[FAQs] Introduction & Applicability of Tax Audit | A.Y. 2022-23
- Account & Audit|Blog|Tax Audit Week|
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- By Taxmann
- Last Updated on 18 October, 2022
FAQ 1. What is a 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 expenses1. A tax audit can be conducted only by a Chartered Accountant in practice.
Read More About – Compulsory Audit of Accounts
FAQ 2. In which form the tax audit report has to be obtained?
The tax audit report has to be furnished in the forms prescribed below:
|Category of Taxpayer||Form for Audit Report||Annexure to Audit Report|
|If the books of account of the assessee are required to be audited under any other law||Form 3CA||Form 3CD|
|In any other case||Form 3CB||Form 3CD|
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.
FAQ 3. Who is required to get books of accounts audited?
Section 44AB provides for the audit of books of accounts of an assessee engaged in business or profession. The table below enumerates the requirement to get the books of accounts audited by different taxpayers:
|Nature of Business or Profession||Category of Taxpayer||When is the audit mandatory?|
|Any professions (specified or non-specified)||Any||If gross receipts from the profession during the relevant previous year exceed Rs. 50 lakhs.|
|Business||Both payment and receipt in cash do not exceed 5% of the total receipts and payment, respectively.||If total sales, turnover or gross receipt from the business during the previous year exceeds Rs. 10 crores.|
|Either payment or receipt in cash exceeds 5% of the total receipts and payment, respectively.||If total sales, turnover or gross receipt from the business during the previous year exceeds Rs. 1 crore|
|Business eligible for presumptive tax scheme under Section 44AD||Resident Individual or HUF||If the assessee’s income exceeds the maximum exemption limit and he has opted for the scheme in any of the last 5 previous years but does not opt for the same in the current year.|
|Business eligible for presumptive tax scheme under Section 44AD||Resident Partnership Firm (Excluding LLP)||The taxpayer has opted for the scheme in any of the last 5 previous years but does not opt for the same in the current year.|
|Profession eligible for presumptive tax scheme under Section 44ADA||Resident Individual or partnership firm (Excluding LLP)||The taxpayer claims that profits from the profession are lower than the profits computed under Section 44ADA, and the total income exceeds the maximum exemption limit.|
|Business eligible for presumptive tax scheme under Section 44AE||Any Assessee engaged in plying, hiring or leasing of goods carriage||The taxpayer claims that the profits from the business are lower than the profit computed under Section 44AE.|
|Business eligible for presumptive tax scheme under Section 44BB||Non-resident assessee engaged in the exploration of mineral oil||The taxpayer claims that his profits from the business are lower than the profit computed under Section 44BB.|
|Business eligible for presumptive tax scheme under Section 44BBB||Foreign Co. engaged in civil construction||The taxpayer claims that his profits from the business are lower than the profit computed under Section 44BBB.|
The provisions for tax audit under Section 44AB are not applicable in the case of an assessee who comes within the purview of Section 44B or Section 44BBA.
FAQ 4. Is a tax audit required if turnover exceeds the specified limit, but total income is below the maximum exemption limit?
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.
FAQ 5. How to avail of the benefit of the enhanced limit of Rs. 10 crores for the tax audit?
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.
For example, Mr. A is engaged in the business of trading readymade garments. He has a turnover of less than Rs. 10 crores during the financial year 2021-22. He made the following transactions during the relevant year:
|Particulars||Mode of transaction|
|Cash (Rs. in lakhs)||Bank (Rs. in lakhs)|
|Advance from customers||10||20|
The turnover of Mr. A during the financial year 2021-22 is up to Rs. 10 crores. He shall not be liable for tax audit if his cash receipt and payment during the year do not exceed 5% of the total receipt or payment, as the case may be.
Computation of percentage of cash receipts & payments:
|Particulars||Total (A)||Cash (B)||% in cash (B/A*100)|
Though the payment made in cash during the year does not exceed 5% of total payments, the percentage of cash receipts exceeds the limit of 5%. Thus, Mr. A is not entitled to the benefit of the increased threshold limit of Rs. 10 crores for the tax audit. Hence, the tax audit is applicable.
FAQ 6. Can the professionals avail the benefit of the enhanced turnover limit of Rs. 10 Crore for the tax audit?
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.
Read More About –Presumptive Scheme for Businesses under Section 44AD
FAQ 7. Whether a person opting for a presumptive taxation scheme under section 44AD is required to get his accounts audited?
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.
If an assessee is covered under both the clauses, that is, clause (a) and clause (e) of Section 44AB, will he be liable to get the books of account audited?
For example, if the turnover of an assessee is more than Rs. 1 crore and his cash payment and receipt are less than 5%, is he liable for a tax audit?
Let’s understand this with the help of the table below:
|Situation*||Turnover||Whether liable for a tax audit?|
|The assessee has opted for Section 44AD in any of the last 5 years but is not opting for the same in the current year.||Up to Rs. 1 crore||Yes, if income is more than the maximum amount not chargeable to tax [Section 44AB(e)]|
|Up to Rs. 2 crores|
|More than Rs. 2 crores but up to Rs. 10 crores.
|No [Proviso to Section 44AB(a)]|
|More than Rs. 10 crores||Yes|
|The assessee has not opted for Section 44AD in any of the last 5 years and is not opting for the same during the current year as well.||Up to Rs. 10 crores||No [Proviso to Section 44AB(a)]|
|More than Rs. 10 crores||Yes|
* Assuming cash receipts or payments do not exceed 5% of the aggregate amount received or paid during the year.
It should be noted that Clause 8 of Form 3CD requires the auditor to provide the relevant clause under which the tax audit has been conducted.
FAQ 8. Is a salaried employee required to get accounts audited if he is also doing trading in derivatives such as futures and options?
The gains or losses arising from trading in F&O are always taxable under the head ‘Profits and Gains from Business or Profession’. Income or loss from dealing in F&O shall be deemed as normal business income (non-speculative business) even though delivery is not affected in such transactions.
To check the applicability of tax audit in such cases, the turnover from trading in derivatives must be computed first. The computation of turnover is an essential factor as the applicability of a tax audit is determined based on turnover. If total sales, turnover or gross receipt from the business during the previous year exceeds Rs. 1 crore, the tax audit shall be required in such cases. However, the increased threshold limit of Rs. 10 crores shall be applicable if cash receipts and cash payments during the year do not exceed 5% of the total receipt or payment, as the case may be. In other words, more than 95% of business transactions should be done through banking channels.
For example, during the year, Mr. A has earned salary income and incurred losses from trading in futures and options (F&O). The details of his transactions are as under:
|Transaction||Buy Value||Sell Value||Realised P&L||Computation of Turnover|
The turnover, in this case, shall be Rs. 2,75,00,000, and the loss from F&O shall be Rs. 55,00,000. The tax audit requirement arises if the business turnover from F&O exceeds Rs. 1 crore. However, the tax audit shall not be required if more than 95% of business transactions are done through banking channels, and turnover is less than Rs. 10 crores. Since in F&O transactions, the trading shall be through digital means only, the enhanced limit of Rs. 10 crores shall apply to determine the applicability of tax audit.
FAQ 9. Analysis of the applicability of tax audit under different scenarios in case of professionals:
|Case||Gross Receipts||Profit||Whether tax audit applicable?||Reason|
|Case 1||40 Lakhs||25 Lakhs||No||Gross receipts are less than Rs. 50 lakhs and profit is more than 50% of the gross receipts.|
|Case 2||40 Lakhs||10 Lakhs||Yes||Profits are lower than 50% of total gross receipts, and total income exceeds the maximum exemption limit.|
|Case 3||40 Lakhs||2 Lakhs||No||Although profits are less than 50% of total gross receipts, but the total income is less than the maximum exemption limit.|
|Case 4||70 Lakhs||50 Lakhs||Yes||Gross receipts exceed Rs. 50 lakhs.|
|Case 5||70 Lakhs||15 Lakhs||Yes||Gross receipts exceed Rs. 50 lakhs. The profit percentage is irrelevant here.|
FAQ 10. Whether the provisions of tax audit apply to the Charitable/Religious Trust?
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.
Read More About– Computation of Income under Section 11 and 12 Here
 Goodyear India Ltd. v. CIT  112 Taxman 419/246 ITR 116 (Delhi)
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