In India, tax audits and inspections are governed by various legal provisions under the Income Tax Act, 1961, and related regulations. Here are the key legal requirements for tax audits and inspections: Mandatory Tax Audit: As per Section 44AB of the Income Tax Act, certain categories of taxpayers are required to undergo a tax audit if their total sales, turnover, or gross receipts exceed specified limits. The limit is currently set at Rs. 1 crore for businesses and Rs. 50 lakhs for professionals (as of the assessment year 2022-23). Appointment of Auditor: Taxpayers are required to appoint a Chartered Accountant (CA) to conduct the audit. The auditor must issue an audit report in the prescribed format (Form 3CA/3CB) and submit it along with the income tax return. Documentation and Records: Taxpayers must maintain proper books of accounts and records as specified under the Income Tax Act. This includes records of all financial transactions, receipts, and any other documentation relevant to income, expenditure, and tax calculations. Reporting Requirements: The auditor must provide a detailed report on the financial statements, including the income and expenditure, and assess compliance with applicable tax laws. The report must also include any discrepancies or issues observed during the audit. Filing Deadlines: The tax audit report must be submitted by the due date specified under the Income Tax Act, usually before the filing of the income tax return. For individual taxpayers, the deadline is generally July 31 of the assessment year, while for companies, it is typically September 30. Income Tax Department Inspections: The Income Tax Department has the authority to conduct inspections and investigations to verify compliance with tax laws. These inspections can include scrutiny of financial records, bank statements, and other relevant documents. Notice for Inspection: The tax authorities may issue a notice under Section 133A of the Income Tax Act to conduct an inspection at the taxpayer's premises. The notice specifies the purpose of the inspection and the documents required for verification. Right to Appeal: If taxpayers disagree with the findings of the tax audit or the decisions made by tax authorities during inspections, they have the right to appeal before higher authorities, such as the Commissioner of Income Tax (Appeals) and subsequently before the Income Tax Appellate Tribunal (ITAT). Penalties for Non-Compliance: Failure to comply with tax audit requirements, including not conducting an audit when required or not filing the audit report on time, may result in penalties under Section 271B of the Income Tax Act. The penalty can be up to 0.5% of the total sales, turnover, or gross receipts, subject to a maximum of Rs. 1.5 lakh. Audit of Charitable Organizations: Charitable trusts and organizations must also undergo tax audits if their total income exceeds the prescribed limit under Section 12A of the Income Tax Act. These legal requirements ensure that taxpayers maintain transparency in their financial dealings and comply with tax regulations, ultimately contributing to the integrity of the tax system in India.

Dear client, Tax audit is an examination or verification of accounts of business/profession carried out by the taxpayers for income tax compliance. It eases the income computation process for filing income tax returns. Under Section 44AB of the Income Tax Act, a tax audit is mandatory for businesses with a turnover above Rs.1 crore and professions with gross receipts exceeding Rs.50 lakhs in a financial year. Auditing of books of accounts must be carried out by a certified Chartered Accountant. What is Section 44AB of the Income Tax? Section 44AB of the Income Tax Act of 1961 deals with mandatory tax audits for certain taxpayers in India. It requires taxpayers whose business or professional income (turnover or gross receipts) exceeds a specified limit in a financial year to get their accounts audited by a chartered accountant. This audit verifies the accuracy of their income and deductions reported in the tax return, ensuring compliance with tax regulations. Who is liable to do a tax audit under Section 44AB of the Income Tax? The Income Tax Act, Section 44AB, mandates tax audits for two categories of taxpayers: Businesses: A tax audit becomes compulsory if a business’s gross turnover exceeds Rs. 1 crore in the preceding financial year. Professionals: Professionals whose gross receipts surpass Rs. 50 lakh in the preceding financial year are liable for a tax audit. Who should Prepare Tax audit reports? A Chartered Accountant or a firm of Chartered Accountants can conduct a tax audit. 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. It can also be performed by the Statutory Auditor. It is important to note that Chartered Accountants have a limit on the number of tax audit reports that can be filed. The maximum number of audits that can be undertaken by a Chartered Accountant is limited to 60. In the case of a firm, the restriction on tax audit limit will be applicable for each partner. Forms Required to Furnish Tax Audit Report Any person who is required to get a tax audit would be required to furnish the following forms: Form 3CA-3CD: This form is applicable for the person who is required to conduct an audit under any other law, like the Companies Act 2013 Form 3CB-3CD: This form is applicable to the person who is not mandated to conduct an audit under any other law. How to File Your Tax Audit Reports? Filing a tax audit report requires collaboration between a taxpayer and their Chartered Accountant (CA). The process begins with the taxpayer assigning Form 3CA-3CD to their CA through the e-filing portal. Once assigned, the CA will electronically accept the form and then use an offline utility to complete it. After filling out the form, the CA will upload it and any supporting documents back to the e-filing portal for the taxpayer’s review. Finally, the taxpayer will electronically verify the completed form using a digital signature certificate, which signifies their acceptance of the report. Upon successful submission, both the taxpayer and the CA will receive confirmation messages. Due Date for Filing Tax Audit Report The due date for completing and filing the 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, the assessee must file the income tax return on or before 30th September along with the tax audit report. If the taxpayer is also liable for transfer pricing audit, the due date for filing audit is 30th November of the assessment year. Penalty for not filing a Tax audit report If a taxpayer required to obtain a tax audit does not get the accounts audited, a penalty could be levied under Section 271B of the Income Tax Act. The penalty for not completing the tax audit is 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1,50,000. While failing to comply with audit requirements typically incurs a penalty, there are exceptions for reasonable causes. Tribunals and courts have recognized the following as reasonable causes: 1. Natural disasters or calamities 2. Resignation of the tax auditor, leading to a delay in completing the audit 3. Extended labour issues such as strikes or lockouts 4. Loss of accounting records due to circumstances beyond the taxpayer’s control 5. Physical inability or death of the partner responsible for managing the accounts How to Appoint a Tax auditor in your company? The board of directors is responsible for appointing tax auditors to a company. The Board may also delegate this responsibility to any other officer, such as the CEO or CFO. Auditors in a firm or proprietorship can be appointed by a partner, proprietor or a person authorized by the assessee. Moreover, a taxpayer can appoint two or more chartered accountants as joint auditors for the tax audit. In this case, all the joint auditors must sign the audit report if all of them concur with the report. In case of any differences in opinion, the auditors must express their opinion separately through another report. Who is not eligible for Tax auditor? There are certain prohibitions on the appointment of tax auditors, which are enumerated below: a. Any member in part-time practice is not eligible to perform audit. b. A chartered account cannot audit the accounts of a person to whom he is indebted for more than Rs.10,000. c. A statutory auditor will be deemed to be guilty of professional misconduct if he/she accepts the appointment of a Public Sector Undertaking/Government Company/Listed Company and other Public Companies having turnover of Rs 50 crores or more in a year and accepts any other work, assignment or service regarding 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. d. The chartered accountant assigned the task of writing and maintaining the assessee’s books of account, who should not audit such accounts. e. Any partner or employee of a professional firm of Chartered Accountants cannot perform the audit of its accounts. f. An internal auditor of the assessee cannot be appointed as a tax auditor. g. An auditor cannot accept more than 45 audit assignments in a particular financial year. Conclusion Understanding tax audit requirements is crucial for businesses and professionals in India. Section 44AB of the Income Tax Act mandates audits for those exceeding specific turnover or gross receipt thresholds. The article details who needs a audit, how to appoint a qualified Chartered Accountant, and the filing process. Remember, timely completion avoids penalties and reasonable causes for delay exist. Should you have any queries, please feel free to contact us!