Understanding onTax Audit U/s 44AB of I.T. Act.

Introduction :

Tax Audit refers to the audit carried out under the provisions of section 44AB of the Income Tax Act, 1961.

Originally introduced by The Finance Act, 1984, in the Income-tax Act, 1961 w.e.f. 1 April 1985 through Section 44AB.

Even if income is below taxable limit, tax audit needs to be carried out if turnover exceeds prescribed limit.

Applicable to both Residents and Non-Residents.

Basic Elements of Sec. 44ABEvery person-

a) carrying on business shall, if his total sales, turnover or gross receipts in business exceeds forty lakh rupees in any previous year ; or

b) carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year; or

c) carrying on the business shall, if his profits and gains from business are deemed to be profits and gains under *[section 44AD or 44AE or 44AF] [or Sec. 44BB or Sec. 44BBB] and who has claimed his income to be lower than the deemed profits and gains of this section,

* Words “Sec. 44AE shall be substituted for the words” Sec. 44AD or Sec. 44AE or Sec. 44AF by the Finance (No. 2) Act 2009 w.e.f. 01.04.2011

Cont…

The following clause (d) shall be inserted after clause (c) of section 44AB by Finance (No. 2) Act 2009 w.e.f. from 01.04.2011 ;

d) Carrying on business shall, if the profits and gains from the business are deemed to be profits & gains u/s 44AD, and he has claimed such income to be lower than profits & gains of his business and his income exceeds maximum amount which is not chargeable to income-tax in any previous year.

get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant & setting forth such particulars as may be prescribed……

Object Of Tax Audit:-To assist the Assessing Officer in computing the total income of the assessee.Involves expression of opinion on the truth and correctness of certain factual details by assesses to the Income Tax Dept. To enable proper assessment of tax by the Department.To ensure that income-tax assessments are made simpler and faster since the basic data required for assessments are provided with the return of income, by filing Forms 3CA, 3CB and 3CD of the tax audit report.Increases self compliance by the tax payer and educates them.

Applicability of Sec. 44AB:-Person carrying on business:-–Sales turnover, gross receipts exceeds Rs. 40 lacs in previous year.–Deemed profit U/s 44AD, 44AE, 44AF, 44BB & 44BBB and claims it to be lower.–Not applicable if covered by Sec. 44B and 44BBA.

Person carrying on Profession:-- Gross receipts in profession exceeds Rs. 10 lacs.

Position from AY-2011-2012:-

(Changes made by Finance (No.2) Act 2009 U/s 44AD):-

44AD now applicable to all “eligible assessees” engaged in any “eligible business”.

Eligible assessee – Individual, HUF or General Firm.

Eligible business – any business except buying/leasing or hiring goods carriage referred to in Sec. 44AE and turnover from eligible business does not exceed Rs. 40 lacs.

Cont…

Salient Features:-

Not applicable to Company and LLP.Limit of turnover business wise.Option of presumptive scheme-business wise.Audit for that business only which does not opt for

presumptive norms and total income exceeds taxable limit.

Applicability of TDS provisions.

Total Sales, Turnover or Gross ReceiptsNot defined in Sec. 44AB or any other provision of the Act.Can be interpreted as volume of business, total is for all three expressions.Sale denotes sale of movable commodity, turnover is receipt from other trading activities.Turnover is aggregate amount for which sales effected or services rendered (as per guidance note of ICAI).Gross receipt to include all receipts whether in cash or kind from carrying of business.Sales, turnover & gross receipts should be determined as per method of accounting regularly employed.Transaction in shares is turnover or not will depend whether shares held as stock in trade or capital assets.Types of transaction in shares/derivatives :

-Speculative transactions.-Derivative, F&O-Delivery based transaction.

Who can be appointed as Tax Auditor?:-

A Chartered Accountant or a firm of Chartered Accountants in full time practice.

A CA/firm appointed as Tax Consultants.

Statutory Auditor.

Internal Auditor cannot be Tax Auditor- (decided in 281st meeting of Council in October 2008, w.e.f 12.12.2008.)

Due date for Audit:

Obligation on the aforesaid persons to obtain before the "specified date" a report of the audit.

Report to be in the prescribed form duly signed and verified by the “accountant”.

“specified date" relevant to the assessment year, means 30th of September of the A.Y.

Audit Planning

Obtain Appointment letter

Issue engagement letter

Obtain representation letter

Obtain certificates as required in clause of 3CD

Forms applicable for Tax Audit Report:-S.No. Particulars Applicable Form

1. Assessee not required to get his accounts audited under any other law.

Form 3CB and Form 3CD.

2. Assessee required to get his accounts audited under any other law.

Form 3CA and Form 3CD.

3. Assessee required to get his accounts audited under any other law and financial year is not previous year.

Form 3CB and Form 3CD.

Contents of Form 3CD:-

PART A - General particulars - Clause 1 to 6.

PART B - Disclosure of particulars - Clauses 7 to 32.

ANNEXURE 1 - Financial Parameters - Part A and Part B.

ANNEXURE II - Valuation of Fringe Benefits.

Salient Features for Major Clauses:-

CLAUSE 1 - In case of proprietary business mention (Name of Assesse) name of proprietor with name of proprietary firm.

CLAUSE 2 – Address shall be:-(Address) > as communicated to department. > address of branch office in case of branch accounts. > principal place – new assessee. > registered office – for company.

CLAUSE 4 - LLP formed in India – Firm (Status) - LLP formed outside India – Company

CLAUSE 9 - Books of accounts: (Maintenance of > Sec. 2(12A) – inclusive definition. books of accounts) > would cover books of original entry & other books of accounts. > If books specified in Rule 6F, list shall be same for clause (a), (b) & (c). > Other cases- (b) and (c) shall be same.

CLAUSE 11 - Clause (a) to (c) applicable to all assessees.(Method of - Clause (d) to assessee following mercantile accounting) system of accounting.

CLAUSE 12A - Reportable to audit report signed after (Capital assets 10.08.06Converted into - Capital asset - Sec. 2(14)Stock in trade) - Transfer – Sec. 2(47)(iv) - Purpose is to determine fair market value for capital gain tax purpose.

CLAUSE 13 - Sub clause (b) & (c) will not apply if cash (amount not system is followed.Credited to - Sub clause (a), (d) & (e) will apply P&L A/c) irrespective of method of accounting.

CLAUSE 14 - Asset wise or block wise depreciation

(Particulars of - Additional depreciation – asset wise

Depreciation) - Block of asset omitted by Finance (No.2)

Act, 2009 from explanation 3 to Sec. 32(1)

- Block of asset as defined in Sec. 2(11) of the Act -Tangible or intangible asset.

CLAUSE 16 - Clause (a):

(a. Payment of bonus > Requirement is towards disclosure only and

& commission not to allowability.

b. Sum received from > Payment made within time allowed U/s 43B.

employees towards - Clause (b):

contribution to PF etc.) > Reporting of amount deducted

from employees have been paid on or before due date.

> Due date as per PF Act 1952.

CLAUSE 17 - Applies to all assessees, except clause (g), which (Amount debited to applies to Firm and LLP. P&L A/c ) - Clause (a):- capital nature Sec. 37(1) does not allow expenditure of capital

nature. - Clause (d):- expenditure at club (i) no express disallowance (ii) for purpose of FBT. - Clause (f):- amount in admissible u/s 40(a) > Sec. 40(a)(ia) amended by Finance Act 2008 with

retrospective effect from 01.04.05 > Circular No. 1/2009, dated 27.03.2009. - Clause (g):- payment to partners > applicable to firm , Indian LLP only > determine and qualify inadmissible amount.

- Clause (h):- sec. 40 A(3) payments > amended provision for AY 2009-10 : aggregate of payment in a day. > limit enhanced to 35000 w.e.f. 1.10.2009 in case of transporters > Rule 6DD substituted by Notification no. 97/2008, dated 10.10.2008.

- Clause (k):- contingent liability > As per AS-29, no provision shall be made for contingent liability. > to report if provision made.

- Clause (l):- sec. 14A > Primary duty is of assessee to furnish details > Rule 6DD w.e.f. 24.03.2008.

- Clause (m):-payment in admissible u/s 36(1)(iii) > Refers to interest paid for capital borrowed for acquiring asset for extension of existing business/profession for the period when capital borrowed to put to use. > Distinct with AS – 16.

CLAUSE 17A - New clause inserted in Form 3CD by Notification (Interest to MSM No. 36/2009, dated 13.04.09. Enterprises) - Amount to be reported whether sum debited to P&L

A/c or not.

CLAUSE 18 - Ascertain specified persons for selection.(Payment to specified - To provide particulars of payment and not to report persons) reasonability.

CLAUSE 20 - Reporting of items such as recovery against any (Profit chargeable deduction, balancing charge, sale of assets for scientific U/s 41) research, recovery of bad debts. .

CLAUSE 21: - Refers to following sums:

(43B payments) (a) Tax duty, Cess or Fee

(b) Employer’s contribution to PF, Superannuation Fund

(c) Bonus or commission to employees

(d) Interest payable to FI, SFC,HC, State Ind. Investment Corp.

(e) Interest payable to scheduled bank in respect of loan or

advance.

(f) Leave encashment.

- Deduction only on actual payment

- Conversion of interest into loan not repaid.

- Liability incurred during year and paid before due date of filing of

return are allowable.

- Liability which pre existed have to be paid during previous year.

- Sales Tax / Excise Duty collected separately disclosed. Amount

not paid to be reported.

CLAUSE 24 - Sec. 24(a) not applicable to Banking company, Corporation established by (Particulars of Central, State Act, Govt. co. U/s 617 of the Companies Act.

acceptance or - Transactions between sister concerns

repayment of loan) - Transfer entries

- Transactions through electronic transfer, - Direct deposit of cash into bank A/c.

CLAUSE 26 - Covers section wise details of deduction admissible under Chapter VI A.

(Deduction under - For payment – for income – other deduction - 80JJA, 80U

Chapter VI A) - Tax auditor has to ascertain admissibility of claim. - Deduction to be reported based on business activity. - Amendment of Sec. 80A with retrospective effect – impact of multiple deduction for same profit – subsection (4),(5) referring to deduction U/s 10A, 10AA, 10B, etc., Subsection (6) to

transfer pricing. - Reliance on certificates for various deductions to be mentioned

CLAUSE 27 - Reporting of Clause (a) depends on compliance to clause (b).(Provision of - As there are lot of debatable issues, appropriate comment shall be madeTDS) against clause (a). - Late deposit of deducted amount need not be reported. - TDS under other law not to be reported. - New Sec. 206AA inserted – furnishing of PAN to deductor to avoid

deduction at higher rate and amendment to 194C w.e.f. 1.10.09.

CLAUSE 28 - clause (a): for trader only(Quantitative - clause (b): for manufacturerdetails) - clause (b): for manufacturer cum trader also.

CLAUSE 32 - All ratios in monetary terms only.(Accounting - Ratio for business as a wholeratio) - Consistency to be maintained - Ratio to be calculated based on figures as per books of accounts.

- For clause (c) – existence of closing stock is a must.

Annexure – I to Form No. 3 CDPart A – repetition of item 1 to 6 of form 3CDCapital Account- Non corporate assesseeFixed capital in item no. 1, current account balance in item no.2

Annexure- II - Salient FeaturesFBT abolished w.e.f. Asstt. Year 2010-11Following items executed from FBT – w.e.f. Asstt. Year 2009-10

- credit facility for employee’s children- payment to sponsor on employee sportsman - expenditure to organize sports events for employees- maintenance of guest house other than for training purpose- state N.A. - valuation for festival celebration reduced from 50% to 20%- expenditure through electronic meal card subject to

condition.

Levy of Penalty:-

Sec. 271B Failure to get accounts audited as required by Sec.

44AB. Lower of 0.5% of total sales, turnover or gross

receipts of business/profession and Rs. 1 lac. Not to be imposed if reasonable cause is proved, Sec.

273B. Annexure less tax return – No levy of penalty unless

audit report not obtained.

Certain Issues:- Immunity from Scrutiny / disallowance under various

sections.Applicability where income exempt U/s 10Applicability on Stock Brokers/Speculative

Transactions Acceptability of tax auditors certificate as regards

amount of various expenses under FBT in Annexure – II to Form 3CD.

Rectification/revision of audit report.When accounting year is different from financial yearAccounts written in other languages.

Action on incomplete audit reports:

Assessing Officer can report to Commissioner regarding incomplete report or non commital points in tax audit reports.

Matter can be taken up by the Commissioner of Income Tax to see if it reflects professional negligence on part of auditor.

Initiating Disciplinary proceedings in terms of Sec. 288 of the IT Act.

ICAI entitled to institute proceedings against members who submit faulty audit reports. (Source PIB press release New Delhi dated 10.12.1999.)