Income Tax Audit: Rules, Limits, Eligibility, and CA Audit Capacity (AY 2025-26)

Income tax Audit

Introduction

An Income Tax Audit is a crucial compliance measure under the Income Tax Act, 1961, ensuring accurate financial reporting and tax calculation. Chartered Accountants (CAs) conduct these audits to verify whether taxpayers have maintained proper records and complied with tax laws. For the Assessment Year (AY) 2025-26, tax audit regulations have specific turnover limits, eligibility criteria, and procedural requirements.

This article provides an in-depth understanding of:

• What is an Income Tax Audit?
• Who is required to undergo a tax audit?
• Turnover limits and applicability of tax audits
• Audit ceilings for Chartered Accountants
• Step-by-step tax audit procedure
• Consequences of non-compliance
• Recent amendments for AY 2025-26
• Best practices for tax compliance
• Case study on under-provisioning of taxes
• Frequently Asked Questions (FAQs)

This guide is for help taxpayers and finance professionals navigate tax audit compliance efficiently.

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What is an Income Tax Audit?

A tax audit involves a thorough review of a taxpayer’s financial records to ensure compliance with Section 44AB of the Income Tax Act, 1961. The primary objectives are:

• Verifying the accuracy of income and expense records.
• Preventing misreporting and tax evasion.
• Ensuring proper claiming of deductions and exemptions.
• Enhancing transparency in financial reporting.

A Chartered Accountant submits the audit report electronically using Form 3CA/3CB and Form 3CD to the Income Tax Department.

Importance of an Income Tax Audit

• Helps in early detection of discrepancies.
• Reduces the risk of penalties and legal action.
• Strengthens credibility for loans and investments.
• Ensures businesses remain compliant with tax laws.

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Who Needs to Undergo a Tax Audit in AY 2025-26?

1. Businesses

A tax audit is mandatory if:

• The total turnover or gross receipts exceed ₹1 crore.
• Businesses with 95% or more digital transactions have a higher threshold of ₹10 crore.

2. Professionals

A tax audit applies to professionals if their gross receipts exceed ₹50 lakh in a financial year. This includes:

• Doctors
• Lawyers
• Chartered Accountants
• Architects
• Consultants

3. Businesses Under Presumptive Taxation (Section 44AD & 44ADA)

• If a taxpayer opts for presumptive taxation but declares profits lower than 6% (digital transactions) or 8% (cash transactions) of turnover, a tax audit is required.

4. Companies and LLPs

• All LLPs and companies meeting statutory audit thresholds must comply with tax audit provisions.
• Foreign companies operating in India must undergo tax audits as per Indian tax laws.

5. Startups and E-commerce Sellers

• Online sellers and startups must comply with tax audits if their revenue exceeds the prescribed limit.
• This is crucial for businesses selling on platforms like Amazon, Flipkart, and Shopify.

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Maximum Number of Audits a CA Can Conduct

As per ICAI guidelines, a practicing Chartered Accountant can conduct 60 tax audits per financial year.

This regulation ensures:

• Higher audit quality.
• Better compliance and advisory support.
• Effective workload management.

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Tax Audit Procedure: Step-by-Step Guide

1. Gathering Financial Records

• Balance sheets, profit & loss statements, bank statements, invoices, and ledgers.
• Reconciliation with GST returns and TDS reports.

2. Verification of Books of Accounts

• Cross-checking financial transactions and supporting documents.
• Ensuring accurate expense categorization and income recognition.

3. Reconciliation with GST and TDS Filings

• Identifying discrepancies in GST and TDS records.
• Minimizing risks of tax adjustments.

4. Compliance Check as per Income Tax Act

• Verification of deductions claimed under Sections 80C to 80U.
• Review of capital gains and depreciation claims.

5. Submission of Tax Audit Report

• The CA prepares and submits Form 3CD electronically.
• Taxpayers then file their Income Tax Return (ITR) accordingly.

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Case Study: Under-Provisioning of Tax Liabilities

Background

XYZ Ltd., a manufacturing company with an annual turnover of ₹8 crore, underestimated its tax liability by ₹20 lakh due to incorrect expense allocations and inadequate advance tax planning.

Consequences

• Interest liabilities under Sections 234B & 234C.
• Additional tax burden after reassessment.
• Higher scrutiny in future tax assessments.

Lessons Learned

• Conduct mid-year tax reviews to estimate tax liabilities accurately.
• Maintain proper documentation for expenses and deductions.
• Seek professional tax advisory to avoid underreporting.

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Penalty for Non-Compliance with Tax Audit

Non-compliance attracts penalties under Section 271B:

• 0.5% of total turnover or ₹1.5 lakh, whichever is lower.
• Additional penalties for late filing under Sections 234B & 234C.
• Risk of detailed scrutiny by the Income Tax Department.

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Frequently Asked Questions (FAQs)

1. What is the last date to file a tax audit report for AY 2025-26?

The deadline for filing the tax audit report is 30th September 2025, unless extended by the government.

2. What happens if I fail to get a tax audit done?

Non-compliance may result in a penalty of up to ₹1.5 lakh under Section 271B.

3. Can an individual be subject to a tax audit?

Yes, if the individual has business or professional income exceeding the prescribed limits.

4. How can businesses ensure compliance with tax audit requirements?

• Maintain accurate records and file GST and TDS returns on time.
• Conduct internal financial audits before tax filing.
• Engage a Chartered Accountant for guidance.

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Conclusion

A tax audit plays a vital role in ensuring financial accuracy and legal compliance. With changing tax regulations for AY 2025-26, businesses and professionals must stay updated with evolving requirements. Proper tax planning, timely compliance, and professional assistance can help avoid penalties and enhance financial transparency.

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