What a Rajkot Engineering Firm Did When a Tax Audit Notice Landed Before the Books Were Ready

TL;DR

A Rajkot-area engineering firm with revenue crossing the §44AB threshold received a tax audit notice — and discovered that the books for three prior years had not been formally closed. The process took about four months. Here is what it involved.

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Section 44AB of the Income Tax Act makes a tax audit mandatory for businesses with turnover above ₹1 crore. What many small businesses do not realise is that the §44AB audit is not just about the current year. If prior years’ books are not in order, the tax audit of the current year will also flag discrepancies in the opening balances.

The Situation

The business had been filing income tax returns for three years. Each year, the accountant prepared the return from the bank statements without formally closing the books. When a §44AB notice arrived, the first thing the tax audit appointment uncovered was that the books for the two prior years also had material discrepancies.

The core problems were threefold:

One — expenses classified by bank date, not by nature. The accounting system had recorded transactions without assigning a proper expense classification under the Income Tax Act heads.

Two — TDS certificates not reconciled. Several professional fee payments had TDS deducted under §194J, but the deductor had not filed the corresponding TDS return, so the credit was not appearing in the taxpayer’s Form 26AS.

Three — no depreciation schedule. Assets had been purchased over three years but there was no depreciation schedule on record.

The Sequence of Work

First: reconstruct the books for all three years. The bank statement was the primary source document. Every transaction was classified under the Income Tax Act heads.

Second: pull Form 26AS and AIS for all three years. Cross-referencing these against the books revealed TDS credits that were in the tax records but had not been accounted for in the returns.

Third: locate or reconstruct missing invoices. For the depreciation schedule, every asset purchase invoice from the prior years was needed.

Fourth: prepare and file the tax audit report. Form 3CB-3CD for the relevant year.

What Came Out of It

After four months, all three years of returns were in order. The key lesson is that a §44AB notice is an opportunity to clean up the prior years at the same time, because the tax auditor’s scope will cover the opening balances anyway.

What Other Businesses in Gujarat Should Do Now

If your business has crossed the ₹1 crore turnover threshold, the right time to get the books properly closed is right now, before an audit notice arrives. A quarterly review of expense classification, reconciliation of TDS deductions against Form 26AS, and a depreciation schedule maintained from day one of asset purchases means that when a §44AB notice does come, the response is filing the audit report, not reconstructing three years of accounting.

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FinTax24 helps Gujarat engineering, manufacturing, and contracting businesses respond to tax audit notices and maintain books that are audit-ready year-round. Talk to us on WhatsApp for a pre-audit review.