Preface

Tax audit, as the name suggests appears to be an audit confined to the purposes of tax but in practice it is not so. Tax audit report involves reporting in two sets of forms. One out of Form Numbers 3CA and 3CB is to be filled while form number 3CD is to accompany one of these two forms invariably. Many professionals remain under misconception that in case of Tax audits their liability is limited to reporting under form number 3CD. But, legally speaking it is not so. While in cases where the accounts are audited under any other law then the auditor needs to report about particulars in form number 3CD and also has to attach the audit report issued under the other law. But in cases where the audit is not done under any other law then the auditor has to audit the financial statements and issue report in form number 3CB alongwith statement of particulars in form number 3CD. So in most of the cases, where tax audit is to be done, the auditor is not only required to fill statement of particulars in form number 3CD but also has to opine about the true and fair view of the financial statements. Thus, Tax Audit under section 44AB of the Income Tax Act, 1961 is a privilege provided to Chartered Accountants, yet, it casts a greater degree of responsibility on them. This is so because on one side under the Income Tax Act, only a Chartered Accountant is authorised to perform the functions of Tax Audit but on the other hand he is responsible for true and fair view of the financial statements including the certification of particulars specified in form number 3CD. Responsibility regarding the matters relating to signing of form number 3CD becomes all the more important because in that case they have to certify that particulars stated therein are true and correct.

If we closely analyse various clauses of form number 3CD then scope of reporting under some of them is factual only, under some of them legal only and while in others it involves both factual as well as legal. Wherever the inquiry is legal in nature then to report about the same, the Chartered Accountant is required to sit in the chair of the assessing officer and decide about allowability or otherwise of the various deductions/allowances claimed in the profit and loss account. The Chartered Accountant is required not only to make a thorough checking of the books of account as well as of the supporting documents and vouchers, but has also to identify the incidents of non-compliances of the related statutory provisions, if any and also to carefully report them in the prescribed Form No. 3CD.

To support the Chartered Accountants in discharging this onerous task we have decided to bring out this publication titled "Handling Tax Audit". We have devised the contents in a manner that all practical aspects of Tax Audit are presented in a single manageable treatise to our readers.

This book caters to each and every requirement of Tax Auditor. To begin with, we have started with Accounting and Auditing aspects so as to provide the auditor with an overview of the regulatory environment in which he has to operate. The Council of ICAI, at its 400th meeting, held on March 18-19, 2021, considered the matter relating to applicability of Accounting Standards issued by The Institute of Chartered Accountants of India (ICAI), to Non-company entities (Enterprises). The scheme for applicability of Accounting Standards to Non-company entities shall come into effect in respect of accounting periods commencing on or after April 1, 2020. We have provided a list of Accounting Standards and detailed information as to their status and applicability as on 1-4-2020. The period covered by the audit for the assessment year 2021-22 is from 1-4-2020 to 31-3-2021. Accounting standard applicable as on first day of accounting year is to be followed in the preparation and presentation of financial statements, therefore, the status and applicability as of 1-4-2020 has been given. Similarly we have identified and listed Auditing Standards which are applicable as of now and also listed out the Auditing Standards which may find their applicability in the context of tax audits. Readers are well aware of the current regulatory environment in which we are operating and the need for compliance with these Accounting and Auditing standards cannot be over-emphasised. We believe this handy information will be welcomed by one and all. The new code of ethics has also been implemented and we have included relevant aspects in the book and devoted a separate chapter "Code of Ethics and Tax Audit" to this effect.

Aspects relevant to tax audits are taken care of in great detail in the Part IV--Aspects Basic to Tax Audit. Hence the detailed Chapters on various aspects include:

-- Requirement of Tax Audit

-- Tax Audit Requirement Where Assessee Having Only Exempt Income

-- Presumptive Incomes and Tax Audit

-- Sales, Turnover or Gross Receipts--Generally

-- Sales, Turnover, Gross Receipts Under Particular Situations

-- Securities Transactions and Tax Audit

-- Running of Nursing Homes--Whether Constitute Business or Profession

-- Case Studies on Tax Audit

Recent amendments to section 44AB have been explained in detail with apt illustrations so as to enable the Chartered Accountant to arrive at correct conclusion as to whether tax audit is to be done and if yes then under which clause of section 44AB it is to be done.

Audit documentation has always been important aspect and so rightly stressed upon by the ICAI. In the current regulatory environment the need for audit documentation has witnessed its relevance more and more. This aspect we have taken care of and devoted two chapters to this aspect, namely:

-- Audit Engagement Letter and Management Representation Letter

-- Declarations, Representations, Certificates, Etc., to be Taken From Auditee

The above contents will help the auditors in making proper documentation while discharging attest function thus we believe.

We have included Exhaustive check lists to various clauses of form number 3CD so as to enable the busy auditor to ensure that all relevant information is gathered and analysed before putting his hands on signing of the Audit report. This will prove to be a good tool while discharging the function of reporting in form number 3CD.

Apart from this we have identified the nature of reporting in form no. 3CD and classified it into a clause-wise list of factual/legal reporting. Icing on the cake is that we have also identified and discussed common errors in reporting by auditors and discussed them at one place. This will help auditors in ensuring error free reporting.

One of the most important aspects of Tax Audit is the filling up of the Form No. 3CD. Separate chapters are therefore, devoted to each of the Clauses of Form No. 3CD. These chapters stand fully backed up by their relevant Legal and Handpicked Case Law Backgrounds. In the process all the related Circulars, Rules etc., have also been recalled and discussed as and where necessary, incorporating totality of even the collateral aspects within the boundaries of a single book of pleasantly manageable size. This book also avoids the need for consultation from any other external sources - so much complete it is.

We have also identified and listed the responsibilities of auditor under each clause in headings like Reporting Requirements, What the Auditor Shall Do and Auditor to Take Care [Safeguards in reporting].

The avowed objective of this book is not only to update readers about the provisions relating to Tax Audit, but also to provide them with the best of advice and guidance for carrying out the Audit. Thus it is more a practice guide authored with keeping all practical aspects of Tax Audit in mind and will prove to be a handy tool in carrying out Tax Audits.  It, accordingly, comprises a host of Check Lists, Case law, Circulars, Safeguards, Reporting requirements, What is expected from auditors, etc.

Needless to say that the text of this book stands fully updated with the law as in the wake of the Finance Act, 2021.

With this we present this book to the readers with a firm belief that this will aid them while discharging their attest function. We would like to hear from our readers about shortcomings, if any in the book which will help us in improving upon in future.

Jodhpur	CA. Manoj Gupta
21 October, 2021