BCom 3rd Year Tax Audit in Auditing Notes Study Material
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BCom 3rd Year Tax Audit in Auditing Notes Study Material
Introduction
The financial statement prepared by a business enterprise is very useful for owners of the organization. Besides them, there are other interested parties such as investors, bank authorities, creditors or suppliers, tax authorities, and labour representatives. It is, however, to be noted that these statements may not fulfill the requirements of all parties alike. As such, the organizations are advised to prepare a special statement of accounts giving relevant information and such a statement should be duly audited by professional accountants.
The Income Tax Act, of 1961 for the purpose has made certain specific provisions under various sections of the Act. These provisions have become compulsorily applicable in our country. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
Tax Audit Defined
In every business enterprise, anal accounts are prepared at the close of the financial for submission to the owners of the business. These final accounts exhibit a true and fair view of the financial affairs of the business. Such accounts are audited by a professional accountant who duly certifies them and submits them to the owners of the business. But determining tax payable is not possible unless the auditor examines the counts and submits them to the Income Tax authorities. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
Hence, it is established that in accordance with the provisions of the Income Tax Act, of 1961. the accounts of some types of assesses are required to be audited by an auditor for the determination of tax payable. The process as such is called a tax audit.
Appointment of Tax Auditor
While a chartered accountant is covered as an auditor by definition, so only a practicing chartered accountant can perform tax audits as required under section 7 of the Chartered Accountants Act, 1949. But before accepting the assignment, the chartered accountant may communicate with the auditor of the previous year who has done similar work earlier.
For the purpose of tax audit and audit of statements for the purposes of reliefs and deductions under the Income Tax Act, an accountant may be appointed by the management of the organization or by the assessed himself. For a company, the Board of Directors or the Chief Executive on behalf of the Board can appoint the tax auditor. Similarly, the owner of a sole trader or partners in a partnership firm or any person authorized by them can appoint the auditor. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
Limits (Ceiling) on Acceptance of Tax Audits
The Institute of Chartered Accountants of India has prescribed the number of tax audits that a chartered accountant can accept in a financial year. For an individual chartered accountant, the number of tax audits that he can accept is sixty while for a firm of chartered accountants, a limit of 60 will be applicable per individual partner. For a partner in one firm, if he is a partner in another firm also, the number of tax audits to be accepted by him will not exceed sixty. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
The assessment can be corporate or non-corporate. Besides this, the tax audit of the head office and its branch or branches will be counted as one tax audit. If a tax audit is the head office and its branch or branches will be con conducted jointly by 2 or more firms, it will be counted as one tax audit in the case of such a firm. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
Maintenance of Accounts by Certain Persons Carrying on ‘Business’ or ‘Profession’
According to section 2(13) of the Income Tax Act, a ‘business’ includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
Under section 44AA(1) of the Income-tax Act, every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the official gazette shall keep and maintain such books of accounts and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(i) It is obligatory for a person carrying on business to get his accounts audited before the ‘specified date’ if the total sales, turnover or gross receipts in business for the previous year exceed one crore rupees.
A person carrying on a profession has to get his accounts audited before the specified date if his gross receipts in profession for the previous year exceed twenty-five lakh. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(ii) where the business or profession is newly set up in any previous year, if his income from the business or profession is likely to exceed one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed ten lakh rupees during the such previous year. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(iii) where the profits and gains from the business are deemed to be profits and gains of the assesse under section 44AD or section 44ADA or section 44AE or as the case may be, and the assesse 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, during such previous year; keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
Compulsory Audit of Accounts
(1) If turnover/gross receipts exceed the prescribed limit. It is obligatory for a person carrying on business to get his accounts audited before the ‘specified date’ if the total sales, turnover, or gross receipts in business for the previous year exceed one crore rupees.
A person carrying on a profession has also to get his accounts audited before the specified date if his gross receipts in profession for the previous year exceed 25 lakh rupees. Such persons are also required to obtain the ‘species report of the audit in the prescribed form.
(2) Business under section 44AE. Where the assesse claims that the profits and gains of business of plying, hiring or leasing goods carriage (Sec. 44AE) are lower than the deemed profits, he has, to get his accounts audited by the specified report of the audit in the prescribed form. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(3) Business under section 44AD. Where the assesse claims that the profits and gains of business are lower than the deemed profits and his income exceeds the maximum amount which is not chargeable to tax during the such previous year, he has to get his accounts audited by the specified date and obtain a report of the audit in the prescribed form.
(4) Profession under section 44ADA. Where the assesse claims that the profits from profession are lower than the deemed profits and his income exceeds the maximum amount which is not chargeable to tax during such previous year, he has to get his accounts audited by the specified date and obtain a report of the audit in the prescribed form. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(5) Assesse claims deduction under Sections 33AB, 33 ABA, 35AD, 350 or 35E. Where the assesse claims deduction under Tea development account’. ‘Site restoration fund’. ‘Specified Business’. “Preliminary expenses’ or ‘Expenditure on prospecting, etc., for certain minerals’, he has to get his accounts audited by the specified date and obtain a report of the audit in the prescribed form.
Where such person is required by or under any other law to get his accounts audited. he need not get them audited again; but he should get the audit done before the specified date and get its report as well as another report in the form prescribed under this section.
Accountant
An accountant, for the purpose of section 44AB as also for audit of specified statements under various sections of the Income Tax Act, means a chartered accountant within the meaning of the Chartered Accountants Act, 1949. Any person who by virtue of the provisions of section 141 of the Companies Act, 2013 is entitled to be appointed to act as an auditor of companies.
Where an assesse wants to claim a deduction in respect of certain incomes, from gross total income under any of the following sections, the deduction will be allowed only when accounts of the previous year have been audited by an accountant and a report of such audit is furnished by the assesse:
TAX AUDITS IN OTHER CASES
(1) Audit of Public Trusts
Section 12A of the Income Tax Act, of 1961 provides for a tax audit of the accounts of public trusts. Under sections 11 and 12 of the Act, certain items of income of public trust have been exempted from the calculation of taxable income.
As per the provisions of section 12A(1)(b), if the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year, the accounts of trust or institution for that year should be audited by an accountant and report be made in the prescribed form, duly signed and verified by him. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
Under Rule 17B of the Income Tax Rules, 1962, the audit report is to be prepared in Form No. 10B and a statement of particulars is to be annexed therewith. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(2) Selective Tax Audit
The provisions of sub-sections 2A, 2B, 2C, and 2D of section 142 of the Income Tax Act have been given hereunder:
(2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assesse and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner direct the assesse to get the accounts audited by an accountant.
The accountant is to be nominated by the aforesaid authority. The auditor has to furnish a report of such audit in the prescribed form duly signed and verified by him and setting forth such particulars as may be prescribed and such other particulars as the assessing officer may require. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(2B) The provisions of sub-section (2A) shall have effect notwithstanding that the accounts of the assesse have been audited under any other law for the time being in force or otherwise. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(2C) Every report under sub-section (2A) shall be furnished by the assesse to the Assessing Officer within such period as may be specified by the Assessing Officer. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
Provided that the Assessing Officer may, suo motu, or on an application made mu behalf by the assesse and for any good and sufficient reason, extend the said period such further period or periods as he thinks fit. So, however, that the aggregate of the period originally fixed and the period or periods so extended shall not in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assesse. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
(2D) The expenses of, and incidental to any audit under sub-section (2A) (including the remuneration of the accountant), shall be determined by the aforesaid au per rule 14B, and the expenses so determined shall be paid by the Central Government.
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 or years relevant to an assessment year or furnish a report of such audit as required under section 44AB, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum equal to one-half percent of the total sales, turnover or gross receipts, as the case may be, in business or of the gross receipts in the profession, in such previous year or years or a sum of 1,50,000, whichever is less.
Conclusion
Does a question arise as to what is the necessity of tax audit? It may be said that the audited financial accounts may be of use and importance to many people outside the concern as well as to the concern itself. It is also true that Income-tax Authorities have to depend upon these audited accounts to assess the amount of tax payable. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
In order to collect relevant information and justify its authenticity and determine the amount of tax payable by the assesse, the importance of re-examining the accounts already audited cannot be denied. (BCom 3rd Year Tax Audit in Auditing Notes Study Material)
BCom 3rd Year Tax Audit in Auditing Notes Study Material
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