Tax audit is an essential process of maintaining Indian tax compliance, especially for companies and professionals crossing certain turnover thresholds. Under Section 44AB of the Income Tax Act, the tax audit checks the genuineness of income, deductions, and other financial information reported in the income tax return.
This blog guides you through what a tax audit is, who needs it, and how it is conducted step by step. Whether you are a consultant, business owner, or tax practitioner, being aware of the process makes you more prepared, prevents penalties, and promotes transparency.
Introduction
Tax audits differ from regular financial audits. Whereas financial audits look at the overall financial health of an entity, tax audits specifically check for tax compliance. Tax audits are mandatory in Indian law when a business or professional’s gross receipts or turnover crosses certain thresholds. The purpose is to avoid tax evasion and ensure correct and timely tax returns.
The audit should be carried out by a competent Chartered Accountant (CA), and the report should be submitted on prescribed forms within the due date to prevent penalty.
What is a Tax Audit?
A tax audit, as per Section 44AB of the Income Tax Act, is an in-depth scrutiny of a taxpayer’s books and accounts to verify that income, deductions, and other tax issues are properly disclosed in the income tax return. A tax audit is distinct from a statutory audit and is particularly concerned with tax compliance.
It is mainly applicable to professionals and businesses whose turnover or gross receipts are over certain limits in a financial year. Its purpose is to discourage tax evasion, encourage proper reporting, and ensure proper adherence to specified tax provisions.
Who Is Required to Get a Tax Audit?
According to Section 44AB of the Income Tax Act-
- Those businesses having aggregate sales, turnover, or gross receipts in excess of Rs 1 crore in a financial year are required to undergo tax audit.
- Professionals with gross receipts in excess of Rs 50 lakhs also come under the tax audit category.
Where an assessee chooses presumptive taxation under Section 44AD or 44ADA but shows lower income than the presumptive rate and the total income crosses the basic exemption limit, then a tax audit becomes obligatory.
Steps Involved in Conducting a Tax Audit
The tax audit process is systematic, and it is important for both the taxpayer and the Chartered Accountant who is carrying out the audit to keep clear records and timelines.
1. Appointment of Chartered Accountant
The taxpayer should engage a Chartered Accountant who is qualified to conduct tax audits. One CA or CA firm cannot audit more than 60 entities in a financial year, according to ICAI rules. This guarantees quality and comprehensiveness in the audit process.
2. Collection and Review of Financial Records
Upon appointment, the CA collects books of accounts of the company, like profit and loss accounts, balance sheets, ledgers, and bank statements. The CA reviews invoices, tax payment challans, TDS records, and depreciation schedules.
Such a comprehensive assessment makes any discrepancy, false categorization, or non-compliance with tax rules evident.
3. Verification of Specific Sections
The tax audit is not all about verifying balances and totals. The CA needs to ensure that provisions of the Income Tax Act are complied with, such as TDS deduction, Section 40A(3) compliance (which pertains to cash payments in excess of Rs 10,000), and compliance with regulations regarding employee benefits and related party transactions.
It also includes ensuring depreciation under Section 32, disallowing expenses, and transferring pricing regulation compliance if needed.
4. Preparation of Form 3CD
Form 3CD is the core of the tax audit report. It has 41 clauses which call for elaborate disclosure including the nature of business, accounting practices, list of disallowed expenses, loans and advances, and details of payments subject to TDS.
Every section needs to be filled cautiously, on the basis of documents that can be verified. The CA makes sure that all the entries are in accordance with the books and in accordance with income tax provisions.
5. Filing of Form 3CA/3CB and 3CD
After preparing the report, the CA signs and finalizes Form 3CA (if the company is already under statutory audit) or Form 3CB (if there is no statutory audit), along with the completed Form 3CD.
These returns are filed electronically on the Income Tax e-filing portal by using the CA’s digital signature. The taxpayer then has to authenticate and approve the filing through his own login.
Timeline and Due Dates
For enterprises and professionals to be subjected to a tax audit, the tax audit report needs to be filed on or before 30th September of the year of assessment. For instance, for FY 2024–25, the tax audit report needs to be filed by 30th September 2025.
Delaying the deadline could attract penalties under Section 271B, which can be up to Rs 1.5 lakh or 0.5% of total turnover, whichever is lesser. Even if the audit is conducted late owing to valid reasons, records must be kept to support the delay.
Importance of a Tax Audit
Whereas most businesses view tax audit as mere statutory compliance, it has its value added uses. It brings errors, misstatements, or false claims into the notice on time to make corrections before one comes under question. It builds a solid document trail in the event of further inquiry or re-assessment by the tax officials.
Tax audits can identify financial inefficiencies or procedures that could result in future tax liabilities. Companies that approach audits as opportunities instead of mere requirements are more likely to develop stronger financial systems and have greater confidence in reporting.
Conclusion
A tax audit is not merely a legal requirement, it ensures that professionals and businesses are running transparently and in accordance with Indian tax laws. A timely and correct tax audit prevents penalties, establishes credibility with tax authorities, and ensures long term business compliance. Having a good Chartered Accountant on board and keeping proper records during the year is the key to a smooth audit process.
Regardless of whether you are a small business owner, self-employed individual, or corporate organization, knowing how to work your way through the tax audit process is a necessary aspect of good financial stewardship.
Reference
The Companies Act, 2013 (Act No. 18 of 2013)
The Income-Tax Act, 1961 (Act No. 43 of 1961)
