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Understanding of 44AB Tax Audit

Understanding of 44AB Tax Audit

Understanding of 44AB Tax Audit

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Introduction- The object of audit under section 44AB is only to assist the Assessing Officer in computing the total income of an assessee in accordance with different provisions of the Act. Therefore,

  • Even though the income of a person is below the taxable limit, he will have to get his accounts audited and if his turnover in business exceeds the prescribed limit.
  • If Assessing Officer wants the assessee to get his accounts audited in cases where the figures of turnover as appearing in the books of account of the assessee do not exceed the prescribed limits, he has no option but to pass an order under section 142(2A) directing the assessee to get his accounts audited from a chartered accountant as may be nominated by the Commissioner of Income-tax or the Chief Commissioner of Income-tax

Hence It must also be understood that the issue whether the turnover/gross receipt exceeds the prescribed limit is to be determined in each year independent of the results obtained in the preceding year or years. This section applies only if turnover/gross receipt exceeds the prescribed limit according to the accounts maintained by the assessee. It would be advisable to maintain basic records to support the turnover/gross receipt for declare audit required or not.

Basics

♠ Tax audit is applicable With Following Conditions:

  • Must be a person under Income tax Act
  • Must carry on business or profession
  • Must maintain books of account
  • Object to earn profit or gain
  • Profit or gain computable under Chapter IV
  • Income is Taxable or Loss allowable under Act

♣ In the Following Conditions Tax Audit is not apply:

  • Entire income exempt under chapter III i.e. section 10
  • Agricultural income [sec 10(1)]

Provision of Section 44AB

Audit of accounts of certain persons carrying on business or profession”.44AB. Every person, —(a) carrying on Business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees in any previous year; or(b) carrying on Profession shall, if his gross receipts in profession exceed twenty-five lakh rupees in any previous year; or(c) carrying on the Business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or(d) carrying on the Business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax in any previous yearget his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

Analysis of Provision

♣ Who are required to get their accounts audited?

Every Person

  • Individual/Proprietorship
  • HUF
  • Company
  • Partnership Firm
  • AOP/BOI
  • Local Authority
  • Co-operative / Trust
  • AJP

As per Guidance Note on Tax Audit Issued By ICAI the following activities have been held to be Business :

(i) Advertising agent

(ii) Clearing, forwarding and shipping agents – CIT v. Jeevanlal Lalloobhai & Co.

(iii) Couriers

(iv) Insurance agent

(v) Nursing home

(vi) Stock and share broking and dealing in shares and securities – CIT v. Lallubhai Nagardas & Sons

(vii) Travel agent.

♣ Turnover

It includes

  • Profit on sale of Export License/ Duty Drawback/Cash Assistance
  • Gross interest income received by Moner lender
  • Exchange rate difference on export sales.
  • Advance received & forfeited from customers
  • Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account

It excludes

  • Sale/ Purchase of Fixed Assets
  • Sale Proceeds of Assets held as Investments
  • Rental Income
  • Income by way of Interest unless assessable as business income
  • Any expense which is reimbursable to the agent by the client
Nature of BusinessGross Receipts/ Turnover
Selling Agent entitled only for commissionCommission Earned/ Receivable
Selling agent who is vested with the Rights of Property, risk & reward in relation to goodsSales Price Received/Receivable
Consignment AgentCommission Earned
Commission Agent      a)            Pacca Arahtia      b)            Kaccha Arahtia  Total SalesCommission Earned
Building ContractorGross Receipts including value of material supplied
Speculation BusinessNet Gain from speculation is considered as Turnover, Since “Actual delivery” of scrips or items is not made
Money Lending BusinessInterest Earned
Chit Fund BusinessCommission Income, Brokerage Income, Service Charges
Leasing BusinessGross Receipts including Lease Rent
Share Brokers Dealing on behalf of customers: Only BrokerageDealing on Personal Account: Sale Value

 ♣ Circumstances Audit Applicable

⇒ In case the person is required by or any other law to get his accounts audited

It shall be sufficient compliance with the provisions of this section i.e. such assessee is not required to get his accounts separately audited under this section subject to the following conditions

– The audit under that law must be completed before the specified date i.e. before 30th day of September of the Relevant assessment year &

– The audit report under that law & an additional tax audit report in the form (3CA/CD) prescribed under this section must be furnished by that date.

BasisActivityLimitNature of Assessee
Resident Individual/HUF/FirmOther
Total Income up to Basic Exemption LimitTotal Income exceeding to Basic Exemption Limit
TurnoverBusiness1croreYesYesYes
Gross RecieptProfesion25LakhsYesYesYes
Income/GainBusiness 44AE/BB/BBBLower than specifiedYesYesNo
Income/GainBusiness 44ADLower than 8%NoYesNo

(i) Turnover Basis

a. Any Business Turnover > 1 Crore

–  What if Purchase cross limit but not Sales?

It appears from the Chief CIT v. Vijay Maheshwari HUF ruling of the supreme court that it would safe for assessee to get their accounts audited under section 44AB if purchase exceeds prescribed limit although sales might not have exceeded the limit. However A mere dismissal of SLP of The Loardship Mrs. Sujata v. Manohar & D. P. Wadhwa J. J. Without assigning any reason does not mean that the High Court decision is approved on merits so as to be a judicial precedent.

b. Any Profession Gross Receipt > 25 Lakhs

ii. Profit Basis

c. If showing income below the prescribed in section 44AE/BB/BBB (Specified Business for Specified Assessee)

If 44AE/BB/BBB applicable to Assessee then the provisions of section 44AB (c) requires such an assessee to get his accounts audited irrespective of the fact that his turnover has not exceeded the prescribed limit.

d. If showing income below the prescribed in section 44AD (Any Business for Specified Assessee) and Total Income Exceeds Basic exemption limit

There is twist in the provision. Clause states “and whose Total Income exceeds the maximum amount which is not chargeable to income tax”. Important thing to be kept in mind is whether “Total Income” is exceeding the exemption limit or not. So we have to consider all the sources of income to arrive Total income

Eligible Assessee

Resident Individual, HUF & Partnership Firm

Non Eligible Business/ Profession

(A) Profession as per 44AA(1)

The following have been listed out as professions in section 44AA read with Rule 6F and other professions notified

(i) Accountancy

(ii) Architectural

(iii) Authorised Representative

(iv) Company Secretary

(v) Engineering

(vi) Film Artists/Actors, Cameraman, Director including an assistant director; a music director, including an assistant music director, an art director, including an assistant art director; a dance director, including an assistant dance director; Singer, Story-writer, a screen-play writer, a dialogue writer; editor,lyricist and dress designer.

(vii) Interior Decoration

(viii) Legal

(ix) Medical

(x) Technical Consultancy

(xi) Information Technology

(A)  Commission Brokerage Income

(B)  Agency Business

(C)  Business of 44AE

  • When income is taxable at the rate of 8%, Assessee is not under any obligation to explain individual entry of cash deposit in his bank, unless such entry has noxus with the gross receipt (CIT v. Surinder Pal Anand)
  • No addition can be made on the ground that assessee was not able to explain discrepancies in account books (CIT v. Nitin Soni)
  • AO has no power to assess anything in excess of return income if returned income is more than 8% of Total Sales Consideration(Abhi Developers v. ITO)
  • Disallowance Provision u/s 40, 40A& 43B are not applicable (ITO v. Mark Construction)
  • Section 44AD would not apply where gross receipt of an assessee are more than 100lakhs even if the said figure includes undisclosed income ( CIT v. Sobti Construction (India))
  • As per Guidance Note on Tax Audit Issued By ICAI    
When a person is carrying onTurnover
More than one Business/ProfessionThe total turnover shall be clubbed together & tax audit shall be conducted if the Total Turnover exceeds 1 crores or 25 lakhs as the case may be
Business as well as professionTotal Gross receipts (Business & Profession) shall be checked

Multiple Business

The Aggregate ( Clubbing) sales, turnover and/or gross receipts of all Businesses ( ACIT v Dr K Satish Shetty) carried on by an assessee would be taken into consideration in determining whether the prescribed limit as laid down in section 44AB has been exceeded or not.

– Turnover is Assessee wise rather than Business wise

– Turnover of All Business Activities carried on by assessee is aggregated other than presumptive(44AD/AE/BB/BBB)

– Circumstances in which the tax audit report can be revised

  • Change in law with retrospective effect;
  • Change in interpretation of law, i.e. CBDT Circulars, Notifications, Judgements;
  • Revision in accounts of the company after the adoption in the AGM
  • Tax auditors Duty
    • To specify the reason for such revision
    • To mention the fact in the audit report that it is the Revised Audit Report

♣ Income from PGBP & other

The Language of Section 44AB is Clear. The requirement of compulsory audit is only in respect of Business carried on by the person and not in respect of his income from other sources.The audit report is required only in respect of books of account pertaining to the business.(Gai construction v. State of Maharashtra)

♣ Tax Audit applicable income v. Not applicable income

There may be another circumstance where an assessee has mixed of different source & Head of Income amenable to taxation and also get audit meanwhile one PAN accept only one ITR/Audit Report so separate form/Report cannot be file. Hence, The tax auditor auditing the books of account etc. relating to business covered by the provisions relating to Tax Audit should sufficiently indicate in his report ( For 3CA/CB/CD) that his audit report only relate to the business covered by the provisions relating to Tax Audit and his audit report does not relate to business/ other income head/source assessable under the normal provisions of the Act.

Understanding of 44AB Tax Audit

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