Income Tax Audit – Criteria & Penalty
There are various kinds of audit being conducted under different laws such as statutory audit (which is commonly known as company audit), conducted under company law provisions, cost audit, stock audit. Similarly, the income tax law also mandates an audit called tax audit. As the name suggests, tax audit is a review of accounts of taxpayers with business or profession from income tax point of view which takes into consideration income from all heads, deductions, and other compliance with tax laws. The purpose of conducting tax audit is to ensure the correctness of books of accounts maintained by the taxpayer and such audits can be conducted by a chartered accountant who holds the certificate of practice and is in full time practice.
Tax audit is conducted to accomplish the following objectives:
- An auditor ensures and certifies that the books of accounts are correct and properly maintained.
- Auditor reports the observations and discrepancies noted during the examination of the books of accounts.
- An auditor ensures that all the provisions of the income tax act have complied.
Who must compulsorily get his accounts Audited?
Every person who derives income (whether in cash or in-kind) by the way if Business & Profession and maintains books of accounts and has not opted to pay tax on presumptive basis has to get his accounts audited, provided his income exceeds the threshold limit. Tax audit is mandatory in the following cases:
|Different Taxpayers||When they are covered by the provisions of compulsory audit under section 44AB|
|A person carrying on business and not opting for presumptive taxation scheme)||If the total sales or turnover or gross receipts for the financial year exceeds Rs 1 crore|
|A person carrying on business and opting for presumptive taxation scheme)||If the total sales or turnover or gross receipts for the financial year exceeds Rs 2 crore|
|A person carrying on a business (if 2 conditions given in the next column are satisfied)||If the following conditions are satisfied, a compulsory audit from the financial year 2019-20 is required only if total sales or gross receipts in the business exceeds Rs. 5 crore –
1. The receipts in cash is not more than 5 per cent of the aggregate of all receipts.
2. The payments in cash is not more than 5 per cent of the aggregate of all payments.
|A person carrying on profession||If the total receipts of a person do not exceed Rs. 50 lakh in the financial year|
|A person covered under presumptive taxation (i.e. Section 44AD, 44AE, 44AF, 44BB or 44BBB)||If such person claims that the profits and gains from the business are lower than the deemed profits and gains computed under these sections (irrespective of his turnover)|
|A person covered under section 44AD||If the person who is carrying on business, has opted for computing profits and gains of business on presumptive basis earlier, claims that the profit and gains from the business are lower than deemed profit and gains computed under this section and also his income exceeds the basic exemption limit which is not chargeable to tax.|
|A person covered under section 44ADA||If the person who is carrying on profession, has opted for computing profits and gains of profession on presumptive basis earlier, claims that the profit and gains from the business are lower than deemed profit and gains computed under this section and also his income exceeds the basic exemption limit which is not chargeable to tax.|
|A person covered under section 44AD(4)||If a person carrying on the business is covered by the provisions of section 44AD(4) and his income exceeds the maximum amount which is not chargeable to tax in the relevant financial year.|
The due date for getting books audited/submission of report and forms in which the audit report is to be reported are:
|Different Taxpayers||Audit From no.||Statement Particulars||Due Date of getting books audited|
|In case of a person who carries on business/profession and is required to get his accounts audited under any other law. For example – company law in the case of companies||Form no 3CA||Form No 3CD||Up to the Financial year 2018-19: 30th September of the following year. For example, the Due date for F.Y. 2020-21 will be 30th September 2021.
From F.Y. 2019-20: 31st October of the following year.
|In case of a person who carries on business/profession but not being a person referred above||Form no 3CB||Form No. 3CD|
Note: The due date of tax audit is 30th November following the relevant financial year for those taxpayers who have international or specified domestic transactions.
Details to be furnished in form 3CA: Audit Report in form 3CA is furnished when auditing of books of accounts is required under any other law other than income tax law. Details to be furnished are:
- Details of the taxpayer such as Name, Address, PAN, etc.
- Date of Audit Report
- Annexure (Audited Balance Sheet, Profit and loss Account, Form 3CD)
- A declaration by the auditor that all the details filled in form no. 3CA and annexure attached are true to the best of his knowledge
- Audit observations and qualification if any
- Auditor’s name, Address, Membership no., Firm Registration no., and signature with seal/stamp.
Details to be furnished in form 3CB: Audit Report in form 3CB is furnished when auditing of books of accounts is not required under any other law. In this form, a chartered accountant gives a declaration that he had examined the financial statements of the assessee and the statement reflects the true & fair view and reports the observations, qualification, inconsistency in the financial statement if any. Details to be furnished are similar to those discussed above in Form 3CA. Additional details to be furnished are:
- Reporting of detailed observations, qualifications, material misstatement and inconsistencies in financial statements if any
- A declaration that the accounts are maintained at the head office or branch office only.
- A declaration by the auditor that they have obtained all the requisite information to form their opinion on financial statements.
Form 3CD is a part of the process of filing income tax returns in cases where a tax audit is conducted. Form 3CD is an annexure to the audit report. It contains 44 clauses. It is attached along with Form 3CA/3CB, as applicable.
Penalty for Non-compliance of section 44AB
If any person fails to get his accounts audited before the due date or does not get his accounts audited at all, then the defaulter of the tax audit will be penalized under section 271B and the penalty for non-compliance will be 0.5% of the turnover or the gross receipts up to a maximum penalty of Rs. 1,50,000/-
However, there will be no penalty if there is a reasonable cause of such failure. Reasonable causes generally accepted by tribunals/courts are enumerated below:
- Resignation of the tax auditor and consequent delay
- Death of the partner
- Loss of accounts because of theft/ fire etc
- Natural calamities, pandemics or any other reasons which are beyond the control of the taxpayers.
Hope the information provided will be helpful and assist in your timely furnishing of returns and getting books audited before the due date. In case of query, please reach us at [email protected]