Why Does the Law Require a Tax Audit?

Many businesses already get their accounts audited under other laws, such as the Companies Act, 2013. So a common question that comes up every year, especially as the deadline approaches, is: why does the Income-tax law also require a separate 'tax audit'? This article explains what a tax audit is, why it exists, who needs one, and what the compliance requirements are, based on the Income-tax Act, 2025.

What is a Tax Audit

A tax audit is an examination of a taxpayer's books of accounts by a Chartered Accountant, carried out specifically to verify that income has been correctly computed and reported as per the Income-tax law. It is different from a financial audit, which checks whether the financial statements give a true and fair view of a business for the benefit of shareholders and lenders. A tax audit focuses only on whether the income offered to tax is accurate and whether the taxpayer has complied with the specific requirements of tax law.

Earlier, this requirement was governed by Section 44AB of the Income-tax Act, 1961. Under the new Income-tax Act, 2025, which came into force from 1st April 2026, the same requirement is now governed by Section 63.

Why the Law Requires a Separate Tax Audit

A financial audit and a tax audit are not the same exercise, even though both examine the same set of books. A financial audit is prepared under accounting standards, which follow their own principles. Tax law, on the other hand, has its own rules on what can be claimed as a deduction, when it can be claimed, and how certain income is to be treated. These rules do not always match accounting treatment.

A tax audit exists to bridge this gap. It helps ensure:

• Books of account are properly maintained by the taxpayer.
• Income is computed and reported correctly as per the provisions of the Income-tax Act, and not merely as per accounting records.
• Specific compliances, such as disallowance of certain expenses, are correctly identified and reported.
• The Assessing Officer does not need to verify every transaction separately during assessment, since a qualified professional has already examined the accounts and reported on them.
  
   

Who Needs a Tax Audit — Section 63 of the Income-tax Act, 2025

As per the Income Tax Department, the applicability of tax audit under Section 63 remains largely the same as it was under the earlier Section 44AB. A person carrying on business or profession is required to get accounts audited in the following situations:

•  Business: where total sales, turnover, or gross receipts exceed ₹1 crore in the tax year.
• Business with mostly digital transactions: the limit is increased to ₹10 crore, provided cash receipts and cash payments each do not exceed 5% of total receipts and total payments respectively.
• Profession: where gross receipts exceed ₹50 lakh in the tax year.
• Presumptive taxation cases: where a taxpayer opts out of the presumptive taxation scheme, or declares profits lower than the prescribed presumptive rate, and the income exceeds the basic exemption limit.

For the purpose of counting the 5% cash transaction limit, payments or receipts made by cheque or bank draft that are not account payee are treated as cash, and not as a banking transaction.

Where profits and gains from business or profession are declared strictly as per the presumptive taxation provisions of the Act, a separate tax audit under Section 63 is not required for that income.

Audit Already Done Under Another Law

If a person is required, under any other law, to get accounts audited — for example, under the Companies Act — a separate audit under Section 63 is not required, provided the accounts are audited under that other law before the specified date and the prescribed audit report is furnished within the prescribed time. In such cases, the audit conducted under the other law is treated as sufficient compliance with the tax audit requirement.

Forms and Due Date

For FY 2025-26 (AY 2026-27), the tax audit report continues to be filed using the existing Forms 3CA, 3CB and 3CD prescribed under the Income-tax Act, 1961. The due date for furnishing the tax audit report for AY 2026-27 is 30th September 2026, and 31st October 2026 for taxpayers covered under transfer pricing provisions.

From tax year 2026-27 onwards, tax audit reporting will move to Form No. 26, prescribed under Rule 47 of the Income-tax Rules, 2026, in line with Section 63 of the Income-tax Act, 2025.

Practical Example

Suppose a business records an expenditure of ₹5 lakh in its books. The financial auditor may find that the expense is properly recorded, supported by evidence and appropriately presented in the financial statements. That conclusion does not automatically mean that the entire ₹5 lakh is deductible for income-tax purposes.

The tax auditor must examine the relevant provisions of the Income-tax Act, 2025 and the prescribed reporting requirements. If the law requires an adjustment, disallowance or disclosure, that tax treatment has to be reflected in the tax-audit reporting and the computation of taxable income, as applicable.

Thus, the two audits can start from the same books but reach different reporting conclusions because they answer different legal questions.

Consequences of Not Complying

If a person who is required to get accounts audited under Section 63 fails to do so, or fails to furnish the audit report as required, the Assessing Officer may levy a penalty under Section 446 of the Income-tax Act, 2025. The penalty is the lower of 0.5% of total sales, turnover, or gross receipts for the relevant tax year, or ₹1,50,000. This penalty may not be levied if the taxpayer is able to show a reasonable cause for the failure.

In Short

A financial audit and a tax audit serve two different purposes, even when they examine the same books of account. One looks at the overall financial position of a business; the other specifically checks whether income has been correctly computed and reported for tax purposes. Understanding this distinction helps businesses prepare the right documentation on time, rather than treating a tax audit as a repeat of the statutory audit.