Audit Under Income Tax Act
Tax audit refers to the verification of the books of accounts maintained by a taxpayer. The purpose of a tax audit is to validate the income tax computation made by the taxpayer in the income tax return and to ensure compliance with the laws of Income Tax. Auditing of books of accounts must be carried out by a certified Chartered Accountant. In this article, we discuss the concepts of tax audit limit, Section 44AB of the Income Tax Act and the legal provisions governing the appointment of a tax auditor.
As per Section 44AB, who is covered by Tax Audit?
Tax Audit is applicable to certain classes of individuals which are mentioned under Section 44AB of the IT Act. Thus, as per the regulations of Section 44AB of the Income Tax Act, 1961, following is the list which outlines the classes of people who have to compulsorily follow the income tax audit procedures and get their accounts audited:
1. Taxpayer whose total sales, turnover or gross receipts from business exceeds Rs 1 cr or where Professional receipts exceed Rs 50 Lakh:
- It is mandatory to fill the Part A of Schedule Profit & Loss A/c and part A of Balance Sheet and also to file the Audit report u/s 44AB of Income Tax Act where the Total Sales, Turnover or Gross Receipts of the business exceeds Rs.1 cr or where Professional receipts exceed Rs 50 Lakh for the Financial Year 2017-18.
- The Audit Report u/s 44AB has to be electronically filed prior to or along with the return of income before the due date.
- The taxpayer has to approve the Audit Report u/s 44AB after it is e-filed by the Chartered Accountant. Without taxpayer approval, the submission of the Audit Report u/s 44AB is NOT COMPLETE.
- For the purpose of all the provisions of Income Tax Act, 1961, the date of approval by the taxpayer will be considered as the date of filing of the Audit Report u/s 44AB.
2. A taxpayer reporting Presumptive income under section 44AD:
- As per the provisions of Income Tax Act, the benefit of Section 44AD shall not be applicable where the gross receipts from business exceed Rs.2 cr in the financial year 2017-18.
- Hence, where the gross receipts/total turnover from the business exceeds Rs.2 cr, it is mandatory to fill the Part A of profit and Loss A/c and Part A of Balance Sheet and also file the Audit Report u/s 44AB of Income Tax Act.
- The taxpayer is advised to follow the process as per Sl. No. 1 above strictly in such cases. The benefit of Section 44AD is not available in such cases.
- A person who is eligible to opt for the presumptive taxation scheme of section 44AD but claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of section 44AD. This is also applicable in case his income exceeds the amount which is not chargeable for taxation.
- If an eligible assessee opts out of the presumptive taxation scheme, after a specified period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years after the decision to opt out is taken.
3. Taxpayer whose gross receipts in profession exceed Rs 50 Lakhs:
- It is mandatory to fill the Part A of Schedule Profit & Loss A/c and part A of Balance Sheet and also file the Audit report u/s 44AB of Income Tax Act where the gross receipts in profession exceed Rs 50 Lakhs for the Financial Year 2017-18.
- The audit report has to be electronically filed along with the return of income before the due date.
- The taxpayer is also required to approve/reject the audit report once the same is e-filed by the Chartered Accountant.
- A person who is eligible to opt for the presumptive taxation scheme of sections 44AE but he claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of sections 44AE.
- A person who is eligible to opt for the presumptive taxation scheme prescribed under section 44BB(*) or section 44BBB(*) but he claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections.
(*) section 44BB is applicable to non-resident taxpayers engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire basis to be used in the exploration of mineral oils. Section 44BBB is applicable to foreign companies engaged in the business of civil construction or erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project.
Due Date by which A Taxpayer should get his Accounts Audited?
Any person / persons covered under the section 44AB should get their accounts audited and should also obtain the audit reports on or before 30th September of that particular year, i.e. the due date of filing the return of the income.
For example, the Tax audit report for the financial year 2018-19 corresponding to the assessment year 2019-20 should be obtained before 30th September 2019.
The tax audit report is to be electronically filed by the Chartered Accountant to the Income Tax Department. The taxpayer has to approve the submitted reports using the e-fling account with the Income Tax Department after the filing of the Income Tax Report by the Chartered Accountant.
Frequently Asked Questions
Whether Tax Audit may be undertaken without statutory audit required as per law?
It may be noted that Form No. 3CA requires the tax auditor to enclose a copy of the Statutory Audit report. Where a statutory auditor has not been appointed by the authorities concerned or where the report of the statutory auditor is not available for whatever reasons, it will be possible for the tax auditor to give his report in Form No. 3CB and to certify the relevant particulars in Form No.3CD.
Similar approach can also be adopted in case of assessees following accounting year other than the financial year more particularly in the case of foreign companies or subsidiary of foreign companies who have to follow the English calendar year as its accounting year.
Who can Appoint Tax Auditors and who should sign their Appointment Letter?
The Assessee himself can appoint Tax Auditor for conducting the audit as mentioned in section 44AB. It is advisable that such an appointment letter should be signed by the person competent to sign the Return of Income.
Is it necessary to Appoint Statutory Auditors as Tax Auditors?
Section 44AB does not specify that only the statutory auditor appointed under the Companies Act should perform the tax audit. Therefore the tax audit can, be conducted either by the statutory auditor or by any other CA in practice.
I am working in a public limited company having businesses in more then one state, Can we appoint more than one CA firms as Tax Auditor?
It is possible for the assessee to appoint two or more CAs as joint auditors for carrying out the tax audit, in which case, the audit report will have to be signed by all the CAs.
I am working in Tax department of a Multinational Company and our Tax audit is jointly conducted by two CA firms. On some issues our auditors differ from each others and want to issue separate Tax Audit reports, can they do so?
In case of difference in the opinion of joint tax auditors, each tax auditor may issue separate audit report.
My relative is a CA in practice since last 10 Years and I want to appoint him as Tax Auditor of my Company. Can I appoint my relative as the Tax Auditor?
The position of a tax auditor for conducting audit under section 44AB will be considered as an office of profit. Therefore, the provisions of section 188 of the Companies Act, 2013 will be attracted when a relative of a director is appointed as a tax auditor of the company, if the remuneration thereof exceeds the limits prescribed in the aforesaid section. The necessary formalities will be required to be complied with as required under section 188.