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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”.
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Specified professions under the Income Tax Act 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.
The tax audit is conducted to achieve the following objectives:
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.
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:
If total turnover, sales or receipts in a business for the previous year are more than Rs.1 crore.
If total turnover, sales, and receipts in the profession for the previous year are more than the amount of Rs.50 lakhs.
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.
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.
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.
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.
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.
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 ReportWhat is the Tax Audit limit for the AY 2023-24?
Minakshi Bindhani has completed LL.M. with a specialization in Criminal Law from Madhusudan Law University, Cuttack, Odisha. She is more inclined toward legal research and writing and have prior experience in Civil and Criminal litigation and content writing.
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