A lot of new age businessmen or entrepreneurs have this curiosity often as to what is tax audit.  It’s a term that often worries young start-ups. And they are concerned about its applicability when growing a business. The fact is that the income tax rules in India circling tax audit are complex indeed. And that is the reason even some seasoned business owners fail till date to understand its applicability. In this article however we shall try to untangle and simplify the answer to today’s question. We shall also discuss about its objectives, its applicability and consequence to failure in completing the same, if applicable.

Before we go into – What is tax audit? Let’s understand what an audit is in general with respect to business finances and financials. Dictionary wise an audit is an official inspection of an organisation’s accounts. This is summarised, commented and opined upon through a report, usually by an Independent body, being a Chartered Accountant.

Tax audit – There are various types of audit conducted for businesses in India under different statues. E.g. statutory audit, Cost audit, Stock audit etc. under company law etc. Similarly, Indian Income tax act warrants a Tax audit under certain circumstances. For examination of a business’s books of accounts from Income tax regulations stand point. It assists the government in ascertaining the reliability on the income tax returns filed by specific tax payers.

Objectives of Tax audit

The primary objectives of a tax audit are.

1. Ensure proper maintenance of accounts and certification of the same by a chartered accountant.

2. Reporting of observations/discrepancies, if any, by the chartered accountant as per the provisions of the Income tax act.

3. Assure all tax deductions/credits are claimed lawfully by the tax payer within the permissible limits of the Income tax law.

Tax audit applicability

We have attempted to simplify the complex provisions pertaining to tax audit eligibility here by specifying thresholds vis-à-vis scenarios of businesses:

Scenario 1: Carrying on business (not opting for presumptive taxation scheme)

When total sales, turnover or gross receipts exceed INR 1 Crore in the relevant financial year (FY).  From AY 2020-21, if the total cash payments or cash receipts do not exceed 5% of the total expenditures or 5% of the total revenues respectively, then such limit for tax audit shall be deemed to be INR 5 Crore.

Scenario 2: Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB

When business claims profits or gains lower than the prescribed limit under presumptive taxation scheme.

Scenario 3: Carrying on business eligible for presumptive taxation under Section 44AD

When business declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit.

Scenario 4: Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when the presumptive tax scheme was opted

If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for.

Scenario 5: Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD

If the total sales, turnover or gross receipts does not exceed Rs 2 Crore in the financial year, then tax audit will not apply to such businesses.

Scenario 6: Carrying on a Profession (e.g. CA, Doctors, Lawyers etc.)

Total gross receipts exceed Rs 50 lakh in the FY

Scenario 7: Carrying on the Profession, as above, and eligible for presumptive taxation under Section 44ADA

1.  Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme.

2.  Income exceeds the maximum amount not chargeable to income tax.

Scenario 8: In case of loss from carrying on of business and not opting for presumptive taxation scheme

Total sales, turnover or gross receipts exceed Rs 1 Crore

Scenario 9: Carrying on business (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below basic threshold limit

Tax audit not applicable

Scenario 10: Carrying on business (presumptive taxation scheme under section 44AD applicable) and having a business loss but with income exceeding basic threshold limit

Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit.

Tax audit report ingredients

Chartered Accountant would furnish his tax audit report findings in either Form 3CA or 3CB.  Form 3CA is usually furnished when the business or profession audited is already mandated audit under any other law e.g. Company law.  Whereas Form 3CB is furnished when the business or profession is not mandated audit under any other law.  In either situation, the CA will furnish the prescribed particulars in Form 3CD which forms part of such tax audit report.

Due dates for completing Tax audit

It is usually 30^th September of the subsequent year, popularly called the assessment year for businesses in general. And 30^th November for businesses that have entered into international transactions with associated entities. 

As a result of the Covid-19 the tax audit due date for AY 2020-21 i.e. tax audit for FY 2019-20 is extended to 31^st December 2020 for all businesses and the income tax return filing date for FY 2019-20 to 31^st January 2021.

Penalty for non-filing of tax audit

at least one of the following:

1.     0.5% of total sales, turnover or gross receipts or

2.     Rs. 1,50,000

We trust the article was helpful and useful in understanding the intricacies of tax audit.  Feel free to write to us at info@gjmco.in to seek further clarifications specific to your business or Schedule a Call today.