Tax Audit

What it means

A tax audit is an examination of a business’s or professional’s books of account by a chartered accountant, required under section 44AB (old Act section). The CA checks whether the books are properly kept, whether income and expenses are correctly reported, and whether tax rules have been followed. The findings are reported in a prescribed tax audit report, which the CA uploads on the income tax portal and the taxpayer accepts.

How it works

A tax audit is required when:

• Business: turnover or gross receipts exceed ₹1 crore in the year. The limit is ₹10 crore if cash receipts and cash payments are each within 5% of the total.

• Profession: gross receipts exceed ₹50 lakh.

• Presumptive taxation: a business or professional who declares profit lower than the presumptive rate (for example 6% or 8% under 44AD, or 50% under 44ADA) and whose income exceeds the basic exemption limit.

• Presumptive schemes have their own higher limits when cash is within 5%: ₹3 crore for businesses under 44AD and ₹75 lakh for professionals under 44ADA. Those who stay in these schemes and declare at least the presumptive profit do not need an audit.

• Due date: the audit report is due by 30 September of the year following the tax year, one month before the 31 October return due date for audit cases.

Example

Three Surat traders compare their position for the year:

1. Trader A: turnover ₹4 crore, cash receipts 3% and cash payments 2%. Both within 5%, so the limit is ₹10 crore. No tax audit needed.

2. Trader B: turnover ₹4 crore, but cash receipts are 12%. The limit drops to ₹1 crore, so a tax audit is required.

3. Trader C: turnover ₹12 crore. This is above ₹10 crore, so a tax audit is required regardless of cash.

If Trader B fails to get the audit done, the penalty under the old Act was 0.5% of turnover, capped at ₹1,50,000. Here 0.5% of ₹4 crore is ₹2,00,000, so the penalty would be ₹1,50,000.

Key points to remember

• Count digital receipts and payments correctly. Cash above 5% on either side cuts the limit to ₹1 crore.

• Delay in furnishing the audit report can attract a penalty or fee of up to ₹1,50,000, so do not leave it to the last week.

• The return must be filed after the audit report is uploaded and accepted.

• Keep GST returns, bank statements and books reconciled, since the report asks for detailed disclosures.

• Watch for CBDT notifications extending the due date in any year.