tax audit project - final

8/13/2019 Tax Audit Project - Final

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TAX AUDIT REPORT

Under Section. 44AB

Section 44AB provides for the compulsory audit of accounts certain persons carrying on

business or profession. Section 44AB reads as under:

Form 3CA/3CB

Form 3CD

AnnexureI

Audit of accounts of certain persons carrying on business or profession.

Every person

a) Carrying on business shall, if his total sales, turnover or gross receipts, as the case maybe, in business exceed or exceeds sixty lakh rupees in any previous year; or

b) Carrying on profession shall, if his gross receipts in profession exceed fifteen lakh rupeesin any previous year; or

c) Carrying on the business shall, if the profits and gains from the business are deemed to bethe profits and gains of such person under section 44AD or section 44AE, or section

44AF or section 44BB or section 44BBB, as the case may be, and he has claimed his

income to be lower than the profits or gains so deemed to be the profits and gains of his

business, as the case may be, 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 and setting forth such particulars as may be prescribed:


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Provided that this section shall not apply to the person, who derives income of the nature

referred to in section 44AB or section 44BBA, on and from the 1stday of April, 1985 or, as the

case may be, the date on which the relevant section came into force, whichever is later:

Provided furtherthat in a case where such person is required by or under any other law to

get his account audited, it shall be sufficient compliance with the provisions of this section if

such person gets the accounts of such business or profession audited under such law before the

specified date and furnishes by that date the report of the audit as required under such other law

and a further report by an accountant in the form prescribed under this section.

ExplanationFor the purposes of this section:

i. accountant shall have the same meaning as in the Explanation below sub-section (2) ofsection 288;

ii. Specified date, in relation to the accounts of the assessee of the previous year relevantto an assessment year, means the 30

thSeptember of that Assessment Year.

Scope of Auditors role Under Income Tax Act:

The role of the auditor under Income tax Act is summarized into:

a) Conduct of tax audit under section 44 AB.b) Certification for claiming various deductions under the Income Tax Act.c) Conducting selective Audit under section 142 (2A).d) Giving tax advice and tax planning consultancy.


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RULE 6G:-

Rule 6G (1) provides that the report of audit of accounts of a person required to be furnished u/s

44AB shall be in Form No.-

3CA: In case of a person who carries on Business or Profession and who is required by or under

any other law to get his accounts audited.

3CB: In case of non corporate entities where audit is not required to be carried out under any

other law.

As per Rule 6G (2),particulars which are required to be furnished u/s 44AB shall be in Form

3CD.

Tax auditor:-

A tax auditor has to be a chartered accountant even if statutory audit has been conducted by a

person other than a chartered accountant. Section 44 AB does not stipulate that only the statutory

auditor appointed under the companies act or other similar statute should perform the tax audit.

Hence, tax audit can be performed either by the statutory auditor or by any other Chartered

Accountant in practice.

Firm of chartered Accountants

Though the section refers to the accounts being audited by an accountant which means chartered

accountant the statement of audit can be done by a firm of chartered accountants. In such a case,

the name of the partner be mentioned along with membership number below the signature.


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Communication with previous auditor

The tax auditor who is accepting the assignment must communicate with the member who had

done tax audit in the earlier year as specified by the chartered accountants Act.

Letter of appointment

As per section 44 AB, the tax auditor must obtain from the assessee a letter of appointment for

conducting the audit. The letter of appointment must be signed by the assessee who signs the

return of Income.

Statement of particulars

The tax auditor should get the statements of particular authenticated by the assessee before he

proceeds to verify the same.

Report

The tax auditor has to submit the report to the assessee.


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Special Points:-

Provision to Sec 44AB:

The proviso to Sec 44AB lays down that where the accounts of an assessee are required to be

audited by or under any other law, it shall be sufficient compliance with the provisions of this

section, if such person gets the accounts of such business or profession audited under such other

law before the specified date and furnishes by that date the report by an accountant only. W.e.f

1.4.2001, tax audit can be carried only by an accountant only. Accordingly, in case of any

assessee like a co-operative society where the accounts under the relevant law have been audited

by a person other than a chartered accountant, the tax audit will have to be conducted by the

accountant as defined u/s 44AB. This has invalidated the Circular No. 561, dated 22 may,

1990.

Same was also held in the case T.D. venkata rao v. Union of India [1999] 237 ITR 315 (SC).

Joint audit report:

There could be no objection to joint report, as long as the audit report is signed by all the

chartered accountants who have done the audit. As per Statement of Responsibility of Joint

Auditors, there could be an agreed report by joint auditor or in case of disagreement, separatereports on matters of disagreement.

In case where an assessee follows an accounting year different from financial year:

It is necessary that the financial year should be fully covered, though the accounts for the

financial year may fall in two different years in assessees accounts (Board Circular No. 561,

dated 22.5.1990)


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Incomplete report:

An incomplete report may constitute professional negligence and render the Chartered

Accountant liable for proceedings under u/s 288 of the I.T. Act, and may result in complaint to

the ICAI.

Consequences of assessment overlooking Sec 44AB:

Though tax audit report u/s 44AB was not filed, where the accounts had been examined by the

Assessing officer and assessment was made thereafter, such an assessment cannot be subject to

revision u/s 263 merely because the assessment was made without tax audit report. Revision

could be justified only, where such assessment is prejudicial to revenue. In such a case only a

penalty can be levied on the assessee for not filing tax audit report u/s 271B of the Act, if there is

no reasonable cause. In a case of a non-resident, where the assessing officer had accepted the

returned loss with draft assessment order approved by Additional commissioner, exercise of

revision jurisdiction is not valid.

Internal auditor of an assessee, whether working with the organization or independently

practicing chartered accountant or a firm of chartered accountants, cannot be appointed as his tax

auditor.

A chartered accountant in practice can take up 45 tax audits (earlier limit was 30 per chartered

accountant).


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ELIGIBILIY, APPOINTMENT & REMOVAL:-

Eligibility:

As per sec. 288 the Accountant (who is appointed as Tax Auditor) should be a Charted

Accountant within the meaning of Charted Accountant Act. 1949.

Appointment:

He is appointed by Assessee.

The tax auditor should obtained the letter of appointment for conducting the audit as mentioned

in sec. 44AB

Removal:

There is no specific procedure for removal of a tax auditor appointed under sec. 44AB

However it is possible for the management to remove a tax auditor where there are any valid

grounds for such removal.


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AUDITORs RESPONSIBILITY:

Forms of Certificate and report:

Forms No. 3CA and 3CB require certificate as to the reliability of the books in the sense that

proper books have been kept and that the report is made after all the necessary information given

by the assessee with the assertion that profit and loss account/income and expenditure account

and the balance-sheet give a true and fair view as required under clause 3(c) of Form No. 3CB

applicable to cases which have not been statutorily audited. At the same time particulars in Form

No. 3CD are required to be certified as true and correct.

In respect of audited accounts, the requirement of accounts being true and fair is absent in Form

No. 3CA applicable to them obviously because statutory accounts would have been so certified

as true and fair. Form No. 3CD has to be true and correct even for this class of accounts. Form

No, 3CD requires signature of the auditor with his full name and date.

Disqualification of Tax Auditor:

Though there is no specific disqualification for a Chartered Accountant being an auditor u/s

44AB, disqualification for purposes of company audit u/s 226 of the Companies Act, 1956

should apply even for tax auditor.

The Chartered Accountant is bound by regulations imposed on him by the Chartered Accountant

Act, 1949, and is expected to follow the guidelines issued by the institute from time to time.

Guidance Notes are of a general nature guiding the auditor in the performance of his duties,

while opinions relate to specific matters which may involve interpretation of law and may get

superseded by either weightier opinion based upon legal precedents, instructions from the

concerned authorities, changes in law, etc.


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Liability of the auditor:

Chartered Accountant may be liable for professional negligence under the Chartered

Accountants Act, 1949. However that does not spare him from any civil liability as under

consumer protection law, where it is applicable, or for damages or criminal liability under the

prevalent law on failure on his part, if his actions becomes vulnerable under such other laws.

Auditor cannot be responsible, if sufficient time is not given to him to take up and complete the

work in time, so that audit report can be filed on or before the due date. However, where the

delay had occurred in auditors office and if there is any unreasonable delay on the part of the

auditor, he is answerable to the ICAI, if a complaint is made by the client, making him

vulnerable to disciplinary proceedings for tax audit as for any other professional misconduct

relating to audit.

Neither the assessing officer nor the assessee are bound by the opinion of the tax auditor in his

report. They may have their own views for their own reasons.

SALES, TURNOVER & GROSS RECEIPTS :-

The terms sales, turnover, and gross receipt have not been defined in the statue.

Gross Receipts are the amounts received by the assessee from the clients for the contract and do

not include within its purview the value of materials supplied by the clients.

As per board circulars and Institute guidelines following items will fall within the scope of gross

receipts:

(a) All assistance from the government whether by way of duty drawback, cash grant, import

license including profit there from.

(b) Exchange difference on export sales.

(c) Liquidated damages, insurance claims and sale of scrap, etc.

(d) In the case of leasing business, hire charges, lease rent and hire purchases.


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Gross receipts is confined to professional receipts, hence out-of- pocket expenses would not form

part of it.

U/s 145(1) Sales, Turnover or Gross Receipts are computed either on cash or mercantile

system of accounting.

The term Turnover would mean, the total sales after deducting there from goods returned,

price adjustment, trade discounts and cancellation of bills for the period of audit, if any.

Adjustment which do not relate to turnover should not be made e.g. writing off bad debts, royalty

etc.

Items not regarded as turnover:

1. Discount and rebates.2. Sales return.3. Sale of fixed assets/investments.4. Miscellaneous incomes such as dividend, rent and interest but they will be included in the

turnover in case of dealers.

If sales tax and excise duty are included in the sales price, no adjustment in respect thereof

should be made for considering the quantum of turnover.

As per ICAI guidelines, in case of non-residents, it is only indian turnover arising out of indian

operations which would be relevant for reckoning the limit of turnover.

Where an assessee has both profession and business, each being a separate source of income

below the limit, there is no need for tax audit.

Since each firm is separate and partner is different from firm, limit has to be reckoned for each

separately.

Though the assessee may have had turnover exceeding the limit and, therefore, liable for tax

audit, it will not be liable for tax audit for the year for which it falls short of the limit.


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PENALTY FOR FAILURE TO GET ACCOUNTS AUDITED:-

If the assessee fails to get his accounts audited u/s 44AB in respect of any previous year or years

relevant to an assessment year,

a flat penalty u/s 271B shall be attracted which is equal to: % of the total Sales,turnover or gross receipts

Or

Sum of Rs. 100,000

(Whichever is less)

Sec 273B provides that no penalty shall be imposed for any failure referred to in Sec271B if assessee proves that there was reasonable cause for such failure.

Reasonable Cause

It is a subjective matter. Instances where Tribunals/ Courts have accepted as reasonable cause.

A. Resignation of the tax auditor and consequent delay;B. Bona fide interpretation of the turnover based on expert advice;C. Death or physical inability of the partner in charge of the accounts;D. Labour problems such as strike, lock-out for a long period, etc;E. Loss of accounts because of fire, theft, etc., beyond the control of the assessee;F. Non-availability of accounts on account of seizure;G.Natural calamities, commotion, etc.


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PENALTY U/S 277 A:-

Falsification of books of accounts or documents etc:

The Finance (No.2) Act, 2004 has inserted section 277 A w.e.f 1-10-2004. Accordingly any

person shall be punishable with rigorous imprisonment, which may extend form 3 months to

3 years and shall be liable to fine if the following conditions are satisfied:

i. He willfully and with intent to enable any other person (assessee) to evade any tax orinterest or penalty chargeable and imposable under the Income Tax Act.

ii. He makes or causes to be made, any entry or statement in any books or otherdocuments relevant for any proceeding under the Act which is false.

iii. He knows it to be false or doses not believe it to be true.


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AUDIT FUNCTIONS:-

The duties of Comptroller and Auditor General includes audit of:

all expenditure from the Consolidated Fund of India of Union, of each State and of eachUnion Territory having a Legislative Assembly with the objective to ascertain whether

the moneys shown in the accounts as having been disbursed were legally available for

and applicable to the service or purpose to which they have been applied or charged and

whether the expenditure conforms to the authority which governs it;

all transactions of the Union and of the States/Union Territory having a Legislatureelating to Contingency Funds and Public Accounts;

all trading, manufacturing, profit and loss accounts and balance-sheets and othersubsidiary accounts kept in any department of the Union or of a State and in each case, to

report on the expenditure, transactions or accounts so audited by him;

receipts and expenditure of bodies or authorities substantially financed from Union orState revenues;

grants or loans given to other authorities or bodies; revenue of the Union and of the State Governments; accounts of stores and stock; Government Companies and Corporations under the Company's Act 1956 read with

CAG's (DPC) Act, 1971 ; and

Accounts of other authorities or bodies as per their statute or upon request by the Governor of a

State or the Administrator of a Union Territory having a Legislative Assembly.


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TAX AUDIT REPORT OF SUHANISH TAXTILES PVT LTD

FORM NO. 3CA[See rule 6G (1) (a)]

Audit report under section 44AB of the Income-tax Act, 1961, in acase where the accounts of the business or profession of a

person have been audited under any other law

1. We report that the statutory audit of SUHANISH TEXTILES PRIVATE LIMITED Ram NagarHouse, 7th Floor, Room No. 13, 11 Old Ham Lane, Mumbai-400 002 PAN : AAEVF9064R was

conducted by us in pursuance of the provisions of The Companies Act,1956 and we annexed hereto acopy of our audit report dated 28thAugust, 2013 along with a copy each of

a. the audited profit and loss account for the year ended on 31 March,2013b. the audited balance sheet as at 31 March,2013 andc. Documents declared by the said Act to be part of, or annexed to, the profit and loss account and

balance sheet.

2. The statement of particulars required to be furnished under section 44AB is annexed herewith inForm No. 3CD.

3. In our opinion and to the best of our information and according to explanations given to us, theparticulars given in the said Form No. 3CD and the Annexure thereto are true and correct.

For, D. Kothary & Co.Place: Mumbai Chartered AccountantsDate: 16thSeptember, 2013 Firm Registration No. 102685W

Aakash B PatelPartner

M / No. :: 132650Address:

11/12, F Wing, 5th

Floor,Raj Tower, Mumbai400 021.