Tax Audit
Examination and reporting under the Income Tax Act where the turnover thresholds are crossed.
Usually 2–3 weeks, and governed by the due date for furnishing the report for the assessment year
A tax audit is required under the Income Tax Act where turnover or gross receipts cross the prescribed limits. Its purpose is different from a statutory audit: it exists so that the department receives a standardised report on the particulars relevant to computing taxable income.
The reporting is done in Form 3CA or 3CB together with Form 3CD, which runs to a long list of specific particulars on which the auditor must report.
When it applies
The thresholds differ for business and for profession, and a higher threshold is available to businesses where cash receipts and cash payments each stay within a small proportion of the total. Separate provisions apply to taxpayers who have opted out of a presumptive taxation scheme.
Because the limits have been revised repeatedly and depend on the mix of digital and cash transactions, it is worth confirming applicability on your actual figures rather than from a remembered threshold.
What Form 3CD asks for
The form requires reporting on payments disallowable for want of tax deduction, cash transactions above prescribed limits, loans and deposits accepted or repaid otherwise than through banking channels, amounts payable to micro and small enterprises, and a long list of similar particulars.
In practice most of the work is reconstructing these particulars from the books. Where the books already track them, the audit is straightforward; where they do not, that reconstruction is the bulk of the effort.
Who needs this
- Businesses whose turnover crosses the prescribed limit for the year
- Professionals whose gross receipts cross the prescribed limit
- Taxpayers who have opted out of a presumptive taxation scheme and are required to be audited
- Entities required to furnish the report along with the income tax return
Eligibility and conditions
- Books of account maintained for the previous year
- Turnover or receipts crossing the applicable threshold
- Financial statements prepared for the year
What this covers
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Applicability confirmed
Checked on your actual receipts and payments mix, not on turnover alone.
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Particulars reconstructed
The Form 3CD disclosures compiled from the books.
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Disallowance exposure identified
Payments at risk of disallowance flagged before filing.
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Report furnished
Form 3CA/3CB and 3CD filed within the due date.
How the process works
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Confirm applicability
Thresholds tested against your figures for the year.
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Compile records
Books, statements and the supporting details for the particulars.
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Verification
Testing of the items the form requires reporting on.
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Review disclosures
The particulars discussed with you before finalisation.
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Furnish the report
Forms filed and the acknowledgement shared.
Documents required
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Books of account
For the previous year under audit.
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Financial statements
Profit and loss account and balance sheet.
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TDS returns and challans
For the year, to assess disallowance exposure.
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GST returns
For turnover reconciliation.
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Loan and deposit details
Accepted and repaid during the year.
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Details of cash transactions
Above the prescribed limits.
The list above is indicative. Additional documents may be required depending on your case and the current departmental requirements.
Frequently asked questions
What is the difference between a statutory audit and a tax audit?
A statutory audit is required by the law governing the entity — every company requires one regardless of turnover — and results in an opinion on whether the financial statements give a true and fair view.
A tax audit is required under the Income Tax Act where turnover or gross receipts cross the prescribed limits, and results in a report on specified particulars relevant to computing taxable income. An entity may require both.
Does a tax audit apply to my business?
It depends on your turnover or gross receipts for the year, and on the proportion of your receipts and payments made other than in cash — a higher threshold is available where cash transactions stay within a small proportion of the total.
Because of that, two businesses with identical turnover can reach different answers. Share your figures with us and we will confirm the position for your case.
Unsure whether tax audit applies to you?
Share your turnover and the split between cash and digital transactions, and we will confirm your position.