Audit refers to the careful examination of information contained in the accounting books and financial statements by a person (known as an auditor) to express an opinion. When people say “audit,” they usually mean “financial statement audit.” However, there are various types of audits: company audits, cost audits, internal audits, tax audits, and so on.
What Is an Income Tax Audit?
Income tax law requires an audit of the books of accounts of a taxpayer to confirm compliance with Income Tax Act provisions. This is known as an income tax audit.
Purpose of an Income Tax Audit
The purpose of an audit under the Income Tax Act is to:
- Confirm compliance with the Income Tax Act and the rules and regulations made thereunder.
- Check the accuracy of taxpayers� books of accounts.
- To review whether records reflect taxpayers� actual income and actual deductions claimed.
Income Tax Audit Applicability
Section 44AB under the Income Tax Act, 1961 (the “Act”) governs income tax audit applicability. As per the provisions of this section, an income tax audit applies to the following classes of assessees (or taxpayers):
1. Assessee Carrying on Business
Where total turnover or sales exceeded 1 crore in any previous year, however, it has been provided that if, in the case of a person:
- The aggregate of cash receipts is not more than five percent of total receipts, and
- The aggregate of cash payments is not more than five percent of total payments.
The income tax audit applicability threshold will then be raised from one crore to ten crores.
It is also stated that receipts or payments made other than by account payee check or account payee bank draught are considered cash receipts or payments.
Business of:
- plying, hiring, or leasing goods carriages, and who owns not more than ten goods carriages at any time during the previous year under Section 44AE of the act; or
- Exploration of mineral oils under Section 44BB of the Act; or
- Foreign companies engaged in civil construction under section 44BBB of the act
and declared a lower income than prescribed under these sections in any previous year.
- Assessee carries on eligible business as defined under section 44AD of the act and declares profits for any of the next five years, not in accordance with this section.
Furthermore, an income tax audit shall not apply to a person who declares profits and gains for the previous year in accordance with the provisions of Section 44AD and whose total sales, turnover, or gross receipts in business did not exceed 2 crores in the previous year.
2. Assessee Carrying on Profession
Where gross receipts in any previous year exceeded 50 lakhs; the following professions as defined in Section 44ADA of the act:
- Legal
- Medical
- Engineering
- Architectural
- Accountancy
- Technical consultancy
- Interior decoration
and declaring a lower income than prescribed under the section.
Documents to Keep Ready for an Income Tax Audit
The following documents are required for an income tax audit:
- Name and Address of the Taxpayer.
- The taxpayer’s PAN Card and Aadhar Card.
- GST Registration Certificate or any other indirect tax certificate.
- The Status of the Taxpayer
- Previous Year
- Assessment Year
- A deed of partnership or association of persons.
- Accounting books
- Nature of business. Is there any change in the nature of business?
- Such forms are required where the taxpayer has submitted Form 10-IB/IC/ID to elect the tax regime under Sections 115BA, 115BAA, or 115BAB.
- Details whether the profit and loss account includes profit or gains under the presumptive scheme as per 44AD/44ADA/44AE/44AF/44B/44BB/44BBA/44BBB or any other such provision.
- Details about the method of accounting employed in the previous year and any changes made to the method of accounting, including reasons for such a change.
- Whether the profit and loss account needs to be adjusted to comply with Income Computation and Disclosure standards under Section 145(2).
- Method of valuing the closing stock employed during the previous year and changes, if any.
- Any receipt of a capital nature.
- Details of depreciation along with the statement of calculation.
- Receipts or payments made to employees of the business.
- Any amount that is debited from the P&L account.
- Interest, if any, as per Section 23 of the Micro, Small, and Medium Enterprises Act 2006.
- Details of payments, if any, made to specified persons under Section 40A2(b).
- Amounts under Section 43 B
- Accelerated loss or depreciation.
- Whether the business paid any tax on profits distributed.
- Details of tax deducted at source or tax collected at source (TDS or TCS).
- Sales or turnover ratio
- MRL, or Management Representation Letter.
- Appointment Letter for Defining Scope.
- Related parties and related party transaction details.
- Trail balance
- Financial statements, including notes to accounts, duly signed by the management or owner.
- Compliances of a statutory nature.
- Details of liabilities along with an estimation of contingent liabilities.
- Whether any assets were purchased or revenue capitalized, along with proof.
- Nature of extraordinary items and their disclosure.
- Bank statements and confirmation of balances from banks.
- List of major debtors and creditors, along with their confirmation.
- Valuation of inventories and for the total year’s quantitative inflow and outflow statement.
- Disclosure made for accounting policies.
- Sale and purchase registers and bills.
- Ratio analysis or analytics
FAQs on Income Tax Audit Applicability
Go through the given FAQs to better understand the concept of income tax auditing.
Who will perform an income tax audit?
As per Section 288 of the Act, an income tax audit shall be conducted by a chartered accountant or a firm (including a limited liability partnership) of such chartered accountants. The maximum number of income tax audits that can be performed by a chartered account shall not be greater than sixty in a year.
What are the various reports to be submitted under an income tax audit?
- An income tax audit requires that the tax auditor report whether, in his opinion, the particulars in respect of Form 3CD are true and correct. It is the primary responsibility of the taxpayer to prepare the information in Form 3CD.
- The auditor has to examine whether the information given is true and correct. Form 3CD is not a report of the Tax Auditor.
- The report is in Form 3CA or 3CB, depending on the nature of the organisation of the entity.
- If the tax auditor is satisfied that the information contained in Form 3CD is true and correct, he can give an unqualified report in Form 3CA or 3CB saying, “In my opinion and to the best of my information and according to the explanations given to me and considering the materiality, the particulars given in Form 3CD are true and correct.”
Forms requirement:
- Forms 3CA and 3CD for a person carrying on business or practising a profession who is required under any other law to get his accounts audited; and
- Some form 3CB, while others form 3CD.
What is the due date for the submission of the income tax audit report?
The due date for filing an income tax audit report is September 30th of the relevant assessment year.
Who is responsible for filing income tax audit reports?
The chartered accountant shall file an income tax audit report using their login credentials on the income tax portal. After the report is uploaded by the chartered accountant, the taxpayer has the option to either accept or reject this report.
Is there any penalty for failure to comply with the provisions of the income tax audit?
Yes. In case a taxpayer fails to get his accounts audited as per the provisions of Section 44AB of the act, they shall pay by way of penalty a sum, which shall be the least of the following:
- one-half percent of the total sales, turnover, or gross receipts; or
- ?50,000.
Income tax audits are crucial for statutory compliance, and failure to comply could lead to huge penalties and tax prosecution. We are sure that after reading this article, you will have good knowledge about income tax audit applicability and documents to keep ready at the time of audit.�
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