Tuesday, September 13

Tax Audit - A glimpse.


These days we all are busy with our tax audits schedules and many of the small firms have their most earnings and survival on tax audits itself.

An attempt is made here in my series “TAX AUDITS” about what exactly is this and what are its importance in today’s world.

To start with basically, what is the guiding section or legislatives which require a person/business to undergo a tax audit?

It’s section 44AB which is the general section and there are few more sections which, by nature and influence, make a business come under tax audit net. It’s the presumptive taxation sections i.e. 44AD, 44AE, 44AF.

Once the audit of such person/business is done then what are its reporting requirements? Form 3CA/3CB and 3CD is given by the person who performs the audit and this are generally called tax audit reports.

Now, how is eligible to do these audits? Unlike the internal audits wherein, the audit can be performed by a CA in practice or a specialised team of management, the tax audits are ONLY to be performed by a practicing Chartered Accountant.

Are there any limits prescribed to the CA's for undertaking the number of tax audits during a year? Yes, a practicing CA can only undertake 45 Tax audits in a year.

It is more evident by ICAI president's statement as "The ceiling on tax audit has been increased from 30 to 45 per chartered accountant/per partner. Each partner can undertake 45 tax audits," Mr Sunil Talati, President of ICAI. (During 2007-08 I believe). 

Let’s go deep into provisions now,

First comes the general section on tax audits which are governed by Section 44AB. What do these provisions say all about?

It provides some figures called Rs. 6000, 000/- and 1500, 000/-.

This first figure of Rs. 6000,000/- is applicable to a person who has achieved and crossed it as business turnover and second figure of Rs. 1500,000/- is applicable to a person who has rendered services for more than the above said figure. Here it should be clearly understood that the turnover needs to exceed to the specified above mentioned limits. For businesses, not only the turnover is counted, but also the total sales and gross receipts and in case of professions it is gross receipts only.

Now, the word turnover has come into picture. What does turnover means? Does it mean Gross turnover or Net turnover? Does it include VAT, CST, Excise Duty?

A summarized meaning of turnover after considering the guidance note of ICAI says that, the aggregate value for which the sales are effected or services are rendered is to be taken. It includes all the types of taxes applicable on such goods.

But, doesn’t the above two figures sound funny? A newly set up iron trading business would easily achieve this turnover in a year or two. Then what is the intention behind these figures? The governing authorities want almost all the business to come under this tax audit net to avoid all such violations of other taxes and diverting of income.

Are there any time limits to comply with these provisions i.e. to get the books audited and submit and audit report? 30th September, of every year (unless this date is not officially changed) a golden day.

There are certain circumstances where an assesse, even without even achieving those basic eligibility figures (Rs. 6000, 000/- & 1500, 000/-) is required to get himself audited. What are those circumstances? Which sections apply to such circumstances? Why the legislative wants even such assesses to get themselves audited? Is there any way that are such persons left off? An attempt is made to answer these questions here.

What are those circumstances?

There are some notified industries wherein the law preparers have assumed that such industries would earn a required rate of return compulsorily and this is computed based on the industry standards, their performance, their productivity, their turnover, their market captivity and their importance to economy. The rate of return estimated is blindly treated as the profit of the assesse on some Base figure. Another circumstance could arise is the ease to the assesse who is to give an ease to small business units in maintaining the books of accounts, getting them audited and determining the profit thereof.

Which sections are applicable and what does this section say?

Section 44AD and 44AE are the presumptive taxation sections applicable. They provide some criteria`s which are discussed systematically as follows. These sections are applicable from 1st April, 2011, as per revised norms.

44AD –

Who can take advantage of this section would be the first question? It is an Individual, HUF, Firm (not LLP);

Are there any eligibility criteria's? Yes, the assesse shall not avail any tax exemptions U/s. 10A, 10AA, 10B, 10BA, 80HH to 80RRB;

To what kind of business is this applicable? All the business except, those business covered under section 44AE;

Is there any requirement of turnover? No, the turnover limits are not applicable. Then how is the profit calculated? It is a straight forward rate of 8% of Gross Receipts/Total Turnover (taken as base);

But, are there any assumptions applicable? Yes, in case of individual all expenses U/s. 30 to 38 have been allowed for computing deemed profits and in case of a Partnership Firm, all expenses U/s. 30 to 38 have already been allowed except salary and interest to partners U/s. 40(b), which needs to be adjusted. Than what about the disallowances? It is assumed that they are already considered in considering the deemed income.

An example is given to calculate the profit – Suppose, an assesse has a turnover of say Rs.1000, 000/- and gross receipts of another Rs. 1000, 000/-, he opts for presumptive taxation then his profit charged to tax would be 8% of Rs. 2000,000/- i.e. Rs. 160,000/-.

44AE –

Who can take advantage of this section would be the first question? It is applicable to all assesses [assesse as defined U/s. 2(7)] irrespective of residential status;

Are there any eligibility criteria's? Yes, the assesse shall hold less than or equal to 10 goods carriage vehicle at any time during the year. How is any tome interpreted here? Substance over form exists to know the ownership of vehicle and even if the vehicle is in possession for 1 day it is eligible;

To what kind of business is it applicable? Any business which is engaged in plying, hiring or leasing goods carriage vehicles;

Any requirement of turnover? No turnover limits are applicable here. And the profits are calculated as follows

-  Heavy goods vehicle = Rs. 5,000/- per month or part of it,
-  Other than heavy goods vehicle = Rs. 4,500/- per month or part of it, during the period in which the vehicle is owned.

Now, the term heavy goods vehicle exists. What is this? Heavy good vehicles are those whose unladed weight is more than 12,000 kgs.

Does law assumes anything constant? Yes, In case of Individual all expenditure U/s. 30 to 38 have been allowed for computing deemed profits and in case of Partnership Firm all expenses U/s. 30 to 38 have already been allowed except salary and interest to partners U/s. 40(b), which needs to be adjusted. What about disallowances now? Even they are let-off while considering the deemed income.

A simple e.g. in computing the profit is as follows - A transporter purchases a heavy vehicle on May 15th and puts to use on June 15th then the income deemed is Rs. 55,000/- (Rs. 5000*11 months). Here, the usage of vehicle is not relevant and even if it is purchased on last day of the year/ month it is counting for the whole month.

But, always there isn`t such profit earned in practice during the year. The assesse might earn a less profit or run in losses too and these sections takes deemed profit as it income charged to tax. The assesse is actually taxed on that income on which he might have not earned during that year. Then why are the law preparers still using this method? If some people in the industry run into losses while majority earn profits then taking materiality at national level into consideration they would follow the rule. But, what about those who earn less profit or do not earn anything? They can declare their income on actual basis but they need to maintain their books of accounts as per section 44AA and get the books audited as per section 44AB irrespective of the turnover.

Declaring of actual income earned is one side of coin but what about the other side i.e. declaring of higher income? Can an assesse declare a higher income then the deemed profits? Yes, the assesse can declare a higher income than the income calculated on estimated basis and there are no conditions to be complied for it unlike that of maintaining and get the books audited in case of declaring higher income. This is because it is in the best interest of the Income Tax department who gets higher tax incomes.

Section 44AF doesn’t apply for all the assessment year beginning from 1st April 2011.


COURTESY: Karan Teli

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