Tax audit under the Income Tax Act 1961 is the verification of the books of accounts of an assessee to ensure compliance with the laws of Income Tax and reporting the allowances and disallowances as per law. Tax Audit of books of accounts must be carried out by a certified Chartered Accountant.
Tax Audit Limit
The provisions relating to tax audit are provided under Section 44AB of the Income Tax Act. According to Section 44AB, a tax audit is required to be done for the following persons:
In the case of any business including
Proprietorship firm, Partnership Firm, LLP, Company, Trust or any other person or entity, tax audit will be required if the total sales turnover or gross receipts in the business exceeds Rs.1 crore in the last financial year. Under the Income Tax Act, “Business” simply means any economic activity carried on for earning profits. Section 2(3) has defined the business as “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce, and manufacture”.
In case of a person carrying on a specified profession, tax audit would be required if gross receipts in the profession exceed Rs.50 lakhs in the previous financial year. A profession could be any of the following as per Rule 6F of the Income Tax Rules, 1962:
- Authorised representative
- Film Artist – Actor, Cameraman, Director, Music Director, Editor, etc.
- Interior Decorator
- Legal Professional – Advocate or Lawyer
- Medical Professional – Doctor, Physiotherapist, etc.,
- Technical Consultant
Presumptive Taxation Scheme
If a person is enrolled under the presumptive taxation scheme under section 44AD and total sales or turnover is more than Rs. 2 crores, then tax audit would be required u/s 44AB
Similarly, If a person is enrolled under the presumptive taxation scheme under section 44ADA and total sales or turnover is more than Rs. 50 Lakhs, then tax audit would be required u/s 44AB
Also, any person enrolled under the presumptive taxation scheme u/s 44AD of 44ADA who claims that the profits of the business or profession are lower than the profits calculated in accordance with the presumptive taxation scheme would be required to obtain a tax audit report.
Due Date for Filing Tax Audit Report
The due date for filing tax audit report under section 44AB of the Income Tax Act is 30th September of the assessment year. Hence, if a taxpayer is required to obtain a tax audit, then he or she would be required to file an Income tax return on or before 30th September along with the tax audit report. In case the taxpayer is also required to file transfer pricing audit report 3CEB u/s 92, then the due date for filing tax audit is 30th November of the assessment year.
Form 3CA & 3CD
Any person who is covered under tax audit would be required to furnish the following for tax audit before filing the income tax return:
Form 3CA – Audit Form
Form 3CD – Statement showing relevant particulars
Tax Audit Limit for Chartered Accountnts
A tax audit can be conducted by a Chartered Accountant or a firm of Chartered Accountants. If it is performed by the latter, the name of the signatory who has signed the report on behalf of the firm must be stated in the audit report. The signatory must provide his/her membership number while registering in the e-filing portal. Tax audits can also be performed by the Statutory Auditor.
It is important to note that, Chartered Accountants also have a limit on the number of tax audit reports that they can undertake for any financial year. Currently, the maximum number of tax audits that can be undertaken by a Chartered Accountant is limited to 60 tax audits. However, tax audits undertaken u/s 44AD and 44ADA are excluded from this limit.
Penalty for Completing Tax Audit
If a taxpayer does not get the accounts audited, then penalty could be levied under Section 271B of the Income Tax Act. The penalty for not filing tax audit is 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1,50,000.
Appointment of Tax Auditor in Company
The responsibility for appointing Tax Auditors or Tax Audit Firm in a company is vested with the Board of Directors. The Board may also delegate this responsibility to any other officer like CEO or CFO. Tax Auditors for a firm or proprietorship can be appointed by a partner, proprietor or a person authorized by the assessee.
Moreover, a taxpayer can also appoint two or more chartered accountants as joint auditors for performing tax audit. In this case, the Tax audit report must be signed by all the joint auditors, if all of them concur with the report. In case of any differences in opinion, the tax auditors must express their opinion separately through another report.
Letter of Appointment for Tax Audit
The tax auditor must obtain a letter of appointment from the concerned assessee before undertaking the tax audit. The appointment letter for Tax Audit must be duly signed by the person competent to sign the return of income. The letter must mention the remuneration offered to the auditor.
Besides, the appointment letter should clearly that no other auditor is entrusted with the task for the particular financial year, and must contain details of the previous auditor. The latter is mentioned to facilitate the communication between the appointed auditor and his predecessor.
Who cannot be tax auditor?
There are restrictions on person eligible to be appointed as a tax auditor, which are enumerated below:
- Any member in part-time practice is not eligible to perform a tax audit.
- A chartered account cannot audit the accounts of a person to whom he is indebted for more than Rs 10,000.
- A statutory auditor will be deemed to be guilty of professional misconduct if he/she accepts the appointment of Public Sector Undertaking/Government Company/Listed Company and other Public Company having turnover of Rs 50 crores or more in a year and accepts any other work, assignment or service in regard to the same undertaking/company on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking/company.
- The Chartered Accountant who is assigned with the task of writing and maintaining the books of account of the assessee should not audit such accounts.
- The audit of accounts of a professional firm of Chartered Accountants cannot be performed by any partner or employee belonging to such firm.
- An internal auditor of the assessee cannot be appointed as a tax auditor.
- An auditor cannot accept more than 60 tax audit assignments in a particular financial year.
Removal of Tax Auditor
The management is entitled to remove a tax auditor if he/she has delayed the submission of the tax audit report to such an extent that it is not anymore possible to get the audit report filed before the specified due date. A tax auditor cannot be removed merely because he has submitted an adverse audit report or on the assessee’s apprehension that the tax auditor is likely to provide an adverse audit report.
If a Chartered Accountant is removed on unfair grounds, the Ethical Standards Board, which was established by the Institute of Chartered Accountants of India (ICAI) can be approached to intervene. Moreover, if a Chartered Accountant is removed on invalid grounds, no other Chartered Accountant shall be allowed to act as a replacement to the predecessor.