Tax Audit

What is a tax audit?

A tax audit is an audit of a business's or professional's accounts from an income-tax perspective, required under Section 44AB of the Income-tax Act once turnover or receipts cross set limits. A Chartered Accountant examines the books and reports on a long list of tax-related particulars in Form 3CD.

It's separate from a company's statutory audit, though the same CA can do both. It applies to companies, LLPs, firms, proprietors, and professionals alike, depending on their numbers.

The key terms

The rules turn on a few thresholds and forms:

Business threshold

A tax audit is required when business turnover exceeds ₹1 crore. The limit rises to ₹10 crore if cash receipts and cash payments are each no more than 5% of the total.

Professional threshold

Professionals need a tax audit when gross receipts exceed ₹50 lakh.

Presumptive taxation

Businesses and professionals under presumptive schemes may need a tax audit if they declare profit below the presumptive rate and their income exceeds the basic exemption limit.

Form 3CA / 3CB

The audit report: 3CA where the accounts are already audited under another law, like a company; 3CB where they aren't.

Form 3CD

The detailed statement of particulars — depreciation, disallowances, TDS compliance, loans, related party payments, and much more.

Due date

The report must be filed on the income-tax portal by the specified date, generally a month before the due date of the income-tax return.

Penalty

Failing to get the audit done or file the report can attract a penalty of 0.5% of turnover or gross receipts, up to ₹1.5 lakh.

Why it matters

The tax audit report is what the tax department reads first:

It's mandatory above the limits

Missing a required tax audit attracts a penalty and exposes the return to scrutiny.

Earlier return deadline

Tax-audit cases file their return later than non-audit cases, but the audit report itself is due first.

It flags disallowances

Form 3CD reports items like late PF payments, TDS defaults, and cash payments that may be disallowed. Knowing them early lets you fix what you can.

Data used by the department

Clause-by-clause data from 3CD is used in risk assessment and scrutiny selection.

Accuracy matters

The CA certifies the particulars. Errors in the books show up as qualifications or adverse remarks.

Loan and credit uses

Banks sometimes ask for the tax audit report along with the accounts.

Presumptive traps

Declaring profit below the presumptive rate can trigger an audit requirement many small businesses don't expect.

Who is this for?

Whether you need a tax audit depends on each year's numbers, so check every year rather than assuming last year's answer still holds.

When a tax audit applies

The main tests at a glance:

What we'll need from you

Books of account

The full year's books, reconciled, and the financial statements.

TDS records

TDS deducted, deposited, and returns filed, to report compliance.

Statutory payments

PF, ESI, GST, and other dues, with payment dates.

Fixed assets

Asset additions and disposals, with dates, for tax depreciation.

Loans and deposits

Loans taken and repaid, and the mode of payment.

Related party payments

Payments to relatives and connected parties.

Audit fees depend on turnover, volume of transactions, and how ready the books are.

How the tax audit works

A typical tax audit runs like this:

1. 1

   Check applicability

   We confirm whether a tax audit is required for the year, based on turnover, receipts, cash, and profit.

2. 2

   Review the books

   The books and financial statements are reviewed, and reconciled with GST and TDS data.

3. 3

   Examine the particulars

   Each clause of Form 3CD is examined — depreciation, disallowances, TDS, loans, payments, and more.

4. 4

   Discuss issues

   Items that may be disallowed or need correction are discussed with you before reporting.

5. 5

   Prepare and upload

   Form 3CA or 3CB and Form 3CD are prepared and uploaded on the income-tax portal.

6. 6

   Your approval

   You approve the report on the portal, and the return is filed based on it.

After the tax audit

The report feeds straight into the return:

File the return

The income-tax return is filed by its due date, consistent with the tax audit report.

Address disallowances

Items reported as disallowable are added back in the tax computation.

Fix recurring issues

Late PF or TDS payments reported this year can be avoided next year.

Keep working papers

Keep the audit documentation in case the return is selected for scrutiny.

Revise if needed

If an error is found, the report can be revised in limited circumstances, for example after an adjustment to the accounts.

Check next year early

Monitor turnover and cash ratios through the year to know if next year's audit will apply.

Benefits and responsibilities