Audit refers to an official inspection or unbiased investigation of a firm's or companies financial statements or reports as well as the production of reports, typically by an autonomous body. There are various types of audits under different laws such as company audit, statutory audit, cost audit, stock audit, etc. Similarly, an audit compensated under Income Tax is termed ‘Tax Audit’. A tax audit is an inspection or study of accounts of any firm or trade executed by taxpayers. It eases the income estimation for filing the ITRs.
Objectives of Tax Audit:
Tax audits are conducted with a few predetermined objectives which are as follows:
Mandatory Subject to Tax Audit
|Engaged in business but not opted for presumptive taxation scheme||Total sales, gross receipts or turnover surpasses 1 crore in the Financial Year|
|Engaged in business qualified for presumptive taxation u/s 44AE, 44BB or 44BBB||Claims gains/profits less than the specified limit under presumptive taxation scheme|
|Engaged in business qualified for presumptive taxation u/s44AD||Notifies taxable income less than specified limit under the presumptive tax scheme and has income surpassing the basic TLV (threshold limit value)|
|Engaged in business but unqualified for presumptive taxation u/s 44AD because of withdrawing from presumptive taxation in any of the FY of the lock-in period (of 5 consecutive years from the date when opted for the presumptive tax scheme).||If income surpasses the maximum amount that do not attract tax in the just next 5 consecutive tax years from the FY when the presumptive taxation was not chosen for|
|Engaged in business which is notifying profits in accordance with presumptive taxation scheme u/s44AD||If the total sales, gross receipt, or turnover is less than 2 crore in the FY, then tax audit will not be applicable to such businesses.|
|Practicing a profession||Total gross receipts surpass 50 lakh in the FY|
|Practicing a profession qualified for presumptive taxation u/s44ADA||1. Claims profits less than the specified limit under the presumptive taxation scheme 2. Income surpasses the maximum value that does not attract income tax.|
|In the event of loss from conducting a business and not choosing presumptive taxation scheme||Total sales, gross receipts or turnover surpass 1 crore|
|If the total income of the taxpayer surpasses basic TLV (threshold limit value) but suffered a business loss (not opting for presumptive taxation scheme)||In the event of loss from business when sales, gross receipts or turnover surpass 1 crore, the taxpayer is a mandatory subject to tax audit u/s 44AB|
|Engaged in business (opting presumptive taxation scheme u/s44AD) and suffered a loss but with income below basic TLV (threshold limit value)||Tax audit does not apply|
|Engaged in business (presumptive taxation scheme u/s44AD applicable) and suffered a loss but with income surpassing basic TLV (threshold limit value)||Declares taxable income less than the limit specified under the presumptive tax scheme and has income surpassing the basic TLV (threshold limit value)|
Report filling process of Tax Audit
The Chartered Accountant who has been selected to conduct a tax audit of an individual or a firm has to report online for tax audit, using his/her valid login credentials.
The taxpayer also has to specify the details about the Chartered Accountant, appointed by him/her, in their login platform.
Once the tax audit report is uploaded by the auditor i.e. the CA, it has to be either received or declined by the taxpayer on their login portal. If the taxpayer declines the tax audit papers, the complete process has to be revised until the tax audit report is confirmed by him/her.
The tax audit record has to be filed on or before the pre-stated date of filing income return i.e. 30th November of the subsequent evaluation year for taxpayers who have engaged in international business and 30th September of the subsequent evaluation year for other taxpayers.
Rules for Auditing Tax
The following points should be noted by the taxpayers while tax audit:
- If the taxpayer is engaged in more than one business and the total turnover of all the businesses is more than 1 crore, he/she is liable to get his/her accounts audited.
- If the taxpayer is engaged in practicing more than one profession and the gross receipts from all the professions surpasses the limit of 50 lakhs, he/she is liable to get his/her accounts audited.
- If the taxpayer is engaged in carrying out a business as well as practicing a profession, then tax audit does not rely on the summed up turnover from both. If the business turnover is more than one crore then an audit is mandatory for the business accounts and if the gross receipts from the profession are above 50 lakhs then an audit of the profession accounts is mandatory. However, if the business turnover is 90 lakhs and gross receipt from profession is 40 lakhs, no audit of either of the accounts is mandatory.
- If the turnover of a business or profession is less than one crore or 50 lakhs, but there is a sale of fixed assets like vehicles or immovable property, the gain from the sale of assets will not be treated as business or professional gain and will remain excluded from total turnover or gross receipts of business or profession.
- Tax audit reports are irreversible. However, in case the accounts have been revised after due acceptance at the AGM due to amendment in law or interpretation of law, the filed audit report can be changed.
Form 3CB: For tax audit reports prescribed u/s 44AB of the IT Act, 1961,
Form 3CD: To report Form 3CB and the specified details
Form 3CA and Form 3CD: Form 3CA is the appropriate form when a taxpayer wants to get the accounts audited under any law except u/s 44AB, the prescribed information needs to be reported in the Form 3CD.
Penalty for non-adherence to Tax audit:
In the next step, the auditor will verify the Financial Statements of auditee and verify it on sample basis. The important thing under any audit is to make sample, it is called sample audit.If any taxpayer who is required to get the tax audit performed but fails to do so, the least of the following may be levied as a punishment:
- 5% of the total sales
- 5% of the turnover
- 5% of gross receipts
- Rs 1,50,000
Waiver in Penalty for non-adherence to Tax audit
A penalty is waived only when a taxpayer is capable of showing a reasonable cause for non-compliance.
- Delay caused due to the withdrawal by the tax auditor
- Delay caused due to loss or physical disability of the partner liable for accounts
- Delay caused out of labor concerns such as sit-ins or lock-outs
- Delay caused due to loss of accounts because of robbery or attack, or events that are not under the assesses control
- Natural disasters
The concept of Matching forms the backbone of ITC (Input Tax Credit) under the GST regime.
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