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What is a tax audit and to whom is it applicable?

What is a tax audit?

The term ‘audit’ refers to a check, review, verification or inspection of a record, transaction, account etc. A tax audit is the process of verification and inspection of the accounts of a taxpayer to confirm their adherence to the provisions of the Income Tax law.

Section 44AB of the Income Tax Act, 1961 deals with the Audit of the Accounts of a certain category of persons carrying on a business or engaged in a profession. The class of taxpayers listed under this section compulsorily have to get their accounts audited by a Chartered Accountant. The CA will check and verify that these accounts comply with the various provisions of the Income Tax law. Simply put, this audit required as per Section 44AB of the Income Tax Act, 1961 is called a tax audit.

The outcome of the audit is an audit report. This report is drawn by the Chartered Accountant where he or she gives his findings and observations about the compliance of the person under audit.

Why a tax audit?

A tax audit determines whether financial records and transactions are correctly recorded and accounted for. This, in turn, ensures that the records reflect the actual income of the taxpayer and that the claims for deductions made are accurate.

To whom is a tax audit applicable?

The following persons are compulsorily required to get their accounts audited.

In the case of professionals:
  • If your gross earnings are more than ₹50 lakhs in a financial year
  • If you carry on a profession eligible for presumptive taxation (Section 44ADA) and you have claimed that your profits were lower than the stipulated limit, and income is more than the maximum amount up till which income tax isn’t chargeable.
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In the case of people carrying on a business:
  • If your turnover or gross earnings are more than ₹1 crore. 
  • If you are running a business which is eligible for presumptive taxation (Section 44AE, 44BB or 44BBB) and you claim that profits or gains are lower than the stipulated limit, then an audit is necessary.
  • If your business is qualified for presumptive taxation as per Section 44AD of the Income Tax Act and
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  • you declare that the< taxable income has been below the limits specified as per the presumptive taxation and your income is more than the threshold limit
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  • If your turnover or gross receipts exceed ₹2 crores in the financial year
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