Audits under the Income Tax Act serve as a crucial mechanism for ensuring transparency, accountability, and compliance with tax regulations. Businesses, trusts, and companies are often subject to audits under Income Tax Act, 1961, based on specific thresholds and criteria. This blog aims to clarify the different types of audits—tax audit, trust audit, and company audit—along with their slabs and criteria, and who is applicable and not applicable under each.

Tax Audit (Section 44AB) and Company Audit (Under the Companies Act)

1. Tax Audit (Section 44AB) :

A tax audit is an examination of accounts of the taxpayer by a chartered accountant (CA) to verify that income calculations and deductions have been done accurately according to the Income Tax Act. A tax audit under Section 44AB is mandatory for certain taxpayers based on income levels, turnover, or profession. The key criteria include:

Who is Applicable:

Businesses:

·      Individuals, HUFs, or firms  with a total turnover or gross receipts exceeding ?1 crore in a financial year.

·      Under presumptive taxation (Section 44AD), businesses must undergo a tax audit if their turnover exceeds ?2 crore.

Professionals:

·      Professionals like doctors, lawyers, or architects are liable for an audit if their gross receipts exceeding ?50 lakhs per year.

Presumptive Scheme Users:

Taxpayers opting for the presumptive taxation scheme under sections 44ADA but declaring income lower than the presumptive rate (50% of the gross receipts) are required to undergo a tax audit if their income exceeds the basic exemption limit.

Who is Not Applicable:

Businesses and Professionals below the thresholds:

·      If the turnover or receipts are below ?1 crore for businesses and ?50 lakhs for professionals, no tax audit is required.

·      Presumptive Scheme Users (if income declared is not lower):

·      Taxpayers under the presumptive scheme (44AD or 44ADA) declaring income at or above the prescribed rate are not required to undergo a tax audit.

2. Company Audit (Under the Companies Act) :

·      A company audit is mandatory for all companies under the Companies Act, 2013, and the Income Tax Act, 1961. . A company audit ensures that the financial statements of the company are accurate and comply with legal regulations.However, the slab and criteria for tax audits differ slightly.

Who is Applicable:

All Companies:

·      Both public and private limited companies are required to undergo an audit under the Companies Act. This includes statutory audits to ensure the financial records are accurate.

Companies Under Income Tax:

·      Companies with total revenue exceeding ?1 crore in any financial year Companies opting for presumptive taxation under Section 44AD have a higher turnover threshold of ?2 crores.

·      However, companies opting for the presumptive taxation scheme under Section 44AE, applicable to businesses involving goods transport, do not need a tax audit if their income aligns with the presumptive rates.

·      Applicability to Startups and SMEs: Startups with lower turnover may not be subject to tax audits unless they cross the threshold for exemptions or seek tax benefits.

Who is Not Applicable:

·      Small companies with turnover below ?1 crore that do not claim any presumptive taxation scheme are exempt from tax audits under the Income Tax Act but still must undergo a statutory audit under the Companies Act.

Audit Slab and Threshold

3. Audit Slab and Threshold :

Conclusion

Understanding the slabs and criteria for tax audits, trust audits, and company audits is essential for ensuring compliance and avoiding penalties. Each audit type comes with specific rules depending on the entity's turnover, receipts, or income. Always consult with a professional auditor or CA to ensure your financial records are compliant with current regulations.