Understanding of 44AB -Tax Audit

Introduction

The main objects of any audit are :

a. To certify to the correctness of the financial position as to shown in the Balance sheet, and the accompanying revenue statements,

b. The detection of errors,

c. The detection of fraud.

The detection of fraud is generally regarded as being of primary importance.  A regular audit is one generally accepted means for preventing and discovering frauds.  When the Act says that the auditor shall audit the accounts, it is just as much concerned with protecting  from fraud.

The object of audit under section 44AB is only to assist the Assessing Officer in computing the total income of an assessee in accordance with different provisions of the Act.This Audit effectively curbs tax Evasion and ensure tax compliance.  Therefore,

a. Even though the income of a person is below the taxable limit, he will have to get his accounts audited and if his turnover in business exceeds the prescribed limit.

b. If Assessing Officer wants the assessee to get his accounts audited in cases where the figures of turnover as appearing in the books of account of the assessee do not exceed the prescribed limits, he has no option but to pass an order under section 142(2A) directing the assessee to get his accounts audited from a chartered accountant as may be nominated by the Commissioner of Income-tax or the Chief Commissioner of Income-tax

Hence, it must also be understood that the issue whether the turnover/gross receipt exceeds the prescribed limit is to be determined in each year independent of the results obtained in the preceding year or years.  This section applies only if turnover/gross receipt exceeds the prescribed limit according to the accounts maintained by the assessee.  It would be advisable to maintain basic records to support the turnover/gross receipt for declare audit required or not.

Basics

a. Tax Audit not an investigation(Sahara India (Firm) v CIT)

b. Availability of audit report no fetter on AO's powers of scrutiny & disallowances.( Goodyear India Ltd. v. CIT)

c. Tax Audit u/s 44AB is "audit of accounts" and not audit of books of accounts.

d. Assessee not exempted from tax audit if he maintains no books of account.

e. Tax audit is audit in respect of accounts pertaining to business income only.

f. Assessee would be required to establish that total turnover by him is within the limits on the basis of Documents evidence such as:

• Sales Invoice/Cash Memo/Bills
• Bank Statements
• Any other Secondary Records
• Return Filed under any indirect tax like VAT/Sales Tax.

g. Tax audit is applicable With Following Conditions:

• Must be a person under Income tax Act
• Must carry on business or profession
• Must maintain books of account
• Object to earn profit or gain
• Profit or gain computable under Chapter IV
• Income is Taxable or Loss allowable under Act

h. Tax Audit is not apply if entire income exempt  under chapter III i.e. section 10

i. A trust/association/institution carrying on business may enjoy exemptions as the case may be under sections 10(21), 10(23A), 10(23B) or section 10(23BB) or section 10(23C) or section 11.  A co-operative society carrying on business may enjoy deduction under section 80P.  Such institutions/associations of persons will have to get their accounts audited and to furnish such audit report for purposes of section 44AB if their turnover in business exceeds the prescribed limit.

j. An agriculturist, who does not have any income under the head "PGBP" chargeable to tax under the Act and who is not required to file any return under the said Act, need not get his accounts audited for purposes of section 44AB even though his total sales of agricultural products may exceed the prescribed limit

Provision of Section 44AB

"Audit of accounts of certain persons carrying on business or profession”.

44AB.  Every person, --

(a) carrying on Business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year; or

(b) carrying on Profession shall, if his gross receipts in profession exceed twenty-five lakh rupees  in any previous year; or

(c) carrying on the Business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or

(d) carrying on the Business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the 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 and setting forth such particulars as may be prescribed.

Analysis of Provision

Who are required to get their accounts audited?

Every Person

• Individual/Proprietorship
• HUF
• Company
• Partnership Firm                              
• AOP/BOI
• Local Authority
• Co-operative / Trust
• AJP

As per Guidance Note on Tax Audit Issued By ICAI the following activities have been held to be Business :

(i) Advertising agent

(ii) Clearing, forwarding, and shipping agents - CIT v. Jeevanlal Lalloobhai & Co.

(iii) Couriers

(iv) Insurance agent

(v) Nursing home

(vi) Stock and share broking and dealing in shares and securities - CIT v. Lallubhai Nagardas & Sons

(vii) Travel agent.

Turnover

It includes

• Profit on sale of Export License/ Duty Drawback/Cash Assistance

• Gross interest income received by Moner lender

• Exchange rate difference on export sales.

• Advance received & forfeited from customers

• Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account

• Sales of scrap shown separately under the heading “Miscellaneous Income”

• Luxury tax collected by a hotelier also a trading receipt in his hand- Pandyan Hotels Ltd. v. CIT

It excludes

• Sale/ Purchase of Fixed Assets
• Sale Proceeds of Assets held as Investments
• Rental Income
• Income by way of Interest unless assessable as business income
• Any expense which is reimbursable to the agent by the client

Circumstances Audit Applicable

Exception to Tax Audit:

a. Business covered under Section 44B and 44BBA( 1st proviso)

b. In case the person is required by or any other law to get his accounts audited(2nd proviso)

It shall be sufficient compliance with the provisions of this section i.e. such assessee is not required to get his accounts separately audited under this section subject to the following conditions

i. The audit under that law must be completed before the specified date i.e. before 30th  day of September of the Relevant  assessment year &

ii. The audit report under that law & an additional tax audit report in the form (3CA/CD) prescribed under this section must be furnished by that date.

Consequences:

F Companies are required to be audited under the Companies Act, 2013; they need not be audited once again under Section 44AB.  However, the accounting year is different from the previous year then fresh audit has to be conducted.  In this case, even though, the company was subject to statutory audit, the Tax auditor has to issue his report only in form 3CB and not in 3CA.

F Co-ops are required to be audited under the Co-operative Societies Act, but the auditor of a co-op need not be a CA.  Even then, a co-op need not be once again audited under Section 44AB.  However, Form No. 3CD cannot be signed by auditor appointed for co-operative societies under relevant law if he is not a CA

Audit under section 44AB is applicable to four categories of Assessee.

(i) Turnover Basis

a. Any Business Total Sales/Turnover/Gross Receipt > 1 Crore

The first category covers any person carrying on a business whose total sales, turnover or gross receipts exceed prescribed limit during the previous year.  Though the words Total Sales, Turnover, and Gross Receipts seem to give the same meaning, each one has its own meaning.  Various Legal forums have interpreted these words to have different meaning.

The expression ‘Business’ does not necessarily mean Trade or Manufacture only ( Barendra Prasad Roy v ITO) but also cover Service Provider & Speculative as well as Non-Speculative Business.

The additional sales found as a result of search, liability couldn’t be fastened on assessee (Brij Lal Goyal v ACIT)

What if Purchase crosses limit but not Sales?

It appears from the Chief CIT v. Vijay Maheshwari HUF ruling of the Supreme Court that it would safe for assessee to get their accounts audited under section 44AB if purchase exceeds prescribed limit although sales might not have exceeded the limit.  However A mere dismissal of SLP of The Lordship Mrs. Sujata v. Manohar & D. P. Wadhwa J. J. Without assigning, any reason does not mean that the High Court decision is approved on merits so as to be a judicial precedent.

b. Any Profession Gross Receipt > 25 Lakhs

The Second Category covers any person who is carrying on a profession whose gross receipts exceed prescribed limit

Profession is a word of wide import and includes ‘Vocation’, which is only way of living.  (CIT v Ram Kripal Tripathi)  (CIT v Manmohan Das (Deceased))

(ii)  Profit Basis

c.  If showing income below the prescribed in section 44AE/BB/BBB (Specified Business for Specified Assessee)

The Third Category covers persons whose income is assessed on a presumptive basis under section 44AE, 44BB, or 44BBB.  Where such assessee declare an income lesser than that presumed under the Sections 44AE, 44BB or 44BBB, they are required get their accounts audited in accordance with Section 44AB (c) irrespective of the fact that his turnover has not exceeded the prescribed limit in 44AB (a)

JCB cannot be termed as Goods Carriage.  (Gaylord Constructions v ITO)

d.  If showing income below the prescribed in section 44AD (Any Business for Specified Assessee) and Total Income Exceeds Basic exemption limit

The Fourth Category covers those persons who declare a lower income than the amount presumed under section 44AD.  The difference between the fourth and the third category is that, in the case of the fourth category, the assessees are subject to audit under section 44AB only if their income exceeds the basic exemption limit

There is twist in the provision.  Clause states “and whose Total Income exceeds the maximum amount which is not chargeable to income tax.”  Important thing to be kept in mind is whether “Total Income” is exceeding the exemption limit or not.  Therefore, we have to consider all the sources of income to arrive Total income.

Eligible Assessee

Resident Individual, HUF, & Partnership Firm

Non-Eligible Business/ Profession

(A)  Profession as per 44AA(1)

The following have been listed out as professions in section 44AA read with Rule 6F and other professions notified

(i) Accountancy

(ii) Architectural

(iii) Authorised Representative

(iv) Company Secretary

(v) Engineering

(vi) Film Artists/Actors, Cameraman, Director including an assistant director; a music director, including an assistant music director, an art director, including an assistant art director; a dance director, including an assistant dance director; Singer, Story-writer, a screen-play writer, a dialogue writer; editor, , lyricist and dress designer .

(vii) Interior Decoration

(viii) Legal

(ix) Medical

(x) Technical Consultancy

(xi) Information Technology

(B)  Commission Brokerage Income

(C)  Agency Business

(D) Business of 44AE

(E)  Claiming Deduction /Exemption u/s 10A,, 10AA, 10B, 10BA, 80HH to 80RRB

• Shivani Builder v ITO: Held that whenever the law provides any concession for its rigors, the observance and satisfaction of the qualifying criteria are presumed and section 44AD would not operate to curtail the scope of Section 2(24) read with Section 5.Hence where assessee admittedly earns a higher income it would be liable to assess on that basis & section 44AD.

• Aseessee will not be denied the benefit of claiming lower income than specified ,if it maintains books of account and geets them audited and furnishes a report beyond due date / though belatedly (Leyland Automobiles v ITO)

• Filing of audit report is only procedural in nature and can be denied the benefit of exemption claimed (CIT v A N Arunachalam)

• Assessee is not compelled to declare his actual profit/ gain from the eligible business if it is more than 8% of the turnover.  The word “claimed” indicates that it is a right and not the obligation of the assessee to show more profit than 8% as specified.  He may or may not exercise his right.

Case laws supporting this view:

Samta construction Co V. Pawan Kumar Sharma
CIT V. Arvind Mills Ltd
AC, Banglore  Velliapa Textiles Limited and Another

• When income is taxable at the rate of 8%, Assessee is not under any obligation to explain individual entry of  cash deposit in his bank, unless such entry has nexus with the gross receipt (CIT v. Surinder Pal Anand)

• No addition can be made on the ground that assessee was not able to explain discrepancies in account books (CIT v. Nitin Soni)

• AO has power to issue notice u/s 142/143, however AO has no power to assess anything in excess of return income if returned income is more than 8% of Total Sales Consideration (Abhi Developers v. ITO).

• Disallowance Provision u/s 40, 40A& 43B are not applicable (ITO v. Mark Construction)(GopalSingh R. Rajpurohit v ACIT)

• Refund of VAT is not included u/s 41(1) but included as a part of gross receipt.

• Non allowance of unabsorbed depreciation (DCIT v Sunil M. Kankariya)

• Section 44AD would not apply where gross receipt of an assessee exceeding limit

• Even if the said figure includes undisclosed income ( CIT v. Sobti Construction (India))

• Principle underlying also can not adopted( Sri Ram jhanwar Lal v ITO)

• Now certain issues arise regarding the applicability of tax audit on account of a combination of the above four categories

As per Guidance Note on Tax Audit Issued By ICAI    

Multiple Business

• The Aggregate ( Clubbing) sales, turnover and/or gross receipts of all Businesses ( ACIT v Dr K  Satish Shetty) carried on by an assessee would be taken into consideration in determining whether the prescribed limit as laid down in section 44AB has been exceeded or not.

• Turnover is Assessee wise rather than Business wise

• Turnover of All Business Activities carried on by assessee is aggregated other than presumptive(44AD/AE/BB/BBB)

Income from PGBP & other

The Language of Section 44AB is clear.  The requirement of compulsory audit is only in respect of Business carried on by the person and not in respect of his income from other sources. The audit report is required only in respect of books of account pertaining to the business.  (Gai construction v. State of Maharashtra)

Tax Audit applicable income v.  Not applicable income

There may be another circumstance where an assessee has mixed of different source & Head of Income amenable to taxation and also get audit meanwhile  one PAN accept only one ITR/Audit Report so separate form/Report  cannot be file.  Hence, The tax auditor auditing the books of account etc. relating to business covered by the provisions relating to Tax Audit should sufficiently indicate in his report (For 3CA/CB/CD) that his audit report only relate to the business covered by the provisions relating to Tax Audit and his audit report does not relate to business/ other income head/source assessable under the normal provisions of the Act.

Who can carry out Tax Audit?

An ‘Accountant’, as defined u/s 288(2) of the Income Tax Act, 1961 i.e. Any Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 and includes, any person who by virtue of the provisions of the Companies Act, 2013

In the Case of T.D. Venkata Rao v. Union of India, Supreme Court upheld the superiority of CAs by noting that Chartered Accountants, by reason of their training have special aptitude in the matter of audits and no other person can be held eligible to conduct audit under Section 44AB. Supreme Court further held that CAs are a Class by themselves meaning that CAs are the brand for auditing itself.  Thus monopolist trust vested on Chartered Accountants

Whether non-practicing or Part time practicing Chartered Accountant can conduct the Income Tax Audit?

Section 7 of the Chartered Accountants Act, 1949 requires every member who practices as Chartered Accountant to hold a Certificate of Practice & hence a member, if he wishes render services which amount to “practice” must hold COP. Therefore, Non-practicing Chartered Accountant cannot conduct the tax audit.

A part time practicing member i.e. a member in practice (namely holding a COP & also engaging himself in any other business/ & or occupation) is not entitled to perform the attest function due to Clause 11 of the Part I of the First Schedule of the Chartered Accountants,1949

However, CA or firm of CAs appointed as tax consultants can be tax auditors.

Ceiling limits for Tax Audit as per Central Council Guidelines of ICAI

The Income Tax Act 1961 does not provide any ceiling limit in regards to the Tax Audit. However, as per guidelines given by the Central Council of ICAI, Practicing Chartered Accountant, as an Individual or as a Partner, can accept maximum 60 tax audit assignments in a financial year.

Audit conducted u/s 44AD, 44AE of the Income Tax Act, 1961 shall not be considered while calculating ceiling limit

Following shall be considered as single Tax Audit Assignment while calculating ceiling limit:-

1. Audit of the Head office & Branches offices of a same concern shall be regarded as single Tax Audit Assignment;
2. Audit of one or more branches of the same concern

Purpose of Ceiling limits is-

To ensure proper allocation & distribution of tax Audit assignments;

To Provide Quality work

Duties of Auditor

a. To communicate with the predecessor auditor before starting tax audit in order to find out whether there is any professional or other reasons why he should not accept the appointment

b. Get engagement approval from client side.

c. Tax Auditor auditing requirements u/s 44AB of the Income TAX Act,1961 is not for computing the income but is:-

- Reporting of Accounts, &
- Reporting on the relevant information furnished in Form no. 3CD.

Auditor’s Disqualifications as per ICAI

Following person cannot be appointed as tax auditor of the assessee:-

a. The audit of accounts of a professional firm such as firm of chartered accountants, under section 44AB can’t be conducted by any partner or employee of such firm,

b. A Chartered Accountant, who is responsible for writing or the maintenance of the books of the assessee, then such chartered accountant or his partner or his firm in which he is partner should not accept tax audit assignment of that assessee.

c. Internal Auditor cannot be tax auditor and vice-versa.

Whether an assessee can remove the tax auditor appointed u/s 44AB

There is no specified procedure for removal of a Tax auditor appointed u/s 44AB of the Income Tax Act, 1961.

It is, however, possible for the management to remove the Tax Auditor; the management can remove the auditor on any valid grounds of such removal.

Circumstances in which the tax audit report can be revised

a. Change in law with retrospective effect;

b. Change in interpretation of law, i.e. CBDT Circulars, Notifications, Judgements;

c. Revision in accounts of the company after the adoption in the AGM

d. Tax auditors Duty

i.  To specify the reason for such revision
ii. To mention the fact in the audit report that it is the Revised Audit Report

Penalty for failure to get accounts audited:

If any person who is required to get his accounts audited by an Accountant as compliance provision of 44AB,  before the specified date fails to do so shall be liable for penalty under section 271B.  The amount of penalty shall be one-half percent of turnover / gross receipts or Rs.150000/- whichever is lower.  This penalty shows the seriousness that the Government affixes towards Tax Audit under section 44AB.

Some Example

(i) Business: 27Lakhs &    Profession: 72Lakhs                           

Audit of Profession as well as Business since professional Receipt exceeds limit

(ii) Total turnover from business: 86lakhs  & Professional receipts: 21 lakhs

No Audit since neither professional receipt nor business turnover exceeds limits

(iii) Transportation Business:

Two Light Commercial Vehicle (LCV) Owned by the Assessee : 64Lakhs
Hired Vehicle Owned by Other : 27Lakhs
Sec 44AB : Not applicable (Turnover is less than Rs 1 crore in business)
Sec 44AD : Assessee may opt for LCV owned by himself but not for hired vehicle & turnover also did not club (Anil Ram Gopal Mali (HUF) v ACIT)

(iv) Dealings on F & O : 70lakhs

Loss: 2Lakhs

Salary Income : 6Lakhs

Only Audit of dealing on F & O since

Section 44AB deals with Business income

Section 44AD covers speculative Business

Business Income (loss of 2lakhs) is below the 8% of turnover and assessee’s Total Income (salary income cannot be set off with business income so that 6lakhs) exceeding the maximum amount which is not chargeable to income tax.

(v) Proprietorship Business Sales: 38 Lakhs & Purchase : 36laks

Professional Receipt : 23Lakhs & Expenses 19Lakhs
Tax audit of Business since 
Business income is below 8%
Total income exceeds Basic exemption limit

(vi)  Eligible 44AD: 35Lakhs, Eligible 44AE: 30Lakhs & other : 80Lakhs

No tax Audit since other business not exceeding limit(80 lakhs)
Tax Audit if assessee claiming lower income than u/s 44AD(35X8%)
Tax Audit if assessee claiming lower income than specified in 44AE

(vii) Consultancy Fees Receipt: 20 Lakhs

Gross  Receipt  from Trading : 92 Lakhs
Service Charges: 10 Lakhs
Interest Income: 15 Lakhs

Tax audit of Business since (Mohd Aslam v ITO) exceed the limit (92lakhs +10laks) 

Bharat Paudel
Bharatpaudel47@gmail.com