Tax Audit

Tax audit refers to the verification of the books of accounts maintained by a taxpayer. The purpose of a tax audit is to validate the income tax computation made by the taxpayer in the income tax return and to ensure compliance with the laws of Income Tax. Auditing of books of accounts must be carried out by a certified Chartered Accountant. In this article, we discuss the concepts of tax audit limit, Section 44AB of the Income Tax Act and the legal provisions governing the appointment of a tax auditor. The provisions relating to tax audit are provided under Section 44AB of the Income Tax Act. According to Section 44AB, a tax audit is required for the following persons:

  1. Business: In the case of a business, a tax audit would be required if the total sales turnover or gross receipts in the business exceeds Rs.1 crore in any previous year. Under the Income Tax Act, “Business” simply means any economic activity carried on for earning profits. Section 2(3) has defined the business as “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”.
  2. Profession: In case of a profession or professional, tax audit would be required if gross receipts in the profession exceed Rs.50 lakhs during the financial year. A profession or professional could be any of the following as per Rule 6F of the Income Tax Rules, 1962: 
  • Architect
  • Accountant
  • Authorised representative
  • Engineer
  • Film Artist – Actor, Cameraman, Director, Music Director, Editor, and so on
  • Interior Decorator
  • Legal Professional – Advocate or Lawyer
  • Medical Professional – Doctor, Physiotherapist, or Nursing and Paramedical Staff
  • Technical Consultant

If a person is enrolled under the presumptive taxation scheme under section 44AD​ and total sales or turnover is more than Rs. 2 crores, then a tax audit would be required. Also, any person enrolled under the presumptive taxation scheme who claims that the profits of the business are lower than the profits calculated in accordance with the presumptive taxation scheme would be required to obtain a tax audit report.

If a taxpayer who is required to obtain a tax audit does not get the accounts audited, then a penalty could be levied under Section 271B of the Income Tax Act. The penalty for not completing a tax audit is 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1,50,000.

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