MEANING AND DEFINITION OF TAX AUDIT
Tax audit implies audit of income and expenditure and related exemptions with the objective of tax determination. Income Tax Act, 1961 has made many provisions with regard to tax audit. Therefore, there is a special requirement of tax audit under Income Tax Act, 1961. Since general or financial audit does not fulfil the requirements of tax officers, there is a need for separate tax audit.
Every business organisation prepares and presents its final accounts at the end of a financial year for the inspection and information of its members. These accounts exhibit a true and fair view of the affairs of the company as certified by the auditor. Now, the questions is, how to determine the tax on the basis of these accounts? This is not possible until these accounts are inspected by tax auditors and are submitted to Income Tax authorities. Thus, it is compulsory to get these accounts audited by tax auditors for the purpose of tax assessment. Thus, conducting inspection and examination of financial accounts for the purpose of tax calculation is known as Tax Audit.
TYPES OF TAX AUDIT
According to Income Tax Act, 1961, tax audit is of three types:
- Compulsory tax audit under Section 44 AB
- Tax nudit for claiming deductions under Sections-12A. 35D, 35E, 44(AB), 80HH, SOHHB, 80HHD, 80HHE and 80(1A).
- Selective tax audit under Section 142(2A).
Compulsory Tax Audit [Section 44AB]
Any individual:
- Who is engaged in a business, and the sale proceeds or gross receipts from such business is more than 1 crore in any previous year, or
- Who is engaged in a profession and his professional income is more than 25 lakhs in the previous year, or
- In case of assessee whose income is not more than 1 crore, when profits from business are coming from Section 44 AD, 44AE, 44AF, 44BB, and 44BBB whichever the case may be are considered his personal profits.
Any individual coming under the above categories shall have to get their accounts prepared and get the same audited for the purpose of tax audit on the specified date. Section 44 AD and 40 AF covers all those assessees whose declared gross receipts is not more than 1 crore. On the other hand, Section 44 AC is applicable to such assessees, who do not own more than 10 goods carriers and whose gross receipts and sale may be of any amount.
In simple words, when sale is more than 1 crore, a person is not liable for tax audit if he owns less than 10 goods carriers.
Explanations : For the purpose of these Sections:
- Accountant means the same as explained in section 288(2) below.
- Specific date means date fixed for assessment of tax with regard to previous year's accounts, which is
(a) If the assessee is a company. 30th November of the assessment year
(b) In any other, case, 30th October of the assessment year.
Accountant: 'Accountant' for the purpose of audit of specific statements U/S 44 AB and Section 12A, 35D, 35E, 80HHB, 80HHC, 80HHD, 80HHE, 80-1B and 142 (2A), means-A Chartered Accountant under Chartered Accountants Act 1949 and who is qualified to become an auditor in the state in which such company exists under Indian Companies Act, 2013.
APPOINTMENT OF TAX AUDITOR
According to Chartered Accountants Act, 1949 only a chartered accountant who is working as an auditor can be appoointed as tax auditor [Section 7]. Before giving appointment to a new Chartered Accountant (Auditor) for this purpose, the auditor who is already acting as financial auditor, has to be informed. The management of the company or the assessee himself can appoint an accountant to claim deductions and exemption under Income Tax Act. In case of a company, Board of Directors or the Executive officer on behalf of Board of Directors can appoint a tax auditor. Like- wise in case of sole trader or partnership firm the owner or any person authorised on behalf of partners can appoint such an auditor. If the assessee feels so more than one tax auditor can be appointed. In such case, the audit report should be signed by all the auditors and they will be responsible jointly for their work.
WHO CAN CONDUCT TAX AUDIT?
According to Section 2880 of the Income Tax, 1961 any defined accountant can conduct tax audit. The definition of an accountant is given as per the Chartered Accountants Act, 1949. According to Companies Act, 2013, any person possessing qualifications to become an auditor also comes in the category of such accountant Any practicing Chartered Accountant, who is full time engaged in this profession can act as tax auditor.
LIMIT OF ACCEPTANCE OF TAX AUDIT
The Institute of Chartered Accountants of India has fixed a limit for Chartered Accountants to take up tax audits in a financial year. In case of individual Chartered Accountant, he cannot accept the offer of more than 30 tax audits in one financial year, but the provisions of Company Act, 2013, Section 139 be taken care. In case of a firm of Chartered Accountants, such limit shall be 30 tax audits per pertner. If one partner is a Chartered Accountant in more than one firm then he cannot accept more than 30 such audits altogether. For the purpose of tax of head office and its various branches of a company, one tax auditor will be counted. If a tax audit is conducted jointly by two firms, such an audit will be considered one tax audit for the purpose of counting number.
RIGHTS AND DUTIES OF TAX AUDITOR
There are no specific directions or provisions with regard to rights and duties of a tax auditor under Income Tax Act, 1961. In practice, following are the rights and duties of a tax auditor.
Rights:
The tax auditor has right to inspect books and other documents, concerning, his work with regard to business of his client. In other words, he has a right to get justified facilities for smooth conduct of his audit work. He also has a right to claim his remuneration. Generally, remuneration etc. is mentioned in the letter of appointment.
Duties:
The following are the duties of a tax auditor :
- He should perform his duties honestly in the best interest of all concerned and according to provisions of Income Tax Act.
- He should submit his report in time and on the specified format
- He should present all relevant details.
The format of audit report is given under rule 6G of Income Tax Rules, which can differ in different circumstances.
TAX AUDIT IN OTHER CASES
1. Audit of Public Trust :
Section 12A of Income Tax Act, 1961 provides for the tax audit of public trusts. Sections 11 and 12 of the Act provide for exemption of some specified income from tax while determining total income of such trus Section 12A (b) provides that if the income of such trusts in respect of a financ (Previous) year exceeds the maximum amount it is compulsory for them to get their accounts audited and present a report to this effect on specified proforma, duly signed) and certified by the auditor, without affecting provisions contained in Section 11 and 12 The report should be prepared on form 10 and details relating to this must be enclosed with such report.
Under Rule 17-B of the Income Tax Rules, 1962, the audit report is to be prepared in forma No. 10B and a statement of particulars is to be annexed therewith.
2. Deductions for setting up Industries in Backward Areas :
Section 80HH of Income Tax Act, 1961 has given exemptions from deductions of income tax from the total income of those assessee who have established a new industrial unit or a hotel in backward areas. The deduction allowed shall be 20% of the total profits earned or 20% of the income of such business. Provided that such a deduction shall be allowed (Except in case of company and co-operative institutions) if their accounts for the previous year are duly audited and report to this effect has been submitted According to Income Tax Act such a report has to be made in Form 10C.
3. Claims for deductions U/S 35D and 35E :
Section 35D of Income Tax Act provides for claims in respect of preliminary expenses incurred for the purpose of establishing a new industrial unit or expansion of an existing unit. These provisions provide for deduction of 1/10 of such expenses for 10 years from the date of starting of such business or from that previous year from which the expansion was completed or from the date of start of production of such new business.
Section 35E provides for the procedure of claiming deductions with regard to mining of minerals or production there of. The minerals which are eligible for such deductions, are explained in Schedule 7 of Income Tax Act.
These sections also provide that except in case of company or cooperative society, such deductions shall be allowed only if the accounts of such business are duly audited by an accountant and the report is prepared on prescribed form i.e., Form 3B, Rules 6AB and details to this effect are enclosed with the report.
4. Audit Under Section 80-I :
According to Section 80-I of the Income Tax Act, 1961 when the Gross total income of an assessee also includes any income earned from an industrial unit or ship or hotel business or any other power related industry to which this section applies, 20% of such profits or income earned shall be allowed as deduction while calculating his total income. Provided further that such a deduction shall be allowed if the accounts are duly audited and the report submitted on prescribed proforma.
5. Deduction allowed U/S 80HHB :
According to Section 80HHB any Indian company or any person who is a citizen of India and who earns any profit or income from outside India, some part of his total income shall be eligible for deduction, which shall be equal to-
- Assessment year beginning on 1st April, 2001 = 40%
- Assessment year beginning on 1st April, 2002 = 30%
- Assessment year beginning on 1st April, 2003 = 20%
- Assessment year beginning on 1st April, 2004 = 10%
No deduction shall be allowed for the assessment year beginning 1st April, 2005 and afterwards.
Such deduction shall be allowed only subject to fulfilment of certain conditions. The Act provides that the accounts should be audited by an accountant in respect of such companies, individual etc. [Rule 18BBA]. The report to this effect is to be prepared in Form 10CCA and presented. With regard to Cooperative Society, audit in respect of these concerns is made compulsory under law.
6. Audit under Section 80-1A :
Deduction under Section 80-1A is allowed to those assessees who have earned any profit or income from an elgible business such as industrial undertaking, cold houses, ship business or hotel business and such business which came into effect after 31st March, 1991. Such deductions are:
- 25% of profits in case of industrial undertakings
- If such a business undertaking is a company, 30% of profits of such a company.
Such deduction is allowed for 10 years, but in case of cooperative society such deduction is allowed for a period of 12 years from the year previous to the one which the business commenced is provided. Further that such deduction shall be allowed only it accounts of such undertakings are duly audited and report is submitted in form 10CCB under Rule 18BBB of Income Tax Rules.
7. Selective Tax Audit :
Sub-section 2A, 2B, 2C and 2D of Section 142 of the Income Tax Act has provided for the following in this regard:
Section 2A : If in the opinion of the assessing officer, at any time during any proceedings seeing the complexities and nature of accounts of the assessee and in the interest of income tax, his accounts can be audited by an accountant with the prior approval of Commissioner or Chief Commissioner for the purpose of clarification of any aspect (s) of accounts within the meaning of Section 228 (2) and report to this effect is to be prepared and submitted on prescribed proforma, duly signed by such accountant to the Income Tax Authorities.
Section 2B : Under the provision of Section 2A, this explanation shall not be accepted that accounts were already audited under any other law.
Section 2C : Under Section 2A, the assessee shall file a report with the assessing officer within the time limit prescribed by the assessing officer.
The assessing officer, on the written request of assessee, can extend the prescribed time limit if there are sufficient reasons, but in no case this time period shall be more than 180 days from the receipt of order issued under Section 2A..
Section 2D : The expenses on any tax audit (including remuneration of the auditor) conducted under Section 2A shall be determined by the Chief Commissionerer Commissioner and shall be paid by the assessee. If the assessee does not do so, then the payments for the same shall have to be made by him according to norms given in Chapter XVII-D (Relating to recovery of balance amount).
The report of the auditor shall be submitted in Form No. 6B as per rule 14A.
Penalty : Under Section 271B of the Income Tax Act, 1961, if any person fails to get his accounts audited in respect of any previous year as years relevant to an assessment year or funish a report of such audit as required under the provision of Section 44 AB, the assessing officer may direct that such person shall pay by way of penalty, a sum equal to one-half percent of the total turnover or gross receipts, as the case may be in business or of the gross receipt in profession, in such previous year as years or a sum of 1,50,000 w.e.f. 1-4-2011, whichever is less.
Conclusion : From the above entire discussion, the need and importance of tax audit can be seen. The audited financial accounts are of importance for the concern itself and also for the use of outside world related to concern. It is true that the Income Tax authorities have to depend upon these accounts for assessment of tax but such accounts are adequate only for the purpose of collecting information relating to income tax. To calculate the taxable income of the assessee and seeking detailed information regarding taxable income also the verification of truthfulness and fairness of accounts becomes necessary to conduct the tax audit.