Tax Audit

Before we dive into the specifics of the tax auditing and taxation related details, let’s just take a step back and look at what an audit means. ‘Audit’ essentially means an inspection of the accounts of a particular organization especially by an outside independent third-party.  In this piece, we’re going to look at tax audit and specifically tax audit relating to the payment of income tax. Refer: E-Filing Income Tax. Let’s look at the income tax audit limit, due dates, Penalty among other details.

 The tax audit makes the computation of income tax, procedure for filing income tax return much easier.

Tax Audit: Objectives

The tax audit has been mandated by the government in order to achieve a certain set of objectives as listed below:

  • Enforcing precision as well as timely maintenance of the books of accounts  and their certification by the  tax auditor
  • Intimating the discrepancies in the books of accounts to concerned authorities after  a thorough inspection by the tax auditor
  • Reporting of important information related to the taxation such as tax depreciation,  compliance of various laws under the income tax laws. This, in turn, saves time for both taxpayer for the payment of taxes as well as helps authorities verify the details of the taxpayer in a fast manner.

Who should get a Tax Audit Done? Tax Audit Limit (s)

Everything related to the income tax audit is given in Section 44 AD of the Income Tax Act, 1961. The section 44 AB  dictates the eligibility for the tax audit. This sections basically dictates that the following categories of taxpayers need to get a tax audit report.

Businesses

Businesses operating in the country have to obtain an audit report once their total sales turnover or gross receipts in the business activities start crossing the ₹ 1 crore mark in any previous years. The income tax labels a ‘business’ as an economic activity that is being carried with the objective of earning profits. Section 2(3) of the income tax describes  “business” as ”  any trade, commerce, manufacturing activity,  or any adventure in the nature of trade, commerce and, manufacture”

Professionals

Professionals whos gross annual receipts extend over ₹ 50 lakh in total, in any of the previous years,  they need to get tax audit performed on their business activities. The Section 6F of the Income Tax Rules, 1962 specifies who all fall under the category of professionals who might need a tax audit.

  • Architects
  • Accountants
  • Authorized Representatives
  • Engineer
  • Artists involved in Film Actors, Directors, Music  Director, Editor
  • Interior Decorator
  •  Legal Professional – Advocate or Lawyer
  • Medical Professionals- Doctors, Physiotherapists etc.
  • Technical Consultants

Taxpayers Under Presumptive Taxation Scheme

If a taxpayer/ business owner who has enrolled in the presumptive taxation scheme compliant with the section 44AD of the income tax act needs to get his accounts and books audited if their turnover exceeds ₹ 2 Crores.

Taxpayers who claim that their earnings/ profits are lower than the threshold limit compliant with the presumptive scheme will also need to acquire a tax audit report.

In addition to this, taxpayers Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting for presumptive taxation in one tax year and not opting for presumptive tax for any of the subsequent 5 consecutive years will need to get a tax audit report if  income exceeds a maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the tax year where presumptive taxation is not opted for.

 Tax Audit Due Date

The section 44 AB of the income tax act specifies that the final date for the tax audit is 30th of September of the Assessment Year. This means that if a taxpayer has to obtain the tax audit report they have to do the ITR filing on or before 30th September with the tax audit report. In addition to this, if the taxpayer is also due for a transfer pricing audit then the due date for the income tax audit becomes 30th Septmeber of the Assessment Year.

Tax Audit Forms

In order to procure the tax audit report, a particular taxpayer has to furnish information about his business in the forms specified by the Income Tax Department.

The forms for tax audit report are namely:

Form 3CA

This is basically the ‘Audit Form’

Form 3 CB

This is a statement of relevant particulars

Tax Audit Limit for CA (Chartered Accountant)

A Chartered Accountant or CA is eligible to perform tax audits. This can also be performed by a firm of Chartered Accountant.  If the audit is performed by a CA firm, the name of the signatory who has verified the report on behalf of the firm should be mentioned in the report.  the signatory should provide their membership number while registering in the e-filing portal. Statutory Auditors can also perform the tax audits.

CA’s have a limit on the number of tax audit reports that they can fill out. Generally, the CA can fill out a maximum of 60 tax audit reports. the restriction applies to each and every partner in case of a CA firm.

Penalty for Non-Compliance

If a taxpayer who is required to obtain the tax audit report but they fail to do so will be penalized. The defaulters of the tax audit report will be penalized under the Section 271B of the Income Tax Act. The penalty for non-completion of the tax audit report is 0.5% of the turnover or the gross receipts, this penalty amount is subject to a maximum of ₹  1,50,000.

 Appointment of Tax Auditor

The power of delegation of an auditor of the firm lies with the board of directors. The board can choose to delegate this work to a high ranking official in the company such as the CEO or the CFO.  Auditors in a firm like a Private Limited Company or some other business structure such as a Proprietorship can be appointed by anyone ranging from the proprietor, partner, or a  person authorized by the assessee.

Taxpayer also has the power to appoint two or more CAs to be joint auditors of the particular assessee to perform the tax audit. If this is the case, the tax audit report should be co-signed by all joint auditors in case they all concur on the report. In case there is a difference of opinion on the tax audit report between the co-signors of the tax report, they should express their personal opinions through a different report.

Letter of Appointment

The letter of appointment for being a tax auditor of a particular assessee should be obtained before generating the tax audit report of a taxpayer. The appointment letter should be duly signed by the assessee. The appointment letter should also contain the remuneration being offered to the auditor.  The appointment letter should also specify that no other auditor is being entrusted with the procedure of generating the tax audit report.

You can go ahead and read:  The Companies (Audit and Auditors) Amendment Rules, 2018

 Who cannot be Auditor?

Prohibitions imposed on the appointment of the auditor of the company are as follows:

  • Part-time practitioners are ineligible to generate audit reports
  • A CA who owes more than ₹ 10,000 to the assessee cannot act as an auditor
  • A statutory auditor will be deemed to be guilty of professional misconduct if he/she accepts the appointment of a Public Sector Undertaking/Government Company/Listed Company and other Public Company having turnover of Rs 50 crores or more in a year and accepts any other work, assignment or service in regard to the same undertaking/company on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking/company.
  • A chartered accountant who is assigned with the job of writing and maintaining the books of the account of the taxpayer cannot act as an auditor.
  • The audit of accounts of a professional firm of Chartered Accountants cannot be performed by any partner or employee belonging to such firm.
  • An internal auditor of the assessee cannot be appointed as a tax auditor.
  • An auditor cannot accept more than 45 tax audit assignments in a particular financial year.

Removal of Auditor

An auditor can be removed on the grounds of submitting/ handing in a tax audit report so late that it cannot be uploaded to the portal before a specified due date. However, the auditor cannot be removed on the grounds of producing an adverse report of the assessee.

Chartered Accountant cannot be removed on unfair grounds. Removal of a CA on unfair grounds the Ethical Standards Board established by the Institute of Chartered Accountants of India (ICAI). No Chartered Accountant can be appointed again to be an auditor of a firm if they their predecessor was removed on unfair grounds.

 

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