must sign the report. If opinions differ, each auditor must issue a separate report.
WHO CANNOT BE APPOINTED AS TAX AUDITOR
Certain restrictions apply to maintain independence and integrity:
· A CA in part-time practice cannot perform audits.
· A CA indebted to the client for over ₹10,000 is ineligible.
· Internal auditors or employees of the assessee cannot act as tax auditors.
· Auditors already engaged in statutory audits of large public sector or listed companies (turnover ≥ ₹50 crore) cannot take additional assignments beyond prescribed limits.
No auditor can accept more than 45 tax audit assignments in one financial year.