Income Tax Audit Focusing on Recent Changes and Key Areas with Practical Examples
This Article explains the Provisions of Income Tax Audit governed by Section 44AB of Income Tax Act, 1961 including the recent amendments in Budget 2020.
Income Tax Audit Meaning:
Tax Audit is an audit which is made compulsory by Income Tax Act, 1961. It is an examination or review of accounts of any business or profession carried out by taxpayers to ascertain the compliance of various provisions of the Income-tax law. Tax audit is conducted as per section 44AB of Income Tax Act, 1961 by a Chartered Accountant.
The Various Categories of Taxpayers who are required to get their books of accounts audited as per the provisions of Income Tax Act, 1961:
|S. No.||Categories of Taxpayers||Threshold Limit|
|(a)||Carrying on Business (If Taxpayer is not opting for Presumptive Taxation Scheme).||Total sales, turnover or gross receipts exceed Rs. 1 Crore in the FY.|
|(b)||Carrying on business eligible for presumptive taxation under Section 44AD.||If Taxpayer declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit applicable to him.|
|(c)||Carrying on business and also declaring the profits as per the presumptive taxation under Section 44AD.||If the total sales, turnover or gross receipts does not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses.|
|(d)||Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB.||If declares profits or gains lower than the prescribed limit under presumptive taxation scheme.|
|(a)||Carrying on Profession.||Total gross receipts exceed Rs 50 lakh in the FY.|
|(b)||Carrying on the profession eligible for presumptive taxation under Section 44ADA (i.e. professional receipts not exceeding Rs. 50 lakhs in the FY).||If Taxpayer declares the profits below the limits prescribed under the presumptive taxation scheme and has income exceeding the maximum amount not chargeable to tax as applicable to him.|
Note: Whether GST shall be included while calculating the gross turnover or receipt in case of Tax Audit or Presumptive Taxation?
Ans: In case assessee opted for Composition scheme: In case of an assessee who has opted for Composition Scheme under GST Act, the tax is not to be recovered from the customer and it is debited to the Statement of profit & loss as an indirect expense. Thus, amount of GST paid by an assessee should not form part of his gross turnover.
In case of other Assessees: As GST is charged from the customer and it is recognized separately in the books of account, it is not clear whether the amount of GST shall be included in the turnover for the purpose of calculation of taxable income only or for every other provision which has a reference to ‘turnover’. (Section 145A provides for inclusion of taxes, cess, etc. in the value of sale, purchase and inventory.)
Author View: Unless the CBDT clarifies its stand on this matter, it would be appropriate to ignore the amount of GST while calculating the gross turnover or gross receipts because of following reasons:
1. Section 145A begins with “For the purpose of determining the income chargeable under the head “Profits and gains of business or profession” which makes this provision inapplicable for other purposes (i.e. for the purpose of sections 44AA, 44AB, 44AD and 44ADA).
2. If GST recovered from customer is credited to Current Liability Accounts (Output CGST or Output IGST or Output SGST) and payments to the authority are also debited to the said separate account, these should not form part of turnover shown in profit and loss account.
Inclusion of GST in the turnover would have the cascading effect, i.e., presumptive income shall also be computed on the component of GST which is never treated as income of the taxpayer.
Let us understand the applicability of Tax Audit with the following example. Assume that Taxpayer does all his transactions in cash. Now consider this example spread over 20 assessment years:
|Year||Gross T/O||Profit %||Whether Total Income more than Basic Exemption||44AD applic
|1.||1,50,00,000||More than 8%||Yes||Yes||No||The taxpayer is not required to maintain the books of accounts and conduct audit.|
|2.||80,00,000||Less than 8%||Yes||No||Yes||The taxpayer has fallen in the 44AD(4) and he is required to gets his accounts audited u/s 44AB(e). Now, Section 44AD shall not be available to the taxpayer for next 5 assessment years.|
|3.||99,00,000||9%||Yes||No||Yes||The taxpayer has fallen u/s 44AD(4) i.e. opted out for section 44AD in the previous year, therefore he is required to get his accounts audited u/s 44AB(e).|
|4.||1,10,00,000||4%||No||No||Yes||The taxpayer has fallen u/s 44AB(a) and it is irrelevant that the Total Income is less than basic slab exemption, therefore he is required to get his accounts audited u/s 44AB(a).|
|5.||99,00,000||4%||No||No||No||The taxpayer has fallen u/s 44AD(4) but TI is less than basic exemption, therefore he is not required to get his accounts audited u/s 44AB(e). His turnover is less than Rs. 1 Crore, so he shall not be covered u/s 44AB(a).|
|6.||99,00,000||6%||Yes||No||Yes||The taxpayer has fallen u/s 44AD(4) but TI is less than basic exemption, therefore he is not required to get his accounts audited u/s 44AB(e).|
|7.||99,00,000||9%||Yes||No||Yes||The taxpayer has fallen u/s 44AD(4) [i.e. opted out section 44AD in any of the preceding 5 A.Y.] and TI is more than basic exemption, therefore he is required to get his accounts audited u/s 44AB(e).|
|8.||1,70,00,000||8.5%||Yes||Yes||No||Taxpayer is eligible for the provisions of section 44AD and no requirement to maintain the books of accounts.
As the taxpayer has completed 5 years of ineligibility to claim the benefit of the provisions of section 44AD(4).
|9.||2,10,00,000||3%||Yes||No||Yes||Taxpayer is required to get his accounts audited u/s 44AB(a). Section 44AD is not applicable as turnover is more than Rs. 2 Crores. Also section 44AD(4) is not applicable as the taxpayer is not an eligible assessee as per 44AD(1).|
|10||1,68,00,000||8.5%||Yes||Yes||No||The taxpayer is not required to maintain the books of accounts and conduct audit.|
|From 10th year to 15th year- Taxpayer has adopted for section 44AD. (i.e. continuously claimed the benefit of section 44AD for at least 6 years)|
|16||1,90,00,000||4.5%||Yes||No||Yes||Tax payer is required to get his books of accounts audited. But provisions of section 44AD(4) will not be applicable here.|
|17||1,20,00,000||8.5%||Yes||Yes||No||The taxpayer is not required to maintain the books of accounts and conduct audit.|
|18||1,80,00,000||4%||Yes||No||Yes||Taxpayer is required to gets his accounts audited u/s 44AB(e). He has fallen in the 44AD(4) and therefore Section 44AD shall not be available to the taxpayer for next 5 assessment years.|
|19||1,20,00,000||8.5%||Yes||No||No||The taxpayer has fallen u/s 44AD(4) [i.e. opted out section 44AD in any of the preceding 5 A.Y.], therefore he is required to get his accounts audited u/s 44AB(e).|
|20||1,20,00,000||5%||Yes||No||Yes||The taxpayer has fallen u/s 44AD(4), therefore he is required to get his accounts audited u/s 44AB(a).|
Case a: In case of loss to the tax payer from carrying on business and not opting for presumptive taxation scheme.
Ans. Tax audit is required in case total sales, turnover or gross receipts exceed Rs 1 crore.
Case b: If taxpayer’s total income exceeds basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme).
Ans. In case of loss from business and when sales, turnover or gross receipts exceed 1 crore, the taxpayer is subject to tax audit under section 44AB.
Case c: Carrying on business (not opting for presumptive taxation scheme under section 44AD) and having a business loss but with income below basic threshold limit.
Ans. Tax audit is not applicable in this case if gross turnover is up to Rs. 1 crore.
As per the third proviso of section 44AB of the Act, in such a case taxpayer is not required to gets his accounts audited again under the Income Tax Act, 1961. As it shall be the sufficient compliance with provisions of this section if such person gets the accounts of such business or profession audited under such law before the due date of filing the income tax return.
Taxpayer can submit the audit report required under such other law along with the report by Chartered Accountant in the form prescribed under section 44AB i.e. Form 3CA and Form 3CD.
Author’s Comments for above special case 2:
1. Form 3CA is required to be submitted instead of Form 3CB along with the Form 3CD.
2. Taxpayer is not required to gets his accounts audited means “all the particulars of Form 3CD are required to be audited but not the accounts”. Therefore, audit report conducted any other law is required to be annexed along with the Form 3CD.
Form 3CA/3CB & 3CD:
Any person who is required to get tax audit would be required to furnish the following for tax audit while filing income tax return:
Form 3CA, 3CD – Audit Report Form in case where accounts of taxpayer has been audited under any other law.
Form 3CB, 3CD– Audit Form in case accounts of taxpayer are not being subject to audit under any other act except Income tax Act.
The due date for completing and filing tax audit report under section 44AB of Income Tax Act is 30th September of the relevant assessment year. But in case the taxpayer is required to furnish Form no. 3CEB under section 92 of the Act, then the due date for filing tax audit is 30th November of the relevant assessment year.
If any taxpayer who is required to get the tax audit done but fails to do so, then penalty as per section 271B of the Act shall be the lower of the following amounts:
1. 0.5% of the total sales, turnover or gross receipts.
2. Rs. 1,50,000.
However as per Section 273B of Income Tax act, no penalty shall be levied on taxpayer, for non-compliance of audit if he proves that there was reasonable cause for the said failure. The expression “reasonable cause” has to be interpreted liberally and in a fair and reasonable manner so as to advance the cause of justice particularly when it comes to levy of penalty. [ACIT vs. Gayatri Traders on 30.04.1996]
Some of the instances where Tribunals/Courts have accepted as “reasonable cause” are as follows:
1. Resignation of the tax auditor and consequent delay;
2. Bona fide interpretation of the term `turnover’ based on expert advice;
3. Death or physical inability of the partner in charge of the accounts;
4. Labour problems such as strike, lock out for a long period, etc.;
5. Loss of accounts because of fire, theft, etc. beyond the control of the assessee;
6. Non-availability of accounts on account of seizure;
7. Natural calamities, commotion, etc.
While presenting the Union Budget for 2020-21, the Honorable Finance Minister announced that currently, businesses having turnover of more than one crore rupees are required to get their books of accounts audited by an accountant. In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, she proposed to raise by five times the turnover threshold for audit from the existing Rs. 1 crore to Rs. 5 crores. In order to boost cash less economy, she proposed that the increased limit for mandatory tax audit shall apply only to those businesses which carry out less than 5% of their business transactions in cash. In all other cases, limit would remain 1 crore only.
In other words, the tax audit turnover limit would be Rs. 5 Crores applicable only in the case where following two conditions are satisfied:
Condition-1: the total of all the amount received (including the amount received towards sales or turnover or gross receipts) in cash during the previous year doesn’t exceed 5% of such amounts; and
Condition-2: the total of all the payments (including amount incurred for expenditure) in cash during the previous year does not exceed 5% of such payments.
Due to change in due date of filing of Income Tax Return from 30th September to 31st October for all audit cases, the related audit reports have to be filed at least one month before the due date of filing ITR i.e. by 30th September. It would include the report u/s 44AB (Tax Audit) as well.
In other words, to enable the pre-filling of returns in case of persons having income from business or profession, it is required that the tax audit report may be furnished by the said assessees at least one month prior to the due date of filing of return of income. Therefore, Income tax audit report is required to be filed at least one month prior to the due date of filing the ITR i.e. on or before 30th September.
The above amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
Conclusion 1: Due to the proposed change in budget 2020 the situation stands as follows for a taxpayer having turnover below 5 crores and having Cash receipts and cash payments not exceeding 5%:-
Case a: For taxpayer having turnover more than 2 crores (but below 5 crores and having Cash receipts and cash payments not exceeding 5%), he is not liable to Tax Audit. This is irrespective of fact that the taxpayer showing profits up to 6% or 8% as per 44AD or not.
Case b: For taxpayer having turnover less than 2 crores (but having Cash receipts and cash payments not exceeding 5%), he is liable to Tax Audit, if he does not show profits up to 6% or 8% as per 44AD.
Further, the above abnormality occurs as there is no change made in section 44AD. As we all know section 44AD is applicable only on Resident Individual, HUF or Partnership firm. Therefore, this abnormal situation will exist only in the case of Resident Individual, HUF or Partnership firm but no confusion exists with regard to applicability of tax audit in case of companies, LLPs or other persons.
Conclusion 2: Suppose if the taxpayer has fallen under the provision of section 44AD(4), after that turnover of the taxpayer is Rs. 4 Crores and also all receipts & payments are through banking channel. Tax audit is required to be conducted as per section 44AB(e).