Tax Audit Applicability: Criteria and Thresholds You Should Know

Tax audit applicable if business or profession exceeds certain turnover or income threshold limits.

Income tax audits under Section 44AB of the Income Tax Act, 1961, are crucial for ensuring compliance with tax regulations in India.

Here’s a comprehensive overview of the requirements and procedures for a tax audit under Section 44AB:

Tax Audit Applicability of Section 44AB

Section 44AB mandates a tax audit for certain categories of taxpayers. The audit is required based on turnover limits and other criteria:

For Businesses

Turnover Limit: If the turnover or gross receipts exceed ₹10 crore in a financial year.

For Professionals

Gross Receipts Limit: If the gross receipts exceed ₹50 lakh in a financial year.

Other Specific Cases

Presumptive Income Schemes: If a taxpayer opts for presumptive taxation under sections 44AD (for businesses), 44AE (for certain businesses involving goods carriage), or 44ADA (for professionals), but fails to meet the conditions or exceeds the specified limits.

Requirements for Tax Audit

Appointment of Auditor

Qualified Auditor: The audit must be conducted by a qualified Chartered Accountant (CA) who is independent and has the necessary expertise.

Maintaining Records

Books of Accounts: Maintain comprehensive and accurate books of accounts, including cash books, ledgers, journals, and supporting documents.

Documents: Retain all necessary documents such as invoices, receipts, contracts, and bank statements.

Audit Report

Form 3CD: The auditor must prepare and submit the audit report in Form 3CD. This form includes detailed disclosures about the taxpayer’s financial statements, compliance with tax laws, and other specified information.

Form 3CA/3CB: Depending on the entity type (company or firm), the report is submitted along with Form 3CA or Form 3CB.

Key Aspects of the Tax Audit Report (Form 3CD)

Form 3CD includes various sections where the auditor provides information on:

Account Details: Verification of books of accounts, financial statements, and compliance with accounting standards.

Income and Deductions: Details of income, deductions claimed, and compliance with various sections of the Income Tax Act.

Taxation Compliance: Verification of tax payments, TDS (Tax Deducted at Source) compliance, and other tax obligations.

Specific Clauses: Information on specific clauses related to tax provisions, such as related party transactions, loan details, and foreign transactions.

Due Dates and Filing

Due Date for Filing: The tax audit report must be filed before the due date for filing the income tax return, which is usually 30th September of the assessment year. Extensions can be granted by the Income Tax Department if applicable.

E-Filing: The tax audit report and income tax return can be file electronically using the Income Tax Department’s online portal.

Penalties for Non-Compliance

Late Filing: Penalties may impose for late filing of the tax audit report. The penalty can be up to ₹1,50,000 under Section 271B for non-compliance.

Non-Filing: Failure to file the tax audit report or maintaining proper records can lead to additional scrutiny, penalties, and potential legal action.

Detailed Breakdown of Form 3CD

Form 3CD is crucial for the tax audit report, and it contains detailed information across several clauses:

Clause 1 to 8

Information about the taxpayer’s name, address, PAN (Permanent Account Number), and business details.

Clause 9

Details regarding the books of accounts maintained, including the method of accounting used (cash or accrual).

Clause 10

Specific information about the taxpayer’s financial statements, including the balance sheet and profit & loss account.

Clause 11 to 16

Information on various tax provisions such as depreciation, the valuation of stock, and specific compliance under different sections of the Income Tax Act.

Clause 17 to 21

Details of payments to related parties, loan transactions, and advances, as well as compliance with TDS requirements.

Clause 22 to 27

Information about foreign transactions, investments, and compliance with transfer pricing regulations.

Clause 28 to 33

Additional disclosures related to specific transactions, deductions, and other financial activities.

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FAQs

What is the 5% cash limit for tax audit?

The 5% cash limit for tax audit means that if a business’s cash transactions (both receipts and payments) are up to 5% of total gross, then tax audit threshold is increased to ₹10 crores instead of the usual ₹1 crore.

Who is liable to a tax audit?

Every person earning income from business or profession must maintain books of accounts and must undergo a tax audit, except those who opt for presumptive taxation u/s 44AD, 44ADA, or 44AE, or if their turnover is below the threshold limits.

What happens if I fail to undergo a tax audit when required?

Failure to conduct a mandatory tax audit may result in penalties.

When should I Submit tax audit report?

The due date of filing the income tax return, usually is September 30th of the assessment year.