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Tax Audit - Criteria, Audit Report, Penalty & Other Information

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"Qwikfilings team helped to understand business taxes adn file my Tax Audit before due date 30 September. My Income Tax Audit and Return (ITR Filing) was filed on time and I avoided any late fee"
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Shweta Agarwal Founder, Beauty Ventures INC
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Income Tax Audit Limits For AY 2023-24

  • A business person whose gross receipts/turnover/sales for the previous financial year is more than Rs. 1 crore. It is​ no longer relevant to the person who opts for a presumptive taxation scheme under section 44AD ​. The person’s general income or turnover would not exceed the amount of Rs. 2 crores.
  • A professional whose gross receipts for the previous financial year are more than Rs. 50 lakhs.
  • Persons covered under Sections 44AD, 44AE, 44AF, 44BB and 44BBB declared lower profits from business than estimated.
  • As per the latest amendment the persons who carry out most of the transactions through digital transactions are eligible for an increase in the limit for audits.
CriteriaLimit (in Rs.)
Businesses with >5% cash transactions1 crore
Businesses with ≤5% cash transactions10 crores
Professionals with gross receipts in the previous FY50 lakhs
Presumptive taxation scheme under Section 44AD2 crores

Types Of Tax Audits

There are three types of audit of the auditing process. They are given below:

  • Field audit: The audit is conducted at the office of a company. All the necessary documents are to ensure that the auditing is done successfully.
  • Office audit: The auditing takes place in the office of the IRS. All the necessary documents are required for the audit, and one must receive a letter mentioned in the documents.
  • Correspondence audit: Here, a person received a letter mentioning the documents required for the auditing process and ensured to mail all the required documents to the mentioned address.
Type of AuditDescription
Field AuditConducted at the company’s office.
Office AuditTakes place in the IRS office.
Correspondence AuditDocuments mailed to a specified address after receiving a letter.

Objectives of Tax Audit

The objectives of a tax audit can be summed up as follows:

  • It ensures that the books of accounts are adequately maintained and are certified by an auditor.
  • It helps provide reports concerning the recommended information such as tax depreciation, income tax law and compliance, etc.
  • It ensures the method-bound scrutiny of the books of accounts and the reports regarding the observations or discrepancies pointed out by an auditor.
  • It helps verify the correctness of the income tax returns filed with the IT department.
  • It makes it easier to calculate and verify total income, claims for deductions, etc.

Tax Audit for Business

  • For business entities opting for presumptive taxation: For businesses opting for presumptive taxation under section 44AD, the general turnover limit is increased to Rs.2 crore for a financial year. Also, for entities covered under sections 44AD, 44AE, 44AF, 44BB, and 44BBB who declared their profits as a particular percentage of turnover, which is below the prescribed limit and income exceeds the basic exemption limit, then tax audit becomes applicable to them.
  • A tax audit limit of Rs.10 crore applies to business entities: A threshold of Rs.10  crore is applicable if a person carries most of the transaction digitally. In that case, an audit applies to those business entities.
  • Businesses that do not opt for a presumptive taxation scheme The total sales and turnover exceed the amount of Rs.1 crore in the financial year. If the cash transactions are up to 5% of total gross payments, the threshold limit of turnover for an audit is increased to Rs.10 crore. 
  • Entities eligible for presumptive taxation under Section 44AE, 44BB or 44BBB: Profits claimed are lower than the prescribed limit under the presumptive taxation scheme.
  • Entities eligible for presumptive taxation under Section 44AD: Taxable income is declared below the prescribed limits per the presumptive tax scheme but exceeds the basic threshold limit.
  • Entities not eligible to claim presumptive taxation under Section 44AD because of opting out of the presumptive taxation scheme in any one financial year of the lock-in period: If income goes beyond the maximum amount not taxable for the subsequent five consecutive years from the date when the presumptive taxation was not availed
  • Entities declaring profits as per presumptive taxation scheme under Section 44AD: The presumptive taxation scheme is only availed if the income is within the maximum amount not taxable in the subsequent five consecutive years from the date.
  • Businesses declaring profits as per presumptive taxation scheme under Section 44AD: The audit is not applicable if the total sales are at most Rs.2 crore in the financial year. 

Tax Audit for Profession

  • Carrying on a profession : otal gross receipts are above Rs.50 lakh in the Financial year 
  • Profession eligible under Section 44ADA 
    • Claims profits below the prescribed limit as per the presumptive taxation scheme 
    • Income is above the maximum amount, not taxable. 

Business Loss

  • Businesses that incur loss and do not opt for a presumptive taxation scheme: Total sales above Rs.1 crore
  • If the taxpayer’s total income exceeds the basic threshold limit, but they have incurred a loss. : For businesses incurring a loss when sales, turnover, or gross receipts are above Rs.11 crore, the taxpayer is prescribed for taxing audit under Section 44AB.
  • Businesses opting for the presumptive taxation scheme under section 44AD that have incurred a loss but with income below the primary threshold limit.: No tax audit required
  • Businesses opting for the presumptive taxation scheme under section 44AD incur a loss but with income exceeding the basic threshold limit.: Taxable income declared below the limits prescribed under the presumptive tax scheme and income above the basic threshold limit.

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Audit Reports

  • The auditor furnished an audit report online, using the login credentials in the presence of a chartered accountant. 
  • Once the auditor has uploaded the report, it is the taxpayer’s discretion to accept or reject it.
  • If the report is rejected, the auditing process begins again.
  • Ensure the auditing report is filed before the due date.

Forms Required For Audit

  • Rule 6G of the Income Tax Act enlists the forms to submit an audit of a business/profession under Section 44AB.
  • The Income Tax Act (7th Amendment) Rules 2014 has changed the forms required for audit submission. The Central Board of Direct Taxes has altered Forms 3CA, 3CB and 3CD so that the auditor has to produce the audit report’s observations or qualifications when filling the forms.
  • When a businessperson or professional has to audit their accounts under any law other than the Income Tax Act, the Form 3CA (Audit Form) and Form 3CD (Statement of Particulars) are to be filled and submitted accordingly.
  • Furthermore, when a businessperson or professional has to audit their accounts under the Income Tax Act, they use Form 3CB (Audit Form) and Form 3CD.
  • Suppose a taxpayer must audit his business under more than one law. They can submit the same audit report for relevant scrutiny. The audit report is required to be attached while e-filing the IT Return.

Penalty for Non Filing of Tax Audit

  • If a business or profession’s account books are not audited under section 44AB, then the assessee has to pay the penalty as per Section 271B of the Income Tax Act.
  • A delay in completing the audit and submitting the report timely (on or before September 30), then 0.5% turnover or a maximum of Rs. 1.5 lakh has to be paid as a penalty.

If there is a sufficient reason for delay or non-filing of the audit report, then as per Section 273B, no penalty is applicable. Reasons allowed as per section 273B are:

  • The resignation of the  auditor caused the delay;
  • The delay caused by the death or physical inability of the partner responsible for accounts;
  • The delay is caused by labour issues such as strikes or lock-outs;
  • The delay caused by loss of accounts due to theft or fire, or incidents that are not under the assesses control;