Income Tax Audits In India: Everything You Need To Know

Income tax is one of the most important terms that every earning individual must be aware of. In India, income tax rules differ for salaried employees and businesses. There are several scenarios when simply filing your business tax returns is insufficient. The Income Tax Department requires you to get your account verified to ensure you are not evading taxes and following all tax laws. This is where the concept of a 'Tax Audit' comes into play.
 

What is a tax audit in India?

 
The term "audit" refers to the process of reviewing, inspecting, and verifying a company's financial transactions, books, and business accounts. The audit process is carried out to ensure that the company is in compliance with income tax laws.
 
The tax audit provisions are prescribed under section 44AB of the Income Tax Act. The audit process is carried out by the Chartered Accountant (CA). 
 

What are the objectives of a Tax Audit?

 

• To ensure businesses keep proper accounting records and certifies them with an authorised tax auditor.
• To ensure companies adhere to income tax provisions and provides accurate information on the depreciation of various capital assets. 
• Reporting bookkeeping discrepancies to the appropriate authority in the Income Tax department.

 

What are the components of a Tax Audit report?

 
The Income Tax Department requires the auditor to submit their audit report in one of two forms.
 

• Form 3CA

  The auditor will provide this form if the Income Tax Act does not require the person to have his business accounts audited.
   

• Form 3CB

  This form must be furnished if the law does not require the business to have its accounts audited.
   

• Form 3CD

  It includes detailed information about business transactions as well as a few other details.
   

• Form 3CE

  This form is for foreign companies or NRIs that receive royalties or commissions from the Indian government or a domestic company in exchange for providing services.
   

Note: Furnishing of Form 3CD is mandatory with Form 3CA and 3CB. 
 

When is tax audit applicable?

According to the law, any business with an annual turnover, sales, or gross receipts of more than Rs 1 crore in a given financial year must have its account audited. However, there are two revisions to this rule. The first is a proposal in the Finance Act 2020 to raise the threshold limit to Rs 5 crores if cash receipts/payments are within 5% of gross receipts/payments (w.e.f. FY 2019-20).
 
Another is under the Finance Act 2021, which raises the Rs 5 crore threshold limit to Rs 10 crore with the condition that the business' cash transaction is less than 5% in the fiscal year.
 
Other conditions for the tax audit are detailed below.
 

Business Type	Conditions
Businesses that have not opted for the presumptive taxation scheme	Turnover exceeding Rs 1 crore in the financial year
	The threshold limit is Rs 10 crores if the cash transaction value is less than 5% of the gross receipt.
Businesses that qualify for presumptive taxation (sections 44BB, 44BBB, or 44AE)	If the company claims that its profit is less than the prescribed limit.
Businesses that qualify for presumptive taxation (section 44D)	If the taxable income declaration is less than the prescribed and the basic threshold limit.
Profit declaration as per presumptive taxation (under section 44D)	Annual turnover exceeding Rs 2 crores in the financial year

 

For Professionals
Profession Type	Conditions
Normal profession	Gross receipt of more than Rs 50,00,000 in the financial year
Professions that qualify for presumptive taxation (Section 44ADA)	Income in excess of the tax threshold limit
	If the professional claims that his profit is less than the prescribed limit.

 

For loss-making business
Business Type	Conditions
A loss-making company that has not opted for presumptive taxation	Annual turnover exceeding Rs 1 crore
Individual's income exceeds the basic limit, but he has faced a significant loss in a business that has not elected presumptive taxation.	Turnover exceeding Rs 1 crore
A loss-making company with income below the threshold limit, but the company has chosen presumptive taxation under section 44AD.	No tax audit is required

 

What is the deadline for submitting a tax audit report?

 

• The due date for submitting Form 3CA and 3CB is 30th September of the assessment year. 
• In the case of Form 3CE, the previous deadline was 31st October 2022. 

 

What is the penalty for failing to file a tax audit report?

 
If your company falls into the category where having your accounts audited is mandatory, but you fail to meet this requirement, the penalty will be the least of the following. 
 

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

 
However, if the default is due to an unavoidable cause, no penalty is imposed under Section 271B. Here is the list of scenarios that do not attract any penalty. 
 

• Natural Calamities
• Strikes by workers
• Lock-outs 
• Loss of accounts due to uncontrollable situations
• Business owner's physical inability 
• Business partner's death 
• Resignation by auditor

 
Also Read: Don't Fall In Financial Pits, Debunk These Tax Deduction Myths
 

Conclusion

 
Tax auditing is a necessary procedure. Failure to follow this rule will result in a penalty. As a taxpayer, it is critical to keep up with recent amendments and to be aware of the various sections under which you can receive tax benefits.