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AUDIT UNDER INCOME TAX ACT

What Is Tax Audit?

 

Section 44AB of the Income Tax Act lays down provisions pertaining to the tax audit under the Income Tax Audit. An Income tax audit is conducted to ensure that the taxpayer has properly maintained the books of accounts and other records, and they truly reflect the income of the taxpayer. Tax audits have been made mandatory by the Income Tax Act that states that all taxpayers are required to get the accounts of their business or organization audited according to the provision of the act.

Moreover, it is intended to verify whether the assessee has complied with various requirements like filing of income tax returns, the accurate specification of claim and income tax deductions, etc. In short, a tax audit is a measure which is initiated to curb fraudulent tax practices. Tax audit must be carried out by a practicing Chartered Accountant in pursuance of the requirement of section 44AB. This article is a detailed account on section 44AB, which deals with a tax audit.

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 44ABafter 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 thedate of filing of the Audit Report u/s 44AB.

 

  1. 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.

 

  1. 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.

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.

 

What Are Form Nos. 3CA/3CB and 3CD?

 

The tax audit reports conducted by a registered Chartered Accountant are to be presented in a prescribed format. Under section 44AB of the IT Act, the form that is prescribed for the audit report in Form No. 3CB and the prescribed particulars are to be reported in the Form No. 3CD.

In some cases, when a person wishes to get their accounts audited under any law other than 44AB, then the form prescribed for audit report is Form No. 3CA and the prescribed particulars are to be reported in the Form No. 3CD.

What Is the 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 2017-18 corresponding to the assessment year 2018-19 should be obtained before 30th September 2018.

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.

 

What Is the Penalty for Not Getting the Accounts Audited as Required by Section 44AB?

 

According to section 271B, if any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB, a penalty may be imposed on him. The penalty shall be lower of the following amounts:

  • 5% of the total sales in case of a business organization or 0.5% of the total receipts in case of the profession of the current financial year.
  • The business may be fined with an amount of Rs.1,50,000/-.

However, according to the section 273B, no penalty would be imposed on the person if a valid reason for such failure is proved.

Thus, a tax audit is a very important requirement for individuals who are required to undergo such an audit. Failure to comply with the income tax rules would attract penalty and individuals wishing to avoid any penalty should ensure full compliance with all the rules of the income tax audit.

 

Audit under GST & Sales Tax

GST (Goods and Services Tax) Audit:

 

  1. Audit Under GST:

 

Applicability: GST audit is applicable to certain taxpayers whose aggregate turnover during a financial year exceeds the prescribed limit. The threshold for GST audit is generally specified by the tax authorities.

Frequency: It is typically conducted annually.

Audit by Professionals: GST audit is to be conducted by a Chartered Accountant or a Cost Accountant.

Form: The audit report is to be filed in Form GSTR-9C. GSTR-9C is a reconciliation statement between the Annual Returns (GSTR-9) and the audited annual financial statements.

 

  1. Key Components of GST Audit:

 

  • Verification of correctness of turnover.
  • Examination of the accuracy of input tax credit claimed.
  • Ensuring compliance with GST laws and rules.
  • Checking the accuracy of the GST returns filed.
  • Verifying the reconciliation of financial statements with GST returns.

 

  1. Consequences of GST Audit:

 

  • The audit may result in the identification of discrepancies or non-compliance.
  • Corrective actions may be required, and penalties may be imposed if any violations are found.
  •  

Sales Tax Audit (State-Level):

 

  1. Audit Under Sales Tax:

 

Applicability: Sales tax laws vary by state, and each state may have its own threshold for the applicability of sales tax audit. Generally, businesses exceeding a specified turnover are subject to audit.

Frequency: The frequency of sales tax audits may vary by state, but they are usually conducted annually or as determined by the tax authorities.

Audit by Professionals: Sales tax audits are often conducted by the state’s tax department officials.

 

  1. Key Components of Sales Tax Audit:

 

  • Verification of sales records and turnover.
  • Examination of purchase records to ensure proper payment of tax on inputs.
  • Checking the correctness of tax collected and deposited with the government.
  • Verifying compliance with state-specific sales tax laws and rules.

 

  1. Consequences of Sales Tax Audit:

 

  • Similar to GST, discrepancies or non-compliance identified during the audit may lead to corrective actions and penalties.

 

Audit under Companies Act

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