Audit under section 44AB of the Income Tax Act, 1961, commonly known as Tax Audit, is one of the most sought after assignments so far as income tax practice is concerned. In case of assessees not liable to audit under any other law, it is fusion of financial as well as tax audit. So in those cases the tax audit does not remain only examination of books of accounts to find out particulars to be reported in Form No. 3CD, it also involves the financial audit of the accounts of the assessee and expression of true and fair view thereon. Many professionals remain under misconception that in case of tax audits their liability is limited to reporting under Form No. 3CD. But, legally speaking it is not so. While in cases where the accounts are audited under any other law the auditor needs to report about particulars in Form No. 3CD and also has to attach the audit report issued under that 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 No. 3CB alongwith statement of particulars in Form No. 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 No. 3CD but also has to opine about the true and fair view of the financial statements. Though, Tax Audit under section 44AB of the Income Tax Act, 1961 is a privilege conferred upon 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 entitled to perform the function 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 No. 3CD. Responsibility regarding the matters relating to signing of Form No. 3CD becomes all the more important because in that case they have to certify that particulars stated therein are true and correct.
Of late, the provisions regarding tax audit has undergone many changes. While the limit for audit has gone up from Rs. 40 lakhs to Rs. 1 crore in business cases, the later insertion of proviso to section 44AB(a), which provides higher limit of Rs. 10 crores, if certain conditions are satisfied, has made the scenario quite complex. Icing on the cake has come from sections 44AD and 44ADA. While persons declaring their incomes as per mandate of sections 44AD and 44ADA has been exempted from the requirements of getting accounts audited yet a lot of confusions arise as to whether a tax audit is required or not. While, skipping audit may lead to penalty under section 271B, if department takes a different view, but doing it may pose problem of unwanted compliance. A lot of assessees are engaged in trading in share markets, particularly day trading and futures and options. Issues arise as to determination of turnover in such cases and issues also arise as to determination of turnover in other cases.
Coming to reporting of specified particulars in Form No. 3CD, it needs to be stated that 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. A separate chapter has been devoted to this aspect of the matter, which clearly depicts the nature of reporting under various clauses of Form No. 3CD be it factual, legal or combination of both. The Auditors, it is advised, while filling up Form No. 3CD ensure that in clause dealing with factual reporting they report correctly and wherever nature of reporting is legal and they take a particular view then they have some back-up material which justifies the view.
The specific clauses in Form No. 3CD are designed to collate the relevant information which the department can use to later initiate action against the erring assessees. This onerous responsibility of reporting in Form No. 3CD is placed on Chartered Accountants. To keep them answerable it is provided that they need to certify that particulars in Form No. 3CD are true and correct, it shall not be confused with true and fair view.
So in nutshell the tax audit is not a cakewalk rather it is an onerous responsibility on the shoulders of Chartered Accountants and they need to ensure that they rise to the occasion to accept the challenge and discharge their duty to the satisfaction of the Stakeholders.
To support the Chartered Accountants in discharging this onerous task we have decided to bring out this publication titled "Handling Tax Audit". Contents have devised in a manner that all practical aspects of Tax Audit are presented in a single manageable treatise to the readers.
This book caters to each and every requirement of Tax Auditor. To begin with, Accounting and Auditing aspects have been discussed so as to provide the auditor with an overview of the regulatory environment in which he has to operate. 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 1-4-2022 has been given. Similarly Auditing Standards have been identified and listed which are applicable as of now and also the Auditing Standards which may find their applicability in the context of tax audits have been discussed. 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-emphasized. So it is believed that this handy information will be welcomed by one and all. The new code of ethics has also been implemented and relevant aspects have been included in the book and a separate chapter titled "Code of Ethics and Tax Audit" has been devoted to this effect. Of late the NFRA has started its operations and we see everyday an order is passed by NFRA penalising the Chartered Accountants. So the CAs must be very careful while discharging their attest functions and follow the Accounting Standards and Audit Standards in letter and spirit.
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 Accountants 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 of any audit 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 has been taken care of in two chapters devoted 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. Also in Clausewise discussion the required documentation has been indicated at places so that one can ensure that he collects all relevant documents prior to issuing the report.
There is included Exhaustive check lists to various clauses of Form No. 3CD so as to enable the busy auditor to ensure that all relevant informations are 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 No. 3CD.
Icing on the cake is that common errors in reporting by auditors have been identified and discussed upon 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.
Responsibilities of auditor under each clause have been incorporated 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 acquaint 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 is believed. It, accordingly, comprises a host of Check Lists, Case law, Circulars, Safeguards, Reporting requirements, What is expected from auditors, Auditor to take care, etc.
Needless to say that the text of this book stands fully updated with the law as in the wake of the Finance Act, 2023.
The contents of the book have been enriched with the knowledge gained by the Author while conducting various Seminars/Webinars on the topic of Tax Audit and other income tax related issues and also from the queries received on Whatsapp on a daily basis. All the experience so gained has been incorporated in the contents so as to make them more practice oriented.
Hope this effort will be welcomed by one and all. Suggestions, if any are however, welcome.
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JODHPUR |
CA. MANOJ GUPTA |
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1st AUGUST, 2023 |
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