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Tax Audit

Get your Tax audit done easily with the help of Corpbiz

  • Proper analysis of laws & accounts and addresses all queries about Tax Audit.
  • Preparation of proper documents & analysis of reports and statements.
  • Ensure that the company follows the applicable Tax Standards & Business and Working procedures analysis.
  • Ensures that the audit services should be checked as an investment with medium to long-term profits.
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Selection of Tax Auditor and filing the application with necessary documents.

Step 1

Verification of the application and documents by the tax auditor.

Step 2

Preparation of Tax Audit report by Tax Auditor.

Step 3

Overview of Tax Audit

 Tax Audit refers to the verification and inspection of the accounts of the taxpayer to ensure that the accounts are in accordance with the provisions of the Income Tax Act 1961. The Government of India has made tax audits mandatory compliance for every taxpayer.

Income Tax Act 1961has made tax audit compulsory on the annual gross turnover/receipts if the amount exceeds a specified limit. Chartered Accountant conducts the tax audit defined in Section 44AB of the Income Tax Act, 1961

Applicability of Tax Audit 

Section 44AB has made tax audit mandatory for the following persons:

  • Annual Gross Turnover in Business > 10 Crore 

If the annual gross turnover of an assessee exceeds one crore, then he shall be liable to undergo a  the audit as per Section 44AB of the Income Tax Act.

  • Annual Gross Income in Profession > 50 Laces 

When the Annual Gross Income in a profession exceeds Rs. 50 Lacs, then the Assessee is eligible for this procedure  

Objectives of Tax Audit

The key objectives of the Tax audit are given below-

  • It ensures that the books of accounts are maintained properly and correctly, and certified by the tax auditor.
  • Once methodical verification of books of accounts is done, it is necessary to report observations or discrepancies observed by the tax auditor.
  • The primary purpose of this  audit is to extract a report according to the requirements of form no. 3CA/3CB and 3CD. Apart from reporting needs of the above forms proper tax audit is also required, which would ensure that the book of accounts and records are properly maintained and accurately show the taxpayer's income and appropriate claim for deductions.
  • An annual audit is both time and money-consuming process. Tax audit is necessary for every eligible Assessee,Income Tax Act has made it mandatory In India, and a tax consultant (Chartered Accountant) conducts Tax Audit.
  • It  can prove financially beneficial for a business.
  • An audit gives credibility to a piece of information published for employees, customers, suppliers, investors, and tax authorities.
  • The Audit gives assurance to shareholders that the figures in the accounts show an accurate and fair view.

Tax Audit

Types of Tax Audit

The types of Tax Audit are given below

  • Field Audit – 

It is the type of Audit that takes place at the taxpayer's office. The taxpayer needs to provide the documents to the auditor.

  • Office Audit 

This Audit takes place at the office of the IRS. The taxpayer needs to carry the required documents. The taxpayer will be informed about the necessary documents through a letter from the IRS Office.

  • Correspondence Audit 

Here the IRS sends a letter requesting the taxpayer to provide the missing documents or any other documents which can provide clarity pertaining to the taxpayer's tax returns. The taxpayer is only required to mail the required documents.

Type of Accounts Come Under Tax Audit

  • Individual/Proprietorship
  • Hindu Undivided Family
  • Company
  • Partnership Firm
  • Association of Person
  • Local Authority

Essential Documents Required for Tax audit 

The following documents are necessary for Tax Audit – 

  • Documents Required for Preparation of Tax Audit Report 
  1. Name of the Assessee
  2. Address Proof of Assessee
  3. PAN / Aadhar Card of the Assessee
  4. GST Registration Number or any other document which proves the payment of indirect taxes 
  5. Status of the Assessee as a person under section 2 ( 31 ) of the Income-tax act 1961
  6. Previous Year and Assessment Year 
  7. Relevant Clause of section 44AB
  8. Nature of Business and Change in Nature of business, if any 
  1. If the Assessee has opted for taxation and taxation regime under 115BA/115BAA/115BAB and submitted form 10-IB / 10-IC /10-ID
  1. Details of Partnership Firm or AOP 
  2. Books of Accounts as per Section 44AA
  3. Whether the P&L have and profit or gain under the presumptive scheme 44AD, 44ADA, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, Chapter XII-G, First Schedule or any other relevant section).
  4. Method of accounting in the previous year and change in the method, if any 
  5. Whether there is a need for adjustment in the P&L account to comply with ICDs U/s 145 (2)
  6. Method of valuation of closing stock on the previous year 
  7. Details regarding the capital asset converted to stock, if any 
  8. Capital receipt 
  9. Particulars of Depreciation 
  10. Amount admissible under sections 32,33 and 35 on the ITA 1961
  11. The amount received or paid to employees. 
  12. Amount debited in Profit and Loss Account. 
  13. Amount of interest under Section 23 of MSME Act 2006
  14. Any payment made to persons u/s 40A 2 (b)
  15. Profit chargeable on tax 
  16. Deemed to be profit 
  17. Profit Chargeable to tax 
  18. Sum referred under section 43 B
  19. Details of Loan/amount deposited along with a certificate from Assessee declaring the same
  20. Sum referred u/s 43B
  21. Depreciation or loss brought forward.
  22. Tax distributed on profit
  23. Tax summary
  24. TDS
  25. Ratio of Turnover
  • Documents Required for Tax Audit
  1. Management Representation Letter
  2. Appointment Letter for Defining Scope 
  3. List of related parties and Transactions 
  4. Trail balance
  5. Financial Statements duly signed by Owners 
  6. Statutory Compliances
  7. Liabilities including Contingent liability Estimation 
  8. Notes on nature of business 
  9. Depreciation Calculation Statement 
  10. Proof of revenue expenditure capitalised and assets purchased  
  11. Extraordinary items nature and Disclosure
  12. Bank balance confirmation 
  13. Bank balance Statements 
  14. Major sundry debtors and creditor balance confirmation 
  15. Valuation of Inventories and for the total year quantitative inflow, outflow statement
  16. Notes on accounts and Disclosure of accounting policies
  17. Sample Purchase and sales bills
  18. Analytical Ratio analysis

The procedure of Tax Audit

The following steps are involved in a Tax Audit:

  • Selection of a Tax Auditor 

The first step is the selection of a Tax auditor. The auditor can be the Chartered Accountant of the business or any official of the IRS office.

  • Filing the Form and Submission of Necessary Documents to the Auditor 

The next step is to file the required form and submit the essential documents to the tax auditor.

  • Verification of Documents by the Auditor 

After submitting the necessary documents, the auditor verifies all the essential details and verifies every document submitted by the taxpayer. The auditor can also ask for additional documents to get clarity about the transaction of the taxpayer.

  • Preparation of Audit Report 

After verifying all the documents, the auditor finally prepares an audit report. The audit report act as proof of adherence to tax laws by the taxpayer.

Presumptive Taxation Scheme Under Section 44AD

  • Businesses whose annual turnover is within the limit of Rs 2 crore are suitable for this scheme.
  • It is not necessary to maintain books of Accounts U/s 44AD
  • Net income is estimated to be @8% of your gross turnover
  • A Digital mode of payment is used to receive gross receipts.
  • Net income is calculated as @6% and @8% of gross receipts
  • If the Assessee goes for Presumptive taxation u/s 44AD, then he requires following the same audit section for the next 5 financial years.
  • You need to file ITR 4 to avail these schemes.

Presumptive Taxation Scheme- Section 44ADA

  • Professions whose annual gross income does not exceed Rs 50lakhs are suitable for this scheme.
  • It is not necessary to maintain books of Accounts under Section 44ADA.
  • Net income is evaluated to be at 50% of the gross receipt. of the taxpayer 
  • If the taxpayer opts for Presumptive taxation under Section 44ADA, then he is required to follow the same audit section for the next five financial years.

Tips to be safe from a Tax Audit

The motive behind indulging in any business or professional activity is to earn financial profit. And it is crucial to remember that profit should be earned legally and appropriately. Perform the following activities that will result in a healthy Tax Audit:

  •  It is obligatory to maintain books of accounts as per the Income Tax Act 1961
  • It is necessary to compute profit or gain under Chapter IV
  • Income is taxable or loss allowable
  • In tax return file mention taxable income and allowable loss

What is included in Turnover for Tax Audit?

  • Duty drawbacks received after export sales are considered a part of Turnover in a fiscal year.
  • Income earned out of interests from income by money lenders or through foreign fluctuation income by an exporter is regarded as a part of turnover in a financial year or Advance received and forfeited from customers, and if excise duty is included in turnover, it should be debited in the profit and loss account.

What is excluded in Turnover for Tax Audit?

  • Sale or Purchase of Fixed Assets
  • Income raised from selling the assets held as an investment
  • Rental Income
  • Residential or Commercial Property
  • Interest income and reimbursement of expenses as a receipt.
  • It helps in building a healthy reputation of the company.

Constituents of a Tax Audit Report

The tax auditor presents his report in the specified form, which could be either Form 3CA or Form 3CB, where:

  • Form No. 3CA is presented when a person involved in business or profession is already mandated to get his accounts audited under any other law.
  • Form No. 3CB is presented when a person is involved in business or profession and does not need to get his accounts audited under any other law.

The Due date for Tax Audit 

It is necessary for any person/persons who is/are covered under section 44AB to get their accounts audited and also obtain the audit reports on or before 30th September of that particular year, i.e., the due date of filing the return of the income.

Penalty of non-filing or delay in filing Tax Audit report

If any taxpayer fails to get the tax audit done is punished with the following penalty:

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

How does Corpbiz help its client in Tax Audits?

Corpbiz has a team of experts and experienced business advisors who will assist and execute the entire Tax Audit. Corpbiz helps its client in conducting the Tax Audit by providing services like-

  • Proper analysis of laws & accounts and addresses all queries about Tax Audit.
  • Preparation of proper documents & analysis of reports & statements.
  • Ensuring that the company follows the applicable Tax Standards & analysis of Business and Working procedure.
  • Ensures that the audit services should be viewed as an investment with medium to long term profits.

Why Corpbiz?

We at Corpbiz have trained professionals to help you throughout the Tax Audit procedure. Our Experts will guide and assist you in the whole process of Audit and related services & also ensures the timely and effective completion of your work. For any queries related to Tax Audit and related services, feel free to contact our experienced and trained professionals at Corpbiz.

Frequently Asked Questions

Limit of tax audits:

  • The limit for Businesses is Rs. 10 crore.
  • The limit for profession is Rs. 50 lakhs.

The maximum number of tax audits that can be performed by a Chartered Accountant (CA) is limited to 60. In the case of a firm, the restriction on tax audit limit applies to each of the partners.

The primary aim is to ensure that the books of accounts have been maintained as per the provisions of the Income Tax Act. It also assures that the Accounts are properly presented to the Assessing Officers.

The following are the causes that prompt a tax audit:

  • Having higher than average income
  • Taking deductions that are disproportionate to the income
  • Claiming business losses every year.
  • Taking irrelevant deductions

If there is an error in the books of accounts, generally, it gets corrected by the CA. In case there is any mistake, then a penalty will be charged which may lead to paying more tax amount.

Some examples of tax evasion are false tax returns, smuggling to fake documents, and bribery.

While auditing if you do not have any receipt, the auditor may accept any other documentation and in case you fail to present the same, the auditor will not accept the entry in the books of accounts.

Section 44AB gives the provisions relating to the class of taxpayers like businesses or professions or self employed persons who are required to get their accounts audited from a Chartered Accountant. The Audit under section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfilment of other requirements of the Income-tax Law. The Audit conducted by the chartered accountant of the taxpayer accounts in pursuance of the requirement of section 44AB is called a tax audit.

Types of accounts that come under tax audit:

  • Individual/Proprietorship
  • Hindu Undivided Family
  • Company
  • Partnership Firm
  • Association of Person
  • Local Authority

Any business having a total sales turnover of over Rs. 1 crore must complete a compulsory tax audit by a Chartered Accountant (CA). And in the case of the profession, if the profession has total gross receipts of more than Rs. 50 lakhs, then it is mandatory to conduct a tax audit by a Chartered Accountant.

In case of loss, since there is no income, therefore it does not exceed the maximum amount not chargeable to tax, and so the second condition mandating the audit u/s 44AB r/w section 44AD is not satisfied, and therefore the Assessee is not required to get the accounts audited u/s 44AB.

An audit, which is required by the statute (law), is known as a statutory audit. A tax Audit is a compulsory audit under Income Tax Act 1961 if the turnover of the assesses reaches the specified limit. Statutory Audit is performed by external auditors, whereas tax audit is conducted by a practising Chartered Accountant.

Objective of a tax audit

  • It ensures that books of accounts are maintained properly and correctly and certified by the tax auditor.
  • Once methodical verification of books of accounts is done, it is necessary to report observations or discrepancies observed by the tax auditor.
  • It can prove financially beneficial for a business.
  • An audit gives credibility to a piece of information published for employees, customers, suppliers, investors, and tax authorities.

The lists of activities that will result in a healthy tax audit:

  • Income Tax Act has made it mandatory to maintain books of accounts
  • It is necessary to compute profit or gain under Chapter IV
  • Income is taxable or loss allowable.
  • In tax return file mention show taxable income and allowable loss

The tax auditor presents his report in the specified form, which could be either Form 3CA or Form 3CB, where:

  • Form No. 3CA is presented when a person involved in business or profession is already mandated to get his accounts audited under any other law
  • Form No. 3CB is presented when a person is involved in business or profession does not need to get his accounts audited under any other law.

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