Income Tax

FAQs on Tax Audit under section 44AB

As per Section 44 AB of the Income Tax Act, an audit of the books of account and furnishing a report by the assessee before the due date should be done. The Tax audit can be performed by a practicing Chartered Accountant. In this article, we take a look at some of the frequently asked questions in this regard.

What is a Tax audit and what is its purpose?

It is a process that allows to verify if the books of accounts prepared by a taxpayer complies with the generally accepted accounting principles and with the provisions of the Income Tax Act. The purpose of tax audit is to ensure that the taxpayer has properly maintained books of account and also to correctly compute the real income of the taxpayer.

It is worth mentioning here that audit doesn’t give the assessee any immunity from assessment or disallowance of expenses.

Some of the essential purposes of income tax audit are given below:

• To keep a check on fraud and any unprofessional conduct of taxpayers;
• Acts as a certification by an auditor for the books of accounts;
• Verifies the business person as a tax complier and shows account maintenance;
• It helps the tax authorities to know that the tax laws have been administered properly by submitting proper presentation of accounts.

In which forms the tax audit report should be obtained?

Form number 3CA/3CB is a format of audit report, whereas the Form 3CD is a statement of particulars that should be furnished under section 44AB of the IT Act^[1]. In case the assessee is required to get his books of account audited under another law, then it is enough to get his accounts audited under that law and produce a report of the audit and report in Form 3CA and 3 CD by a Chartered Accountant.

Who should get their books of account audited?

As per section 44 AB, the audit of books of account of an assessee should get done by those who are engaged in business or profession. The table made below provides for the requirement to get books of account audited.

Nature of business or profession	Category of taxpayer	When is audit mandatory?
Any profession	Any	If gross receipts from the profession during relevant previous year is more than 50 lakh rupees
Business	Payment, as well as receipt in cash, doesn’t exceed 5% of the total receipts and payments     Payment or receipt in cash exceed 5% of the total receipts and payments	If total sales, turnover or gross receipt from business in the previous year exceeds 5 crore rupees     If total sales, turnover or gross receipt from business in the previous year exceeds 1 crore rupees
Businesses that are eligible for presumptive tax scheme under Section 44AD	Resident Individual or HUF	If the income of the assessee exceeds maximum limit of exemption and he opted for the scheme in any of last 5 previous year but doesn’t opt for it in current year
Businesses that are eligible for presumptive tax scheme under Section 44AD	Resident partnership firm	Taxpayer opted for the scheme in any of the last 5 previous years but doesn’t opt for it in current year
Profession eligible for the presumptive tax scheme under Section 44ADA	Resident Assessee	Taxpayer claims that profits from profession are lower than the profits computation under Section 44ADA and total income exceeds the maximum exemption limit
Businesses that are eligible for presumptive tax scheme under Section 44 AE	Assessee engaged in plying/hiring/leasing of goods carriage	Taxpayer claims that profits from business are lower than the profits computation under Section 44AE
Business eligible for presumptive tax scheme under Section 44AB	Non-resident assessee engaged in mineral oil exploration	Taxpayer claims that profits from business are lower than the profits computation under Section 44AB

Latest update-

With a view to reduce the compliance burden on SMEs through Finance Act 2020, threshold limit for a person carrying on business was raised from 1 crore rupees to 5 crore rupees in cases where the aggregate of all receipts in cash in the previous year doesn’t exceed 5% of such receipt and the aggregate of all payments in cash in the previous year doesn’t exceed 5% of such payment.

 Now to incentivize non-cash transactions to promote digital economy and also to reduce compliance burden on SMEs, it has been decided to further raise the threshold from 5 crore rupees to 10 crore rupees in cases as provided above.

This change is set to take effect from April 1^st, 2021 and shall accordingly apply for the assessment year 2021-22 and to subsequent assessment years.

What are sales turnover and gross receipt in a tax audit?

Sales Turnover– the meaning of sales turnover shall be the aggregate of amount for which sales are affected by an enterprise.

Gross Receipts– this term has not been defined under the Income Tax Act. Gross receipts include all receipts coming from carrying on a profession.

How to calculate sales turnover of commission agent?

Turnover of a commission agent or a person selling goods on consignment basis is determined with reference to the transfer of risk or reward of ownership. In case the property in goods or all significant risks and rewards of goods ownership continues to belong to principal, the relevant sale price won’t form part of the turnover of commission agent. 

However, where the property in the goods, significant risk and ownership reward belongs to the commission agent, the sale price received/receivable would form part of his turnover.

How to calculate the sales turnover of share broker?

When a share broker buys securities on the behest of customers, he doesn’t get them transferred in his name but are delivered in the customer’s name. It is true in case of sales as well. The share broker holds delivery on behalf of his customer. The property in securities doesn’t get transferred to share brokers. Only brokerage must be taken into account to calculate the value of the turnover.

How to calculate the sales turnover in case of multiple businesses?

If an assessee carries on more than one business, sale turnover or gross receipts from all the business will be clubbed together, but if the assessee opts for presumptive tax scheme, the turnover of such business will be excluded while determining the total sales turnover or gross receipts.

How to furnish tax audit report to the Income tax department?

The audit report can be filed electronically by a Chartered Accountant to the income tax department. The report would be uploaded directly by the tax auditor on the official website of the income tax. In order to furnish the report, the assessee must authorize and appoint a Chartered Accountant from his e-filing account.

The date of approval of the report by the taxpayer would be considered as the date of filing of the audit report. In case the assessee doesn’t accept or approve, the tax audit report shall be regarded as pending as if it hasn’t been filed.

How many Tax audit reports can be signed by a Charted Accountant?

 A practising CA can conduct 60 tax audits relating to an assessment year. The Institute of Chartered Accountants in India clarified that audit specified under a statute that requires assessee to furnish an audit report, won’t be considered for reckoning the specified number of tax audit assignments in case the turnover of the auditee is less than the turnover limit provided in section 44AB of the IT Act. 

Can a Tax audit report be revised?

Normally the audit report under section 44AB should not be revised, but sometimes a member may revise such report on the following grounds:

• Revision of the accounts of a company after its adoption in AGM;
• Change of law;
• Change in interpretation.

Therefore on the aforementioned grounds, the audit report, once filed, can be revised.

Is there a penalty on late filing of Audit report?

In case a person fails to get his accounts audited, or he fails to furnish the audit report, the assessing officer can direct such a person to pay penalty of sum equal to lower of 0.5% of the total sale, turnover/gross receipts or 1,50,000 rupees.

However, it may be noted here that there would be no penalty if such failure is owing to a reasonable cause.

Does reporting in Form 3CD would be made according to books of account or after adjustment according to Income Computation and Disclosure Standards?

The preamble of Income Computation and Disclosure Standards provides that ICDS is applicable for income computation chargeable under Profit and Gains of business or profession or Income from other sources and not for maintenance of books of account.

Whether the address of all locations should be mentioned in the audit report?

If books of account are kept in multiple location, then the auditor is required to provide the address of all locations with the details of books of account maintained at each location.

In case of company assessee, the auditor must verify if Form AOC-5 is filed with the ROC under the Companies Act for maintenance of books of account at a place apart from the registered office.

The duty of auditor is not just limited to giving a list of books of accounts, but should examine books of account maintained.

Is it mandatory to disclose the nature of businesses carried on by the assessee and any change therein?

Clause 10 of the Form 3CD requires disclosing nature of every business or profession carried on by the assessee during the previous year. In case of any change in the nature of business, should be disclosed precisely. Such change includes a change from manufacturer to the trader and change in principal line of the business.

Any addition to or permanent discontinuance of, a line of business can also amount to change requiring reporting. However, in case of temporary suspension of business, it may not amount to change and hence need not be reported.

What kind of documents should be maintained by taxpayers in order to comply with maintenance of books of account?

The following documents should be maintained:

• Cash book;
• Journal, if books of accounts are there as per the mercantile system of accounting;
• Ledgers;
• Carbon copies of bills and carbon copies or counterfoils of receipts which is issued by the assessee of value more than 25 rupees;
• Original bills issued to the assessee and receipts with respect to the expenditures incurred by him;
• Signed vouchers, in case where bills and receipts are not issued, and expenditure amount is not more than 50 rupees, if cash book doesn’t have adequate particulars in respect of these expenditures. 

Conclusion

Hope that the FAQs answered at least some of your queries. Tax audit is not something to worry about if you carry on your business in the right manner and file returns on time. Ensure that if you fall under the category of taxpayer, then follow all the compliances before due time.

Read our article: The Impact of Section 44AA and 44AB of the Income Tax Act