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October 16, 2020

Know when Tax Audit is Compulsory for Turnover from zero up to Rs 5 crore

by CA Shivam Jaiswal in Income Tax

Know when Tax Audit is Compulsory for Turnover from zero up to Rs 5 crore

There are various kinds of audits being conducted under different laws such as company audit, statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’.

Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity. As per these provisions, tax audit shall be conducted by a Chartered Accountant who ensures that the taxpayer has maintained proper books of account and complied with the provisions of the Income-tax Act. Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department in Form no. 3CA/3CB and Form no. 3CD along with the income tax return.

What is Tax Audit under section 44AB?

  • Tax Audit refers to the independent verification of the books of accounts of the assessee to form an opinion on the matters related to taxation compliances carried out by the assessee.
  • While preparing the books of accounts of the business or profession for the purpose of income tax filing, the assessee has to comply with the provisions of Income-tax Act, 1961.
  • Tax audit can be conducted by a Chartered Accountant who holds the certificate of practice and is in full-time practice.
  • However certain classes have been defined who cannot conduct tax audit under section 44AB. 
  • The tax auditor (CA) carries out a systematical examination of books of account as per the formats prescribed by the department. 

Who has to get tax audit under section 44AB done?

Every person who derives income by way of Business or profession and maintains books of accounts and has not opted for computation of income on presumptive basis under section 44AD, 44ADA or 44AE of the Income-tax Act, 1961 has to get tax audit done provided his income exceeds the prescribed threshold limit of:

  • A person carrying on business if the total sales/ turnover exceeds Rs 1 crore during the previous year.
  • A person carrying on profession if the Gross receipts exceed Rs 50 lakhs during the previous year.

In order to reduce compliance burden on small and medium enterprises, the threshold limit for a person carrying on business was increased from 1 crore rupees to 5 crore rupees in cases where:

  • aggregate of all receipts in cash during the previous year does not exceed 5% of such receipt &
  • aggregate of all payments in cash during the previous year does not exceed 5% of such payment

Also, the person who has opted for computing profits and gains of business on presumptive basis under section 44AD earlier and 5 years has not lapsed since then but the assessee has opted out of such presumptive income and his income exceeds the ceiling for chargeability of income tax, is also required to get tax audit done. 

If a person has opted for presumptive scheme under section 44ADA and he claims his income lower than the deemed profits and his income exceeds the ceiling for chargeability of income tax, is also required to get tax audit done.

Tax audit is also mandatory for the assessee’s opting for presumptive scheme under section 44AE, 44BB and 44BBB and claiming income lower than the deemed profits.

Let us find out tax audit applicability of an entity whose turnover is up to Rs 5 crores

TurnoverHas opted for presumptive taxationHas opted for presumptive taxation in any 5 preceding yearsClaims income lower than the deemed profitsDoes aggregate cash receipts/payments exceed 5% of such receipt/paymentsIs tax audit applicable?
Less than Rs 1 croreNoNoNAYes/NoNo
Less than Rs 1 croreNoYesNAYes/NoYes
Less than Rs 1 croreYesYes/NoYesYes/NoYes
1 crore to 2 croresNoNoNANoNo
1 crore to 2 croresYesYes/NoNoNoNo
1 crore to 2 croresYesYes/NoYesNoYes
1 crore to 2 croresYesYes/NoNoYesNo
1 crore to 2 croresYesYes/NoYesYesYes
2 crores to 5 croresNANANANoNo
2 crores to 5 croresNANANAYesYes
More than 5 croresNANANAYes/NoYes

What is a Tax Audit Report comprised of?

Tax auditor shall furnish his report in a prescribed form which could be either Form 3CA or Form 3CB where:

  • Form No. 3CA is furnished when a person carrying on business or profession is already mandated to get his accounts audited under any other law.
  • Form No. 3CB is furnished when a person carrying on business or profession is not required to get his accounts audited under any other law.

In case of either of the audit reports, tax auditor must furnish the prescribed particulars in Form No. 3CD, which forms part of audit report.

ALSO READ 12 situations when a CA cannot do Tax Audit

Is there any penalty for not conducting audit of a partnership firm?

Any partnership firm where tax audit is applicable & fails in tax audit filing in due date invites penalty under section 271B of Income Tax Act 1961. Penalty for non-filing of tax audit shall be lower of:

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

However, no penalty shall be levied under section 271B if firm proves there is a reasonable cause of such no filing, which are accepted by Tribunals/Courts as reasonable Cause are:

  • Resignation of the Tax Auditor and Consequent Delay
  • Death or physical inability of the partner in charge of the Accounts
  • Labor Problems such as strikes, lock-outs for a long period
  • Loss of Accounts because of Fire/Theft etc. beyond the control of the Assesses
  • Natural Calamities

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