Income Tax Audit

Under direct taxes, the CBDT has posed onerous responsibility on the auditor via the Income Tax Act 1961 which has various provisions requiring a compulsory Tax audit.The Income Tax Act 1961 states various provisions for public charitable trust, the corporate and non corporate assessee, and others to conduct an Tax audit of accounts for tax purposes.

VJM & Associates LLP is known to deliver quality services to its clients. The professional team helps in developing strategies and an effective management system that enhances the operations and provides great value to the business. We at VJM & Associates LLP firmly believe in Tax Audits being a value addition exercise rather than a mere compliance exercise.

Income Tax Audit

Know More about IncomeTax Audit

When the annual gross turnover or professional receipt of an assessee exceeds the limit as specified in the Income Tax Act 1961, the Income tax act makes it compulsory to conduct an audit under section 44AB of Income Tax Act, 1961. In common parlance, such audit is referred as “Tax audit”

Income Tax Act 1961 specified requirement of audit under different sections such as:

  • Audit under Section 12A(b) of Income Tax Act, 1961 in case of charitable or religious trust of institutions.
  • Tax audit under section 44 AB in the case of a person referred to in clause (b) of sub-rule (1) of rule 6G.
  • Various other audit requirements are given under different sections such as Section 33AB, 35D, 33ABA, 32AB etc. for special deductions and tax holidays.,

Audit of accounts of certain persons carrying on business or profession – Section 44AB of Income Tax Act, 1961-

Different requirements of audit are given under different sections of Income Tax Act, 1961. However, the most common and general audit requirement is given in Section 44AB of Income Tax Act. Requirement to carry out audit is as follows:

  • If the annual turnover or receipts of the assessee carrying out business exceeds Rs. 1 crore* during a Financial year, then he needs to get tax audit done by a practicing chartered accountant.
  • If the annual gross receipts of the assessee carrying out profession exceed Rs. 50 Lakhs during a Financial year, then he needs to get his accounts audited by a Chartered Accountant.

* To promote digitalisation of transactions and minimise involvement of cash amount, Finance Act, 2020 amended section 44AB of Income Tax Act with effect from 01.04.2020 to insert that:

  1. If amount received in cash doesn’t exceeds 5% of aggregate of all receipts including amount received for sales, turnover or gross receipts; and 
  2. Payment made in cash doesn’t exceeds 5% of aggregate of all payments including amount incurred for expenditure

Then turnover limit of INR 5 Crore shall apply in place of INR 1 Crores. 

Presumptive Taxation – Section 44AD of Income Tax Act, 1961 

Under this scheme, assessee is liable to pay income tax on a deemed % of profit and there is no need to compute actual profit. This scheme is applicable to all the assessee carrying out business and whose gross turnover or receipt for the financial year does not exceed Rs. 2 crores. The other features of this scheme are as under:

  • No books of accounts are to be maintained by the assessee.
  • When the Income is received through the electronic mode of payments or account payment cheque or demand draft, then net profit is considered as 6% of the gross receipts
  • While if the income is received in cash then the profit from business is calculated at 8% of gross receipt
  • However, since FY 2018-19, if any assessee opts for Presumptive taxation under section 44 AD, then assessee can’t opt out of this scheme for the next 5 years. 
  • If assessee opt out of benefit of presumptive taxation for any F.Y. during 5 years then he is not eligible to opt for this scheme for next five years. Further, if total income of such assessee exceeds the maximum amount not chargeable to Income tax then assessee liable to get his accounts audited under section 44AB.
  • The return of income needs to be filed in ITR 4 form of the Income tax

Presumptive Taxation for professional – Section 44ADA of Income Tax Act, 1961

This scheme is applicable to all the professionals whose gross income does not exceed Rs. 50 Lakhs for the relevant financial year. The other features of the scheme are as under:

  • No books of accounts are to be maintained by the assessee.
  • The net income is to be calculated at 50% of the gross receipts of the relevant financial year.
  • If assessee claimed profit less than 50% then assessee will be required to get his accounts audited under section 44AB of Income Tax Act, 1961.

 

Also if the person is required to get his books of account audited under any other law, then he cannot opt for the presumptive taxation scheme.

Similar to above provisions, different sections have different requirement of Tax Audit.

We, at VJM & Associates LLP believe in offering qualitative services encompassing comprehensive review records along with our recommendations on strengthening internal controls for compliance.  Here are the following tasks during the course of tax audit:

  • The tax auditor expresses his opinion on the financial statements and the particulars as required by the Income tax act 1961
  • A letter of appointment should be given to every tax auditor for conducting the assignment
  • The tax auditor always gets the statement of particulars as required in the annexures to the audit report duly authenticated by the assessee
  • The purpose of the tax audit report is to assist the income tax department to assess the correct income of the assessee. Therefore a proficient tax auditor will always keep his working papers intact as a shred of evidence on which he has relied upon while conducting the audit
  • A tax audit checklist is normally prepared and followed during the course of a tax audit by the auditor for the smooth functioning of the audit. This checklist covers all the aspects of the audit and considers the areas to be covered for the reporting to be done in Form 3CD
  • The tax auditor applies reasonable test check on the total information that is prepared by the assessee in respect of certain items in the prescribed form
  • An expert tax auditor ensures that no items have been omitted in the information furnished to him by the entity
  • The tax auditor examines the books of accounts as well as other documents related to the transactions that reflect in the books of account
  • Audit report is furnished in Form 3CA or Form 3CB as applicable to the person.  Whereas, Form 3CD Statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961. It act as an annexure to form 3CD.
  • Form 3CA is applicable in the case where the accounts of the business or profession of a person have been audited under any other law. While Form 3CB is applicable to all other persons.
  • If the tax auditor is unable to obtain the required information he needs to qualify or mention the same in Form 3CA or Form 3CB and also its impact on the books of accounts
  • The tax auditor states if he has examined the financial statements and also certify the same. This certified copy of financial statements is attached with the tax audit report
  • A proficient tax auditor reports and comments his observations, discrepancies, opinion and inconsistency in the tax audit report
  • The tax auditor is required to upload the tax audit report directly in the e-filing portal of Income tax through his official and registered login credentials
  • After the report is uploaded the taxpayer accepts or rejects the report
  • Following are the major areas which depict why tax audit is important

    • The precision and perfection of the income tax return filed can be assured by tax audit
    • The accuracy of noting of a tax auditor during the course of the audit with regards to depreciation, compliances, tax calculations, income, and expense accuracy are all reported in the tax audit report
    • This helps the income tax department and authorities to analyze and rely  on the data provided by the assessee to the department
    • Also, tax audit is a major device to keep a check on malpractices and fraud abided while filing the income tax return.

It is advisable for the tax auditor to keep the following points in mind while furnishing the audit report:

  • If a particular item of income or expenditure appears in more than one clauses of the report then a suitable cross-reference should be given
  • If there are any differences of opinion between the auditor and the taxpayer then the tax auditor should mention both the views along with the other relevant information in his report
  • The applicable law for the relevant year should be considered while computing allowances and disallowances
  • The tax auditor has an authority to qualify his report if any information is not completely provided to him and has a material impact on the statement of particulars
  • All the information provided in the tax audit report must be based on the books of accounts, records, information, documents, and explanations made available to the auditor
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FAQs on Income Tax Audit

Every person who carries business and his gross receipts exceed Rs 1 crore in a financial year and while the gross receipt for the person in profession exceeds Rs 50 lakhs, then they have to get their books of account audited by a practicing chartered accountant under section 44AB. However, if the amount received in cash or payment made in cash doesn’t exceed 5% of aggregate receipts and payments respectively then the threshold limit of INR 5 Crore shall apply instead of INR 1 Crore.

Apart, different sections have different requirements of audit under Income Tax Act, 1961 like Section 12A created liability of Audit of Trusts etc.

If gross turnover of the business exceeds Rs 1 crores and gross receipts for profession exceeds 50 lakhs then assessee is liable to get his accounts audited under section 44AB. However, the threshold limit is increased to 5 crores if 95% of the receipts are received in digital mode from FY 2020-21.

The purpose of a tax audit is to assure that the books of accounts are maintained by a person according to the provisions of the Income tax Act as applicable. Also, it is conducted to assist the Income Tax authorities to check the accuracy of the return of income filed by a person

Section 44AB provides for liability of audit when turnover of the assessee exceeds a given threshold irrespective of net profit or loss, Therefore, if gross turnover or receipt exceeds the threshold, assessee is required to get his accounts audited irrespective of profit or loss.

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