Tax Audit

Objectives of Tax Audit

Tax audits are carried out to achieve specific objectives, ensuring compliance with tax regulations and providing accurate financial reporting. The key objectives are:

1. Verification of Records: To ensure that the tax accounts and records of the taxpayer are maintained accurately and in compliance with the applicable tax laws.
2. Reporting Discrepancies: To identify and report any discrepancies, such as tax shrinkage, that may be found in the financial records.
3. Tax Filing Assurance: To help tax officials verify the accuracy of the income tax returns filed by the business or individual.
4. Income Estimation: To estimate the total income of the taxpayer and assist in verifying eligibility for tax deductions.

Mandatory Conditions for Tax Audit

Tax audits are mandatory for certain categories of taxpayers based on their business type and annual turnover, as outlined below:

1. For Businesses:

• Non-Presumptive Taxation: Businesses with sales, receipts, or turnover exceeding INR 1 crore in a financial year.
• Presumptive Taxation under Sections 44AE, 44BB, 44BBB: If the declared profits are below the prescribed limit.
• Presumptive Taxation under Section 44AD: If the taxable income is below the specified limit but the business turnover exceeds the basic threshold.
• Business Exiting from Presumptive Scheme: If income exceeds the maximum limit that doesn’t attract tax in the next 5 years after opting out of the presumptive taxation scheme.

2. For Professions:

• Professions with Gross Receipts Exceeding INR 50 Lakh: Mandatory audit if the gross receipts of the profession exceed INR 50 lakh in the financial year.
• Presumptive Taxation under Section 44ADA: If declared profits are less than the specified limit or the income surpasses the threshold limit that attracts income tax.

3. For Business Losses:

• If the taxpayer suffers a loss from business, but their turnover surpasses INR 1 crore, tax audit is mandatory.
• Presumptive Scheme Losses: Tax audit is not applicable if the taxpayer opts for a presumptive taxation scheme and suffers a loss with income below the basic threshold limit.

Rules for Auditing Tax

1. Multiple Businesses or Professions: If a taxpayer engages in more than one business or profession, they must conduct separate audits for each if their combined turnover or receipts exceed the specified threshold limits.
2. Fixed Asset Sales: If an individual or business sells fixed assets such as vehicles or property, the profits from these sales are not included in turnover for tax audit purposes.
3. Revised Audits: Tax audit reports are final, but they can be revised if required due to amendments in law or accounting practices.

Forms Required for Tax Audit

1. Form 3CB: Used for reporting tax audit results under Section 44AB of the Income Tax Act.
2. Form 3CD: To provide detailed information required alongside Form 3CB.
3. Form 3CA and Form 3CD: For audits conducted under laws other than Section 44AB, the necessary details are reported in Form 3CD.