Auditing And Assurance Services
Tax Audit under the Income Tax Act, 1961
Tax audit means:
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, 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.
- To get a proper record about the income of the taxpayers as well as their tax deductions.
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.
Who is mandatorily subject to 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. We have categorized the various circumstances in the tables mentioned below:
|
Category of person |
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 |
| 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 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 2021-22 (FY 2020-21) 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.