FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
- Account & Audit|Blog|Tax Audit Week|
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- Last Updated on 28 July, 2022
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FAQ 1. What is a Tax Audit?
Ans. 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 actual income. The tax audit does not give the assessee immunity from scrutiny assessment or disallowance of expenses. A tax audit can be conducted only by a Chartered Accountant in practice.
FAQ 2. In which form the tax audit report has to be obtained?
Ans. The tax audit report has to be furnished in the forms as 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.
Where an 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?
Ans. Section 44AB requires 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 audit is mandatory?|
|Any professions (specified or non-specified)||Any||If gross receipts from profession during the relevant previous year exceeds Rs. 50 lakhs|
|Business||Cash receipt and payment up to 5%||If total sales, turnover or gross receipt from the business during the previous year exceeds Rs. 10 crore|
|Business||Any||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 income of assessee 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 current year.|
|Business eligible for Presumptive Tax Scheme under Section 44AD||Resident Partnership Firm||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 Assessee||Taxpayer claims that his profits from profession are lower than the profits computed under Section 44ADA and 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||Taxpayer claims that his profits from business are lower than the profit computed under Section 44AE|
|Business eligible for Presumptive Tax Scheme under Section 44BB||Non-resident assessee engaged in exploration of mineral oil||Taxpayer claims that his profits from 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||Taxpayer claims that his profits from business are lower than the profit computed under Section 44BBB|
The provisions for tax audit under Section 44AB is not applicable in the case of assessees who come within the purview of Section 44B or Section 44BBA.
FAQ 4. How to avail of the benefit of the enhanced limit of Rs. 10 crores for the tax audit?
Ans. Up to the assessment year 2019-2020, every person carrying on business was required to get its books of account audited from a Chartered Accountant if its total sales, turnover, or gross receipt from the business exceeds Rs. 1 crore during the previous year.
To reduce the compliance burden on small and medium enterprises, the Finance Act, 2020, effective from the assessment year 2020-21, has increased the threshold limit under section 44AB for the mandatory audit for a person carrying on business from Rs. 1 crore to Rs. 5 crores. The Finance Act, 2021 has increased the threshold limit from Rs. 5 crores to Rs. 10 crores, effective from the assessment year 2021-22 onwards.
However, the increased threshold limit of Rs. 10 crores shall be applicable only if cash receipts and cash payments during the year does 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. Any payment or receipt by cheque or bank draft should be considered a cash transaction if such cheque or draft is not an account payee. Thus, to illustrate, any payment or receipt by a bearer or crossed cheque (not being an account payee cheque) would 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. It means, if one of the conditions is not satisfied, then proviso would not apply. A threshold limit of 5% is prescribed separately for receipts/payments and ought to be applied accordingly.
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, in terms of Section 273B, such a penalty may not be imposed.
For example, Mr. A is engaged in the business of trading of readymade garments. He has a turnover of less than Rs. 10 crores during the financial year 2020-21. 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|
|– Unsecured loan||10||100|
|– Loan repayment||5||50|
The turnover of Mr A during the financial year 2020-21 is up to Rs. 10 crores. He shall not be liable for tax audit if his cash receipt and payment during the year does not exceed 5% of 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, a tax audit is applicable.
FAQ 5. Can the professionals avail the benefit of the enhanced turnover limit of Rs. 10 crores for the tax audit?
Ans. Clause (a) of Section 44AB talks about a person carrying on 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.
FAQ 6. Whether a person opting for a presumptive taxation scheme under section 44AD shall get his accounts audited?
Ans. Section 44AB of the Income-tax Act 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 turnover of 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. The Finance Act, 2020 has extended the threshold of turnover to Rs. 5 crores if cash receipt and cash payment do not exceed 5% of total receipt and payment respectively. This limit of Rs. 5 crores has been further enhanced to Rs. 10 Crores by the Finance Act 2021.
If an assessee is covered under both the clauses, that is, clause (a) and clause (e) of Section 44AB, whether he will 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 is less than 5%, is he liable to 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 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 not opting for the same during the current year as well.||Upto Rs. 10 crores||No [Proviso to Section 44AB(a)]|
|More than Rs. 10 crores||Yes|
* Assuming cash receipt or payments does not exceed 5% of the aggregate amount received or paid during the year.
It should be noted that Clause 8 of the Form 3CD requires the auditor to provide the relevant clause under which the tax audit has been conducted.
FAQ 7. Analysis of the applicability of tax audit under different scenarios in the case of professionals:
|Case||Gross Receipts||Profit||Whether tax audit applicable?||Reason|
|Case 1||40 Lakhs||25 Lakhs||No||The gross receipt is less than Rs. 50 lakhs, and presumptive profit under Section 44ADA is more than 50% of the gross receipts.|
|Case 2||40 Lakhs||10 Lakhs||Yes||The presumptive profit under Section 44ADA is lower than 50% of total gross receipts and total income exceeds the maximum exemption limit.|
|Case 3||40 Lakhs||2 Lakhs||No||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.|
|Case 6||7 Crores||2 Crores||Yes||Gross receipts exceed Rs. 50 lakhs. The limit of 10 Crores only applies in the case of business.|
FAQ 8. Whether the provisions of tax audit applicable to the business income of NGOs under Section 11(4A)?
Ans. Nothing in the statute suggests that the tax audit under Section 44AB shall apply to 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 of the assessee having income under the head “Business and Profession”.
 Goodyear India Ltd. v. CIT  112 Taxman 419 (Delhi)
 Section 13 of the Finance Act, 2021 has increased the turnover limit from 5 crores to 10 crores with effect from Assessment Year 2021-2022.
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