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2-Minute Analysis: Why Tax Audit Exists
A tax audit is not the same as a statutory audit. A company’s statutory audit checks whether financial statements give a true and fair view as per accounting standards. A tax audit is different. A Chartered Accountant checks whether income has been computed correctly as per the income tax provisions.
Think of it as a translation check. Your accountant prepared books as per accounting standards. The tax auditor then verifies: does the income in these books correctly translate into taxable income under the Income Tax Act? Are disallowances applied? Are deductions correctly claimed? Are cash payment limits respected?
Example: Ramesh runs a hardware business with Rs. 1.8 crore in annual turnover. His books show a net profit. While reviewing for the tax audit, the CA finds that Rs. 3 lakh in payments were made in cash above Rs. 10,000 per day to a single person on a single day. Those payments get disallowed under Section 26 of the new Act (equivalent to Section 40A(3) of the 1961 Act). Without the tax audit, Ramesh would have missed this and faced an addition during assessment later.
Tax audit is a pre-filing quality check. Done properly, it protects the taxpayer more than it burdens them.
Legal Basis: Section 63 of the Income Tax Act, 2025
Section 63 of the Income Tax Act, 2025 corresponds directly to Section 44AB of the Income Tax Act, 1961.
Under Section 63(1), every person carrying on business or profession who meets the specified conditions must get accounts audited before the specified date and furnish the audit report in the prescribed form.
Who Must Get a Tax Audit Done?
Category 1: Business, General Rule
If your total sales, turnover, or gross receipts in business exceed Rs. 1 crore in any tax year, a tax audit is mandatory [Section 63(1), Table Sl. No. 1(a)].
Category 1 Exception: Cashless Business Threshold of Rs. 10 Crore
Section 63(1)(b) substitutes the Rs. 1 crore threshold with Rs. 10 crore if both of the following conditions are satisfied for the entire tax year:
- Aggregate of all amounts received, including for sales, turnover, or gross receipts, in cash does not exceed 5% of total amounts received
- Aggregate of all amounts paid, including for expenditure, in cash does not exceed 5% of total payments made
The Act also clarifies that a cheque drawn on a bank or a bank draft that is not account payee counts as a cash payment for this purpose [Section 63(5)(b)]. Only account payee cheques, account payee drafts, and electronic modes qualify as non-cash.
If either the receipt or payment condition is breached, the Rs. 10 crore threshold does not apply and the regular Rs. 1 crore threshold governs.
Category 2: Profession
If your gross receipts in profession exceed Rs. 50 lakh in any tax year, a tax audit is mandatory [Section 63(1), Table Sl. No. 1(c)].
This covers doctors, lawyers, architects, engineers, accountants, consultants, and other professionals.
Category 3: Presumptive Taxation Where Lower Income is Claimed
If you carry on business or profession covered under Section 58(2) or Section 61(2) of the new Act (Table Sl. Nos. 4 and 5, equivalent to Section 44AD/44ADA/44AE of the 1961 Act) and you claim profits lower than the deemed profit under those sections, a tax audit is required [Section 63(1), Table Sl. No. 2].
Example: Kavita is a software consultant. Under presumptive taxation (Section 61(2)), she should declare 50% of gross receipts as income. Her actual net profit this year is only 30% of receipts. If she wants to declare that actual 30%, which is lower than the deemed 50%, she must get a tax audit done to support the lower claim.
Who Does NOT Need a Tax Audit?
Section 63(2) explicitly provides: if the assessee declares profits and gains at or above the deemed rate under Section 58(2) or 61(2), the tax audit provisions do not apply.
This is the core benefit of presumptive taxation. As long as you declare at least the deemed percentage, no audit is required regardless of actual turnover, subject to the scheme’s own turnover limits.
Turnover Thresholds at a Glance
| Category | Condition | Audit Required? |
| Business, general | Turnover exceeds Rs. 1 crore | Yes |
| Business, 95%+ non-cash (both receipts and payments) | Turnover exceeds Rs. 10 crore | Yes |
| Business, 95%+ non-cash | Turnover up to Rs. 10 crore | No |
| Profession | Gross receipts exceed Rs. 50 lakh | Yes |
| Presumptive taxation, income declared at or above deemed rate | No | |
| Presumptive taxation, income claimed below deemed rate | Yes |
Practical Example: Does Vikram Need an Audit?
Vikram runs a wholesale textile business:
| Parameter | Vikram’s Figures |
| Annual turnover | Rs. 3.5 crore |
| Cash receipts | Rs. 40 lakh (approximately 11.4% of turnover) |
| Cash payments | Rs. 20 lakh (approximately 5.7% of turnover) |
Cash receipts = 11.4%, which exceeds 5%. Vikram cannot claim the Rs. 10 crore threshold. His turnover exceeds Rs. 1 crore. Tax audit is mandatory for Vikram.
Compare this with Deepak, who also has Rs. 3.5 crore turnover but only 2% cash receipts and 1.5% cash payments, both under 5%. Deepak qualifies for the Rs. 10 crore threshold. His Rs. 3.5 crore turnover is well below it. No tax audit for Deepak.
Prescribed Form for the Audit Report
Under Rule 47 of the Income Tax Rules, 2026, the report of audit under Section 63 must be filed in Form No. 26 as follows:
| Case | Form |
| Person already required by any other law (e.g., Companies Act) to get accounts audited | Part A of Form No. 26 |
| Person not required to get accounts audited under any other law | Part B of Form No. 26 |
| Particulars required to be furnished under Section 63 | Part C and D of Form No. 26 (applicable in both cases) |
Note for readers familiar with the 1961 Act framework: Under the Income Tax Rules, 2026, the forms previously known as Form 3CA, Form 3CB, and Form 3CD have been replaced by Form No. 26 (Parts A, B, C, and D). The old form numbers no longer apply under the new rules.
Can the Audit Report Be Revised?
Yes. Rule 47(3) of the Income Tax Rules, 2026 permits revision of the audit report. The CA can furnish a revised audit report if a payment made after the original report necessitates recalculation of a disallowance under Section 35 or 37 of the new Act. The revised report must be filed before the end of the financial year succeeding the relevant tax year.
What Does the Tax Auditor Verify?
The particulars in Parts C and D of Form No. 26 require the auditor to report on:
| Area | What Is Checked |
| Books of account | Whether maintained as required and are correct and complete |
| Method of accounting | Whether there has been any change from the prior year |
| Disallowances under Section 26 | Cash payments above limits, payments to connected parties beyond market rate |
| Deemed income provisions | Whether any income was required to be estimated under specific sections |
| Depreciation | Whether rates and computation are correct per Schedule III |
| TDS compliance | Whether TDS was deducted on applicable payments made during the year |
| Stock valuation | Whether the method is consistent with prior years |
| Deductions claimed | Whether all conditions for each claimed deduction are satisfied |
| International and specified domestic transactions | Whether transfer pricing provisions apply |
Statutory Audit and Tax Audit: How They Interact
Section 63(4) provides practical relief for companies and others who already have a statutory audit obligation under another law. It is sufficient compliance with Section 63 if such a person:
(a) Gets accounts audited under that other law before the specified date, and
(b) Furnishes by the specified date the report of that statutory audit along with the tax audit report in Form No. 26 (Parts C and D)
So the CA does not conduct a full separate audit from scratch. The statutory audit work can be relied upon and the tax-specific disclosures are added through Form No. 26. However, filing Form No. 26 (Parts C and D) is still required separately. The statutory audit report alone is not sufficient.
Audit Report Due Date (Section 63(5)(a))
The specified date is defined as: one month prior to the due date for furnishing the return of income under Section 263(1).
Since the ITR due date for audit-required assessees is 31st October, the tax audit report must be furnished by 30th September.
This deadline is strict. The tax auditor signs and submits the report online and the assessee then links it while filing the ITR. If the audit report is not ready by 30th September, the ITR cannot be filed by 31st October. That triggers the late filing fee and the loss of loss carry-forward rights.
Fee for Non-Compliance (Section 428(c))
If you fail to get accounts audited as required under Section 63 or fail to furnish the audit report by the specified date:
| Duration of Delay | Fee Payable |
| Delay up to one month | Rs. 75,000 |
| Delay beyond one month | Rs. 1,50,000 |
Under Section 271B of the Income Tax Act, 1961, the penalty was the lesser of 0.5% of turnover or Rs. 1,50,000. Under the new Act, the structure shifts to time-based flat slabs. The maximum cap stays at Rs. 1,50,000, but a Rs. 75,000 slab now applies for delays up to one month.
Who Can Conduct a Tax Audit?
Only a Chartered Accountant as defined under the Chartered Accountants Act, 1949 can conduct and sign a tax audit. The term “accountant” used in Section 63 is defined in Section 515(3)(b) of the Income Tax Act, 2025. The CA must be in practice and must personally sign and verify the audit report.
Practical Compliance Checklist
- If your business turnover is approaching Rs. 1 crore: Start organising books and engage a CA by July at the latest. Waiting until September is too late. The CA needs time to review, identify issues, and confirm corrections before signing the report.
- If your business is 95%+ cashless and turnover is between Rs. 1 crore and Rs. 10 crore: Keep clear records of cash receipts and payments as a percentage of total throughout the year. If either crosses 5%, the audit becomes mandatory. Do not assume the higher threshold applies without verifying the percentages at year-end.
- If you are a professional with receipts approaching Rs. 50 lakh: Keep monthly billing records current so you know by December whether the threshold will be crossed. Engaging a CA late in September when you are already above the threshold is avoidable with early planning.
- If you opted for presumptive taxation and your actual profit is lower than the deemed rate: Decide early whether to claim actual profit or the deemed rate. If you claim actual profit, engage a CA for the audit well before September.
- If you already have a statutory audit as a company: The statutory audit reduces additional audit work, but it does not replace Form No. 26 (Parts C and D). Ensure your CA prepares and files the tax audit report by 30th September alongside the statutory audit.
Tax audit under Section 63 is, at its core, a quality gate before your return reaches the department. For businesses above the prescribed turnover, having a qualified CA certify your income computation is a protection and not just a compliance burden. The errors a tax auditor catches before filing are far less costly than the additions and penalties the department imposes after assessment. Treat the audit deadline seriously, engage your CA early, and file the report on time.
