Importance of Conducting a Tax Audit 2025

An income tax audit is helpful to determine whether a company (or individual) has filed income tax returns for a particular year. You can hire external agencies, such as Relativity, to conduct tax audits for your business and file returns from the income, as per the Income Tax Act of 1961.

In addition, tax audits simplify the process of tax returns. A company’s growth can be reliable and trustworthy if the return filing of the tax audit is done correctly.

Tax Audits in India

Usually, if you have multiple businesses whose total turnover is over INR 1 crore, you will be liable to conduct a tax audit of your business’ bank accounts. Regardless if you own a business with an annual turnover of INR 50 lakhs, you will need to audit your account books and net receipts of accumulative business income.

However, the audit will not consider the money received from selling assets, such as properties or vehicles. Such items are excluded from calculating the gross profits of a business. Listed below are the items that are not taxable under income tax rules and are not counted in the income tax audits.

• Fixed assets
• Investment (Security, Shares, Stock Markets)
• Income from general interest
• Income from rent
• Expense reimbursed client

Besides this, business owners also need to ensure that an audit report cannot be revised once filed.

What is the purpose of a tax audit?

Tax audits are usually conducted to ensure that businesses pay the tax regularly and follow the tax procedures outlined by the Income Tax Act 1961. Usually, the payable tax amount is calculated by accounting and tax professionals, such as at Relativity. Before the tax is paid, all account data and business records are checked by certified chartered accountants (CAs). To ensure smooth and effective tax audits, business owners must maintain clear and concise account books and records.

When tax audits are conducted regularly, they help the business maintain relevant data properly, which inherently ensures smooth growth. Conducting proper tax audits is necessary for appropriate claims and reductions. Tax audits by professionals also help to reduce the risk of fraud and ensure that the business is adhering to tax laws with accurate accounts.

What are the types of tax audits?

There are two main types of tax audits that businesses in India need to conduct:

#1:-  External Report

Third-party professional auditing companies like Relativity usually carry out external tax audits. These audits are meant to determine the errors in a company’s financial records, and they also help to find any mistakes in the account statements of the business.

In this type of audit, the third-party vendor can produce a completely unbiased tax audit report of the company.

#2:- Internal Audit

Usually, internal tax audits are conducted by company employees, and the report of internal audits is sent directly to the board of directors and management. This audit does not require the company to hire third-party auditors. However, a business may outsource internal tax audits to professional auditing agencies when they don’t have in-house auditors.

Tax audits are mandatory for any business, small or large, as per the Indian tax laws. The audit highlights the safety and errors in the account, which is necessary to ensure smooth operations and faster business growth. To ensure optimal accuracy, hiring Relativity to be your professional tax auditing partner is highly advisable.