TAX AUDIT

Tax Audit help the business organisation in financial planning, Transparency, credibility & Avoid Penalties.

  • Audit done by Qualified CA;
  • End to End Business Solution;
  • Help your Business in Financial Planning;
  • Arrange funds for the business (If requires);

Tax Audit






What is the Tax Audit?

  • In India, there are different kinds of audits being conducted such as company audit/statutory audit conducted under company law provisions, internal audit, cost audit, stock audit, etc.
  • Similarly, there is one audit in income tax law which is called as ‘Tax Audit’. An Income tax audit is the review or examination of books of accounts of any business or profession carried out by taxpayers in India.
  • Computation for Income tax filing return would be easier with the help of a tax audit.
  • The income tax audit report is to be given by the chartered accountant in Form Nos. 3CA/3CB, and 3CD.
  • Section 44AB of the Income Tax Act 1961 gives the provisions relating to the mandatory audit of accounts of certain persons.
  • The Chartered Accountant is required to conduct the income tax audit with the requirement of section 44AB of the Income Tax Act.

Audit of Books of Accounts of Certain Persons [Section 44AB]

Who required to get the accounts audited?

  • It is compulsory for an income taxpayer who is carrying on business or profession to get their books of accounts audited before the due date by a (CA) Chartered Accountant:
  • If the total sales, turnover or gross receipts in business exceed Rs.100 lakh in any previous year; or
  • If the gross receipts in profession exceed Rs.50 lakh in any previous year; or
  • Where the assessee is carrying on a notified profession under section 44AA, and he claims that the profits and gains from such professions are lower than the computation on a presumptive basis under section 44ADA and his professional income exceeds the basic exemption limit.
  • Where the assessee is covered under section 44AD (4) and his income exceeds the basic exemption limit.

Audit Report

  • The person mentioned above would have to furnish by the specified date a report of the audit in the prescribed forms.
  • For this purpose, the income tax department as prescribed under Rule 6G, Forms 3CA/ 3CB/ 3CD i.e. audit report forms and particulars.

Accounts audited under other statutes are considered

  • In cases where the accounts of a person are required to be audited by or under any other law before the specified date.
  • Non-applicability of Section 44AB:
  • The requirement of audit under section 44AB does not apply to a person who declares profits and gains on a presumptive basis under section 44AD and his turnover/gross receipts/total sales shall not exceed Rs.2 crores.
  • The Income Tax audit required under section 44AB does not apply to a person who derives income under sections44B and 44BBA.

Specified date

  • The specified date is the due date for filing the income tax return under section 139(1)  (i.e 30th September of following Financial Year).

Penal provision

  • It may be noted that under section 271B15, penal action can be taken for not getting the accounts audited and for not filing the audit report by the specified date.

Income Taxable on Presumptive Basis [Section 44AD]

Eligible business

All small businesses having gross receipt or total sales or turnover up to Rs.200 lakh (except the business which is covered under section 44AE i.e. hiring or leasing goods business).

 

Eligible Assessee

Eligible assessee doesn’t claim any deduction under section 10AA or any other provisions of Income-tax act 1961 & The following Resident person (Natural or Artificial) are treated as eligible assessee are:-

  • Individual
  • Partnership firm expect LLP (Limited Liability Partnership) Firm
  •  HUFs (Hindu Undivided Family)

Presumptive rate of tax

  • The 8% of the total turnover of the eligible assessee is treated as presumptive tax rate in the section 44AD of Income Tax act 1961.
  • However, the presumptive rate of 6% of total turnover or gross receipts will be applicable in respect of the amount which is received
  • By an account payee cheque or
  • By bank draft of account payee or
  • By use of electronic clearing system
  • Through a bank account Or such other electronic modes
  • During the P.Y or before the due date of income tax return filing u/s 139(1) in respect of that P.Y.
  • However, the taxpayer can also declare the actual amount earned higher than the income from presumptive business in his return of income.

No further deduction would be allowed

Deduction will be allowed only u/s 30 to 38 of profits and gains from business and profession, and no other deduction is allowed to the taxpayer under presumptive business.

 

WDV of the Asset

The WDV (Written Down Value) of any asset of presumptive business shall be assumed to have been computed as if the taxpayer had claimed the deduction for each of the relevant A.Y

 

Relief from books of accounts maintenance and audit maintenance

The taxpayers who choose for the presumptive business are given relief from maintaining books of account u/s 44AA or get them audited u/s 44AB.

 

Advance Tax

Further, since the threshold limit of presumptive taxation scheme has been enhanced to Rs.2 crore, the eligible assessee is now required to pay advance tax by 15th March of the financial year.

 

Persons who are ineligible for presumptive taxation scheme

The following persons are ineligible from the applicability of section 44AD –

(a) A person carrying on profession under section 44AA (1)

(b) A person earning a commission as an income or brokerage as an income

(c) Any agency business carrying by a person.

(d) An eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the basic exemption limit has to maintain books of account under section 44AA and get them audited under section 44AB. This is provided in section 44AD (5).

 

Presumptive Taxation Scheme For The Person Engaged In Eligible Profession [Section 44ADA]

Eligible Profession

  • The presumptive taxation scheme under section 44ADA for estimating the income of an assessee.
  • who is involved in any profession referred to in section 44AA(1) such as profession for accountancy, engineering, medical, advocate, interior decorator, technical consultancy, or any other profession as notified by the income tax department &
  • The Gross Total Receipt in a previous year shall not exceed Rs.50 lacs.

Eligible Assessee

  • He should be Resident assessee
  • He should be engaged in notified profession u/s 44AA (1)
  • The Total gross receipts ≤ Rs.50 lakhs

No further deduction would be allowed

  • Deduction will be allowed only u/s 30 to 38 of profits and gains from business and profession, and no other deduction is allowed to the taxpayer under presumptive business.

WDV of the Asset

  • The WDV (Written Down Value) of any asset of presumptive business shall be assumed to have been computed as if the taxpayer had claimed the deduction for each of the relevant A.Y.

Relief from books of accounts maintenance and audit maintenance

  • The taxpayers who choose for the presumptive business are given relief from maintaining books of account u/s 44AA or get them audited u/s 44AB.

Option to claim lower profits

  • The taxpayer can claim his profits from the aforesaid profession are lower than the profits assumed to be his income under section 44ADA (1)and
  • if such total income exceeds the maximum amount which is not chargeable to income-tax, he has to maintain books of account under section 44AA and get them audited under section 44AB.

Advance Tax

  • Further, since the presumptive scheme has been extended for professionals also, the eligible taxpayer is now required to pay advance tax by 15th March of the F.Y.

Special Provisions For Computing Income of Plying, Hiring 0r Leasing Goods Carriages Businesses [Section 44AE]

Eligible business

  • The Business which is eligible under this section is the owner of goods carriages from leasing, plying, or hiring.

Eligible assessee

  • Only 10 goods vehicle is allowed under this scheme during the P.Y at any time.

Presumptive Income

  • The income which is estimated from each goods vehicle, being a heavy goods vehicle or other than heavy goods vehicle can be

Goods Carriage

            Presumptive Income

Heavy goods vehicle

Rs.1,000/ton of gross vehicle weight or unladen weight, as the

case may be, for every month or

part of a month

During which such

vehicle is owned

by the assessee for

the previous year

Other than heavy goods vehicle

Rs.7,500 for every month or part

of a month

The assessee under this scheme can also declare in his return of income a higher amount. In such a case, latter this income will be considered by the department.

 

All other deductions are allowed

  • The taxpayer under this section is allowed to take the deductions under sections 30 to 38.

WDV of the Asset

  • The WDV (Written Down Value) of any asset of presumptive business shall be assumed to have been computed as if the taxpayer had claimed the deduction for each of the relevant A.Y

Relief from books of accounts maintenance and audit maintenance.

  • The taxpayers who choose for the presumptive business are given relief from maintaining books of account u/s 44AA or get them audited u/s 44AB.

Option to claim lower profits

  • An assessee may claim income than the assumed income specified in sub-section (1) subject to the condition that the books of account are maintained as required under section 44AA(2) and the taxpayer gets his accounts audited as required under section 44AB.

Meaning of certain terms

Sr.No.

Term

Meaning

1.

Heavy goods vehicle

Any goods carriage, the gross vehicle weight of which exceeds 12,000 kilograms.

2.

Gross vehicle

weight

  • Total weight of the goods carriage vehicle and load certified and
  • Registered by the registering authority as Permissible for that vehicle.

3.

Unladen

weight

  • The weight of a goods carriage vehicle or trailer including all goods carriage equipment sometimes used with the vehicle or trailer
  • When working but does not include the weight of the driver or attendant and where selection parts or bodies are used the unladen weight of the vehicle of goods carriage means the weight of the vehicle with the heaviest such alternative body or part.

Tax Audit Checklist

There are many points for consideration while conducting tax audit, some of the checklist are mentioned below:

  • Name of the Assessee;
  • Address of the Assessee;
  • PAN Number;
  • Bank Account Details;
  • Verify the different indirect taxes payable or paid by the assessee and verify the registration number and certificates;
  • Status of the Assessee;
  • Previous Year Ended;
  • Assessment Year;
  • Mention applicable clause of tax audit conducted under section 44AB. If there are additional clauses applicable, then mention both the clauses;
  • Verify Partnership Deed for the partner’s names and profit-sharing ratios. Disclose change/s in the ratio;
  • The ratio for loss sharing, if different from the partner’s profit-sharing ratio, should be initially disclosed;
  • Cross verify the names of the partners including LLP partners and their profit sharing ratios with that in the accounts of the current year and that of the previous year to ascertain any change;
  • Obtain a list of activities of the business from your client and changes from P.Y (if any);
  • Verify above with the current year financial statements, board and general meeting minutes, and Return of Income of the previous years;
  • Check if the client carries out additional business or profession during the P.Y, even if the business or profession discontinued in the year;

For persons carrying on business or profession, the following books are prescribed u/s 44AA:

  • cash book;
  • journal, if the accounts are maintained according to the traditional method of accounting;
  • Ledger;
  • Carbon copies of bills; and
  • Original invoices wherever issued and credit received in respect of expenditure incurred by the Assessee.

Incomes assessable on the presumptive scheme would be of the following businesses:

  • Civil Construction;
  • Plying, hiring or leasing of goods carriages;
  • Retail business;
  • Shipping business in case of non-residents;
  • The business of exploration, etc. of mineral oils;
  • Operation of aircraft in case of non-residents;
  • For disclosure of significant accounting policies followed by the person, verify Notes to Account which is attached to the balance sheet;
  • Disclosure of accounting policies;
  • Prior period items;
  • Extraordinary items;
  • Changes in accounting policy;
  • To check and confirm the disclosure is consistent for Significant Accounting Policies followed by the person;
  • Verify by checking the assets accounts in detail, whether the person has converted any capital asset into stock in trade;
  • Deep checking of liability and capital reserve accounts to find out any amount like income;
  • Deep checking of audit reports and notes to accounts for comments, if any;
  • Deeply check the subsequent credits of customs or excise refunds;
  • To check again whether the accounting policy followed by the person for accounting for escalation claims;
  • If there is any undisclosed income then check the notes to account attached with the balance sheet and auditors’ report;
  • Cross-check the items of capital receipt particularly those credits are credited to capital reserve;
  • By verifying from the statement of profit or loss, check whether any land or building has been transferred by the assessee during the relevant P.Y.
  • Verify the amount received / receivable by the person for whose account is to be audited from his bank account/agreement entered by him;
  • To obtain a schedule in the form which is required under the clause.

Description of the asset should be under the following heads:

  • Building;
  • Plant and Machinery;
  • Furniture and Fixtures;
  • Vehicles/Cars (acquired after 1st April,1990);
  • Other Specified Assets and;
  • Intangible Assets;
  • Computers;
  • Identify from P.Y return of income the opening block of WDV;
  • Discuss from the person whether any of the sections which are referred apply to the assessee.

The business activities/expenditures covered are:

  • Growing and manufacturing of tea (Section 33AB of Income Tax Act 1961);
  • Prospecting/extraction/production of petroleum and/or natural gas (Section 33ABA of Income Tax Act 1961);
  • Operation of ships (Section 33AC of Income Tax Act 1961);
  • Scientific research (Section 35 of Income Tax Act 1961);
  • Telecommunication services (Section 35ABB of Income Tax Act 1961);
  • Rural development programs (Section 35CCA of Income Tax Act 1961);
  • Conservation of natural resources (Section 35CCB of Income Tax Act 1961);
  • Preliminary expenses (Section 35D of Income Tax Act 1961);
  • Amortization of expenditure (Section 35DD of Income Tax Act 1961);
  • Prospecting/extraction/production of any minerals (Section 35E of Income Tax Act 1961).

Deep checking of audited accounts and schedules:

  • Repair & Maintenance;
  • Traveling expenses;
  • Salaries & Wages;
  • Stores & spare parts consumption;
  • Depreciation;
  • Legal, Professional & Consultancy charges;
  • Filing Fees;
  • Capital losses are written off;
  • Penalty;
  • Verify the details of payments to a partner for interest, salary, bonus, commission, or remuneration concerning the partnership deed and books of accounts;

Indicate the following separately

  • Provision towards approved gratuity fund contribution;
  • Gratuity provision that is due and payable during the year;
  • Other provisions;
  • Obtain a list of payments made by an employer towards the setting up to any fund, trust, company, etc., other than:-
  1. Recognized provident fund.
  2. Recognized gratuity fund.
  3. Recognized superannuation fund.
  • Confirm the workings of incomes as per the requirement of these sections;

Check previous year’s tax audit report, to identify any of the following amounts about earlier years:

  • Tax, duty, cess or fee;
  • Any sum payable or paid by the employer by way of contribution to PF or superannuation fund or any fund for the welfare of employees;
  • Bonus payable to employees;
  • Leave encashment;
  • Check whether the consideration received of the shares is greater than the Fair Market value;
  • Obtain loan confirmations;
  • Obtain profit and loss statement in the required format and cross-check with relevant accounts in the general ledger;
  • Cross-check the loan accounts and current account for similar items;
  • No certificate is required to be disclosed in the statement if repayment of any loan or deposit taken or accepted from Government;
  • Verify the last income tax return filed, and make a list of all the carry forward losses;
  • Verify if any other business such as speculation business, report the loss arising from this business in section 73;
  • Check the different business activities carried out by the person, by deep checking of the various incomes and expenses;
  • Check whether the person is engaged in any business specified U/s 35AD;
  • Obtain the acknowledgments of the many TDS return filed by the person during the year;
  • Check whether the income tax returns are filed within the due dates.

Benefits of Tax Audit

Increase Business Credibility

A tax audit enhances the credibility of the audited books of accounts of the taxpayer.

Obtains Loans and Advances

Tax audit helps to obtain loans and advances as the Banks or financial institutions prefer audited books of accounts.

Help in Financial Planning

A tax audit helps to facilitate planning in the financial affairs of the business.

Identify Financial Weaknesses

The tax audit helps to identify weaknesses in the accounting systems and enables to suggest improvements.

Avoid Penalty

If section 44AB is mandatory for the taxpayers, then he is required to conduct the tax audit by the chartered accountant to avoid the penalty raised by the Assessing Officer.

Claiming Deduction

The taxpayers can claim the deduction under section 32 to section 38 of the Income Tax Act 1961 as per the relevant provisions applicable to him.

FAQ

RELATED TO TAX AUDIT

The tax audit is an independent examination or review of financial statements of the taxpayer which is conducted by the practicing chartered accountant or firm of a chartered accountant.

A tax audit is mandatory for all companies whose turnover crosses a particular threshold limit (1 Crore and it’s proposed to be increased to 5 Crs. for F.Y. 2020-21).

For Tax Audit the following turnover of gross receipt is required-

 

  • Every person carrying on business whose total turnover in any previous year exceeds Rs.1 Crore (The Threshold limit will be 5 Crore whose cash receipt is upto 5% of Total Turnover) .
  • Every person carrying on a profession whose Gross receipt in any previous year exceeds Rs.50 Lacs.
  • Every person carrying on a business on a presumptive basis under section 44AE or 44 BB or 44BBB- Income from the business is claimed to the lower than the deemed profits under respective sections

A chartered accountant or a firm or chartered accountant conducts the tax audit. The maximum number of income tax audits that can be undertaken by a Chartered Accountant is limited to 60 in a particular financial year and the case of a Firm of Chartered Accountant is limit will apply to each partner in the firm.

The main objectives of the Tax Audit are as follows:

 

  • To ensure that all the taxpayers who are covered under section 44AB are maintaining the books of accounts and all other revenue generation or expense incurred by them records properly.
  • To ensure that the claim and deduction are taken as per the provision of the income tax act.
  • There is less chance of fraudulent practices as the system is very accurate.

There are certain prohibitions and restrictions on the appointment of tax auditors, which are as follows:

 

  • Any member of ICAI in part-time practice is prohibited to perform a tax audit.
  • A chartered account cannot audit the books of accounts of a taxpayer to whom he is indebted for more than Rs.10,000.
  • The Chartered Accountant who is assigned with the work of writing and maintaining the books of account of the taxpayer is prohibited for being a tax auditor.
  • The partner or employee of the chartered accountant firms is prohibited from being a tax auditor.
  • An internal auditor of the taxpayer is prohibited to be a tax auditor.

The main particulars of Form 3CA are:

  • Name of the Assessee
  • Address of the Assessee
  • Permanent account number of the assessee
  • Name of the Tax auditor
  • Audit Report Date
  • Period of Profit and Loss Account
  • Period of Income and Expenditure account
  • Balance sheet date
  • Declaration of the audit report with the attachment of Form 3CD.
  • Place and Date of Signing of Audit Report.

As per section 271B of the income tax act 1961, the Assessing Officer may impose a penalty to the taxpayer if its accounts are not audited as per section 44AB of income tax act 1961. The penalty will be lower of the amounts

 

0.5% of the total turnover or gross receipts in such year or years,

or

Rs. 1,50,000.

 

However, according to section 271B of the income tax act 1961, if reasonable cause for such failure is proved, no penalty shall be imposed by the assessing officer.

The audit report is to be furnished by the tax auditor in the following prescribed form:

  • Form 3CA- In respect of a taxpayer who is carrying on a business or profession and who is already mandated to get his books of accounts audited by the tax auditor under any other law.
  • Form 3CB- In respect of a taxpayer who is carrying on a business or profession but who is not opted to get his books of accounts audited by the tax auditor under any other law.
  • Along with the above forms, the tax auditor shall also furnish form 3CD with the prescribed format.

When the tax auditor submit the tax audit report to the taxpayer, the taxpayer solely will approve the tax audit reports before its get filed.

The Due date for obtaining the audit report are:

  • A taxpayer has to obtain the report of tax audit on or before 30th September of the relevant Assessment Year. For FY 2019-20, the audit report has to be obtained on or before 30th September 2020.
  • In the case of the taxpayers such as foreigners obtaining a 3CE audit report, the due date is 30th November of the relevant assessment year i.e. 2020-21. For FY 2019-20, Form 3CE has to be obtained on or before 30th November 2020.
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