1. Introduction
What is audit?
1.1 The dictionary meaning of the term "audit" is check, review, inspection, etc. There are various types of audits prescribed under different laws like company law requires a company audit, cost accounting law requires a cost audit, etc.
Tax Audit
1.2 The Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law. Section 44AB gives the provisions relating to the class of taxpayers who are
required to get their accounts audited from a chartered accountant. The audit under section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfillment of other requirements of the Incometax Law. The audit conducted by the chartered accountant of the accounts of the taxpayer in pursuance of the requirement of section 44AB is called tax audit.
1.3 The chartered accountant conducting the tax audit is required to give his findings, observation, etc., in the form of audit report. The report of tax audit is to be given by the chartered accountant in Form Nos. 3CA/3CB and 3CD.
What is the objective of tax audit?
1.4 One of the objectives of tax audit is to ascertain/derive/report the requirements of Form Nos. 3CA/3CB and 3CD. Apart from reporting requirements of Form Nos. 3CA/3CB and 3CD, a proper audit for tax purposes would ensure that the books of account and other records are properly maintained, that they truly reflect the income of the taxpayer and claims for deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 – AY 2022-23 laws by a proper presentation of accounts before the tax authorities and considerably save the time of Assessing Officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched for or not. The time of the Assessing Officers saved could be utilised for attending to more important and investigational aspects of a case.
Tax Audit Guidance Note
1.5 The law has entrusted onerous responsibility of conducting tax audit under section 44AB on chartered accountants in practice. For compiling particulars for tax audit, conduct of audit and issuing of audit report, inputs are required by auditors and the other stakeholders. In order to address this requirement, Direct Taxes Committee (DTC) of the ICAI, has issued Tax Audit Guidance Note. Since the law and particulars for reporting keep on
changing, Guidance Note requires to be updated from time to time.
1.6 This Guidance Note is revised to facilitate compilation of particulars and conducting audit and issuing report for the Assessment Year 2022-23.
Further, DTC has decided to issue at annual intervals, a revised and updated version of the Tax Audit Guidance Note, offering guidance for each assessment year.
2. Background
2.1. The Finance Minister, while presenting the Union Budget for 1984-85, has observed and as stated in the Memorandum explaining the provisions of the Finance Bill, 1984, the compulsory audit is intended to ensure proper maintenance of books of account and other records, in order to reflect the true income of the tax payer and to facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities. This would also save the time of the Assessing Officers considerably in carrying out the verification. The scope of section 44AB was enlarged to provide that audit under the section would be required in case of a person carrying on the business of the nature referred to in section 44AD or 44AE or 44AF (by the Finance Act 1997 w.e.f. assessment year 1998-99) or 44BB or 44BBB (by the Finance Act 2003 w.e.f. assessment year 2004-05) or Section 44ADA (for
persons carrying on profession by the Finance Act 2016 w.e.f. assessment year 2017-18), if such person claims that his income is lower than the amount of income deemed under these sections as presumptive income.
Thereafter, Finance (No.2) Act, 2009 (w.e.f. AY 2011-12) enlarged the scope of section 44AD to encompass within its ambit the assessees covered by the provision of erstwhile section 44AF and hence, section 44AF has been
omitted. While section 44AF dealt with assessees carrying on retail trade, the amended section 44AD covers all assessees carrying on eligible business except professionals as referred to in section 44AA(1), a person earning income in the nature of commission or brokerage, a person carrying on any agency business.
2.2. Besides tax audit, certain other sections in the Income-tax Act, 1961 also require audit/certifications by a chartered accountant. A table appearing in the Appendix III provides information about such audits and reports.
2.3. The first edition of this Guidance Note was published in the year 1985 immediately after the introduction of tax audit provision to help members in discharging their responsibility in an efficient manner. In order to incorporate changes made by the amendments to the Finance Act, as well as judicial pronouncements, circulars etc., the said Guidance Note has been revised in the years 1989, 1998, 1999, 2005, 2013 and 2014. Further, a publication
titled ‘Implementation Guide w.r.t. Notification No. 33/2018 dated 20.07.2018 effective from 20.08.2018’ was also issued in the year 2018 (now incorporated and merged in this revised edition). The sequence of certain significant events is as follows:
(a) The Government had substituted revised Rule 6G and Forms 3CA, 3CB and 3CD in the Official Gazette on June 4, 1999, vide Notification No 10950/F.No. 153/74/98/TPL and omitted Forms No.3CC and 3CE.
(b) These forms have been subsequently revised vide CBDT’s Notification No. 280/2004 dated 16th November 2004.
(c) Significant changes in the Form No.3CD were made in the year 2006 through a Notification No. 208/2006 dated 10th August, 2006 which notified the Income tax (Ninth Amendment) Rules, 2006.
(d) Significant changes in the Form No.3CD were again made in the year 2014 through the Notification No. 33/2014 dated 25.07.2014 which notified the Income-tax (7th Amendment) Rules, 2014.
(e) Further changes were made to Form 3CD by inserting sub-clauses (d),(e) and (f) in Clause 13 to incorporate changes relating to ICDS. The insertion was made w.e.f. 01.04.2017 by Notification No. 88/2016 dated 29.09.2016 which notified the Income Tax (23rd Amendment) Rules, 2016.
(f) Clause 31 of Form No. 3CD was substituted vide Notification No. 58/2017 dated 3rd July 2017 further corrected by corrigendum Notification No. 60/2017 dated 6th July 2017.
(g) Significant changes in the Form No.3CD were again made in the year 2018 through the Notification No. 33/2018 dated 20.07.2018 which notified the Income-tax (8th Amendment) Rules, 2018.
(h) Certain amendments were made in Form No. 3CD by Notification No. 82/2020 dated 01.10.2020. However, the said Notification was substituted by Notification No. 28/2021 dated 01.04.2021.
(i) Certain amendments were made in Form 3CD in clauses 8A, 17, 18, 32 and 36 through Notification No. 28/2021 dated 01.04.2021 which notified the Income-tax (eighth Amendment) Rules, 2021.
(j) The Income-tax (8th Amendment) Rules, 2018 w.e.f. 20.08.2018, inter alia, inserted Clause 30C and 44 in Form No. 3CD. Circular No. 05/2021 dated 25.03.2021 has kept clause no. 30C and 44 in abeyance till 31.03.2022.
2.4. Form No. 3CD is quite comprehensive and covers generally all the items included in Form No. 6B prescribed for reporting under section 142(2A) and hence this Guidance Note would meet almost all the reporting requirements of audit under section 142(2A) also. However, if under section 142(2A), the Assessing Officer requires specific information, the same has to be given separately along with Form No. 6B.
2.5. The audit of accounts was introduced by section 11 of the Finance Act, 1984, which inserted a new section 44AB with effect from 1st April, 1985 [Assessment Year 1985-86]. This audit is popularly known as tax audit. This
section makes it obligatory for a person carrying on business to get his accounts audited by a chartered accountant, and to furnish by the ‘specified date’, the report in the prescribed form of such audit, if the total sales, turnover or gross receipts in business in the relevant previous year exceed or exceeds the prescribed limit. For a professional, the provisions of tax audit become applicable, if his gross receipts in profession exceed the prescribed limit in the relevant previous year.
Click here to download the full Guidance Note on Tax Audit u/s 44AB of the IT Act, 1961 - AY 2022-23
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