What is Tax Audit?
Tax Audit is an examination and review of the books of accounts of a taxpayer by a Chartered Accountant (CA) as mandated by Section 44AB of the Income Tax Act, 1961. The purpose is to ensure that the taxpayer has properly maintained books of accounts and complied with the provisions of the Income Tax Act.
Objectives of Tax Audit
- • Ensure proper maintenance of books of accounts
- • Verify correctness of income computation
- • Check compliance with various provisions of the Act
- • Report observations and discrepancies to tax authorities
- • Facilitate proper assessment by Assessing Officer
- • Reduce fraudulent practices and tax evasion
The tax auditor examines various financial records, vouchers, and documents to verify the accuracy of financial statements and tax returns. The findings are reported in prescribed formats (Form 3CA/3CB and 3CD).
Who Needs to Get Tax Audit?
Tax audit is mandatory for the following categories of taxpayers:
Category 1: Business Entities
- • Turnover > ₹1 crore: Persons carrying on business (not opting for presumptive taxation)
- • Turnover > ₹10 crores: If aggregate cash receipts and payments do not exceed 5% of total receipts/payments
- • Presumptive taxpayers: If declared income is less than prescribed percentage and total income exceeds basic exemption limit
Category 2: Professionals
- • Gross receipts > ₹50 lakhs: Persons carrying on profession (not opting for presumptive taxation)
- • Specified professionals: Legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, etc.
Category 3: Special Cases
- • Section 44AD: If taxpayer opts out of presumptive scheme in any of 5 subsequent years
- • Transfer Pricing: International transactions or specified domestic transactions
- • Section 44AE: Goods carriages owning more than 10 vehicles
Threshold Limits for Tax Audit
| Category | Threshold | Condition |
|---|---|---|
| Business - Normal | ₹1 crore | Turnover exceeds ₹1 crore |
| Business - Reduced Compliance | ₹10 crores | Cash receipts/payments ≤ 5% of total |
| Profession | ₹50 lakhs | Gross receipts exceed ₹50 lakhs |
| Presumptive (44AD/44ADA) | Any amount | If opted out and income > exemption limit |
| Transfer Pricing | ₹1 crore | International/Specified domestic transactions |
Important Note on ₹10 Crore Limit
The increased limit of ₹10 crores (instead of ₹1 crore) applies only if:
- • Aggregate of all receipts in cash during the year ≤ 5% of total receipts
- • Aggregate of all payments in cash during the year ≤ 5% of total payments
Tax Audit Forms
The tax audit report is filed using the following forms:
Form 3CA - Audit Report
For taxpayers who are required to get accounts audited under any other law (e.g., Companies Act). The tax auditor certifies that the statutory audit report has been considered while preparing the tax audit report.
Form 3CB - Audit Report
For taxpayers who are NOT required to get accounts audited under any other law (e.g., proprietorships, partnerships not covered under other audits).
Form 3CD - Statement of Particulars
A detailed statement containing 44 clauses covering various aspects of business/profession, including:
- • Details of business/profession
- • Accounting policies and method
- • Sales, purchases, and expenses
- • Related party transactions
- • TDS compliance
- • GST reconciliation
- • various other disclosures
Form 3CEB - Transfer Pricing Report
For taxpayers having international transactions or specified domestic transactions. Due date is October 31 (one month after regular tax audit due date).
Form 3CD - Key Clauses
Due Date and Extension
Normal Tax Audit
Due Date: September 30 of the assessment year
(e.g., for FY 2024-25, due date is September 30, 2025)
Transfer Pricing Audit
Due Date: October 31 of the assessment year
(One month after normal tax audit due date)
Consequences of Late Filing
| Consequence | Details |
|---|---|
| Belated Return Filing | ITR must be filed by tax audit due date. Late filing attracts penalties under Section 234F |
| Interest under Section 234A | 1% per month on tax due from due date to actual filing date |
| Penalty under Section 271B | 0.5% of turnover, subject to maximum ₹1,50,000 |
| Best Judgment Assessment | Assessing Officer may assess income based on best judgment |
Tax Audit Process
Appointment of Auditor
Taxpayer appoints a practicing Chartered Accountant. Form 3CA requires mention of appointment date.
Submission of Documents
Provide books of accounts, financial statements, GST returns, TDS returns, bank statements, and other relevant documents.
Examination by Auditor
CA examines books, verifies calculations, checks compliance with tax laws, and identifies any discrepancies.
Preparation of Audit Report
CA prepares Form 3CA/3CB and 3CD with all required disclosures and observations.
Digital Signature
CA digitally signs the audit report using their DSC (Class 2 or 3).
Online Upload
Audit report is uploaded on Income Tax e-filing portal by the CA.
Acceptance by Assessee
Taxpayer accepts the audit report on the e-filing portal using their DSC.
Penalties for Non-Compliance
| Violation | Penalty | Section |
|---|---|---|
| Failure to get accounts audited | 0.5% of turnover, max ₹1,50,000 | 271B |
| Failure to furnish audit report | ₹1,00,000 per report | 271BA |
| Failure to furnish information in Form 3CD | ₹10,000 per default | 271J |
| False statement in verification | Imprisonment up to 7 years + fine | 277 |
Common Mistakes to Avoid
Documentation Errors
- • Incomplete or missing vouchers
- • Mismatch between GST returns and books
- • TDS not deposited on time
- • Not maintaining proper ledgers
Timing Issues
- • Late appointment of auditor
- • Missing tax audit due date
- • Not reconciling before audit
- • Delay in providing documents
Form 3CD Errors
- • Incorrect HSN code reporting
- • Wrong TDS disclosure
- • Missing related party details
- • Inaccurate GST reconciliation
Procedural Mistakes
- • Same CA auditing multiple years
- • Not accepting report on portal
- • Wrong UDIN generation
- • Missing statutory audit reference
Frequently Asked Questions
Q: Can the same CA who does statutory audit do the tax audit?
Yes, the same CA who conducts the statutory audit under Companies Act can also conduct the tax audit under Section 44AB. Form 3CA is used in such cases.
Q: Is tax audit mandatory if turnover is below ₹1 crore but profit is below 6%/8%?
No, if turnover is below ₹1 crore and the taxpayer is not opting for presumptive taxation under Section 44AD, tax audit is not mandatory regardless of profit percentage.
Q: Can tax audit be revised?
Yes, a revised tax audit report can be filed if there is a change in accounts or if any error is discovered. The revised report must clearly mention that it is a revised report.
Q: What is UDIN and is it mandatory?
UDIN (Unique Document Identification Number) is a unique number generated on the ICAI portal for every certificate/attestation signed by a CA. It is mandatory for all tax audit reports.
Q: Do I need tax audit for losses?
Yes, if your turnover exceeds the prescribed limits, tax audit is mandatory even if you have incurred losses, unless you opt for presumptive taxation and declare income at the prescribed rate.
Q: What happens if I miss the tax audit due date?
Missing the due date attracts penalty under Section 271B (0.5% of turnover up to ₹1.5 lakhs). Additionally, interest under Section 234A applies on tax due. You may also lose certain benefits of timely filing.
Q: Is tax audit required for salaried individuals?
No, tax audit under Section 44AB is not applicable to salaried individuals. It applies only to persons carrying on business or profession.
Q: What is the difference between statutory audit and tax audit?
Statutory audit is conducted under the Companies Act for companies to report to shareholders. Tax audit is under Income Tax Act to report to tax authorities. The scope, format, and purpose are different.