FAQs on Introduction & Applicability of Tax Audit A.Y. 2021-22
FAQs on Introduction & Applicability of Tax Audit A.Y. 2021-22
Contents FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
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FAQ 1. What is a tax audit?
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FAQ 2. In which form the tax audit report has to be obtained?
5
FAQ 3. Who is required to get books of accounts audited?
6
FAQ 4. How to avail of the benefit of the enhanced limit of Rs. 10 crores for the tax audit?
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FAQ 5. Can the professionals avail the benefit of the enhanced turnover limit of Rs. 10 crores for the tax audit?
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FAQ 6. Whether a person opting for a presumptive taxation scheme under section 44AD shall get his accounts audited? 9
4
FAQ 7. Analysis of the applicability of tax audit under different scenarios in the case of professionals:
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FAQ 8. Whether the provisions of tax audit applicable to the business income of NGOs under Section 11(4A)?
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
FAQ 1.
What is a tax audit? A tax audit is a process to verify whether the books of accounts prepared by a taxpayer comply with the generally accepted accounting principles and the provisions of the Income-tax Act. It is intended to ensure that the books of account and other records are properly maintained and correctly compute the taxpayer’s actual income. The tax audit does not give the assessee immunity from scrutiny assessment or disallowance of expenses1. A tax audit can be conducted only by a Chartered Accountant in practice. (Read more: Compulsory Audit of Accounts on Taxmann.com/Practice)
1 Goodyear India Ltd. v. CIT [2009] 112 Taxman 419 (Delhi)
FAQ 2.
In which form the tax audit report has to be obtained? The tax audit report has to be furnished in the forms as prescribed below: Category of Taxpayer
Form for Audit Report
Annexure to Audit Report
If the books of account of
Form 3CA
Form 3CD
Form 3CB
Form 3CD
the assessee are required to be audited under any other law In any other case
Form No. 3CA/3CB is a format of audit report, whereas Form 3CD is a statement of particulars required to be furnished under Section 44AB of the Income-tax Act.
Where an assessee is required to get his books of accounts audited under any other law, it is sufficient for him to get his accounts audited under that law and furnish a report of such audit and a report in form 3CA and 3CD by a Chartered Accountant by the prescribed due date. 5
FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
FAQ 3. Who is required to get books of accounts audited? Section 44AB requires the audit of books of accounts of an assessee engaged in business or profession. The table below enumerates the requirement to get the books of accounts audited by different taxpayers: Nature of Business or
Category of
Profession
Taxpayer
Any professions
Any
When audit is mandatory? If gross receipts from profession
(specified or non-
during the relevant previous year
specified)
exceeds Rs. 50 lakhs
Business
Business
Cash receipt and
If total sales, turnover or gross
payment up to
receipt from the business during the
5%
previous year exceeds Rs. 10 crore2
Any
If total sales, turnover or gross receipt from the business during the previous year exceeds Rs. 1 crore
Business eligible for
Resident
If the income of assessee exceeds
Presumptive Tax Scheme
Individual or
the maximum exemption limit and
under Section 44AD
HUF
he has opted for the scheme in any of the last 5 previous years but does not opt for the same in current year.
Business eligible for
Resident
Taxpayer has opted for the scheme
Presumptive Tax Scheme
Partnership Firm
in any of the last 5 previous years
under Section 44AD
but does not opt for the same in the current year.
Profession eligible for
Resident
Taxpayer claims that his profits from
Presumptive Tax Scheme
Assessee
profession are lower than the profits
under Section 44ADA
computed under Section 44ADA and total income exceeds the maximum exemption limit
Business eligible for
Any Assessee
Taxpayer claims that his profits from
Presumptive Tax Scheme
engaged in
business are lower than the profit
under Section 44AE
plying, hiring or
computed under Section 44AE
leasing of goods carriage
2 Section 13 of the Finance Act, 2021 has increased the turnover limit from 5 crores to 10 crores with effect from Assessment Year 2021-2022.
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
Nature of Business or
Category of
When audit is mandatory?
Profession
Taxpayer
Business eligible for
Non-resident
Taxpayer claims that his profits from
Presumptive Tax Scheme
assessee
business are lower than the profit
under Section 44BB
engaged in
computed under Section 44BB
exploration of mineral oil Business eligible for
Foreign Co.
Taxpayer claims that his profits from
Presumptive Tax Scheme
engaged in civil
business are lower than the profit
under Section 44BBB
construction
computed under Section 44BBB
The provisions for tax audit under Section 44AB is not applicable in the case of assessees who come within the purview of Section 44B or Section 44BBA.
FAQ 4.
How to avail of the benefit of the enhanced limit of Rs. 10 crores for the tax audit? Up to the assessment year 2019-2020, every person carrying on business was required to get its books of account audited from a Chartered Accountant if its total sales, turnover, or gross receipt from the business exceeds Rs. 1 crore during the previous year.
To reduce the compliance burden on small and medium enterprises, the Finance Act, 2020, effective from the assessment year 2020-21, has increased the threshold limit under section 44AB for the mandatory audit for a person carrying on business from Rs. 1 crore to Rs. 5 crores. The Finance Act, 2021 has increased the threshold limit from Rs. 5 crores to Rs. 10 crores, effective from the assessment year 2021-22 onwards.
However, the increased threshold limit of Rs. 10 crores shall be applicable only if cash receipts and cash payments during the year does not exceed 5% of the total receipt or payment, as the case may be. In other words, more than 95% of business transactions should be done through banking channels. Any payment or receipt by cheque or bank draft should be considered a cash transaction if such cheque or draft is not an account payee. Thus, to illustrate, any payment or receipt by a bearer or crossed cheque (not being an account payee cheque) would be considered as payment or receipt in cash. It may be noted that conditions in respect of ‘amounts received’ and ‘payments made’ should be fulfilled separately. It means, if one of the conditions is not satisfied, then proviso would not apply. A threshold limit of 5% is prescribed separately for receipts/payments and ought to be applied accordingly. 7
FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
The onus would be on the assessee to prove that he is eligible for an increased threshold limit for not getting his accounts audited. He needs to ensure that his aggregate cash receipts and payments are within the limit of 5%. If he fails to do so, the consequences would be a penalty under Section 271B for failure to get accounts audited. However, if there is reasonable cause, in terms of Section 273B, such a penalty may not be imposed. For example, Mr. A is engaged in the business of trading of readymade garments. He has a turnover of less than Rs. 10 crores during the financial year 2020-21. He made the following transactions during the relevant year: Particulars
Mode of transaction Cash (Rs. in lakhs)
Bank (Rs. in lakhs)
20
480
10
20
10
100
40
600
15
400
Nil
50
5
50
20
500
Receipts - - -
Sales
Advance from customers Unsecured loan
Total receipts Payments - - -
Purchase Rent
Loan repayment
Total Payments
The turnover of Mr A during the financial year 2020-21 is up to Rs. 10 crores. He shall not be liable for tax audit if his cash receipt and payment during the year does not exceed 5% of total receipt or payment, as the case may be. Computation of percentage of cash receipts & payments: Particulars
Total (A)
Cash (B)
% in cash (B/A*100)
Receipts
640
40
6.25%
Payments
520
20
3.85%
Though the payment made in cash during the year does not exceed 5% of total payments, the percentage of cash receipts exceeds the limit of 5%. Thus, Mr. A is not entitled to the benefit of the increased threshold limit of Rs. 10 crores for the tax audit. Hence, a tax audit is applicable.
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
FAQ 5.
Can the professionals avail the benefit of the enhanced turnover limit of Rs. 10 crores for the tax audit? Clause (a) of Section 44AB talks about a person carrying on business, whereas clause (b) talks about a person carrying on a profession. The proviso to Section 44AB providing the enhanced turnover limit of Rs. 10 crores for the tax audit is placed below clause (a) to section 44AB. Thus, the persons engaged in the profession are not entitled to claim an enhanced turnover limit of Rs. 10 crores for the tax audit.
FAQ 6.
Whether a person opting for a presumptive taxation scheme under section 44AD shall get his accounts audited? Section 44AB of the Income-tax Act prescribes the conditions under which an assessee is required to get his accounts audited. It excludes a person from getting books of account audited if he opts for a presumptive taxation scheme under Section 44AD provided turnover of business does not exceed Rs. 2 crores.
Clause (e) of Section 44AB states that a person, who has opted for the presumptive taxation scheme under Section 44AD in any of the last 5 previous years but does not opt for the same in the current previous year, shall be liable to get his accounts audited if his total income exceeds the maximum amount not chargeable to tax.
Clause (a) of Section 44AB provides for an audit of books of account if a person is engaged in a business and the turnover of such business exceeds Rs. 1 crore. The Finance Act, 2020 has extended the threshold of turnover to Rs. 5 crores if cash receipt and cash payment do not exceed 5% of total receipt and payment respectively. This limit of Rs. 5 crores has been further enhanced to Rs. 10 Crores by the Finance Act 2021. If an assessee is covered under both the clauses, that is, clause (a) and clause (e) of Section 44AB, whether he will be liable to get the books of account audited? For example, if the turnover of an assessee is more than Rs. 1 crore and his cash payment and receipt is less than 5%, is he liable to tax audit? Let’s understand this with the help of the table below: 9
FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
Situation*
Turnover
Whether liable for a tax audit?
Up to Rs. 1 crore
Yes, if income is more than the
of the last 5 years but not
Up to Rs. 2 crores
maximum amount not chargeable
current year
More than Rs. 2
No [Proviso to Section 44AB(a)]
The assessee has opted
for Section 44AD in any
opting for the same in the
crores but up to
to tax [Section 44AB(e)]
Rs. 10 crores More than Rs. 10
Yes
crores The assessee has not
Upto Rs. 10
opted for Section 44AD
crores
in any of the last 5 years
More than Rs. 10
and not opting for the same during the current
No [Proviso to Section 44AB(a)] Yes
crores
year as well. * Assuming cash receipt or payments does not exceed 5% of the aggregate amount received or paid during the year.
It should be noted that Clause 8 of the Form 3CD requires the auditor to provide the relevant clause under which the tax audit has been conducted. (Read more: Presumptive Scheme for Businesses under Section 44AD on Taxmann.com/Practice)
FAQ 7.
Analysis of the applicability of tax audit under different scenarios in the case of professionals:
Case
Gross
Profit
Receipts Case 1
40 Lakhs
Whether
Reason
tax audit 25 Lakhs
applicable? No
The gross receipt is less than Rs. 50 lakhs, and presumptive profit under Section 44ADA is more than 50% of the gross receipts.
Case 2
40 Lakhs
10 Lakhs
Yes
The presumptive profit under Section 44ADA is lower than 50% of total gross receipts and total income exceeds the maximum exemption limit.
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
Case
Gross
Profit
Receipts
Whether
Reason
tax audit applicable?
Case 3
40 Lakhs
2 Lakhs
No
The total income is less than the maximum exemption limit.
Case 4
70 Lakhs
50 Lakhs
Yes
Gross receipts exceed Rs. 50 lakhs.
Case 5
70 Lakhs
15 Lakhs
Yes
Gross receipts exceed Rs. 50 lakhs.
Case 6
7 Crores
2 Crores
Yes
Gross receipts exceed Rs. 50 lakhs. The limit of 10 Crores only applies in the case of business.
FAQ 8.
Whether the provisions of tax audit applicable to the business income of NGOs under Section 11(4A)? Nothing in the statute suggests that the tax audit under Section 44AB shall apply to business under Section 11(4A). Sections 11 to 13 are independent of the five heads of income. As long as the registration under section 12AA/12AB is intact, the income cannot be computed under the five heads of income. Tax Audit is a specific requirement of the assessee having income under the head “Business and Profession”. (Read more: Computation of Income under Section 11 and 12 on Taxmann. com/Practice)
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22
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FAQs on Introduction & Applicability of Tax Audit | A.Y. 2021-22