Tax audit plays a pivotal role in the realm of income tax compliance, serving as a mechanism to ensure the accuracy and integrity of financial records. Under the Income Tax Act of 1961, tax audit has been established as an essential tool to verify the information provided by taxpayers, promote transparency, and minimize tax evasion. This comprehensive guide aims to shed light on the concept of tax audit, its significance, and the procedural aspects involved.
Under the provisions of the Income Tax Act, 1961, a taxpayer must undergo a tax audit when their business’s sales, turnover, or gross receipts surpass Rs 1 crore, and for professionals, when their income exceeds Rs. 50 Lakhs in a financial year. The criteria for the applicability of tax audits are outlined in Section 44AB of the Income Tax Act, which encompasses the conditions specified in Sec 44AB(a), Sec 44AB(b), Sec 44AB(c), and Sec 44AB(d).
What is Sec 44B(a)?
Persons engaged in business with a total sales turnover or gross receipts exceeding one crore are legally required to have their accounts audited by Chartered Accountants. However, it is worth noting that the turnover limit under Section 44AB is INR 1 crore. In Budget 2020, an amendment was introduced, increasing the turnover limit under Sec 44AB(a) from INR 1 crore to 5 crore. This increased limit applies if the cash payments made by the business do not exceed 5% of the total payments in the financial year and if the cash receipts received by the business do not exceed 5% of the total receipts in the financial year.
What is Sec 44AB(b)?
If an individual taxpayer is engaged in a service profession and their gross receipts in the previous year exceed Rs. 50 lakh, it is mandatory for them to have their accounts audited by chartered accountants. The term “profession” encompasses various service-related activities such as interior decorations, technical consulting, engineering, accounting, legal, medical, architecture, and other services associated with the movie industry, including directors, singers, lyricists, story writers, and more.
What is Sec 44AB(c)?
Section 44AB(c) states that if the taxpayer is involved in a business that falls under the purview of section 44AE, 44BB, or 44BBB, and they declare their profits to be lower than the presumed profits as per the relevant section, they will be required to undergo a tax audit if their total income exceeds the maximum amount exempt from taxation.
Who is required to undergo a tax audit according to Section 44AB?
Taxpayers who need to undergo a tax audit are as follows:
If the aggregate of all amounts received, including sales, turnover, or gross receipts during the previous year in cash, does not exceed five percent of the said amount; and the aggregate of all payments made, including expenditure incurred in cash, during the previous year does not exceed five percent of the said payment. The threshold limit has been increased to 10 crores instead of 1 crore from 1/4/21 for FY 2021-22 (5 crores).
Individuals engaged in a profession with gross receipts exceeding Rs. 50 lakh during the previous year.
Any taxpayer who has opted for sections 44ADA and 44AD but claims their income to be lower than the profits calculated under presumptive taxation, provided their income exceeds the taxable amount as per the Income Tax Act.
Any taxpayer who has opted for sections 44AE, 44BB, 44BBB but claims their income to be lower than the profits computed under the respective sections in any previous year.
What are the goals of conducting an income tax audit?
The primary objectives of conducting a tax audit are as follows:
Ensuring accurate maintenance of books of accounts without any fraudulent activities and obtaining certification from an auditor.
Identifying and reporting any discrepancies found during a thorough examination of the books of accounts.
Reporting relevant information such as tax depreciation and compliance with the provisions of income tax laws.
Facilitating ease in calculating taxes and deductions through the process of auditing.
Verifying the accuracy of the information provided by the taxpayer in their income tax return regarding income, taxes, and deductions.
What does non-compliance with the income tax audit refer to?
When a taxpayer is required to undergo a tax audit but fails to do so, a penalty is imposed.
Nevertheless, if there exists a valid reason for such failure, no penalty will be imposed under section 271B. Currently, the reasonable justifications accepted by Tribunals/Courts include the following:
Natural disasters.
Loss of accounts due to circumstances beyond the control of the tax payer.
Resignation of the tax auditor and resulting delays.
Physical incapacity or death of the partner responsible for accounting.
Prolonged labor issues such as strikes or lockouts.
Income tax audit limits for the financial year 2022-23
A businessperson whose gross receipts, sales, turnover for the previous financial year exceed Rs. 1 crore. However, for individuals opting for the presumptive taxation scheme under section 44AD, their overall income or turnover should not exceed Rs. 2 crores, making the previous threshold irrelevant.
A professional whose gross receipts in the preceding financial year exceed Rs. 50 lakh.
Individuals covered by Sections 44AD, 44AE, 44AF, 44BB, and 44BBB, who report lower business profits than the estimated amount.
According to the recent announcement, individuals who conduct the majority of their transactions (95% in this scenario) online, specifically through digital transactions, will qualify for an enhanced threshold limit for tax audit.
In conclusion, tax audit under the Income Tax Act of 1961 plays a vital role in ensuring accurate and transparent financial reporting. It helps maintain the integrity of the tax system by verifying compliance with tax laws and identifying any discrepancies. Taxpayers subject to audit process must ensure proper maintenance of books of accounts and timely submission of necessary documents. By adhering to the audit process, taxpayers contribute to a fair and efficient taxation system, promoting trust and accountability in financial matters.
To address your income tax audit and related concerns, reach out to I.P. Pasricha & Co, a reputable CA firm specializing in tax matters. You can reach us through our website, www.ippcgroup.com, or mail us at sailfreely@capasricha.com. Take proactive steps towards ensuring compliance and resolving any tax-related issues by getting in touch with I.P. Pasricha & Co today.
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