All about Income Tax Audit

Before reading about what Tax Audit is, we must be clear with the term ‘Audit’. The dictionary meaning of the expression ‘audit’ is to check, review, inspect, etc. Different laws prescribe various types of audits, like company law requires a company audit, cost accounting law requires a cost audit, etc. The principal objective of these audits is to ensure that the books of accounts are free from any error and are in accordance with the provisions mentioned in the respective laws. The Income Tax Law requires the assessees to get the accounts of his business/profession audited from the viewpoint of the Income Tax Act.

In the Income Tax Act, 1961, section 44AB governs and lays down all the provisions for the conduct of audit under the Act. Generally the taxpayers are confused and do not understand the applicability of tax audits. For this, they often search for tax audit firms for complete guidance and solutions. The audit under section 44AB intends to ascertain the compliance of various provisions and fulfilment of all the requirements of the Income-tax Law. The audit conducted by a CA of the assessee’s accounts in pursuance of the requirements of section 44AB is referred to as a Tax Audit. It includes assessing the books of accounts of the assessee to verify that whether he appropriately follows the compliances mandated by the Income Tax Law.

The outcome of the Tax Audit is an audit report. This report is drawn by the Chartered Accountant, where he/she gives his/her findings and observations about the compliances by assessee with tax provisions.

Objectives of Income Tax Audit

The primary purpose of an Income Tax Audit is to ensure that the assessee adheres to the Income Tax provisions in a Financial Year. The objectives of the Tax Audit are summarised below:

* to ascertain/report/derive the requirements of form nos. 3CA/3CB and 3CD

* to verify that whether the assessee duly maintains the books of account and other records

* to ensure that the books of account truly reflect the income of the assessee and the deductions are correctly claimed by him

* to report observations/discrepancies noted by tax auditor after a methodical examination of the books of account

* to check for fraudulent practices adopted by the taxpayer

* to aid the administration of tax laws by a proper presentation of accounts before the tax authorities

* to save the time of Assessing Officers in carrying out regular verifications, like checking the accuracy of totals and checking whether purchases and sales are correctly vouched for or not. The saved time of the Assessing Officers could be used for attending to more meaningful and investigational aspects of a case.

Applicability of Tax Audit u/s 44AB

An assessee is required to have a Tax Audit carried out if the sales, turnover or gross receipts of his business exceed the specified limit in the relevant Previous Year (P.Y.). However, an assessee may be required to get his accounts audited in various other circumstances also. The categories of taxpayers and the threshold limits applicable to them are listed in the tables below –

In case of a person carrying on business

Person	When is Tax Audit required?
In case of a person carrying on business	If his total turnover, sales or gross receipts in business exceed Rs.1 crore in the relevant P.Y.   Note: The condition of audit u/s 44AB is not applicable to a person who declares profit and gains on a presumptive basis u/s 44AD, and his total sales, gross receipts or total turnover does not exceed Rs.2 crores.
In case of an assessee reporting income u/s 44AE, i.e., an assessee involved in the business of hiring, plying or leasing goods carriages who owns not more than ten goods carriages at any time in the P.Y.	If such assessee claims that the profit from business in the relevant P.Y. is less than that computed as per presumptive basis u/s 44AE (i.e., Rs.1,000 per ton of total vehicle weight or unladen weight in case of each heavy goods vehicle and Rs.7,500 for every vehicle, other than heavy goods vehicle, for every month or part of the month for which the assessee owns the vehicle).
In case of an assessee carrying on business, whose sales, total turnover, gross receipts ≤ Rs.2 crores, and who has opted for section 44AD in any P.Y.	If he reports profit for any of the five P.Y.s immediately succeeding the P.Y. in which he opted for section 44AD for the first time not according to presumptive basis (i.e., he states profits lower than 8% or 6% of gross receipts, sales or total turnover, as the case may be, in that year), then he cannot go for section 44AD for five succeeding P.Y.s after the year of such default.   For the year of such default and five subsequent previous years, he must maintain books of account as per section 44AA and get them audited u/s 44AB if his income is more than the basic exemption limit.

In case of a person carrying on profession

Person	When is Tax Audit required?
In case of a person carrying on profession (not opting for presumptive taxation scheme)	If his gross receipts in profession > Rs. 50 lakhs in the relevant P.Y.
In case of an assessee carrying on a profession and eligible for presumptive taxation under section 44ADA	If such resident assessee declares the profits and gains from such profession in the relevant P.Y. lower than the profits and gains calculated on a presumptive basis u/s 44ADA (50% of gross receipts) and his income is higher than the basic exemption limit in that P.Y.

Extended threshold limit in case of digital transactions

Before the Finance Act 2020, under section 44AB of the Income Tax Act, every person carrying business was liable to get Tax Audit in India if his total turnover, sales or gross receipts from such business exceeded Rs.1 crore in any previous year.

However, the provisions of section 44AB got amended by Finance Act, 2020, giving rise to significant confusion in the assessees’ minds regarding the threshold limits for Tax Audit applicability. To decrease the compliance burden on small retailers, traders, and shopkeepers who include the MSME sector, the turnover limit for Tax Audit applicability for a person carrying on business got increased from Rs.1 crore to Rs.5 crores, subject to the following two conditions –

a: the total of all amounts received, including the amount received for turnover, sales or total receipts during the previous year, in cash, does not exceed five per cent of such amount; and

b:  the total of all payments made, including the amount incurred for expenses, in cash, during the previous year does not exceed five per cent of the said payment.

Let us look at a few illustrations below to have a better understanding of this amendment –

1: Mr. Anand had a turnover of Rs. 5,20,00,000 in FY 2019-20. His cash payments were less than 5% of total payments made during the previous year, and total cash receipts were also less than 5% of the total receipts during the year.

In this example, since the assessee’s turnover was over Rs.5 crores (threshold limit) during the previous year, Tax Audit will be applicable on the assessee. Hence, in this case, it is immaterial to check if the cash receipts and cash payments were less than 5% of total receipts and payments, respectively, during the year. Therefore, in the given situation, Mr. Anand must get Tax Audit done for AY 2020-21.

2: Mr. Bansi had a turnover of Rs. 3,50,00,000 in FY 2019-20. His cash payments were less than 5% of total payments made during the previous year, but the total cash receipts were more than 5% of the total receipts during the previous year.

In this situation, since the turnover was Rs. 3.50 crores during FY 2019-20, we need to check whether the cash receipts and cash payments, both, were less than 5% of total receipts and payments, respectively, during the previous year. Since Mr. Bansi's cash receipts were more than 5% of the total receipts during the Financial Year, Mr. Bansi is required to get Tax Audit conducted u/s 44 AB for AY 2020-21.

Current Scenario

The confusion regarding the turnover limits for applicability of Tax Audit further increased when this Rs.5 crores turnover limit discussed above further extended to Rs.10 crores in Finance Act, 2021.

Now with effect from 1st April 2021, the provision is read as follows for the assessment year 2022-23 and subsequent assessment years –

The threshold limit for an assessee carrying on business is Rs.10 crores in a case when –

a: the total of all amounts received, including the amount received for turnover, sales or total receipts during the previous year, in cash, does not exceed five per cent of such amount; and

b: the total of all payments made, including the amount incurred for expenses, in cash, during the previous year does not exceed five per cent of the said payment.

It must be noted that for this clause, the receipt or payment, as the case may be, by cheque drawn on a bank or by a bank draft, other than account payee, shall be considered to be the receipt or payment, as the case may be, in cash.

Let us look at a few examples below to have a better understanding of this amendment –

1: Mr. Sumit had a turnover of Rs.8,50,00,000 in FY 2021-22. His cash payments and cash receipts were less than 5% of total payments and total receipts, respectively, during the previous year.
In this situation, since the turnover was Rs.8.50 crores, i.e., below the threshold limit (Rs.10 crores), we need to check if the cash receipts and cash payments were less than 5% of total receipts and payments, respectively, during the previous year. Since Mr. Sumit’s cash payments were less than 5% of total payments made during the previous year and cash receipts were also less than 5% of the total receipts during the previous year, Mr. Sumit is not required to get Tax Audit done u/s 44 AB for AY 2022-23.

2: Mr. Anand had a turnover of Rs.12 crores in FY 2021-22. His cash payments were less than 5% of total payments made during the previous year, and total cash receipts were also less than 5% of the total receipts during the year.

In this case, since the turnover was above Rs.10 crores (threshold limit) during the previous year, Tax Audit will be applicable on the assessee. Hence, in this situation, it is immaterial to check if the cash receipts and cash payments were less than 5% of total receipts and payments, respectively, during the financial year. Therefore, Mr. Anand must get Tax Audit done for AY 2022-23.

Components of Audit Report

Tax auditor shall furnish his report in a prescribed form which could be either Form 3CA or Form 3CB where:

* Form No. 3CA is furnished when an assessee carrying on business or profession is already required to get his accounts audited by any other law.

* Form No. 3CB is furnished when an assessee carrying on business or profession is not required to get his accounts audited by any other law.

* Along with either of the above-mentioned audit reports, the tax auditor must furnish the prescribed particulars in Form No. 3CD also.

Due Date of Filing Tax Audit Report

An assessee covered u/s 44AB must get his accounts audited and Audit report furnished on or before 30th September following the relevant previous year to avoid being levied with any penalty by the department. For e.g., the Tax Audit report for the Financial Year 2020-21 should be obtained on or before 30th September 2021.

However, the Central Board of Direct Taxes (CBDT) has extended the due date for furnishing the Tax Audit report for Assessment Year 2021-22 from 30th September 2021 to 15th January 2022 on consideration of difficulties reported by the taxpayers and other stakeholders in filing the Income Tax Returns and Audit Reports.

Procedure for Filing Tax Audit Report

* The Tax Audit report is to be filed electronically by a Chartered Accountant to the Income Tax Department.

* After filing of the audit report by the Chartered Accountant, the taxpayer has to approve the report from his account on the e-filing website of the Income Tax Department (i.e., at www.incometaxindia.gov.in).

What if a person is required to get his accounts audited under any other law?

Assessees like companies or co-operative societies are mandated to get their books of accounts audited under their respective laws. Section 44AB provides that if an assessee is required by or under any other law to get his accounts audited, he is not required again to get his accounts audited to comply with the provisions of section 44AB.

In such a case, it shall be sufficient if such assessee gets his books of accounts audited under such law and provides the report of the audit as required under such other law along with a report by the Chartered Accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD.

Penalty for non-compliance to Tax Audit provisions u/s 44AB

If an assessee who is supposed to get the Tax Audit done fails to get his accounts audited under section 44AB, he will have to pay the penalty of a sum lower of the following two amounts –

1: 0.5% of the total turnover, sales or gross receipts during the relevant previous year

2: Rs.1,50,000

Example for amount payable as penalty -

Mr. Gopal is carrying on a business and is liable for a Tax Audit. His total sales during the Financial Year are Rs.5 crores. He fails to get his account audited as per section 44AB within the due timeframe.

The penalty payable by Mr. Gopal will be lower of the following:

1: 0.5% of the total sales, i.e., Rs.5 crore*0.5% = Rs.2,50,000

2: Rs.1,50,000

Here the penalty will be Rs.1,50,000.

However, as per section 271B, no penalty shall be imposed if reasonable cause for such failure is proved. Till date, the reasonable causes that are admitted by Tribunals/Courts are: 

* Natural disasters

* Resignation of the Tax Auditor and consequent delay

* Labour issues such as strikes, lock-outs for an extended period

* Loss of accounts due to situations beyond the control of the assessees

* Physical inability or death of the partner in charge of the accounts

Summing up

The Income Tax Audit is a means by which the Income Tax Department ensures that people keep themselves updated and aware of all the tax provisions and comply with them. It also helps the department to find out the fraudsters and the people who try to evade taxes. To be responsible citizens and avoid any harsh consequences in the long run, we must obey all the requirements of the Act and duly furnish the Audit Report (if applicable) and Income Tax Return within the due dates.

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Disclaimer: The information given above by the author is to provide a general guidance to the readers. This information should not be sought as a substitute for legal opinion.