1 TAX AUDIT UNDER SECTION 44AB LEGAL& PRACTICAL ISSUES Made by: PRIYANKA SHARMA

2 Presentation  Basics  Legal provisions  Practical issues  Conclusion

3 Basics 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, 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’.

4 Basics 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.

5 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 Basics

6 Basics 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.

7 Basics Applicability of Tax Audit CasesApplicability 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.

8 Basics Who can conduct tax audit? oPayment oCredit 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

9 Basics Due Date of getting Books audited Different PersonsAudit 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. 3CA3CD31 st October In case of a person who carries on Business or Profession and not being a person referred above 3CB3CD31 st October

10 Basics Penalty 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..

11 Legal provisions Business:- 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.

12 Legal provisions Some of the activities as business :  Advertising Agent  Clearing,forwarding and shipping agents.  Couriers  Insurance Agent  Nursing Home  Stock & Share broking and dealing in share & securities.  Travel Agents etc. `

13 Legal provisions  Profession-Sec 2(36) includes Vocation which is only way of living Vocation which is only way of living  Profession involves the idea of an occupation, requiring purely intellectual skill or manual skill controlled by the intellectual skill of operator -Cit v. Man Mohandas  List of Profession Accountancy Accountancy Authorised Representatives Authorised Representatives Company Secretary Company Secretary Engineer Engineer

14 Legal provisions  Sales & Turnover –Not defined in the Income Tax –Explained as per publications and guidance notes issued by ICAI  Turnover 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 be made Example –Writing of bad debts –Royalty –Sale proceed from fixed assets etc

15 Legal provisions Legal provisions  Purchases will be treated as turnover  Turnover for transactions in shares, securities and 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 speculative transactions, Derivatives, future & option and delivery based transactions to be considered as turnover u/s 44AB.

16 Legal provisions  Gross receipts –Not defined –Explained by CBDT vide its circular no.684 dated 10 th June 1994 –Means amount received from the client excluding value of material supplied  Brijbhusanlal Pardumankumarv.CIT the gross receipts if not contain profit element will not include the value of materials supplied to assessee.  Deputy Commissioner of Income Tax v. Global Krishnan builders Advance received for booking of flats towards cost of construction has an element of profit, therefore it should be included in words ‘gross receipts’.

17 Legal provisions  Items covered under Gross Receipt Profits on sale of a licence Interest received by the money lender Hire 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;

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

19 Legal 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.

20  No double jeopardy The 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

21 Legal 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

22 Penalty u/s 277A Falsification 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 provisions

23 Conclusion 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

24 Conclusion Action 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)

25 Conclusion PIB Press Release dated 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.

26 Thank You