What is an Audit?

Audit means an independent examination and inspection of the Financial Statements of an entity by some officials or some specified persons to establish that the accounting records present an accurate and fair view.

The audit can further be classified as:

Purpose of a Tax Audit:

A tax audit is conducted with specific objectives:

• Ensures correctness and maintenance of Financial Statements
• Reporting of inconsistencies observed by Auditor while conducting an audit
• To report information as required by Income Tax Act like Tax Depreciation etc

The turnover limit under section 44AB?

Tax Audit Limit in the case of a Business: Rs. 5 Crore if the taxpayer's cash receipts are limited to 5% of the gross receipts or turnover and if the taxpayer's cash payments are limited to 5% of the aggregate payments.

It has been provided further that for this clause, the payment or receipt, as the case may be, by cheque drawn on a bank or by a bank draft, which does not account payee, shall be deemed to be the payment or receipt, as the case may be, in cash.  

Tax Audit Limit in the case of a Profession:

Rs.50 Lakh. It means an assessee needs to be audited under Sec 44AB if his annual gross receipts in profession exceed Rs. 50 Lakh.

Presumptive Taxation Scheme under Sec 44AD of the Income Tax Act :

• Sec 44AD provides special provisions for computing profits and business gains on a presumptive basis.

• If a person is not maintaining proper accounting, net income is estimated to be @ 8% of your gross receipt/turnover or actual profit, whichever is higher.

â—‹ From F.Y. 2016-17, net income is calculated as @ 6% of gross receipts are received through the digital mode of payments and @ 8% of gross receipts are received in cash.

• Businesses whose annual gross turnover/receipt does not exceed Rs. 2 Crore are eligible for this scheme.

Furthermore, to discourage the taxpayers from misusing the scheme, the government has attached the following additional conditions: If an assessee is opting for the presumptive scheme, they must-

a. File presumptive scheme for at least five years in continuation.

b. If the assessee decides to show and file profits as per ITR-3 before the end of these five years, the assessee will lose presumptive benefits and be disallowed from presumptive taxation for the subsequent five years.

Note: 5 years shall be counted, starting the year in which the assessee first file usual taxes for such business.

Assessee needs to file ITR 4 (previously ITR4S) in F.Y. 2016-17 to avail of these schemes.

Various constituents of the Tax Audit Report:

The tax Auditor is required to submit a tax audit report in a prescribed form which could be either via 15CA or 15CB where:

• Form No. 15CA: When a person is carrying on business or profession where an audit of books accounts is already mandatory under other law.

• Form No. 15CB: When a person is carrying business or profession where an audit of books of accounts is not mandatory under any other law and where it is mandatory to obtain a certificate from a Chartered Accountant.

Important to understand:

According to the CBDT Press release regarding clarification on the threshold limit of tax audit u/s 44AB and u/s 44AD,

"Section 44AB of the Income-tax Act ('the Act') makes it obligatory for every person carrying on business to get his accounts of any previous year audited if total sales, turnover or gross receipts exceed one crore rupees. However, suppose an eligible person opts for a presumptive taxation scheme as per section 44AD(1) of the Act. In that case, he shall not be required to get his accounts audited if the total turnover or gross receipts of the relevant previous year does not exceed two crore rupees. Hence, the higher threshold for non-audit accounts has been given only to assessee opting for presumptive taxation scheme under section 44AD."

Please note: The tax audit limit of Rs 1 crore has been increased to Rs 5 crore, affecting AY 2020-21 (F.Y. 2019-20). In addition, if the taxpayer's cash receipts are limited to 5% of the gross receipts or turnover, the taxpayer's cash payments are limited to 5% of the aggregate payments.

So in simple words, If annual gross turnover/receipts from business exceed Rs. 1 Crore, an audit is required u/s 44 A.B. But such audit u/s 44AD can be avoided if the annual gross turnover/receipt is below 2 Crore.

How and when to file a Tax Audit Report:

A Tax Audit report can only be uploaded via the Income Tax E-filing website.

Step 1: The person is required to add the Chartered Accountant to his/hers e-filing portal

Step 2: Before uploading the audit report, 'C.A.' must generate a UDIN from UDIN official website

Step 3: The person's Chartered Accountant must upload the Tax Audit Report (Form No. 15CB) from their Chartered Accountant profile (Already Added by the person) on Income Tax e- filing website.

Step 4: After uploading the required Tax Audit Report, it will be reflected on the assessee's e-filing portal, which is required to approve after cross-verifying all the details mentioned in the report.

A Tax Audit Report is required to be filed on or before the due date of filing of returns i.e.

• In case assessee entered into International Transaction due date - 30th November

• In all other cases due date is 30th September

Penalty on non-filing or delay in filing Tax audit report

If any taxpayer who is required to get the audit done but fails to do so, the least of the following may be levied as a penalty:

0.5% of the total sales, turnover or gross receipts

Rs.1,50,000