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Budget 2021 Update: To incentivise digital transactions and to reduce the compliance burden of the person who is carrying almost all of their transactions digitally, it is proposed to increase the limit for tax audit for persons who are undertaking 95% of their transactions digitally from Rs. 5 crores to Rs. 10 crores.

What is a tax audit?

Tax audit refers to the cross-examination of the books of accounts maintained by the taxpayer by a third party. Section 44AB of the Income Tax Act, 1961 mandates few taxpayers to get their accounts audited by a Chartered Accountant holding a full-time Certificate of Practice.

What are the objectives of a tax audit?

The purpose of the audit is to verify the financial records' accuracy and ensure that the books of account and other records are maintained properly. An audit may also help in checking fraudulent practices. It can also facilitate better administration of tax laws by a proper presentation of accounts before the tax authorities, thereby saving Assessing Officers' time in carrying out routine verifications.

Who is subjected to a tax audit?

The following entities are subjected to a tax audit-

Tax Audit Report and Forms 3CA, 3CB, 3CD, and 3CE - A Comprehensive Analysis

• An assessee carrying on business, if the sales, turnover, or gross receipts of the business exceeds INR 1 crore in the financial year

It is to be noted that the threshold limit for a tax audit has been increased from INR 1 crore to INR 5 crore with effect from AY 2020-21 (FY 2019-20). This is applicable only if the taxpayer's cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer's cash payments are limited to 5% of the aggregate payments.

• A professional, if their annual gross income for the year exceeds INR 50 lakhs

• A person opting for presumptive taxation scheme under section 44AE, 44BB, and 44BBB, claiming gross profits to be lesser than that computed in the above sections.

• An assessee carrying on a profession and opting for presumptive taxation scheme under section 44ADA, declares gross profits to be lesser than those computed as per the scheme and if the income exceeds the maximum amount which is not chargeable to tax

• An assessee carrying on business eligible for presumptive taxation scheme under section 44AD, declares gross profits and gains to be lesser than those computed in the section and if the income exceeds the maximum amount not chargeable to tax

This provision is not applicable if the assessee declares profits under the preventive taxation scheme and the total sales or turnover does not exceed INR 2 crores.

 

What is a tax audit report?

The tax auditor has to provide their findings in the form of an audit report using specified audit forms prescribed by the Income Tax Department. The forms under section 44AB are form 3CA, 3CB. Along with either of the two forms, the auditor has to also furnish form 3CD which contains the prescribed particulars.

When is Form 3CA used?

Form 3CA is furnished when the assessee is mandatorily needed to get their accounts audited under an act other than the Income Tax Act. For instance, a company required to get its accounts audited compulsorily under the Companies Act 2013 will get its audit report furnished in Form 3CA.

 

Particulars of Form 3CA -

• Personal details of the assessee such as name, address, and Personal Account Number (PAN)
• Name of the auditor (individual or firm)
• Number and section/subsection of the law under which the accounts have been audited
• Date of Audit Report
• Period of Profit & Loss Account/ Income & Expenditure Account.
• Date of the Balance Sheet
• A declaration that Form 3CD has been attached along with the audit report
• Audit observations found in the details associated with Form 3CD
• Place and date of signing the audit report
• Name, address, and membership number of the auditor.
• Stamp/ seal of the auditor

When is Form 3CB used?

Tax Audit Report is required to be furnished in Form 3CB when the assessee is required to get their accounts audited only under the Income Tax Act. For instance, a proprietorship entity or partnership firm, having a turnover of over INR 1 crore and not opting for a presumptive income scheme, will furnish form 3CB.

Particulars of Form No. 3CB

• Date of Balance Sheet
• Period of Profit & Loss Account/ Income & Expenditure Account
• Name, address, and PAN of the taxpayer
• Address where the books of accounts are kept
• Address of branches, if books are kept at branches also
• Audit observations, qualifications, comments, discrepancies
• Declaration by the auditor regarding –

  • Obtaining all the information required for the audit
  • Assurance that the organization has maintained proper books of accounts
  • Ascertaining that the Balance Sheet and Profit & Loss Account give a true and fair view of the business

• Declaration of attaching Form 3CD along with the audit report
• Audit observations, discrepancies found in the details related to Form 3CD
• Place and date of signing the audit report
• Name, address, and membership number of the auditor
• Stamp/ seal of the auditor

What is Form 3CD?

Form 3CD is a detailed statement of particulars that contains 41 clauses related to various aspects of the business and transactions that the auditor has to report on. The clauses are bifurcated into-

  • Part A- It includes the basic factual details about the assessee
  • Part B- It covers the particulars of various compliances under the Income Tax Act

What is Form 3CE?

According to sub-section (2) of section 44DA, an audit report has to be furnished in Form 3CE if a non-resident or a foreign company is deriving royalty or fee for technical services from the government or an Indian concern. The auditor will furnish the report along with an annexure mentioning the particulars.

Particulars of Form 3CE-

• Name, address, and PAN of the non-resident
• The financial year for which the auditor has conducted the audit
• A declaration that all the necessary information and explanations for the audit have been obtained
• Certification about the permanent establishment or fixed place of the profession in India
• Declaration of the income from royalty or fees for technical services under section 44DA
• Signature and name of the auditor along with stamp/seal

What is the due date for obtaining the Tax Audit Report?

The due date for obtaining the audit report by the assessee is 30th September of the relevant assessment year. Hence, for Financial Year 2019-20, the audit report has to be obtained by 30th September 2020.

However, if the assessee is required to obtain the report of international or specified transactions under Form 3CE, then the due date is 30th November of the relevant assessment year. For FY 2019-20, the audit report in Form 3CE has to be obtained by 30th November 2020.

Note: As per the announcement dated 24th October 2020 the due date for furnishing Tax Audit Report for FY 19-20 has been extended to 31st December 2020.

What is the penalty for not filing or delay in filing of tax audit report?

​According to section 271B, if any person required to comply with section 44AB fails to do so, the Assessing Officer may impose a penalty. The penalty shall be either of the following amounts, whichever is lower:

(a) 0.5% of the total sales, turnover, or gross receipts or
(b) INR 1,50,000

However, no penalty shall be imposed if the taxpayer provides a reasonable cause for non-compliance.

Also read, Analysis of Form 3CA, 3CB, and 3CD - Part 1: Form 3CA

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