Income tax audits are very essential tools used by the Income Tax Department to ensure that taxpayers are complying with tax laws and disclosing their income honestly in a prescribed manner. These audits help the government detect errors, prevent tax evasion, and maintain transparency. But not all audits are the same — different types of audits are conducted depending on the nature of income, business activities, and suspected irregularities.
In this blog, we’ll explore the different types of income tax audits in India, why they are conducted, and who might be subject to them.
What is an Income Tax Audit?
An income tax audit is an examination of a taxpayer’s financial records and data, tax returns, and other relevant information by the Income Tax Department. The purpose is to verify whether income has been reported accurately and whether taxes have been paid correctly.
Different Types of Income Tax Audits
The audits can be mandatory under the Income Tax Act or conducted at the discretion of the tax authorities.
1. Tax Audit under Section 44AB
This is the most common and well-known type of audit under the Income Tax Act.
Who is required to undergo this audit?
- Businesses: If your total sales, turnover or gross receipts exceed the limit of ₹1 crore in a financial year.
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- For businesses opting for presumptive taxation under Section 44AD, if their turnover exceeds ₹2 crore.
- Professionals: If gross receipts from the profession exceed ₹50 lakhs in a year.
- Presumptive income cases: If someone declares income lower than what is presumed under Sections 44AD, 44ADA, or 44AE and their total income exceeds the basic exemption limit.
Purpose
To ensure that books of accounts are duly maintained and income is correctly declared. The audit must be performed by a Chartered Accountant (CA) and the audit report must be filed using Form 3CA/3CB and 3CD.
2. Scrutiny Assessment (Section 143(3))
This is a detailed examination conducted by the Assessing Officer (AO) when the return filed by the taxpayer is selected for scrutiny.
How is it selected?
Cases are selected either:
- Randomly through Computer-Aided Scrutiny Selection (CASS), or
- Based on specific parameters such as high-value transactions, mismatch of information, or suspicious deductions.
Purpose
- To verify and examine the correctness of income, deductions and exemptions claimed.
- To check whether any income has been underreported or concealed.
Process
- Notice is issued under Section 143(2) within six months from the end of the financial year in which the return was filed.
- Taxpayer must respond and provide necessary documents, explanations, and evidence.
3. Reassessment or Income Escaping Assessment (Section 147/148)
This type of audit is done when the Assessing Officer believes that some income has escaped assessment.
When is it applicable?
- If the department gets new information suggesting that income was not disclosed correctly in earlier returns.
- Reassessment can be done within 3 years from the end of the relevant assessment year (and up to 10 years in cases involving large amounts — more than ₹50 lakhs of income escaping assessment).
Purpose
To reopen past assessments and tax the income that escaped notice during earlier scrutiny or self-assessment.
4. Best Judgment Assessment (Section 144)
This audit is initiated when the taxpayer:
- Fails to file a return,
- Doesn’t comply with notices under Section 142(1) or 143(2), or
- Fails to get books audited under Section 44AB.
What happens?
The Assessing Officer makes an assessment based on available data, records and other relevant information, often leading to a higher tax demand. This is known as “best judgment” since it is based on estimation rather than verified figures.
5. Limited Scrutiny
This is a lighter version of the regular scrutiny assessment and focuses on specific issues rather than a detailed review of the entire return.
Example:
- Mismatch in TDS (tax deducted at source),
- Unusual claim of deductions,
- Large cash deposits not matching income.
Purpose
To reduce the burden on taxpayers and the tax department by resolving minor issues quickly and efficiently.
6. Search and Seizure (Section 132) – Income Tax Raid
This is a drastic form of audit, conducted when the Income Tax Department believes there is large-scale tax evasion.
What happens during a raid?
- Officers enter and search the premises (homes, offices, etc.) of the assessee without prior notice.
- Documents, cash, jewellery, and other assets may be seized.
- After a seizure, an assessment is carried out to determine the tax liability based on unaccounted assets found.
Purpose
To catch black money hoarders and detect serious tax fraud.
7. Survey (Section 133A)
A survey is less aggressive than a raid but still intrusive.
Purpose
To gather information, verify books of account, check cash and stock position.
Where is it done?
- At business premises during working hours.
- Officials are not allowed to search residential premises under this section.
Common use
To verify sales, stock, and cash in hand — especially during festival seasons or in cases where evasion is suspected.
8. Transfer Pricing Audit (for International Transactions)
Applicable to companies that engage in international transactions with related parties or associated enterprises.
Why?
To ensure that transactions with foreign associates are done at arm’s length prices — meaning they are fair and reflect true market value.
Audit requirement
- Such taxpayers must file Form 3CEB, certified by a Chartered Accountant.
- High-risk transactions are picked for Transfer Pricing Audits.
Conclusion
Income tax audits in India serve as important tools to ensure that all taxpayers are complying with the law, maintain transparency and contribute fairly to the nation’s revenue. Whether it’s a routine tax audit under Section 44AB or a full-fledged scrutiny or reassessment, each audit type plays a distinct role in strengthening the country’s tax administration.
While audits may seem intimidating, maintaining proper financial records, timely filing of returns, and honest disclosure of income can keep you out of trouble. It’s also helpful to consult a tax professional, especially if your income sources are complex or if you receive a notice from the Income Tax Department.
Always remember: Being prepared is better than being surprised by an audit. Keep your records and relevant data clean, your documents in order, and file your taxes truthfully for the purpose of better assessment.
