Audit refers to an official inspection or independent examination of a firm’s or company's financial statements and reports, typically conducted by an autonomous body. Various types of audits exist under different laws, such as company audits, statutory audits, cost audits, and stock audits. A tax audit, conducted under the Income Tax Act, is an inspection of a taxpayer's accounts to ensure compliance with tax laws and facilitate accurate income estimation for filing income tax returns (ITRs).

Objectives of Tax Audit

Tax audits serve several key purposes, including:

• Ensuring proper maintenance and accuracy of tax records, verified by an auditor.
• Reporting key financial details such as tax evasion, compliance with income tax laws, and discrepancies found during the audit.
• Assisting tax authorities in verifying the correctness of filed income tax returns.
• Assessing and verifying total income while facilitating deduction claims.

Mandatory Tax Audit Requirements

2. Income exceeds the maximum exemption limit. | | Business Loss | | | Business suffering a loss (not under presumptive taxation) | If total sales, gross receipts, or turnover exceeds ₹1 crore. | | Business with income exceeding the basic exemption limit but incurring losses (not under presumptive taxation) | If turnover exceeds ₹1 crore, a tax audit is mandatory under Section 44AB. | | Business under presumptive taxation (u/s 44AD) suffering a loss but with income below the basic exemption limit | Tax audit is not applicable. | | Business under presumptive taxation (u/s 44AD) suffering a loss but with income exceeding the basic exemption limit | Declares taxable income below the specified presumptive tax limit and income surpasses the basic exemption limit. |

Tax Audit Report Filing Process

1. A Chartered Accountant (CA) appointed for conducting the tax audit must report the audit findings online using their registered login credentials.
2. The taxpayer must approve or decline the uploaded tax audit report on their portal.
3. If declined, the process must be repeated until approval is granted.
4. The tax audit report must be filed by 30th November of the subsequent assessment year for taxpayers engaged in international transactions and by 30th September for all other taxpayers.

Tax Audit Rules

• If a taxpayer runs multiple businesses and the combined turnover exceeds ₹1 crore, a tax audit is mandatory.
• If a taxpayer practices multiple professions and the total gross receipts exceed ₹50 lakh, a tax audit is required.
• If engaged in both business and profession:
  • A business audit is mandatory if turnover exceeds ₹1 crore.
  • A professional audit is mandatory if gross receipts exceed ₹50 lakh.
  • If both remain below these limits, no tax audit is required.
• Sale of fixed assets (e.g., vehicles, property) is not included in total turnover or gross receipts for tax audit purposes.
• Tax audit reports are irreversible, except in cases of legal amendments or revised accounts approved in an Annual General Meeting (AGM).

Forms Required for Tax Audit

• Form 3CB: For tax audit reports under Section 44AB of the Income Tax Act, 1961.
• Form 3CD: Supplementary details required along with Form 3CB.
• Form 3CA & Form 3CD: Used when a taxpayer's accounts are audited under another law, but details must still be reported in Form 3CD.

Penalty for Non-Compliance with Tax Audit

If a taxpayer required to conduct a tax audit fails to do so, the penalty imposed will be the lower of:

• 5% of total sales, turnover, or gross receipts, or
• ₹1,50,000

Waiver of Tax Audit Penalty

A penalty may be waived if the taxpayer provides a valid reason for non-compliance, such as:

• Auditor withdrawal causing delays.
• Loss or physical incapacity of the responsible partner.
• Labor disputes (e.g., strikes, lockouts).
• Destruction of records due to theft, fire, or unforeseen events.
• Natural disasters.

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