Taxation

Accounts Maintenance & Tax Audit Limit Under the Income Tax Act of 1961

A tax audit is an audit of books of accounts regulated by an organization to satisfy the Income Tax Act requirements. The Act mandates businesses and professionals to obtain an audit from a chartered accountant and maintain the book of accounts if the turnover or profit exceeds a certain amount. It examines the audit and accounts maintenance limits for businesses under the Act.

Before understanding the requirement of accounts maintenance and tax audit limit under the Income Tax Act, it is essential to grasp the concepts of “specified professions” and “non-specified professions”.

Specified profession regulated under the Income Tax Act

Specified professions under the Income Tax Act^[1] under Rule 6F and section 44AA include medical, engineering, legal, architectural, accountancy, technical consultancy, interior decoration, film artist, company secretary, information technology professional, or any other notified professional.

Objective

The tax audit is conducted to achieve the following objectives:

• First, to ensure the correctness of books of accounts, certification by the tax auditor and proper maintenance of books of accounts.
• Secondly, reporting observations/discrepancies noted by the auditor after a thorough examination of the books of account
• Lastly, to report prescribed information such as tax depreciation, compliance with various income tax law provisions, etc.

All these enable tax authorities to verify the correctness of the taxpayer’s income tax returns. Calculating and verifying income, claiming for deductions etc., also becomes easier and more accessible.

Accounts maintenance and audit limit under section 44AB

According to section 44AB of the  Income Tax Act, the requirement to submit the book accounts for a tax audit is mentioned in the following situation:

Business

If total turnover, sales or receipts in a business for the previous year are more than Rs.1 crore.

Professional

If total turnover, sales, and receipts in the profession for the previous year are more than the amount of Rs.50 lakhs.

Presumptive taxation under section 44AD, 44AF,44BB, 44BBB and 44E

If a person claims that the profits or gains from the business are lower than those computed under the relevant sections.

Thus, a chartered accountant must complete a compulsory tax audit if a business has a total sales turnover worth Rs.1 crore.

In the case of a profession, if a profession has total gross receipts is more than Rs.50 lakhs, then an audit by a chartered accountant is strictly required. In addition, businesses covered under the claiming income are to be lower than the deemed profits and presumptive taxation schemes specified under the relevant sections are also required to obtain audits mandatorily.

Maintaining books of accounts comes under section 44AA of the Income Tax Act; the following professions and businesses must accounts maintenance mandatorily.

Existing professions

In the case of existing professions, the gross receipts must exceed Rs.1.50 lakhs in all three years consecutively preceding every financial year. Books of accounts are regulated as per Rule 6F.

Suppose the gross receipts are Rs.1.50 lakhs in the preceding three years. In that case, the profession maintains the books of account and other relevant documents to enable an assessing officer to compute the taxable income under the Act.

New professions

In a new profession wherein the gross receipts are more than Rs.1.50 lakhs, books of accounts must be maintained according to Rule 6F.

Suppose the gross receipts are expected to be at most Rs.1.50 lakhs. In that case, the new profession maintains books of accounts to enable an officer to compute the taxable income as per Act 1961.

Existing businesses

In the case of an existing business wherein the profit exceeds the worth of Rs.2.50 lakhs or total gross receipts and sales or exceeds more than Rs.25 lakhs in any of the three years consecutively preceding the previous year, must maintain books of accounts.

New Businesses

All new businesses in which the profits are expected to exceed Rs.2.50 lakhs or total sales or gross receipts exceed Rs.25 lakhs are required to maintain books of accounts as per the Act.

Rule 6F of the Income Tax Act

• All professions and businesses must mandatorily maintain the following books of accounts if their gross receipts cross the limits mentioned under Tax Act.
• A cash book which is a record of all payments and cash receipts and kept and maintained daily, giving the cash balance daily;
• In case the assessee pursues the mercantile system of accounting must keep the books of accounts audited.
• A general ledger.
• Original bills/receipts issued to the assessee regarding expenditure and the amount of expenditure is at most Rs. 50).
• Additionally, if a person involved as a medical practitioner of any system of medicine – surgeons, physicians,  pathologists, dentists, radiologists, hakims, and so on) has to maintain the following records: The register in the prescribed form (i.e. Form 3C) mentions the patient’s name, date, nature of professional services rendered, fees received and date of receipt etc.
• An inventory mechanism, i.e., the stock of medicine, drugs and other consumable accessories used for the medical profession.

The penalty for non-filing or delay in filing tax audit report

• If any taxpayer is required to audit the tax but fails to do so,  the following may be levied as a penalty:
• 0.5% of the total turnover, sales, or gross receipts, i.e., approximately Rs 1 50 000.
• However, if there is a reasonable cause of such failure, no penalty is levied under section 271B. So far, the reasonable causes that are accepted by Tribunals/Courts are:
• Natural calamities;
• Resignation of the auditor and consequent delay;
• Labour problems such as strikes, lock-outs for an extended period;
• Loss of accounts because of situations beyond the control of the assesses;
• Physical inability or death of the partner in charge of the accounts.

Conclusion

A tax audit is conducted only on business or profession, not individual income. Auditing of accounts is a best practice that will ensure that the laws are adhered to and that there is no tax fraud or evasion. The chartered accountant in charge of audits has to ensure that the client’s accounts are in order and is also responsible for making accurate observations and reports to the government.

Also Read:
All you need to know about Tax Audit Report
What is the Tax Audit limit for the AY 2023-24?