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TAX AUDIT UNDER TAX AUDIT UNDER SECTION 44ABSECTION 44AB

LEGALLEGAL

& &

PRACTICAL ISSUESPRACTICAL ISSUESMade by:Made by:

PRIYANKA SHARMAPRIYANKA SHARMA

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PresentationPresentation

Basics

Legal provisions

Practical issues

Conclusion

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BasicsBasics

Background 1.Section 44AB of the Income-tax Act, 1961 was

introduced by section 11 of the Finance Act, 1984 with effect from 1st April, 1985.

2.Under section 44AB of the Income-tax Act, audit of the accounts of certain assessees is required if the total sales, turnover or gross receipts for the previous year exceeds the prescribed limits. In common parlance, section 44AB audit is popularly known as ‘tax audit’.

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BasicsBasics

What Is Tax• A tax is a financial charge or other levy

imposed on an individual or a legal entity by a state.

• A tax may be defined as a "pecuniary

burden laid upon individuals or property to support the government as a payment enacted by a legislative authority.

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• What is auditing?

“Auditing is a systematic and independent examination of data, statements, records, operations and performances(financials or otherwise) of an enterprise for a stated purpose.” ---- ICAI

BasicsBasics

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BasicsBasics  Objectives of Tax Audit To ensure that the books of account and other

records of the assessee are properly maintained. To ensure that the records faithfully reflect the

correct income of the tax-payer and claims for deduction are correctly made.

To facilitate administration by proper presentation of accounts before the tax authorities and to save Assessing Officer’s time in carrying out routine verification.

To ensure that the revenue authorities are provided with audited financial statements along with the relevant data and information for assessment.

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BasicsBasics

Applicability of Tax AuditCases Applicability

In the case of a business Every assessee whose total sales, turnover or gross receipts for the previous year exceeds Rs. 40 lakhs has to get his accounts audited.

In the case of a profession

Every assessee whose gross receipts for the previous year exceed Rs.10 lakhs has to get his accounts audited.

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BasicsBasics Who can conduct tax audit?

o Payment

o Credit

A chartered Accountant Firm appointed as tax consultant

YES

A statutory auditor of assessee company

YES

Internal Auditor of the company in his professional capacity

YES

Partner or employee of a firm which has to get his accounts audited under sec 44AB

NO

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BasicsBasics Due Date of getting Books audited

Different Persons Audit Form No.

Statement Particulars

Due Date

In case of Person who carries on Business or profession and who is required by or under any law to get its account audited.

3CA 3CD 31st October

In case of a person who carries on Business or Profession and not being a person referred above

3CB 3CD 31st October

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BasicsBasicsPenalty

U/s 271B, if a person fails to get his accounts audited as required under section 44AB or to furnish the report of such audit, then:

The Penalty imposed shall be, lower of

• ½ % of sales or gross receipts• Rs 1,00,000/-

NO PENALTY IS IMPOSABLE U/S 271B, IF THE ASSESSEE PROVES THAT THERE WAS A REASONABLE CAUSE FOR THE FAILURE..

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Legal provisionsLegal provisionsBusiness:- Sec 2(13) includes• Any trade, commerce or manufacture Or• Any adventure Or• Concern in the nature of Trade, commerce or manufacture 

Barendra Prasad Roy v. ITO Activity carried on continuously and systematically by

applying of his labour or skill with a view to earning an income.

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Legal provisionsLegal provisionsSome of the activities as business :Some of the activities as business :

Advertising AgentAdvertising Agent Clearing ,forwarding and shipping agents.Clearing ,forwarding and shipping agents. CouriersCouriers Insurance AgentInsurance Agent Nursing Home Nursing Home Stock & Share broking and dealing in share & Stock & Share broking and dealing in share &

securities.securities. Travel Agents etc.Travel Agents etc.

`̀

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Legal provisionsLegal provisions Profession-Sec 2(36) Profession-Sec 2(36) includesincludes

Vocation which is only way of living Vocation which is only way of living 

Profession involves the idea of an occupation , Profession involves the idea of an occupation , requiring purely intellectual skill or manual skill requiring purely intellectual skill or manual skill controlled by the intellectual skill of operator -Cit v. controlled by the intellectual skill of operator -Cit v. Man MohandasMan Mohandas

List of ProfessionList of Profession

AccountancyAccountancy

Authorised RepresentativesAuthorised Representatives

Company SecretaryCompany Secretary

EngineerEngineer

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Legal provisionsLegal provisionsSales & TurnoverSales & Turnover

– Not defined in the Income Tax– Explained as per publications and guidance notes issued by

ICAI Turnover meansTurnover means

– total sales minus– goods returned– trade discount– cancellation of bills for the period of audit– price adjustment

  Adjustment which do not relate to turnover should not Adjustment which do not relate to turnover should not be madebe made

ExampleExample– Writing of bad debts– Royalty – Sale proceed from fixed assets etc

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Legal provisionsLegal provisionsPurchases Purchases will be treated as turnoverwill be treated as turnover

  Turnover Turnover for transactions in shares, securities and for transactions in shares, securities and derivatives.derivatives.

  – Transactions of purchase or sale of stock and shares in

course of business shall be covered under sec 44AB

  Total value of the sales from the transactions such as Total value of the sales from the transactions such as speculative transactions, Derivatives, future & option and speculative transactions, Derivatives, future & option and delivery based transactions to be considered as turnover delivery based transactions to be considered as turnover u/s 44AB.u/s 44AB.

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Legal provisionsLegal provisionsGross receiptsGross receipts

– Not defined – Explained by CBDT vide its circular no.684 dated 10th June

1994– Means amount received from the client excluding value of

material supplied

Brijbhusanlal Pardumankumarv.CITBrijbhusanlal Pardumankumarv.CIT the gross receipts if the gross receipts if not contain profit element will not include the value of not contain profit element will not include the value of materials supplied to assessee.materials supplied to assessee.

  Deputy Commissioner of Income Tax v. Global Krishnan Deputy Commissioner of Income Tax v. Global Krishnan buildersbuilders Advance received for booking of flats towards Advance received for booking of flats towards cost of construction has an element of profit, therefore it cost of construction has an element of profit, therefore it should be included in words ‘gross receipts’.should be included in words ‘gross receipts’.

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Legal provisionsLegal provisions Items covered under Gross Receipt

Profits on sale of a licenceInterest received by the money lenderHire charges of cold storage;Liquidated damages;Insurance claims - except for fixed assets etc 

Items not covered under Gross Receipt Sale proceeds of fixed assets including advance

forfeited, if any;Sale proceeds of assets held as investments;Rental income unless the same is assessable as

business income;

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Legal provisionsLegal provisions

“GROSS RECEIPTS” IN CASE OF PROFESSIONOut of pocket expenses specifically utilised for making payments for stamp duties etc, should not form part of the "gross receipts".

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Legal provisionsLegal provisions

Coverage of Tax Audit  Income exempt under section 10 are also required to

audit of accounts under section 44AB.  A non-resident is also required to get his accounts

audited and to furnish report under sec 44AB, but only pertaining to Indian operations. 

An agriculturist need not required to get his accounts audited u/s 44AB even though the total sales of agricultural products may exceed Rs 40 lakhs.

Institutions/associations of persons (Co-operative society) will have to get their accounts audited and to furnish such audit report for purposes of section 44AB if their turnover in business exceeds Rs.40 lakhs.

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No double jeopardyThe assessee is not put to double jeopardy in having to get his account audited under section 142 (2A) and again section 44AB

special audit under section 142(2A) is discretionary to be ordered only, when it is found after examination of accounts that the accounts are complex and require special audit with the approval of the commissioner.

  Constitutionality

The provisions of this section are not violative of article 14 or 19(1)(g) of the constitution

Legal provisions

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Legal provisionsLegal provisions Venkata rao (T.D.) V Union of India

(1999) 237 ITR 315 (SC).

Chartered Accountants by reason of their training have special aptitude in the matter of audits. Therefore only CA allowed under this section to make audits.

Article 14 provides that “ the state shall not deny to any person equality before law or the equal protection of the laws within the territory of India”

Article 19(1)(g) guarantees all citizens with the right to practice any profession, or to carry on any occupation, trade or business

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Penalty u/s 277AFalsification of book of accounts or documents etc.• A person shall be Punishable with rigorous imprisonment ,

which may extend from 3 months to 3 year And shall be liable to fine if following condition are satisfied:

he willfully and with intent to enable any other person (assessee) to evade any tax or interest or penalty chargeable and impossible under Income Tax Act

he makes or causes to be made, any entry or statement in any books or other documents relevant for any proceedings under the Act which is false.

he knows it to be false or does not believe it to be true.• No such other prosecution shall be launched by any income

tax authority without prior permission of the CIT of Appropriate authority.

Legal provisionsLegal provisions

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ConclusionConclusion

Importance of Tax Audit  To ensure proper maintenance of books of accounts and

other records, To facilitate the administration of tax laws Also, it would save the time of the Assessing Officers

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ConclusionConclusionAction on incomplete audit reports

1. Incomplete Information/Non Commitable replies

Report by AO to Commissioner of IT

2. If professional negligence is reflected Initiation of Disciplinary proceedings (with the approval of CCIT)

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ConclusionConclusion PIB Press Release dated 10.12.1999  The CBDT has instructed its field officers to report any

professional negligence on the part of CA in preparing tax audit report to ICAI in terms of section 288 of the IT Act as the ICAI is entitled to institute proceedings against its member chartered accountants who submit faulty tax audit reports.

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Thank You