WHAT IS “TAX AUDIT” AND WHY IT IS REQUIRED

When an inspection takes place in an organization related to its accounts and reports is called TAX AUDIT. In general terms, TAX AUDIT is the way to examine or inspect the books of accounts of an organization (business or profession) from income tax point of view and it is mandatory to be carried out. It is conducted by an independent body just like certified CAs (Chartered Accountant). It is the responsibility of CA to be ensured that the tax payers have maintained proper books of accounts with respect to incomes, deductions, law related compliances etc.

As per Section 44AB of Income Tax Act 1961, Tax Audit is mandatory if gross receipts from business or any profession exceeds prescribed limit for certain classes of individuals as mentioned under this section. As the main agenda of Tax Audit is to makes the income computation easy for the purpose of filing the return. Although, if the income of an individual is below the taxable limit then also he need to get his accounts audited. In such case, an order need to be passed by an assessing officer directing the assesse to get his accounts audited from a certified Chartered Accountant (that could be nominated by the commissioner or chief commissioner of income tax).

The following business persons and professionals are required to get their accounts audited:-

  • A person who is carrying on business and whose total sales, gross receipts and turnover exceeds the limit of Rs 1 Crore in previous financial year.
  • A professional (like an Accountant, Engineer, Architect, Legal Professional, Technical Consultant, Medical Professional etc.) whose gross receipts exceeds the limit of Rs 50 Lakhs in previous financial year.
  • A person carrying on the business where he has claimed that his income or profit or gains is lower than the prescribed limit in any previous year under presumptive taxation scheme. (Section 44AE, 44BB or 44BBB)
  • A person carrying on the profession where he has claimed that his income or profit or gains is lower than the prescribed limit in any previous year under presumptive taxation scheme and his income exceeds the maximum amount which is not chargeable to tax. (Section 44ADA)
  • A person carrying on the business and is not eligible to claim presumptive taxation scheme (Section 44AD) just because he opted for presumptive taxation in one year but not opted for presumptive taxation for any of the subsequent five consecutive years.

“SECTION 44AD” OF THE INCOME TAX ACT, 1961

Well this Section 44AD of Presumptive Taxation Scheme has come up to reduce the compliance related burden of small taxpayers. The presumptive taxation scheme of section 44AD is meant for all businesses except the business of plying, hiring or leasing of goods carriages. Under this new scheme the small taxpayers are not necessarily required to maintain their books of accounts and can declare their income at a prescribed rate. They can presume a certain percentage of the total sales (say 8%) as their profits. However, the assesse can declare the profit at 6% where the amount of gross receipts and total turnover received by a cheque or by a bank draft or by electronic means. As this Section 44AD is meant for businesses only but not for professionals. Also, this Section 44AD only applies where the total turnover of the assesse is less than Rs 2 Crores.

After the computation of profits, then the businesses are required to pay tax on such profits as per the applicable income tax slab rates.  But if the tax payer feels that his profit or gains are lower than the profits as computed under the presumptive taxation scheme (Section 44AD) than he can opt for this scheme of taxation. Once the taxpayer opts this scheme than he would file his income tax return for five subsequent years in the same scheme. But under this scheme, the assesse should be eligible and has not claimed any deductions under Sections 10A, 10AA, 10B, 10BA, 80HH and 80RRB in the relevant assessment year.

However, all deductions including depreciations, under provision of section 30 to 38 shall be deemed to have been given full effect and further no such deductions would be allowed under this section.

The provision of presumptive taxation scheme under Section 44AD can be opted by following tax assesses:-

  1. Individual tax payers
  2. HUF (Hindu Undivided Families)
  3. Partnership Firm (except LLP {Limited Liability Partnership})

However, if any person showed his profits as per regular business (ITR 3) before the end of these five years then he would not be eligible to avail the benefit of the scheme under presumptive taxation or for the next five subsequent years.

“SECTION 44ADA” OF THE INCOME TAX ACT, 1961

     This benefit of Presumption taxation is meant for professionals (like engineer, Architect, technical consultant, medical professional, legal consultant, etc.) This benefit can be easily claimed by all those professionals whose total gross receipts do not exceed the limit of Rs 50 Lakhs in a financial year (from 2016-17). Just like Section 44AD of presumptive taxation, this section 44ADA also works on presumptions. Under this section, the income of professional would be assumed to be 50% of the total gross receipts. And in this scheme also, the assesse are not required to maintain their books of accounts.

This Scheme is applicable to an individual, HUF or partnership (not Limited Liability Partnership). Here, in this scheme, the assesse should be resident in India and is not allowed to claim any deductions and depreciations under Section 30 to 38.

Unlike Section 44AD, under Section 44ADA, a professional can opt in or out any time without the restriction of five years period.

This scheme is applicable to a resident individual or Hindu Undivided Family or Partnership Firm (except Limited Liability Partnership Firm)

WHY TAX AUDIT IS REQUIRED

  1. As per income tax act, any person carrying on business with his total sales or turnover exceeds Rs 1 Crore is required to do tax audit and any person carrying on profession with his gross receipts exceeds Rs 50 Lakhs is also required to do mandatory tax audit.
  2. As tax audit is the process of review the incomes, compliances, deductions and procedures related to income tax act. This makes the income computation more efficient for filing the returns.
  3. Tax Audit is required to restrict the fraudulent practices as the main agenda behind this audit is to give helping hands to the tax authorities in determining actual and correct tax liabilities.
  4. Tax audit facilitate proper maintenance of books of accounts and this in turn ensures the timely submission of return and administration of tax laws presentation.
  5. Tax audit is necessary for the time saving purpose of tax authorities while verifying the income tax return as filed by the tax payer. As tax audit reports the needful information like tax depreciation, compliance related to various provisions of income tax law etc.

PENALTIES FOR NON COMPLIANCE

The case where delay or non filing of audit report occurs due to genuine reasons than no penalty will be charged as per Section 273B. The genuine reasons could be in the form of resignation of the tax auditor, death of the partner, strikes, lock-outs, loss of accounts due to fire or theft, other natural calamities etc.

But if the tax payer fails to get his tax audit done or delays occurred in auditing and submitting the report thereafter than the penalty of 0.5% of the turnover or total sales or gross receipts OR a maximum of Rs 1.5 Lakhs has to be paid.

 

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