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2020

Audit under Income Tax Act, 1961

 Audit under Income Tax Act 1961

Before understanding what is a tax audit, let us understand the term ‘audit’. Dictionary meaning of the term ‘Audit’ suggests that it is an official inspection of an organization’s accounts and production of the report, typically by an independent body. It is also referred to as a systematic review or assessment of something.

A Tax Audit is an audit, made compulsory by the Income Tax Act if the annual gross turnover/receipts of the assessee exceed the specified limit. Tax audit is conducted in Sec 44AB of the Income Tax Act by a Chartered Accountant. Simply Tax Audit means, an audit of matters related to tax. There are various kinds of audit being conducted under different laws such as company audit/statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’. As the name itself suggests, a tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax viewpoint. It makes the process of income computation for filing of return of income easier.

 

Objectives of Tax Audit: 

Tax audit is conducted to achieve the following objectives:

  • Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor.

  • Reporting observations/discrepancies noted by tax auditor after a methodical examination of the books of account.

  • To report prescribed information such as tax depreciation, compliance of various provisions of income tax law etc.

  • All these enable tax authorities in verifying the correctness of income tax returns filed by the taxpayer. Calculation and verification of total income, claim for deductions etc. also becomes easier.

 

Applicability of Tax Audit:

  • A taxpayer is required to have a tax audit carried out if the sales, turnover or gross receipts of business exceed Rs 1 crore in the financial year.

  • However, a taxpayer may be required to get their accounts audited in certain other circumstances.

 

Category of Persons

Threshold Limit

Business

Carrying on business (not opting for presumptive taxation scheme).

Total sales, turnover or gross receipts exceed Rs 1 crore in the FY.

Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB.

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

Carrying on business eligible for presumptive taxation under Section 44AD.

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

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.

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.

Profession

Carrying on profession.

Total gross receipts exceed Rs 50 lakh in the FY.

Carrying on the profession 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.

Business Loss

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.

If taxpayer’s total income exceeds basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme).

In case of loss from business when sales, turnover or gross receipts exceed 1 crore, the taxpayer is subject to tax audit under 44AB.

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.

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.

Note: The threshold limit of Rs 1 crore for a tax audit is proposed to be increased to Rs 5 crore with effect from AY 2020-21 (FY 2019-20) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments.

 

Due Dates of Filing Tax Audit Report:

  • 30th September is the due date to filing tax audit report under section 44AB for all the assessee. Hence, if a tax audit is applicable to any assessee, then he/she has to mandatorily file its income tax return along with the tax audit report before 30th September.

  • Where the assessee is required to furnish a report of a chartered accountant as referred to in section 9E relating to international transaction or specified domestic transaction then the due date to submit audit report is 30th November.

 

Penalty Provisions:

  • If a taxpayer who is required to obtain tax audit does not get the accounts audited, then penalty could be levied under Section 271B of the Income Tax Act.

 

Lower of the following amount

5% of the turnover in case of business organisation or 0.5% of the total receipts in case of profession of the current financial year.

OR

Rs. 1,50,000

 

  • However, according to the section 273B, no penalty would be imposed on the person if valid reason for such failure is proved.

  • Thus, tax audit is a very important requirement for individuals who are required to undergo such an audit. Failure to comply with the income tax rules would attract penalty and individuals wishing to avoid any penalty should ensure full compliance with all the rules of the income tax audit.

 

Who can Audit Your Books of Accounts?

  • In India, Chartered Accountant will audit the account and prepare the report as prescribed in Income Tax Act.

  • They are qualified for accounts and having degree of Chartered Accountancy (CA) from ICAI.

  • Assessee can also authorize Chartered Accountant to file their income tax return on his behalf or file by himself.

  • It is not mandatory to file income tax return by CA; only audit report is mandatory. The audit report must be submitted before the due dates.

 

What constitutes 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 a person carrying on business or profession is already mandated to get his accounts audited under any other law.

    • Form No. 3CB is furnished when a person carrying on business or profession is not required to get his accounts audited under any other law.

  • In case of either of the aforementioned audit reports, tax auditor must furnish the prescribed particulars in Form No. 3CD, which forms part of audit report.

 

How and when tax audit report shall be furnished?

  • The tax auditor shall furnish tax audit report online by using his login details in the capacity of ‘Chartered Accountant’.

  • Taxpayer shall also add CA details in their login portal. Once the tax auditor uploads the audit report, same should either be accepted / rejected by taxpayer in their login portal.

  • If rejected for any reason, all the procedures need to be followed again till the audit report is accepted by the taxpayer.

  • You must file the tax audit report on or before the due date of filing the return of income which is 30th November of the subsequent year in case the taxpayer has entered into an international transaction and 30th September (extended to 31st October for AY 2020-21) of the subsequent year for other taxpayers.

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