Introduction And Applicability of Tax Audit For AY 2024-25

Tax Audit || Introduction And Applicability of Tax Audit For AY 2024-25

Introduction:

Taxpayers are required to maintain books of accounts and have them audited if their gross turnover or receipts during the previous year exceed the prescribed threshold limit. The requirement to maintain books of accounts is specified under Section 44AA, and the requirement for audit is outlined in Section 44AB of the Income-tax Act.

The purpose of a tax audit is to ensure that the taxpayer maintains proper books of accounts and complies with various provisions of the Income-tax Act relating to claims for deductions, reporting income, TDS deduction, TCS collection, filing of SFT, TDS returns, TCS returns, CBCR reports, and other obligations. The Chartered Accountant conducting the tax audit must present their findings, observations, and conclusions in the form of an audit report. This audit report, as required under Section 44AB, must be furnished electronically on the e-filing portal using Form No. 3CA/3CB-3CD.

The ICAI has released the Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023), hereinafter referred to as the '2023 GN'. The 2023 GN introduces significant changes compared to the Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2022) ['2022 GN']. Additionally, the ICAI has issued an Implementation Guide on Tax Audit in 2024, covering the amendments to Form No. 3CD, as notified by Notification No. 27/2024, dated 05-03-2024.

What is a tax audit?
A tax audit is a process to verify whether the books of accounts prepared by a taxpayer comply with generally accepted accounting principles (GAAP) and the provisions of the Income-tax Act. Its purpose is to ensure that the books of account and other records are properly maintained and that the taxpayer’s true income is accurately computed. A tax audit also helps in detecting any fraudulent practices. However, a tax audit does not grant the taxpayer immunity from scrutiny assessments or disallowance of expenses. A tax audit can only be conducted by a Chartered Accountant in practice.

Who is required to get books of accounts audited?
Section 44AB mandates the audit of books of accounts for an assessee engaged in business or profession. The table below outlines the requirements for different taxpayers to get their books of accounts audited:



The provisions for tax audit under Section 44AB do not apply to an assessee covered under Section 44B, Section 44BBA, or Section 44BBC (applicable from AY 2025-26).

Is a non-resident conducting business liable to get his accounts audited under Section 44AB?
Section 44AB does not differentiate between residents and non-residents. Therefore, a non-resident assessee is also required to get their accounts audited if their turnover, sales, or gross receipts exceed the prescribed limits. However, this audit would be limited to the Indian operations carried out by the non-resident assessee.

How to avail of the benefit of the enhanced limit of ₹10 crores for the tax audit?
The increased threshold limit of ₹10 crores applies only if cash receipts and cash payments during the year do not exceed 5% of the total receipts or payments, respectively. In other words, more than 95% of business transactions should be conducted through banking channels. It is important to note that any payment or receipt by cheque drawn on a bank or by a bank draft, which is not an account payee cheque or draft, will be considered as payment or receipt in cash. For example, any payment or receipt made by a bearer or crossed cheque (not an account payee cheque) will be treated as a cash transaction.

It is also crucial to understand that the 5% threshold must be fulfilled separately for receipts and payments. If either of these conditions is not met, the enhanced turnover limit will not apply.

The onus is on the assessee to prove eligibility for the increased threshold limit by ensuring that aggregate cash receipts and payments are within the 5% limit. Failure to do so may result in a penalty under Section 271B for not getting the accounts audited. However, if the assessee can show reasonable cause, the penalty may be waived under Section 273B.

Is a person opting for the presumptive taxation scheme under Section 44AD required to get their accounts audited?
Section 44AB prescribes the conditions under which an assessee is required to get their accounts audited. It exempts a person from having their books of accounts audited if they opt for the presumptive taxation scheme under Section 44AD, provided the business turnover does not exceed ₹2 crores.

However, Clause (e) of Section 44AB states that a person who has opted for the presumptive taxation scheme under Section 44AD in any of the last 5 previous years but chooses not to opt for it in the current year shall be liable to get their accounts audited if their total income exceeds the maximum amount not chargeable to tax.

Additionally, Clause (a) of Section 44AB provides for an audit of books of accounts if a person is engaged in a business and the business turnover exceeds ₹1 crore. The threshold limit is increased to ₹10 crores if cash receipts and cash payments do not exceed 5% of the total receipts and payments, respectively.

If an assessee falls under both Clause (a) and Clause (e) of Section 44AB, are they required to get their accounts audited? For instance, if the turnover exceeds ₹1 crore but cash payments and receipts are less than 5%, is a tax audit required?

Let’s understand this with the help of the table below:


Who is required to maintain books of accounts as per Section 44AA?
Section 44AA of the Income-tax Act mandates the maintenance of books of accounts by certain taxpayers. The table below outlines the requirements for maintaining books of accounts for different categories of taxpayers:


* Meaning of Specified Profession:
(a) Legal
(b) Medical
(c) Engineering
(d) Architectural
(e) Technical Consultancy
(f) Interior Decoration
(g) Film Artist
(h) Authorized Representative
(i) Accountancy Profession
(j) Company Secretary
(k) Information Technology.

Note: Where a business or profession has been set up during the previous year, the threshold limit of income or gross receipts for the current year shall be checked. In other words, if the income, turnover, or receipts of the current year for a new business or profession are not likely to exceed the threshold limit, the assessee shall not be required to maintain books of account.


What are the due dates for filing the tax audit report?
For the Assessment Year 2024-25, the due dates for furnishing the tax audit report are as follows:


Hope This Helps.

    • Related Articles

    • Tax Audit || Applicability For Financial Year 2019-20 (Assessment Year 2020-21)

      Tax Audit Applicability For Financial Year 2019-20 (Assessment Year 2020-21) Under section 44AB of the Act, every person carrying on business is required to get his accounts audited, if his total sales, turnover, or gross receipts, in business exceed ...

    • Income Tax || How to Prepare Tax Audit 3CA-3CD and 3CB-3CD

      How to Prepare Tax Audit 3CA-3CD and 3CB-3CD Preparing a Tax Audit Report (TAR) in India involves compliance with Section 44AB of the Income Tax Act, 1961. Chartered Accountants (CAs) are responsible for conducting and filing the tax audit report in ...

    • Tax Audit || Observations error

      An error was encountered while generating the TAX Audit JSON file → 1. Value "" is not defined in enum. Path 'FORM3CB.F3CB.Declaration.Point5.Observations[0].ObservationsCode', line 72, position 21. 2. String '' is less than minimum length of 1. Path ...

    • Income Tax || Tax Audit → JSON Import Process

      To successfully import a Tax Audit XML/JSON file, please ensure that the master data for the specific client is already available in the software. If the client is not yet available, you will need to create the client master for that particular ...

    • Tax Audit Report Date issue

      This issue primarily occurs when there are incorrect regional settings and date formats configured on the system. To resolve this issue, please update the regional settings and adjust the date format on your system accordingly. To check and set the ...