Presentation on theme: "Tax Audit U/s 44AB of I.T. Act."— Presentation transcript:
1Tax Audit U/s 44AB of I.T. Act. Understanding onTax Audit U/s 44AB of I.T. Act.
2Introduction :Tax Audit refers to the audit carried out under the provisions of section 44AB of the Income Tax Act, 1961.Originally introduced by The Finance Act, 1984, in the Income-tax Act, 1961 w.e.f. 1 April 1985 through Section 44AB.Even if income is below taxable limit, tax audit needs to be carried out if turnover exceeds prescribed limit.Applicable to both Residents and Non-Residents.
3Basic Elements of Sec. 44AB Every person-carrying on business shall, if his total sales, turnover or gross receipts in business exceeds forty lakh rupees in any previous year ; orcarrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year; orcarrying on the business shall, if his profits and gains from business are deemed to be profits and gains under *[section 44AD or 44AE or 44AF] [or Sec. 44BB or Sec. 44BBB] and who has claimed his income to be lower than the deemed profits and gains of this section,* Words “Sec. 44AE shall be substituted for the words” Sec. 44AD or Sec. 44AE or Sec. 44AF by the Finance (No. 2) Act 2009 w.e.f
4Cont…The following clause (d) shall be inserted after clause (c) of section 44AB by Finance (No. 2) Act 2009 w.e.f. from ;d) Carrying on business shall, if the profits and gains from the business are deemed to be profits & gains u/s 44AD, and he has claimed such income to be lower than profits & gains of his business and his income exceeds maximum amount which is not chargeable to income-tax in any previous year.get 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 & setting forth such particulars as may be prescribed……
5Object Of Tax Audit:-To assist the Assessing Officer in computing the total incomeof the assessee.Involves expression of opinion on the truth and correctness ofcertain factual details by assesses to the Income Tax Dept.To enable proper assessment of tax by the Department.To ensure that income-tax assessments are made simpler andfaster since the basic data required for assessments areprovided with the return of income, by filing Forms 3CA, 3CBand 3CD of the tax audit report.Increases self compliance by the tax payer and educates them.
6Applicability of Sec. 44AB:- Person carrying on business:-Sales turnover, gross receipts exceeds Rs. 40 lacs inprevious year.Deemed profit U/s 44AD, 44AE, 44AF, 44BB & 44BBBand claims it to be lower.Not applicable if covered by Sec. 44B and 44BBA.Person carrying on Profession:-- Gross receipts in profession exceeds Rs. 10 lacs.
7Position from AY :-(Changes made by Finance (No.2) Act 2009 U/s 44AD):-44AD now applicable to all “eligible assessees” engaged in any “eligible business”.Eligible assessee – Individual, HUF or General Firm.Eligible business – any business except buying/leasing or hiring goods carriage referred to in Sec. 44AE and turnover from eligible business does not exceed Rs. 40 lacs.
8Cont… Salient Features:- Not applicable to Company and LLP.Limit of turnover business wise.Option of presumptive scheme-business wise.Audit for that business only which does not opt for presumptive norms and total income exceeds taxable limit.Applicability of TDS provisions.
9Total Sales, Turnover or Gross Receipts Not defined in Sec. 44AB or any other provision of the Act.Can be interpreted as volume of business, total is for all three expressions.Sale denotes sale of movable commodity, turnover is receipt from othertrading activities.Turnover is aggregate amount for which sales effected or services rendered(as per guidance note of ICAI).Gross receipt to include all receipts whether in cash or kind from carrying ofbusiness.Sales, turnover & gross receipts should be determined as per method ofaccounting regularly employed.Transaction in shares is turnover or not will depend whether shares heldas stock in trade or capital assets.Types of transaction in shares/derivatives :-Speculative transactions.-Derivative, F&O-Delivery based transaction.
10Who can be appointed as Tax Auditor?:- A Chartered Accountant or a firm of CharteredAccountants in full time practice.A CA/firm appointed as Tax Consultants.Statutory Auditor.Internal Auditor cannot be Tax Auditor- (decidedin 281st meeting of Council in October 2008,w.e.f )
11Due date for Audit: Obligation on the aforesaid persons to obtain before the "specified date" a report of the audit.Report to be in the prescribed form duly signedand verified by the “accountant”.“specified date" relevant to the assessment year,means 30th of September of the A.Y.
12Audit Planning Obtain Appointment letter Issue engagement letter Obtain representation letterObtain certificates as required in clause of 3CD
13Forms applicable for Tax Audit Report:- S.No.ParticularsApplicable Form1.Assessee not required to get his accounts audited under any other law.Form 3CB and Form 3CD.2.Assessee required to get his accounts audited under any other law.Form 3CA and Form 3CD.3.Assessee required to get his accounts audited under any other law and financial year is not previous year.
14Contents of Form 3CD:- PART A - General particulars - Clause 1 to 6. PART B - Disclosure of particulars- Clauses 7 to 32.ANNEXURE 1 - Financial Parameters- Part A and Part B.ANNEXURE II - Valuation of Fringe Benefits.
15Salient Features for Major Clauses:- CLAUSE 1 - In case of proprietary business mention (Name of Assesse) name of proprietor with name ofproprietary firm.CLAUSE 2 – Address shall be:-(Address) > as communicated to department.> address of branch office in case ofbranch accounts.> principal place – new assessee.> registered office – for company.
16CLAUSE 4 - LLP formed in India – Firm (Status) LLP formed outside India – CompanyCLAUSE Books of accounts:(Maintenance of > Sec. 2(12A) – inclusive definition.books of accounts) > would cover books of original entry & other books ofaccounts.> If books specified in Rule 6F, list shall be same forclause (a), (b) & (c).> Other cases- (b) and (c) shall be same.CLAUSE Clause (a) to (c) applicable to all assessees.(Method of Clause (d) to assessee following mercantileaccounting) system of accounting.
17CLAUSE 12A - Reportable to audit report signed after (Capital assetsConverted into Capital asset - Sec. 2(14)Stock in trade) Transfer – Sec. 2(47)(iv)- Purpose is to determine fair market valuefor capital gain tax purpose.CLAUSE Sub clause (b) & (c) will not apply if cash(amount not system is followed.Credited to Sub clause (a), (d) & (e) will applyP&L A/c) irrespective of method of accounting.
18CLAUSE 14 - Asset wise or block wise depreciation (Particulars of Additional depreciation – asset wiseDepreciation) Block of asset omitted by Finance (No.2)Act, 2009 from explanation 3 to Sec. 32(1)- Block of asset as defined in Sec. 2(11) of the Act Tangible or intangible asset.CLAUSE Clause (a):(a. Payment of bonus > Requirement is towards disclosure only and& commission not to allowability.b. Sum received from > Payment made within time allowed U/s 43B.employees towards - Clause (b):contribution to PF etc.) > Reporting of amount deductedfrom employees have been paid on or before due date.> Due date as per PF Act 1952.
19CLAUSE 17 - Applies to all assessees, except clause (g), which (Amount debited to applies to Firm and LLP.P&L A/c )- Clause (a):- capital natureSec. 37(1) does not allow expenditure of capital nature.- Clause (d):- expenditure at club(i) no express disallowance(ii) for purpose of FBT.- Clause (f):- amount in admissible u/s 40(a)> Sec. 40(a)(ia) amended by Finance Act 2008 with retrospective effect from> Circular No. 1/2009, dated- Clause (g):- payment to partners> applicable to firm , Indian LLP only> determine and qualify inadmissible amount.
20- Clause (h):- sec. 40 A(3) payments > amended provision for AY : aggregate of payment in a day.> limit enhanced to w.e.f in case of transporters> Rule 6DD substituted by Notification no. 97/2008,dated- Clause (k):- contingent liability> As per AS-29, no provision shall be made for contingent liability.> to report if provision made.- Clause (l):- sec. 14A> Primary duty is of assessee to furnish details> Rule 6DD w.e.f- Clause (m):-payment in admissible u/s 36(1)(iii)> Refers to interest paid for capital borrowed for acquiring asset forextension of existing business/profession for the period when capitalborrowed to put to use.> Distinct with AS – 16.
21CLAUSE 17A - New clause inserted in Form 3CD by Notification (Interest to MSM No. 36/2009, datedEnterprises) - Amount to be reported whether sum debited to P&L A/cor not.CLAUSE Ascertain specified persons for selection.(Payment to specified To provide particulars of payment and not to reportpersons) reasonability.CLAUSE Reporting of items such as recovery against any(Profit chargeable deduction, balancing charge, sale of assets for scientificU/s 41) research, recovery of bad debts..
22CLAUSE 21: - Refers to following sums: (43B payments) (a) Tax duty, Cess or Fee(b) Employer’s contribution to PF, Superannuation Fund(c) Bonus or commission to employees(d) Interest payable to FI, SFC,HC, State Ind. Investment Corp.(e) Interest payable to scheduled bank in respect of loan oradvance.(f) Leave encashment.- Deduction only on actual payment- Conversion of interest into loan not repaid.- Liability incurred during year and paid before due date of filing ofreturn are allowable.- Liability which pre existed have to be paid during previous year.- Sales Tax / Excise Duty collected separately disclosed. Amountnot paid to be reported.
23CLAUSE Sec. 24(a) not applicable to Banking company, Corporation established by (Particulars of Central, State Act, Govt. co. U/s 617 of the Companies Act.acceptance or - Transactions between sister concernsrepayment of loan) - Transfer entries- Transactions through electronic transfer, Direct deposit of cash into bank A/c.CLAUSE Covers section wise details of deduction admissible under Chapter VI A.(Deduction under - For payment – for income – other deduction - 80JJA, 80UChapter VI A) - Tax auditor has to ascertain admissibility of claim.- Deduction to be reported based on business activity.- Amendment of Sec. 80A with retrospective effect – impact ofmultiple deduction for same profit – subsection (4),(5) referringto deduction U/s 10A, 10AA, 10B, etc., Subsection (6) to transfer pricing.- Reliance on certificates for various deductions to be mentioned
24CLAUSE 27 - Reporting of Clause (a) depends on compliance to clause (b). (Provision of - As there are lot of debatable issues, appropriate comment shall be madeTDS) against clause (a).- Late deposit of deducted amount need not be reported.- TDS under other law not to be reported.- New Sec. 206AA inserted – furnishing of PAN to deductor to avoid deduction at higher rate and amendment to 194C w.e.fCLAUSE clause (a): for trader only(Quantitative - clause (b): for manufacturerdetails) - clause (b): for manufacturer cum trader also.CLAUSE All ratios in monetary terms only.(Accounting Ratio for business as a wholeratio) Consistency to be maintained- Ratio to be calculated based on figures as per books of accounts.- For clause (c) – existence of closing stock is a must.
25Annexure- II - Salient Features Annexure – I to Form No. 3 CDPart A – repetition of item 1 to 6 of form 3CDCapital Account- Non corporate assesseeFixed capital in item no. 1, current account balance in item no.2Annexure- II - Salient FeaturesFBT abolished w.e.f. Asstt. YearFollowing items executed from FBT – w.e.f. Asstt. Year- credit facility for employee’s children- payment to sponsor on employee sportsman- expenditure to organize sports events for employees- maintenance of guest house other than for training purpose- state N.A.- valuation for festival celebration reduced from 50% to 20%- expenditure through electronic meal card subject tocondition.
26Levy of Penalty:-Sec. 271BFailure to get accounts audited as required by Sec. 44AB.Lower of 0.5% of total sales, turnover or gross receipts of business/profession and Rs. 1 lac.Not to be imposed if reasonable cause is proved, Sec. 273B.Annexure less tax return – No levy of penalty unless audit report not obtained.
27Certain Issues:-Immunity from Scrutiny / disallowance under various sections.Applicability where income exempt U/s 10Applicability on Stock Brokers/Speculative TransactionsAcceptability of tax auditors certificate as regards amount of various expenses under FBT in Annexure – II to Form 3CD.Rectification/revision of audit report.When accounting year is different from financial yearAccounts written in other languages.
28Action on incomplete audit reports: Assessing Officer can report to Commissioner regarding incomplete report or non commital points in tax audit reports.Matter can be taken up by the Commissioner of Income Tax to see if it reflects professional negligence on part of auditor.Initiating Disciplinary proceedings in terms of Sec. 288 of the IT Act.ICAI entitled to institute proceedings against members who submit faulty audit reports.(Source PIB press release New Delhi dated )