Tax Audit – Limit, Due Date & Section 44AB
Tax audit refers to the verification of the books of accounts maintained by a taxpayer. The purpose of a tax audit is to validate the income tax computation made by the taxpayer in the income tax return and to ensure compliance with the laws of Income Tax. Auditing of books of accounts must be carried out by a certified Chartered Accountant. In this article, we discuss the concepts of tax audit limit, Section 44AB of the Income Tax Act and the legal provisions governing the appointment of a tax auditor.
Tax Audit Limit
The provisions relating to tax audit are provided under Section 44AB of the Income Tax Act. According to Section 44AB, a tax audit is required for the following persons:
In case of a business, tax audit would be required if the total sales turnover or gross receipts in the business exceeds Rs.1 crore in any previous year. Under the Income Tax Act, “Business” simply means any economic activity carried on for earning profits. Section 2(3) has defined the business as “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”.
In case of a profession or professional, tax audit would be required if gross receipts in the profession exceed Rs.50 lakhs during the financial year. A profession or professional could be any of the following as per Rule 6F of the Income Tax Rules, 1962:
- Authorised representative
- Film Artist – Actor, Cameraman, Director, Music Director, Editor, and so on
- Interior Decorator
- Legal Professional – Advocate or Lawyer
- Medical Professional – Doctor, Physiotherapist, or Nursing and Paramedical Staff
- Technical Consultant
Presumptive Taxation Scheme
If a person is enrolled under the presumptive taxation scheme under section 44AD and total sales or turnover is more than Rs. 2 crores, then tax audit would be required. Also, any person enrolled under the presumptive taxation scheme who claims that the profits of the business are lower than the profits calculated in accordance with the presumptive taxation scheme would be required to obtain a tax audit report.
Due Date for Filing Tax Audit Report
The due date for completing and filing tax audit report under section 44AB of Income Tax Act is 30th September of the assessment year. Hence, if a taxpayer is required to obtain a tax audit, then the assessee would be required to file the income tax return on or before 30th September along with the tax audit report. In case the taxpayer is also liable for transfer pricing audit, then the due date for filing tax audit is 30th November of the assessment year.
Form 3CA & 3CD
Any person who is required to get a tax audit would be required to furnish the following for tax audit while filing an income tax return:
Form 3CA – Audit Form
Form 3CD – Statement showing relevant particulars
Tax Audit Limit for Chartered Accountants
A tax audit can be conducted by a Chartered Accountant or a firm of Chartered Accountants. If it is performed by the latter, the name of the signatory who has signed the report on behalf of the firm must be stated in the audit report. The signatory must provide his/her membership number while registering in the e-filing portal. Tax audits can also be performed by the Statutory Auditor. It is important to note that, Chartered Accountants have a limit on the number of tax audit reports that can be filed. The maximum number of tax audits that can be undertaken by a Chartered Accountant is limited to 60. In case of a firm the restriction on tax audit limit will be applicable for each of the partners.
Penalty for Completing Tax Audit
If a taxpayer who is required to obtain tax audit does not get the accounts audited, then penalty could be levied under Section 271B of the Income Tax Act. The penalty for not completing tax audit is 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1,50,000.
Appointment of Tax Auditor in Company
The responsibility of appointing tax auditors in a company is vested with the Board of Directors. The Board may also delegate this responsibility to any other officer like CEO or CFO. Auditors in a firm or proprietorship can be appointed by a partner, proprietor or a person authorized by the assessee. Moreover, a taxpayer can also appoint two or more chartered accountants as joint auditors for performing the tax audit. In this case, the audit report must be signed by all the joint auditors, if all of them concur with the report. In case of any differences in opinion, the auditors must express their opinion separately through another report.
Letter of Appointment for Tax Audit
The tax auditor must obtain a letter of appointment from the concerned assessee before going forward with the tax audit. The appointment letter must be duly signed by the person competent to sign the return of income. The letter must mention the remuneration offered to the auditor. Further, the appointment letter should specify that no other auditor is entrusted with the task for the particular financial year, and could contain details of the previous auditor. The latter is mentioned to facilitate the communication between the appointed auditor and his predecessor.
Who cannot be tax auditor?
There are certain prohibitions on the appointment of tax auditors, which are enumerated below:
- Any member in part-time practice is not eligible to perform tax audit.
- A chartered account cannot audit the accounts of a person to whom he is indebted for more than Rs.10,000.
- A statutory auditor will be deemed to be guilty of professional misconduct if he/she accepts the appointment of Public Sector Undertaking/Government Company/Listed Company and other Public Company having turnover of Rs 50 crores or more in a year and accepts any other work, assignment or service in regard to the same undertaking/company on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking/company.
- The Chartered Accountant who is assigned with the task of writing and maintaining the books of account of the assessee should not audit such accounts.
- The audit of accounts of a professional firm of Chartered Accountants cannot be performed by any partner or employee belonging to such firm.
- An internal auditor of the assessee cannot be appointed as a tax auditor.
- An auditor cannot accept more than 45 tax audit assignments in a particular financial year.
Removal of Tax Auditor
The management is entitled to remove a tax auditor if the auditor has delayed the submission of the report to such an extent that it is not anymore possible to get the audit report uploaded before the specified due date. A tax auditor cannot be removed because he has submitted an adverse audit report or on the assesee’s apprehension that the tax auditor is likely to provide an adverse audit report. If a Chartered Accountant is removed on unfair grounds, the Ethical Standards Board, which was established by the Institute of Chartered Accountants of India (ICAI) is entitled to intervene. Moreover, if a Chartered Accountant is removed on invalid grounds, no other Chartered Accountant would be allowed to act as a replacement to the predecessor.