Tax Audit
Tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax viewpoint.
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. 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.
Applicability of Tax Audit
As per section 44AB, the following persons are compulsorily required to get their accounts audited:
- A person carrying on business, if his total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 Crore. This provision is not applicable to the person who opts for presumptive taxation scheme under section 44AD and his total sales or turnover does not exceed Rs. 2 Crores.
- Note that With the effect of the Assessment Year 2020-21, the threshold limit, for a person carrying on business, is increased from Rs. 1 Crore to Rs. 5 Crore in case when cash receipt and payment made during the year does not exceed 5% of total receipt or payment, as the case may be. In other words, more than 95% of business transactions should be done through banking channels.
- An assessee who declare profit for any previous year in accordance with section 44AD and he decreases profit for any of one 5 assessment year relevant to the previous year succeeding such previous year lower than the profit computed as per section 44AD and his income exceeds the amount which is not chargeable to tax.
- If an eligible assessee opts out of the presumptive taxation scheme, within the aforesaid period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter.
- A person who is eligible to opt for the presumptive taxation scheme of section 44ADA but he claims the profits or gains for such a profession to be lower than the profit and gains computed as per the presumptive taxation scheme and his income exceeds the amount which is not chargeable to tax.
- This provision is not applicable to the person who opts for presumptive taxation scheme under section 44AD and his total sales or turnover does not exceed Rs. 2 Crores.
- A person who is eligible to opt for the taxation scheme prescribed under section 44BB that is non-resident taxpayers engaged in the business of providing services or facilities concerning, or supplying plant and machinery on hire basis to be used in exploration of mineral oils or section 44BBB namely foreign companies engaged in the business of civil construction or erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project but he claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections.
Note: Persons like company or co-operative society are required to get their accounts audited under their respective laws. Section 44AB provides that, if a person is required by or under any other law to get his accounts audited, then he need not again get his accounts audited to comply with the requirement of section 44AB. Is such a case, it shall be sufficient if such person gets the accounts of such business or profession audited under such law and obtains the report of the audit as required under such other law and also a report by the chartered accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD.