Overview on Tax Audit under Income Tax

COMPLETE UNDERSTANDING ABOUT TAX AUDIT

• An audit of the books of account and the submission of a report by the assessee before the due date is mandated under Section 44 AB of the Income Tax Act.
• A practicing Chartered Accountant can conduct the tax audit. We’ll look at some of the most often asked questions in this respect in this post.

Limit for Chartered Accountants subject to a tax audit.

• Chartered Accountant or a firm of Chartered Accountants can perform a tax audit. If the latter is used, the audit report must include the name of the signatory who signed the report on behalf of the business.
• When registering for the e-filing site, the signatory must enter his or her membership number.
• The Statutory Auditor can also conduct tax audits. It’s worth noting that the number of tax audit reports that Chartered Accountants can file is limited.
• Chartered Accountant’s maximum number of tax audits is restricted to 60. In the case of a partnership, the tax audit limit will apply to each of the members.

Who is required to compulsory subject to a tax audit?

For FY 2020-21 

For FY 2021-22  

• If a taxpayer’s sales, turnover, or gross revenues in a financial year exceed Rs 1 crore, he or she must have to carry a tax audit.
• In some other instances, though, a taxpayer may be obliged to have their finances audited. In the tables below, we’ve divided the numerous situations into categories:

NOTE: With effect from AY 2022-23 (FY 2021-22 ), the Rs 1 crore threshold limit for a tax audit is proposed to be enhanced to Rs 10 crore if the taxpayer’s cash receipts are restricted to 5% of gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments. The many categories are shown below:

Tax audit applicability under income tax law

1. Business

Categories	Threshold Limit
Business carrying On( Not opting for presumptive taxation scheme)	Total Sales, Turnover, Gross revenue not more than Rs, 100,00,000 in the Financial Year.
in case Business carrying On Opting Presumptive Taxation Scheme under section 44AE, 44BB, and 44BBB	Profit or Gain Claimed lower than prescribed limit under presumptive taxation scheme.
Business carrying on eligible under section-44AD for presumptive taxation	Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit.
If the Business Carrying on 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 opted  for presumptive tax scheme	in case income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the F.Y. when the presumptive taxation was not opted
Business Carrying on which is declaring profits as per presumptive taxation scheme under Section 44AD	In case income excess of 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
When Business Carrying on which is declaring profits as per presumptive taxation scheme under Section 44AD	If the total sales, turnover or gross receipts does not exceed Rs 2,00,00,000 in the financial year, then tax audit will not apply to such businesses.

2. Profession

Categorizes	Threshold Limit
Profession Carrying on	Total gross Revenue exceed of Rs 50,00,000 in the FY
When Profession Carrying on eligible for presumptive taxation under Section 44ADA	1. Claims profits/ gains lower than the prescribed limit under the presumptive taxation scheme 2. Income exceeding the maximum amount not chargeable to income tax

3. Business Loss

Categories	Threshold Limit
In case of loss from carrying on of business and not opting for presumptive taxation scheme	Total sales, turnover or gross revenue exceed Rs 1,00,00,000
If a taxpayer’s total income exceeds the basic threshold limit but he has incurred a loss from carrying on a business (not opting for a presumptive taxation scheme)	In case of loss from business when sales, turnover or gross receipts exceed 1,00,00,000, the taxpayer is subject to tax audit under 44AB
business Carrying on (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below the basic threshold limit	Tax audit not applicable
when Business Carrying on (presumptive taxation scheme under section 44AD applicable) and having a business loss but with income exceeding basic threshold limit	Declares taxable income below the prescribed limits under the presumptive tax scheme and has income exceeding the basic threshold limit

You can read about Tax Audit Check List

What is the objective of a tax audit and what does tax audit purpose?

• Tax Audit is a procedure for determining whether a taxpayer’s books of accounts comply with widely accepted accounting standards and the regulations of the Income Tax Act.
• The objective of a tax audit is to ensure that the taxpayer’s books of account are kept properly and that the taxpayer’s real income is computed appropriately.
• It’s worth noting that an audit doesn’t protect the assessee from being assessed or having costs disallowed.

The following are some of the most important reasons for conducting an income tax audit:

• It acts as an auditor’s certification for the books of accounts.

• Needed to verify the business person as a taxpayer and demonstrates account maintenance.

• It assists the tax authorities in knowing that the tax laws have been effectively administered by submitting appropriate presentations of accounts.

What the purpose of a tax audit?

• Proper keeping of books of the account without fraud activities and verification of the same by an auditor are the key goals of a tax audit.
• For inconsistencies in reporting that is discovered after a thorough review of the books of accounts.
• Reporting a variety of facts, such as tax depreciation, income tax law compliance, and so on.
• With auditing, calculating taxes and deductions becomes simple.
• The primary responsibility is to check the facts contained in the taxpayer’s income tax return, including income, tax, and deductions.

For Appointment of a Tax Auditor in the Company

• The Board of Directors is responsible for appointing tax auditors in a corporation.
• This authority may be delegated by the Board to any other officer, such as the CEO or CFO. A partner, owner, or a person authorized by the assessee can appoint auditors in a partnership or sole proprietorship.
• A taxpayer might also appoint two or more chartered accountants to undertake the tax audit as joint auditors. If all of the joint auditors agree with the findings,
• The audit report must be signed by all of them. In the event of a disagreement, the auditors must state their views independently in a separate report.

Appointment letter for a tax audit:-

• Before proceeding with the tax audit, the tax auditor must get a letter of appointment from the concerned assessee.
• The person authorized to sign the return of income must sign the appointment letter. The auditor’s compensation must be included in the letter.
• In addition, the appointment letter should state that no other auditor has been entrusted with the duty for the current fiscal year, and it may provide information on the prior auditor.
• The latter is suggested to make it easier for the designated auditor and his predecessor to communicate.

The Tax Auditor has been Removal?

• Management has the authority to terminate a tax auditor if the auditor has delayed the submission of the report to the point where it is no longer feasible to submit the audit report before the deadline.
• A tax auditor cannot be fired because he has issued an unfavorable audit report or because the assessee believes the tax auditor will issue an unfavorable audit report.
• The Ethical Standards Board, which was formed by the Institute of Chartered Accountants of India (ICAI), has the authority to intervene if a Chartered Accountant is dismissed on unjust grounds.

Accounts audited in accordance with any other legislation

• If a taxpayer is compelled to have his books of accounts audited under any other legislation, such as statutory audits of businesses under company law requirements, the audit does not need to be repeated for taxation purposes.
• The taxpayer only has to get the audit report in accordance with the income tax legislation before the return’s due date.

Penalty for Non-Completing a Tax Audit:-

Non-filing or late submission of a tax audit report might result in penalties.

• If a taxpayer is obligated to have a tax audit performed but fails to do so, the least of the following penalties may be imposed:
  • 5 % of overall gross revenues/ turnover, or sales
  • 1,50,000
• In case a taxpayer who is obligated to have their accounts audited fails to do so, a penalty may be imposed under Section 271B of the Income Tax Act. The penalty for failing to complete a tax audit is 0.5 percent of total revenue, up to a maximum of Rs.1,50,000.
• However, if the failure is due to a legitimate cause, no penalty will be imposed under section 271B. Tribunals/Courts have so far acknowledged the following legitimate causes:
• Natural Disasters o Tax Auditor’s Resignation and Subsequent Delay
• Loss of Accounts due to circumstances beyond the Assesses’ control, such as strikes or long-term lockouts  Loss of Accounts due to circumstances beyond the Assesses’ control
• Physical incapacitation or death of the accounting partner

Decoding Tax Audit u/s 44AB(e):44AD – Myth vs Facts

Conclusion

• Hope that Tax Audit’s FAQs were helpful in answering at least some of your questions. If you run your business properly and submit returns on time,
• you won’t have to worry about a tax audit. If you fall into the category of taxpayer, make sure you complete all of your obligations on time.

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