What is Income Tax Audit ?

An Income Tax Audit is an assessment of a taxpayer's financial records conducted by the Income Tax Department to verify the accuracy of reported income, deductions, and tax payments. It is compulsory for businesses and professionals whose income or turnover exceeds specified thresholds, such as Rs. 1 crore for businesses.

The audit ensures that the financial statements are accurate and comply with tax laws, identifying any discrepancies in income, expenses, or tax liabilities. Failing to comply with the audit requirements can result in penalties and other legal consequences.

Benefits

  • Legal Compliance : Ensures compliance with tax laws, helping avoid penalties or legal issues.
  • Accurate Financial Records : Validates that financial statements are accurate, aiding informed business decisions.
  • Better Tax Planning : Helps identify tax-saving opportunities and improve financial management.
  • Credibility with Stakeholders : A clean audit boosts trust among investors, lenders, and clients.
  • Avoids Tax Disputes : Reduces the risk of discrepancies between reported income and actual earnings, preventing tax disputes.
  • Reduces Risk of Scrutiny : A proper audit minimizes the chances of further investigation by the Income Tax Department.

Process / Steps

01

Notification

  • The Income Tax Department notifies the taxpayer about the audit requirement based on turnover, income, or other criteria.
02

Appointment of an Auditor

  • Compile and organize documents such as financial statements, income details, expenditure, and any other relevant information.The taxpayer hires a qualified Chartered Accountant (CA) to conduct the audit. The CA reviews financial records, books of accounts, and supporting documents.
03

Preparation of Documents

The taxpayer provides the necessary documents to the auditor, including:

  • Financial statements (Balance Sheet, Profit & Loss Account)
  • Bank statements, vouchers, and invoices
  • Tax returns for previous years
  • Details of deductions, exemptions, and credits
  • Cash flow statements and ledgers
04

Audit Review

  • The auditor evaluates the documents for accuracy, ensures compliance with tax laws, and checks for discrepancies. The auditor may ask for additional information if required.
05

Audit Report

  • The auditor prepares an audit report (Form 3CA/3CB), certifying that the financial statements are accurate and comply with the provisions of the Income Tax Act.
06

Submission to Income Tax Department

  • The audit report is submitted to the Income Tax Department, along with the taxpayer’s income tax return, within the prescribed deadline (usually September 30th of the assessment year).
07

Follow-up

  • The taxpayer may be required to address queries or clarifications raised by the Income Tax Department. In case of any issues or non-compliance, corrective actions or penalties may be applied.

Documents required

Financial Statements :

  • Balance Sheet
  • Profit & Loss Account
  • Cash Flow Statements
  • Statement of Changes in Equity

Books of Accounts :

  • Sales and purchase registers
  • Cash and bank book
  • Journal and ledger entries

Tax Returns and Related Documents :

  • Previous year's Income Tax Return (ITR) and acknowledgment receipts
  • Form 26AS (Tax Credit Statement)
  • GST Returns (if applicable)

Bank Statements :

  • Statements of business accounts for the entire year
  • Any fixed deposit or loan account statements

Invoices and Vouchers :

  • Copies of purchase and sale invoices
  • Receipts of payments made or received
  • Expense vouchers

Details of Deductions :

  • Investment details for claiming deductions under sections like 80C, 80D, etc.
  • Breakup of any income exemptions, such as house rent allowance (HRA) or leave travel allowance (LTA)

Other Supporting Documents :

  • Agreement or contracts related to income or expenses
  • Details of stock, fixed assets, or liabilities, if applicable

Our Support?

At SS Auditors & Tax Consultants, we provide complete support throughout the Income Tax Audit process;

  • Audit Preparation : We help organize and prepare all necessary documents and records for the audit.
  • Expert Guidance : Our Chartered Accountants offer expert advice to ensure compliance and accuracy in your financial statements.
  • Audit Representation : We handle all communication with the Income Tax Department, addressing queries and disputes on your behalf.
  • Tax Filing Assistance : We assist with filing your tax returns and submitting the audit report on time.
  • Ongoing Support : We provide continued support for any post-audit issues, assessments, or appeals, ensuring ongoing compliance.

Frequently Asked Questions

A Tax Audit under Section 44AB is performed by a chartered accountant to examine the financial records and other documents of the taxpayer. This audit applies to individuals, Hindu Undivided Families (HUFs), firms, and similar entities with gross receipts exceeding Rs 1 crore in business or Rs 50 lakhs in profession. The main objectives are to validate the accounts, ensure compliance with income tax regulations, and provide a tax audit report alongside the Income Tax Return.

If a taxpayer is required to furnish a transfer pricing report under Section 92E, the due date for submitting the tax audit report is October 31st of the relevant assessment year.

If the tax audit report is not submitted by the due date, a penalty will be levied. The penalty amount will be the lower of the following:

  • 0.5% of the total turnover or gross receipts, or
  • Rs. 1.5 lakh.

The Chartered Accountant reviews financial records such as the cash book, ledger, journals, bank statements, stock records, and sales/purchase invoices. They verify the business's financial position as of the end of the financial year.

Tax audits are typically not required for salaried individuals. However, if a person has income from other sources, such as professional fees exceeding Rs 50 lakhs or business income over Rs 1 crore, a tax audit may be necessary. Exceeding these thresholds in turnover or gross receipts from business or profession makes the individual liable for a tax audit.

Form 3CA is the tax audit report prepared by the Chartered Accountant, certifying that the audit was conducted in accordance with Section 44AB. Form 3CD is a statement of particulars that must be submitted alongside the Return and Form 3CA. It includes information on claimed deductions, compliance, and other relevant details.

The threshold for tax audit requirements for businesses is set at Rs. 1 crore. However, this limit can be raised to Rs. 10 crores if cash receipts or cash payments do not exceed 5% of the total receipts or total payments.