Tax Audit under the Income-tax Act 1961 for A.Y. 19-20


An income tax audit is an independent verification of the books of accounts of the taxpayer to ensure that all compliances concerning the Income-tax Act 1961. Ensure that no discrepancies exist in the filing of income tax returns.

However, Through tax audit it is guaranteed that the account is being audited income earned by an assessee whose, is paying the tax computed as per the provisions of the Act taking into consideration all the deductions allowable and non-allowable, the rates of depreciation, tax compliances on borrowed capital, treatment of bad debts, statutory methods, accounting methods, etc.

Further, the tax audit is also conducted to keep a check on whether there is proper maintenance of books of accounts by the provisions of tax laws and to ensure that the tax liability has been discharged on time and there is no concealment of income by the assessee.

Who are liable for Tax audit u/s 44AD of Income Tax Act 1961?

  1. Every person whose business turnover exceeds 1 crore in the relevant previous year.
  2. Every person whose gross receipts from profession exceeds 50 lakhs.
  3. Every person who opts out of presumptive taxation scheme u/s 44AD and is liable to be audited.
  4. Every person whose income from business or profession computed under presumptive scheme is greater than the actual income earned and so chooses to declare income on actual basis is liable for tax audit provided the turnover or gross receipts exceed the threshold limits as specified in the above points.

Condition of Tax Audit

Moreover, A question arises where a taxpayer has two businesses. One business fetches him 70 lakhs and the other business provides him 40 lakhs.

Whether the person is liable to tax audit?

Yes, the person would be liable to tax audit as the section 44AB specifies provisions on the basis of as person and not as per business on a gross basis. Since the total PGBP income of the person is more than 1 crore, the person is liable for tax audit.

Another question arises whether all companies registered under the Companies Act, 2013 are required to get their accounts audited as per Income tax Act?

To solve this confusion sec 44AB has provided further that all registered companies are required to get its accounts audited mandatorily irrespective of their turnover.

What is presumptive taxation scheme?

Similarly, Under section 44AD, every person engaged in business having turnover of upto 2 crores can opt for this scheme and under section 44ADA, every person engaged in profession of upto 50 lakhs can opt for this scheme. The following persons cannot opt for this scheme:

  1. A person carrying on a notified profession u/s 44AA i.e legal, medical, engineering or architectural profession or accountancy or interior designing profession, film artists or any other profession as notified.
  2. Any person carrying on an agency business.
  3. erson carrying on a business in the nature of commission or brokerage


Similarly, This scheme is designed for the small taxpayers who do not want to fall under the purview of tax audit. But the businesses having turnover of more than 2 crores cannot opt for this kind of taxation. Similarly the notified professions having gross receipts of more than 50 lakhs cannot opt for this scheme.

According to this scheme, Firstly, the rate of tax called presumptive tax rate would be 8 percent of the turnover in case of businesses as per sec 44AD

However, The reduced rate of 6 % would be applicable when the receipts are received

  1. Payee cheque Bank Account.
  2. By account payee bank draft
  3. By use of ECS. (Electronic Clearing System)

In case of professions, 50 percent of the total gross receipts would be the presumptive rate as per sec 44ADA.

Moreover, In both the cases no allowable deductions from sec 30 to 38 would be allowed on the presumptive income.

One must keep in mind that the business of plying, hiring and leasing goods carriages covered in another section 44AE and not in 44AD and 44ADA.

On Tax Audit 44AE is a presumptive tax scheme for those who are engaged in plying, hiring and leasing good carriages and owns not more than 10 goods vehicles at any point of time during the whole year subjected to tax. The scheme states that

  1. For a heavy goods vehicle, the presumptive income would be Rs 1000 per ton of gross vehicle weight for every month or part of a month.
  2. For other than heavy goods vehicle, the presumptive income would be Rs 7500 for every month or part of a month.

Also in this section, no allowable deductions from sec 30 to 38 are allowed.

However, A point to be observed is that even though the turnover exceeds 1 crore or the gross receipts exceed 50 lakhs, as long as they are within the prescribed limits to be eligible to opt for presumptive tax scheme (2 crores for business and 50 lakhs for gross receipts), the tax audit does not remain mandatory. For those who do not want to opt for presumptive tax, for them the limits of 1 crore and 50 lakhs will apply for businesses and professions respectively.

Who are eligible to conduct Tax audit?

Tax Audit is to be conducted by a Chartered Accountant who holds the Certificate of Practice and is in full time practice.

Basically, Tax conducted by a Chartered Accountant is reported to the Income Tax Department in Form no. 3CA/3CB and form no. 3CD along with the Income Tax return.

Due date for filing tax audit reports?

The due date for filing tax audit reports u/s 44AB is 30th September of the relevant Assessment year i.e 2019-20. However if the assessee is liable for transfer pricing audit, the due date for filing tax audit is 30th November.

Penalty for not filing tax audit reports on due dates

If the provisions of sec 44AB of Income tax act 1961 are not complied with, a penalty would be attracted u/s 271B of the Act.

The taxpayer who is required to get his books audited fails to do so within the prescribed time limit, he is liable to pay a penalty of 0.5% of his turnover/gross receipts subject to a maximum of Rs 150000. But if there is a reasonable cause for the delay, no penalty will be imposed.

Following reasons can be considered as a reasonable cause

  1. Delay due to resignation of the tax auditor.
  2. Any person in charge of maintaining the accounts has expired.
  3. Unforeseen circumstances for eg strikes, lockouts etc.
  4. Natural catastrophe

Forms used for e-filing of section 44AB tax audit reports

If the person is carrying on a business or profession and is required to get its accounts audited mandatorily under any law other than the Income tax Act 1961, then the tax audit report has to be filed in form 3CA and the statement of particulars to be disclosed in form 3CD.

For example, in case of a public limited or a private limited company, the company has to get its accounts audited mandatorily by a CA under Companies Act 2013. This means that a company is required to file 3CA and 3CD along with it.

Secondly, On the other hand if a person carrying on a business or profession is not required to get its accounts audited under any law other than the Income-tax act 1961, such person is required to file 3CB for the purposes of audit report and 3CD for the statement of particulars.

However, An example of such a person would be a sole proprietor of a company. The business is not required to get its accounts audited under Companies act 2013 as it is not a company. Hence it has to file 3CB and 3CD along with it.

It is to be noted that the given forms can only be filed electronically.                          

Is there a ceiling on the number of tax audits a Chartered Accountant can take?

Yes there is a limit on the number of tax audits to be undertaken by a Chartered Accountant in full time practice. Such ceiling is specified by the ICAI. A CA cannot take more than 60 income tax audits in a financial year. But if a firm has more partners, then the number of 60 will be multiplied with the number of partners. If a firm has 5 partners, then the number of income tax audits that can be taken in a year is 5*60 that is 300. The earlier limit of 45 has been increased to 60 by the ICAI.

What is ICDS?                                                                      

Firstly, ICDS short for Income tax Computation and Disclosure Standards were framed by the government of India for bringing out uniformity in the accounting policies required for computation of income in accordance with tax provisions and also to reduce irregularities amongst them. In addition, CBDT has issued 10 ICDS in this regard which are applicable from Assessment year 2017-18 i.e. one has to apply ICDS for the tax audit of the accounts of the previous year 2016-17.

Relevant Accounting Standards for ICDS

Accounting policies (ICDS I) Disclosure of Accounting Policies (AS 1)
Valuation of inventories (ICDS II) Valuation of Inventories (AS 2)
Construction contracts (ICDS III) Construction Contracts (AS 7)
Revenue recognition (ICDS IV) Revenue Recognition (AS 9)
Tangible fixed assets (ICDS V) Accounting for Fixed Assets (AS 10)
Effects of changes in foreign exchange rates (ICDS VI) The Effects of Changes in Foreign Exchange Rates (AS 11)
Government grants (ICDS VII) Accounting for Government Grants (AS 12)
Securities (ICDS VIII) Accounting for Investments (AS 13)
Borrowing costs (ICDS IX) Borrowing Costs (AS 16)
Provisions, contingent liabilities and contingent assets (ICDS X) Provisions, Contingent Liabilities and Contingent Assets (AS 29)

ICDS Applicability

In this paragraph, As per sec 145 of the income tax act 1961, an assessee having taxable income under the heads PGBP. As per tax Audit is liable to make Computation discloser as per ICD. Income from other sources has to compute his taxable income in accordance with cash system or mercantile system of accounting.

Mainly, The Income-tax computation and disclosure standards are applicable to all persons who derive income from business or profession and from other sources.

  1. For an assessee maintaining cash system of accounting, no ICDS would apply
  2. For an assessee maintaining mercantile system of accounting, it depends on if the person is an individual or an HUF or some other person. If a person is an individual or an HUF, no ICDS would apply if the person is not subject to tax audit. If the person is subject to tax audit as per section 44AB, application of ICDS would be mandatory. If a person is not an individual or an HUF and follows mercantile system of accounting, the assessee would have to mandatorily apply ICDS while computing taxable income.

Finally, For the purposes of tax audit, the Finance Act 2018 has inserted 2 sections 43AA and 43CB for which the relevant ICDS are ICDS 6 (Foreign Exchange Rate) and ICDS 3(Construction Contracts)/ICDS 4 respectively.

A practical approach to implementing ICDS

  1. Firstly, Get the financial statement prepared as per the relevant laws and accounting standards AS or Indian accounting standards IND AS as applicable.
  2. Secondly, List out the applicable ICDS relevant to the books of accounts.
  3. Thirdly, Note the differences in the accounting method as per AS/IND AS in books and the relevant ICDS.
  4. Fourthly, If the differences exist, disclose the effect in ITR and in the statement of particulars- Form 3CD.
  5. Fifthly, Clause 13 of Form 3CD must be filled if ICDS applicable
  6. Sixthly, Verify related ICDS amount and disclosures in Form 3CD


Therefore, The A.Y 2018-19 is coming to an end in the month of March and a new Assessment year 2019-20 is about to begin. The interim budget as proposed by the Modi Government has brought about many changes in the tax regime providing relief to small taxpayers especially the salaried persons and the real estate sector but not many changes have been made to the sections covering the provisions of tax audit.

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