Income Tax Audit for Business & Profession A.Y. 2023-24

Tax audits are financial examinations of companies or individuals under certain conditions. A tax audit aims to ensure that taxpayers accurately report their income and deductions to the government. Each type of tax audit has its requirements. Typically, Indian tax audits are conducted under Section 44AB. Businesses with a turnover of more than Rs. 1 crore (or Rs. 10 crore if less than 5% of their cash-based transactions) must undergo this audit.

Tax audits start with the taxpayer selecting a chartered accountant. A chartered accountant checks taxpayers’ financial records and documentation to ensure accuracy and compliance. Additionally, a chartered accountant will write a report on their findings.

What is a tax audit?

An audit is a financial check-up. Just like you visit a doctor for your health, businesses and people sometimes need their financial records checked. There are different types of these checks, based on various laws. The tax department has rules to ensure everyone pays the right tax. Some need a special check by a chartered accountant to see if they’re following tax rules. After this, the chartered accountant writes a report about their findings.

There are various kinds of audits based on different laws, including tax laws. The tax department has specific guidelines about who needs these checks to ensure correct tax payments. A professional, known as a chartered accountant, conducts these checks. Once done, they summarize their findings in a report.

Objectives and Importance of Tax Audits

A tax audit verifies that a taxpayer’s financial records accurately reflect their income and claim deductions on time. Tax audits have the following objectives.

  • The main objective is to comply with all reporting requirements specified on Forms 3CA/3CB and 3CD.
  • A taxpayer’s records and accounts are audited to ensure accuracy. In this way, taxpayers’ reported income reflects their actual earnings.
  • Audits ensure that taxpayers are only claiming deductions they are entitled to, and not claiming deductions they are not entitled to.
  • By doing so, dishonest or fraudulent financial reporting practices can be detected and prevented.
  • The tax authorities’ tasks are made easier and more effective by presenting clear and precise accounting information.
  • Assessing Officers can focus on complex investigations if accounts have been properly audited, which allows them to spend less time performing simple checks.
  • The purpose of a tax audit is to ensure that taxpayers’ financial disclosures are truthful and accurate, thereby improving the overall efficiency of the tax system.

Who is liable for tax audit?

A business with a turnover, sales or gross receipts of more than Rs. 1 crore must perform an account tax audit. In case of an audit, you will need to understand the conditions regarding turnover and amendments to tax audit turnover threshold limits. A chartered accountant will conduct the tax audit. Tax audit is mandatory for businesses and professions in India under certain circumstances. The threshold limits for tax audits have been revised in recent years to promote digital payments and reduce reliance on cash transactions. Here you can check which businesses or professions are liable to get their account tax audited.

Business

Carrying  Business (Not Opt for Presumptive Taxation Scheme): The tax audit is mandatory if Aggregate sales, revenue, or total receipts surpass Rs. 1 crore during the financial year. However, If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for tax audit is increased to Rs. 10 crores (w.e.f. FY 2020-21).

Engaged in a business qualifying for presumptive taxation as per Section 44AE, 44BB, or 44BBB: Declares profits or gains below the threshold limit as described under section 44AE, 44BB or 44BBB.

Conducting a business that qualifies for presumptive taxation under Section 44AD: Reports taxable income that falls beneath the thresholds defined within the presumptive tax scheme or having income or receipts surpassing the threshold limit.

  • The tax audit will be applicable if the total sales, turnover or gross receipts exceeds Rs. 2 crores in the financial year. Rs 3 crore (in case of 95% of the receipts through online modes w.e.f  A.Y.2024-25).
  • The tax audit will be applicable if you show a profit lower than the presumptive rate of 8% or 6% (in the case of digital transactions)
  • By choosing the presumptive scheme, you commit to five consecutive years. If you withdraw from the scheme, you will be prohibited from reentering the scheme for five years.

If incurring a loss from the operation of a business and not selecting the presumptive taxation scheme: Total sales, turnover, or gross receipts exceed Rs. 1 crore.

If the 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)

Profession

Engaged in a professional occupation: Total gross receipts exceed Rs. 50 lakh during the financial year.

Involved in a profession qualifying for presumptive taxation under Section 44ADA: The tax audit will be applicable if

  1. Declares profits or gains below the specified threshold within the presumptive taxation framework: The threshold limit is 50% of the gross receipts. A tax audit will be applicable if the reported profits or gains are lower than this limit.
  2. Generates income that increases the highest amount exempt from income tax: The threshold limit is Rs. 50 Lakh (Rs. 75 In case 95% of the receipts are through online mode w.e.f. A.Y. 2024-25). If the income exceeds this limit, a tax audit will be applicable.

Amendments in Threshold of Tax Audit

1. Initial Threshold: A tax audit was obligatory if a business reported sales, turnover, or gross receipts exceeding Rs 1 crore in a financial year.

2. Amendment in Finance Act 2020:  – Effective from Assessment Year (AY) 2020-21, which corresponds to the Financial Year (FY) 2019-20:

Revised Threshold: The compulsory tax audit threshold was increased to Rs 5 crore.

Eligibility Criteria: There is an increased threshold of Rs 5 crore for tax audits if:

  • The cash received in transactions is no more than 5% of total sales or turnover.
  • The total expense remains within 5% of the cash payments made.

The goal is to promote digital payments and reduce reliance on cash transactions.

3. Amendment in Finance Act 2021:  The compulsory tax audit threshold was increased to Rs. 10 Crore. 

Revised Threshold:  The compulsory tax audit threshold was increased to Rs. 10 Crore. 

Eligibility Criteria: There is an increased threshold of Rs. 10 crore for tax audit if:

  • The cash received in transactions is no more than 5% of total sales or turnover.
  • The total expense remains within 5% of the cash payments made.
Amendment in Finance Act Effective From Revised Threshold Eligibility Criteria Objective
Finance Act 2020 AY 2020-21 (FY 2019-20) Rs 5 crore – Cash received ≤ 5% of total sales/turnover
– Total expense ≤ 5% of cash payments
Promote digital payments, reduce cash reliance
Finance Act 2021 AY 2021-22 (FY 2020-21) Rs 10 crore – Cash received ≤ 5% of total sales/turnover
– Total expense ≤ 5% of cash payments
Further, increase the threshold for tax audit

The goal is to promote digital payments and reduce reliance on cash transactions. The following conditions must be met to qualify for a higher audit threshold. The business doesn’t need a tax audit if its turnover is less than Rs. 5 crore or Rs. 10 crore. It’s meant to get companies to switch from cash to digital transactions.

What is Audit Report?

An audit report of tax auditing consists of several vital elements. Chartered accountants use specific forms, either Form 3CA or Form 3CB, depending on whether the entity being audited must undergo audits under other laws.

  • Form 3CA: This form is utilized when a business or professional entity is obligated to conduct audits under existing laws.
  • Form 3CB: When a business or professional entity is not legally required to conduct audits under any other law, Form 3CB is employed.

Integral to the audit report is Form 3CD, which contains the necessary particulars the tax auditor must furnish. This form plays an essential role in the overall audit process.

The procedure for submitting tax audit reports involves the following steps:

  1. Filing by Tax Auditor: Tax auditors, acting as Chartered Accountants, submit the audit report electronically using their provided login credentials. This step is crucial in initiating the audit report submission process.
  2. Taxpayer’s Involvement: Taxpayers must also add their Chartered Accountant’s details to their designated login portal.
  3. Acceptance/Rejection by Taxpayer: Once the tax audit report is uploaded, the taxpayer is responsible for reviewing and accepting or rejecting the report via their login portal. If left, the necessary actions and procedures must be undertaken until a received report is achieved.

Tax Audit Due Date (A.Y.2023-24)

The deadline for submitting the audit report for A.Y. 2023-24 is 31st October 2023, in accordance with all the requirements of taxation audit rules. The taxpayer must ensure the submission of the tax audit report on or before the deadline to avoid any penalties.

Check ITR Due Date for A.Y. 2023-24 

Penalty for Non-Filing or Delay in Filing Tax Audit Report

In the event a taxpayer fails to conduct a tax audit, a penalty will be assessed based on the lesser of the following:

  1. 0.5% of the total sales, turnover, or gross receipts
  2. Rs 1,50,000

Under section 271B, no penalty shall be imposed if a valid reason exists for non-compliance. To date, the following valid reasons have been recognized and accepted by Tribunals/Courts:

  1. Disasters caused by natural causes
  2. Tax Auditor’s resignation and subsequent delay
  3. Labor disruptions such as strikes or lockouts that last for an extended period
  4. Inability to collect accounts due to circumstances beyond the assesses’ control
  5. Incapacitation or death of the partner responsible for account oversight

17 thoughts on “Income Tax Audit for Business & Profession A.Y. 2023-24”

  1. Any spl. consideration for loss making Micro / Small Enterprise in industrial business with regard to Audit for above 2 Crores turnover during F Y 2021-22 ?

    Reply
    • For Business: If the total sales, turnover or gross receipt in business for the previous year exceeds Rs. 1 crore (Rs. 2 crore in case of person, who declares business profit in accordance with the provisions of section 44AD (1) then you are required to do tax audit your books of accounts from Chartered Accountant.

      For Profession: If the gross receipts in the profession for the previous year exceeds Rs. 50 Lakhs then you are required to do tax audit of your books of accounts from Chartered Accountants.

      Reply
  2. My turnover is 90 lakhs. Loss 12.5 lakhs, pension 4.56 lakhs — 1.56750 Vi deduction =2.99 lakh(Sr citizen). Whether 44AB audit required?

    Reply
  3. I HAVE A TURNOVER OF Rs. 64 LAKHS
    PROFIT OF RS. 85000 APPROX AND COMMISSION RS. 200000 SHOULD MY
    ACCOUNTS BE AUDITED?

    Reply
    • Sir your frequently raised questions do not show the reply. It would help a lot of people if the reply is seen, since we have similar question

      Reply
  4. Sir I filed ITR-4 and fill income in “No Account Case” Column. The Profit was 5 percent filed by me in ITR. Now I have a notice that it is a defective return please file B/s & P&L. Sir I want to know will i get penalety of audit, if i filed B/s & P&L. I filed gross receipt 63 lacs & profit is 3.38 lacs.

    Reply
  5. For, stock market speculater
    Buy sell of stocks value through out year
    Or turnover of fund (cheques)? Calculated

    Reply

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