There are different types of audits performed under different rules such as company audits/statutory audits conducted under the terms of company law, cost audits, stock audits, etc. Similarly, the Income Tax Act mandates an audit called ‘Tax Audit’. As the name itself suggests, a tax audit is a review or examination of the accounts of any business or activity performed by taxpayers from a tax revenue perspective. It simplifies the process of calculating income for filing a tax return. This article discusses what Income Tax Audit is.
The term ‘audit’ means a check, review, verification, or examination of a record, transaction, account, etc. Tax audit is a process of verification and checking of taxpayer accounts to ensure compliance with provisions of tax law.
Section 44AB of the Income Tax Act, 1961 deals with the audit of accounts of a particular category of persons engaged in business or occupation. The category of taxpayers listed under this section must ensure that their accounts are audited by a Chartered Accountant. The CA will monitor and verify that these accounts comply with various provisions of the Income Tax Act. Simply put, this audit required in terms of Section 44AB of the Income Tax Act, 1961 is called a tax audit.
Audit results in an audit report. This report is drawn up by the Chartered Accountant in which he presents his findings and comments on the compliance of the person under audit.
Purpose of tax audit
A tax audit is done to achieve the following objectives:
To ensure the proper and accurate keeping of the books of account and the same certificates by the auditor.
Observing reports/discrepancies noted by the tax auditor after auditing account books.
Reporting prescribed information such as tax deductions, compliance with various provisions of income tax law, etc.
All of this enables tax authorities to verify the validity of taxpayer income tax returns. The calculation and confirmation of total income, claim deductions, etc., is also easier.
For whom does the tax audit apply?
The following people are required to get their accounts audited-
If your total income exceeds Rs.50 lakhs per financial year
If you perform a tax-deductible activity (Section 44ADA) and you require your income to be below the prescribed limit, and your income exceeds the maximum amount until the income tax can be deducted.
People doing business:
If your total profit exceeds ₹ 1 crore.
If you are conducting a taxable business (Section 44AE, 44BB, or 44BBB) and say that the profit or benefits are below the threshold, then research is necessary.
If your business is liable for taxation in advance in terms of Section 44AD of the Income Tax Act as well as declares that taxable income is below the estimated tax threshold and that the income is above the limit
If total profit or receipts exceed ₹ 2 crores for the financial year.
Constituents of Audit report
The Auditor will submit his or her report in the prescribed form which may be in Form 3CA or Form 3CB where:
Form No. 3CA is issued when a person conducting a business or activity is already authorized to have his or her accounts audited under any other law.
Form No. 3CB is issued if the person conducting the business or activity is not required to audit his accounts under any other law.
In the event of any of the above audit reports, the tax auditor must provide the prescribed information on Form No. 3CD.
How and when will tax audit reports be released?
The Tax Auditor will submit an online tax audit report using his or her ‘Chartered Accountant’ entry details. Taxpayers will also add CA details to their login portal.
If the auditor uploads the audit report, the same should be accepted/rejected by the taxpayer on his or her portfolio. If it is rejected for any reason, all procedures need to be followed until the audit report is approved by the taxpayer.
You must submit a tax audit report on or before the due date for completing your return. It is 30th September 2022 for Submission of audit report (Section 44AB) for AY 2022-23 for taxpayers liable for audit under the Income Tax Act.
Penalty for non-completion or delay in completing the tax audit report
If any taxpayer is required to do a tax audit but fails to do so, a minimum of the following may be charged as a fine:
0.5% of total sales, profits, or total receipts
Rs 1, 50,000
However, if there is a valid reason for such failure, no penalty will be imposed under section 271B. To date, the most legitimate causes accepted by Tribunals/Courts are:
Auditor’s resignation and Consequence Delays
Labor problems such as strikes, lock-outs
Loss of Accounts due to circumstances beyond the scope of the Assesses
Physical incompetence or death of a partner in charge of accounts
Tax audits are only done on business or at work, not on personal income. Auditing is the best practice that will ensure that the rules are followed and there is no fraud or tax evasion. The chartered accountant in charge of auditing must ensure that the client’s accounts are accurate and that he or she is responsible for accurate monitoring and reporting to the government.
CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system.
His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.
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