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Tax Audit

A tax audit is an examination of your tax return by an outside agency to verify that income and deductions filed are accurate. The income tax law asks the taxpayers to get the audit of accounts of their business or profession done according to provision of income tax law.

The provisions for tax audits in India are covered under section 44AB of the Income Tax Act, 1961. The definition of tax audit as per IT Act is the audit conducted by the chartered accountant of the accounts of the taxpayer in pursuance of the requirement of section 44AB. The chartered accountant then prepare the audit report and submit their findings in Forms No 3CA/3CB and 3CD.

What is the objective of Tax Audit?

  • Report the requirements of Form No 3CA/3CB and 3CD
  • To ensure the book of account and other records of assessee are properly maintained.
  • Book of account accurately reflect the income of tax payers and deduction are correctly declared.
  • Facilitate the administration of tax laws by proper presentation of accounts before tax authorities and considerably save the time of assessing officers in carrying out routine verification.

Which of the persons are required to maintain their books of Account?

As per Section 44AA of the Income-tax Act, 1961, a person carrying on business or profession is required to maintain books of accounts if, inter alia, the total turnover of the assessee in any of the three years prior to the previous year is more than 10 lakhs or the total income is more than 1.2 lakh.

Further, an assessee who claims his income to be lower than the amount determined under the various provisions relating to presumptive income are also required to maintain books of accounts.

Who should get their books Audited?

A person is required to get his books of accounts audited by chartered accountant as per section 44AB if he satisfies any of the following conditions

  • An individual carrying on business and his/her total sales, turnover or gross receipts (as the case may be) for the financial year exceeds 1 crore. As per ICAI guideline- turnover is the aggregate value for which sales occurred or services are rendered. It also includes all applicable taxes on such goods or services.
  • A person carrying on profession and gross receipts in profession for the year exceed 25 Lakhs
  • Any person carrying on a business where the profits and gains from the business are determined on a presumptive basis under section 44AE, 44BB or 44BBB, and who has claimed their income to be lower than the profits or gains of his business
  • Any person carrying on a business where the profits and gains from the business are determined on a presumptive basis under 1 section 44AD and who has claimed such income to be lower than the profits or gains of their business, yet exceeds the maximum amount which is not chargeable as income tax. For further clarification, see here

Amendment effective from Financial Year 2017-18

“44AA

  • Every specified person shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
  • The specified person referred to in sub-section (1) shall get the books of account and other documents referred therein audited by an accountant before the specified date.
  • The specified person shall, after completion of the audit, furnish by the specified date, the following statements and reports, namely:-
  • the statement of assets and liabilities of the specified person as on the last day of the previous year;
  • the profit and loss statement or the income and expenditure statement, as the case may be, for the previous year; and
  • the report of tax audit.

1. The person referred to in sub-section (1) shall be deemed to have complied with the provisions of this section, if –

  • the person keeps and maintains the books of account and documents and gets such accounts and documents audited, as required by or under any other law;
  • the person obtains by the specified date the report of the audit as required under such other law; and
  • the person furnishes, by the specified date, the statements and report referred to in sub-section (3).

2. The Board may, subject to the provisions of sub-section (4), prescribe the following in respect of keeping, maintaining, auditing of accounts and documents and furnishing of statements and reports:-

  • the books of account and documents to be kept and maintained;
  • the particulars to be contained in the books of accounts and documents;
  • the form and the manner in, and the place at, which the books of account and other documents shall be kept and maintained;
  • the period for which the books of account and documents should be retained;
  • the form of the statement and reports and the manner of verification; and
  • the medium in which the statements and reports is to be delivered;
  • the income-tax authority, or any other person, authorized to receive the statements and reports; and
  • any other matter connected therewith.

3. For the purposes of this section,-

  • “accountant” shall have the same meaning as in the Explanation below sub-section (2) of section 288;
  • “profession” shall mean the legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as may be prescribed;
  • “specified date” means the due date for furnishing the return of income under sub-section (1) of section 139;
  • “specified person” shall mean a person carrying on business or profession in the previous year and who fulfils the following conditions, namely:-
  • the total sales or turnover in the business exceed or exceeds 2 crore rupees or the gross receipts in the profession exceed 1 crore in any one of the 3 years immediately preceding the previous year;
  • the person is carrying on business or profession which is newly set up in any previous year and the total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed ?1 crore rupees in the previous year; or
  • the profits and gains from the business or profession are deemed to be the profits and gains of such person under section 44AD or section 44AE or section 44AF or section 44AG or section 44BB or section 44BBB, as the case may be, and he has claimed such profits and gains of the business to be lower than the profits and gains so deemed in the said previous year.”.

Form 3CA/3CB and 3CD?

Chartered Account has to furnish tax audit report before tax authority in prescribed form.

If a person carrying business or profession and their book of account are required to audited any law, Form 3CA should be chosen.

Form 3CB should be chosen if book of accounts are not required to be audited under any law. Form 3CA/3CB shall be accompanied with Form 3CD where Prescribed particulars are reported.

Due date by which taxpayer should get their accounts audited

The due date of filing the tax audit report under section 44AB is 30th September of the assessment year i.e. for financial year 2015-16; tax audit report should be submitted by 30th September 2016.

In case of taxpayer who is required to furnish report in form no 3CEB under section 92 in respect of international transaction or specified domestic transaction, the due date of filing the return of income is 30th November of the relevant assessment year.

The tax audit report is to be electronically filed by the chartered accountant to income tax Department. After filing of report, the tax payer has to approve the report from his e-filing account with income tax department.

Penalties for not getting the accounts audited as required by section 44AB

Non compliance of the provisions of this Act shall attract penalty under Section 271B of the IT Act. If any person required to get his audit done under Section 44AB fails to do so before the specified date shall be liable for penalty of 1/2% of the turnover/gross receipts subject to a maximum penalty of 1,50,000 /-

However, Section 273B states that no penalty shall be levied under Section 271B if there is a reasonable cause for such failure. Some instances

which have been accepted by the Tribunals/Courts as “Reasonable Cause” are:-

  • Resignation of the Tax Auditor and Consequent Delay
  • Death or Physical inability of the partner in charge of the Accounts
  • Labour Problems such as strikes, lock-outs for a long period
  • Loss of Accounts because of Fire/Theft etc. beyond the control of the Assessee.
  • Natural Calamities

Revision of Tax Audit Report

Tax Audit report e-filed cannot be revised under normal circumstances. However, in case the Accounts are revised in the following circumstances, the Audit Report e-filed can also be revised:-

  • Revision of Accounts of a Company after its adoption in the Annual General Meeting
  • Change in Law with Retrospective effect.
  • Change in Interpretation of Law.

In case the Tax Audit report e-filed is revised, the Auditor shall state that it’s a Revised Report and shall also state the reasons for the same.

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