In India, audits play a vital role in ensuring transparency and compliance under various laws, including Company Law, Income Tax Law, and other sector-specific regulations. Among these, the Tax Audit is a key requirement under the Income Tax Act, 1961, designed to review the accounts of businesses and professionals to ensure accurate computation of taxable income and proper filing of income tax returns.
What is Tax Audit?
A Tax Audit is an examination of the books of accounts and financial statements of a business or professional to verify compliance with the provisions of the Income Tax Act. It helps ensure that income is correctly reported and deductions are appropriately claimed.
Under Section 44AB of the Income Tax Act, a tax audit is mandatory if the annual turnover or gross receipts exceed specific limits. Chartered Accountants conduct these audits and prepare detailed reports to facilitate accurate tax filing.
Applicability of Tax Audit
Businesses: Tax audit is mandatory if annual gross turnover exceeds ₹1 crore.
Professionals: Tax audit applies if annual gross receipts exceed ₹50 lakh.
Presumptive Taxation Scheme under Section 44AD
Applicable to businesses with turnover up to ₹2 crore.
Books of accounts need not be maintained.
Net income is calculated at 8% of gross turnover (digital receipts) or 6-8% of gross receipts.
Tax audit is not required unless the taxpayer opts out, but if opted, the same rules apply for the next five financial years.
ITR-4 must be filed to avail this scheme.
Presumptive Taxation for Professionals under Section 44ADA
Applicable for professionals with gross income up to ₹50 lakh.
No requirement to maintain books of accounts.
Net income is deemed at 50% of gross receipts.
Tax audit rules under this section apply for the next five years if opted in.
Steps to Ensure Compliance for Tax Audit
To minimize risks and ensure smooth audit compliance:
Maintain books of accounts as mandated by the Income Tax Act.
Compute profits and gains under Chapter IV of the Act.
Report taxable income and allowable losses accurately in your income tax return.
Entities Subject to Tax Audit
Tax audit applies to:
Individual proprietors
Hindu Undivided Families (HUF)
Companies
Partnership firms
Associations of Persons (AOPs)
Local authorities
Turnover in Tax Audit
Included in turnover:
Duty drawbacks from exports
Interest income or foreign exchange gains
Advance receipts forfeited from customers
Excise duties included in turnover
Excluded from turnover:
Sale or purchase of fixed assets
Income from investments
Rental income from property
Interest income and expense reimbursements
Objectives of Tax Audit
The primary objectives of a tax audit include:
Ensuring books of accounts are properly maintained and certified by a Chartered Accountant.
Reporting observations and discrepancies in the audit.
Preparing audit reports in Form 3CA/3CB and Form 3CD as required by the Income Tax Department.
Providing credibility to financial statements for employees, investors, suppliers, and tax authorities.
Helping maintain a reputable financial standing for the business.
Types of Tax Audit Reports
Form 3CA: Applicable when accounts are already audited under another law.
Form 3CB: Applicable when no other audit is required by law.
Submission of Tax Audit Reports
The tax auditor submits the report online through their credentials on the Income Tax portal.
Taxpayers must verify the report and either accept or reject it.
If rejected, corrections are made, and the report is resubmitted until accepted.
Due date: Tax audit reports must be completed and submitted by 30th September of the assessment year.
Types of Tax Audits Conducted by the Authorities
Correspondence Audit: Simplest form; queries are raised via letter.
Office Audit: Detailed examination at the tax office, possibly requiring multiple days.
Field Audit: Auditor visits the taxpayer’s premises for comprehensive scrutiny.
Penalties for Non-Compliance
Failure to conduct a tax audit can attract penalties under Section 44AB:
0.5% of total sales, turnover, or gross receipts
Maximum penalty up to ₹1,50,000
Conclusion
Tax audits are not just a statutory requirement—they provide financial credibility, transparency, and assurance to stakeholders. Properly conducted tax audits ensure compliance with the Income Tax Act, prevent penalties, and help maintain a healthy reputation for businesses and professionals in India.