Tax Audit

A tax audit is a process to verify whether the books of accounts prepared by a taxpayer comply with the generally accepted accounting principles and the provisions of the Income-tax Act. It is intended to ensure that the books of account and other records are properly maintained and correctly compute the taxpayer’s true income. Such an audit also helps in checking fraudulent practices. A tax audit does not give the assessee any immunity from scrutiny assessment disallowance of expenses. A tax audit can be conducted only by a Chartered Accountant in practice.

Form No. 3CA/3CB is a format of audit report, whereas Form 3CD is a Statement of particulars required to be furnished under Section 44AB of the Income-tax Act. If the assessee is required to get his books of accounts audited under any other law, it is sufficient for him to get his accounts audited under that law and furnish a report of such audit and a report in form 3CA and 3CD by a Chartered Accountant by the prescribed due date.

Yes, the tax audit is mandatory. Section 44AB does not exempt an assessee from the tax audit simply because its total income does not exceed the maximum exemption limit. The objective of tax audit under section 44AB is to assist the Assessing Officer in computing the total income of an assessee in accordance with different provisions of the Act. Therefore, even if the total income of a person is below the maximum exemption limit, he will get his accounts audited and furnish the audit report if any condition prescribed under Section 44AB is satisfied.

The increased threshold limit of Rs. 10 crores shall be applicable only if cash receipts and cash payments during the year do not exceed 5% of the total receipt or payment, respectively. In other words, more than 95% of business transactions should be done through banking channels. It should be noted that any payment or receipt by cheque drawn on a bank or by a bank draft, not being an account payee cheque or draft, should be considered payment or receipt in cash. For example, any payment or receipt by a bearer or crossed cheque (not an account payee cheque) should be considered as payment or receipt in cash. It may be noted that conditions in respect of ‘amounts received’ and ‘payments made’ should be fulfilled separately. A threshold limit of 5% is prescribed separately for receipts/payments and should be applied accordingly. It means that if one of the conditions is not satisfied, the enhanced turnover limit will not apply. The onus would be on the assessee to prove that he is eligible for an increased threshold limit for not getting his accounts audited. He needs to ensure that his aggregate cash receipts and payments are within the limit of 5%. If he fails to do so, the consequences would be a penalty under Section 271B for failure to get accounts audited. However, if there is reasonable cause, then in terms of Section 273B, such a penalty may not be imposed.

Clause (a) of Section 44AB talks about a person carrying on a business, whereas clause (b) talks about a person carrying on a profession. The proviso to Section 44AB providing the enhanced turnover limit of Rs. 10 crores for the tax audit is placed below clause (a) to Section 44AB. Thus, the persons engaged in the profession are not entitled to claim an enhanced turnover limit of Rs. 10 crores for the tax audit.

Section 44AB prescribes the conditions under which an assessee is required to get his accounts audited. It excludes a person from getting books of account audited if he opts for a presumptive taxation scheme under Section 44AD, provided the turnover of the business does not exceed Rs. 2 crores. Clause (e) of Section 44AB states that a person, who has opted for the presumptive taxation scheme under Section 44AD in any of the last 5 previous years, but does not opt for the same in the current previous year, shall be liable to get his accounts audited if his total income exceeds the maximum amount not chargeable to tax. Clause (a) of Section 44AB provides for an audit of books of account if a person is engaged in a business and the turnover of such business exceeds Rs. 1 crore. However, the threshold shall be increased to Rs. 10 crores if the cash receipt and payment do not exceed 5% of the total receipt and payment, respectively.

Yes, since, though his turnover does not exceed the limit of 2 crores in the case of an individual, his receipts and payments exceed 5% of the turnover, therefore tax audit will be applicable.

One can opt for presumptive scheme if business is eligible and turnover less than 2 core and for other go for audit.

Sections 11 to 13 are special provisions governing the taxation of charitable or religious institutions. Section 12A provides the conditions to be fulfilled by any trust or institution to claim an exemption under Sections 11 and 12. Registration, maintenance of books of account, audit and filing of return of income are the conditions to be fulfilled to claim the exemption under Sections 11 and 12. Once these conditions are complied with, such an institution’s income shall be computed as per Sections 11 and 12. Section 11(4) provides that ‘property held under trust’ shall include a business undertaking, and Section 11(4A) provides an exemption of income from incidental business activities on fulfilment of the specified conditions. Nothing in the Act suggests that tax audit under Section 44AB shall apply to a business under Section 11(4A). Sections 11 to 13 are independent of the five heads of income. As long as the registration under Section 12AA/12AB is intact, the income cannot be computed under the five heads of income. Tax audit is a specific requirement for the assessee having income under the head ‘Business and Profession’. Therefore, there is no obligation on the charitable institutions to get the accounts audited under Section 44AB. However, such organisations are subject to the audit under section 12A(1)(b) read with Rule 17B, and a report of such audit is to be furnished in Form 10B.