cajdshah.com-What is an Income Tax Audit Understand the Rules Types

1. What is an Income Tax Audit? Understand the Rules & Types cajdshah.com/blog/what-is-an-income-tax-audit-understand-the-rules-types jdshah When you hear the term tax audit, it’s not about “someone coming after you” — it’s about ensuring your finances, books and returns are in good order. For many business owners and professionals in India, undergoing an income-tax audit is simply part of staying compliant, avoiding surprises and building trust. In this article we’ll cover: What exactly an income tax audit is Why it matters (especially for your income tax declaration and overall auditing and taxation landscape) The main rules and requirements you should know The different types of tax audits How the process ties into other services offered by JD Shah Associates (so you can see the bigger picture) Table of Contents 1/8

2. 1. What is a tax audit ? A tax audit is a detailed review of a taxpayer’s books of accounts, records, returns and related documents with a view from the tax law side (especially under the Income-tax Act, 1961) to verify that income has been declared correctly, deductions claimed properly, and compliance maintained. under Section 44AB of the Income tax Act the audit of accounts of certain persons carrying on business or profession is required. It’s therefore sometimes called income tax audit, especially when emphasizing the income tax law perspective. This links directly to your income tax declaration obligations, and of course to the broader field of auditing and taxation. Why is it important? It helps ensure your income tax declaration is accurate which means you reduce the risk of notices, penalties or unwelcome surprises. It shows you’re doing “due diligence” in your financial management: maintaining books properly, analysing income, expenses, deductions, etc. A compliance and governance perspective (auditing and taxation domain) it strengthens your credibility with tax authorities, lenders or other stakeholders. 2. Key Rules & Thresholds You Should Know Here are the core rules (as of now) for when a tax audit becomes mandatory, and what to watch out for. 2/8

3. 2.1 Who must undergo a tax audit? If you’re carrying on business (not under the presumptive scheme), and your total sales, turnover or gross receipts exceed ₹ 1 crore in the previous year. There is a relaxed threshold of ₹ 10 crores for business if cash receipts/payments don’t exceed 5% of total transactions (for FY 2020-21 onwards) in certain cases. If you’re a professional (engineer, architect, doctor, lawyer, etc.), and your gross receipts exceed ₹ 50 lakh in a year. Also, if you’ve opted for presumptive taxation under Section 44AD/44ADA/etc and you declare profits lower than what the scheme prescribes, you may still need a tax audit. 2.2 What is the form / report involved? If a tax audit is required, your chartered accountant (CA) will prepare the required audit report (Forms 3CA/3CB + 3CD) and you’ll need to file it along with your income tax return. 2.3 Deadlines & penalties The due date for submitting the tax audit report is linked to the due date of the return (varies by year). For example, for AY 2025-26 the due date may have been extended. If you are required to undergo a tax audit but omit to get it done, you may be liable to a penalty under Section 271B — typically 0.5% of turnover/sales/gross receipts or maximum ₹ 1.5 lakhs, whichever is less. 2.4 Why the rules matter for you For your business or profession: These thresholds determine whether you must plan ahead for an audit (budgeting for CA fees, collecting required documents, etc). For your income tax declaration, it means ensuring the books match what you report, and the CA can certify properly. An auditing and taxation perspective, timely audit improves control, avoids “last minute rush” and reduces risk of disallowances or tax exposures later. 3. Types of Tax Audit In the Indian context, when people speak of tax audits they usually mean the mandatory audit under Section 44AB. But you can classify “types” of tax audit in terms of how audits are conducted (or the special categories). Here are key type: 3.1 Based on mode of audit (operational type) Field Audit: The auditor (or tax official) visits your place of business / premises, inspects records and carries out tests. 3/8

4. Office Audit: The taxpayer is asked to submit records at the tax office or meeting takes place there. Correspondence Audit: The tax authority sends a letter requesting specific documents / clarifications; you respond by mail/e-submission. 3.2 Based on legislative context (sub-types) When we talk about “audit under income-tax law”, you might also come across: Audit under Section 44AB (business/profession) — the primary one discussed here. Audit under transfer-pricing rules (for international or cross-border transactions). Other statutory audits (for example under company law, cost-audit law) — though these are separate, they intersect with auditing and taxation. For instance, the difference between a “tax audit” and a “statutory audit” can matter. 3.3 Why these classifications matter From a client/business viewpoint: Knowing mode helps you prepare: e.g., for field audit ensure premises & records are accessible, staff available. Knowing sub-type helps you identify the scope: e.g., if your business has international transactions you may face transfer-pricing audit which has additional rigour. This ties back into auditing and taxation: being proactive in your internal reviews (before the CA audit) can make the process smoother. 4/8

5. 4. How the Tax Audit Process Works (Step by Step) Here’s a simplified walkthrough of what typically happens when you (or your business) are subject to a tax audit: 1. Determine requirement – At the start (or during the year) you or your CA check whether you’ll need the tax audit (based on turnover/receipts, profit declarations, presumptive scheme, etc). 2. Bookkeeping & records preparation – Ensure books of accounts are updated, correct, reconciled; expenses, income, assets properly recorded. 3. CA appointment & planning – You appoint a practising chartered accountant for the audit. The CA and business agree on scope, documentation list, timelines. 4. Audit work by CA – The CA performs audit procedures: vouching, sampling, review of books, verification of records, checking for compliance with income-tax provisions. 5. Audit report preparation – CA prepares and signs the required form (3CA/3CB + 3CD) and finalises findings/observations. 6. Filing the report & return – The audit report gets filed (electronically) along with the income-tax return by the due date. 7. Action on observations – Based on auditor’s observations and your tax-return position, you may need to take corrective action, provide explanations, or adjust future practices. 8. Future compliance & monitoring – After the audit, you ideally update internal controls so next year’s audit (or no-audit scenario) is smoother. 5/8

6. 5. Common Questions & Mis-Conceptions “Does a tax audit mean the tax department thinks we did something wrong?” No. Often it is a statutory requirement. The audit is about verification and compliance. The tone should be “let’s get it right” rather than “we’re in trouble”. “If we are ‘small’, do we still need it?” Only if you cross the threshold (turnover/receipts). If you are below and not in a special case, you may not need the audit. However, having good internal records is always a plus. “Does audit mean higher tax?” Not necessarily. It means the CA will review everything, and if anything needs correction you may adjust. But you may also discover missed deductions and improve your tax- position. “What if we miss the audit or submit late?” You may attract the penalty under Section 271B and create risk of your return being treated as defective. Therefore, planning ahead is wise. Why You’d Partner with JD Shah Associates We at JD Shah Associates specialise in helping businesses, professionals and start-ups with precisely the kind of compliance and advisory work that sits under auditing and taxation. Here’s how we add value in the context of tax audits: We help review your bookkeeping and readiness before the audit to avoid surprises. We conduct the audit (or coordinate it) and ensure the report (Form 3CA/3CB + 3CD) is filed accurately and on time. We assist in your income tax declaration — making sure that your return aligns with the audited figures. We offer broader services in auditing and taxation (for example, tax-audit support, income-tax return filing, tax-planning, RERA/IND AS compliances) which means you get a full-service partner, not just a “one-time audit”. We support with follow-up advice: once the audit is over, we help you improve internal controls, streamline records, so next year’s process is smoother. Conclusion An income tax audit (or tax audit) may feel daunting at first, but when you approach it as an opportunity for clarity, improvement and compliance, it becomes a powerful tool. With thresholds and rules clearly defined (under Section 44AB etc), the key is timely planning, proper bookkeeping, and partnering with experienced professionals. If you’re ready to take the next step whether it’s preparing for your upcoming tax audit, filing your income tax returns, or getting a review of your internal controls we’d love to talk. 6/8

7. 7/8

8. 14 total views , 5 views today 8/8