TAX AUDIT under Section 44AB for AY 2022-23 75 FAQs on
Taxpayers are required to maintain books of accounts and get them audited if their gross turnover or receipts during the previous year exceed the prescribed threshold limit. The requirement to taxpayer maintains proper books of account and complies with the audit.
tax
Taxpayers are required to maintain books of accounts and get themauditediftheirgrossturnoverorreceiptsduringtheprevious year exceed the prescribed threshold limit. The requirement to keep the books of accounts is specified under Section 44AA, and to get them audited is mentioned in Section 44AB of the Income-tax Act. The purpose of a tax audit is to ensure that the taxpayer maintains proper books of account and complies with the provisions of the Income-tax Act.The Chartered Accountant conducting the tax audit is required to give his findings, observations, etc., in the form of an audit report. The audit report under Section 44AB shall be furnished electronically at the e-filing portal in Form No. 3CA/3CB-3CD. This article covers the Frequently Asked Questions (FAQs) about the tax audit.
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2 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 CONTENTS Introduction & Applicability of Tax Audit Computation of Gross receipts or TurnoverAuditReportDisclosure&Reporting in Form 3CD 3025143
375 FAQs on Tax Audit under Section 44AB for AY 2022-23
The tax audit report has to be furnished in the forms prescribed below: Category of Taxpayer Form for Audit Report Annexure to Audit Report
& Applicability
If the books of account of 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.
Introduction of 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 true income. Such an audit also helps in checking fraudulent practices. A tax audit does not give the assessee any immunity from scrutiny assessment or disallowance of expenses1 be conducted only by a Chartered Accountant in practice.
FAQ 1. What is a tax audit?
FAQ 2. In which form the tax audit report has to be obtained?
4 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
Nature of Business or Profession Category of Taxpayer When is the audit mandatory?
If gross receipts from the profession during the relevant previous year exceed Rs. 50 lakhs. and receipt in cash do not exceed 5% of the total respectively.receipts receipt from the business during the previous year exceeds Rs. 10 crores. Either payment or receipt in cash exceeds 5% of the total respectively.receipts receipt from the business during the previous year exceeds Rs. 1 crore for presumptive tax scheme under Resident If the assessee’s income exceeds the maximum exemption limit and he has opted for the scheme in any of the last 5 previous years but does not opt for the same in the current year. for presumptive tax scheme under Resident The taxpayer has opted for the scheme in any of the last 5 previous years but does not opt for the same in the current year.
Section 44AB provides for 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:
If the assessee is required to get his books of accounts audited under any 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.
FAQ 3. Who is required to get books of accounts audited?
575 FAQs on Tax Audit under Section 44AB for AY 2022-23
Profession eligible for presumptive tax scheme under IndividualResident or
The taxpayer claims that the for presumptive tax scheme under assessee engaged in the exploration of mineral oil
The taxpayer claims that his for presumptive tax scheme under engaged in constructioncivil
The taxpayer claims that his
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FAQ 4. Is a tax audit required if turnover exceeds the Yes, the tax audit is mandatory. Section 44AB does not exempt an assessee from the tax audit simply because its total income does not exceed the maximum exemption limit.
The taxpayer claims that exceeds the maximum exemption limit. for presumptive tax scheme under engaged in leasing of goods carriage
Nature of Business or Profession Category of Taxpayer When is the audit mandatory?
The provisions for tax audit under Section 44AB are not applicable in the case of an assessee who comes within the purview of Section 44B or Section 44BBA.
The objective of tax audit under section 44AB is to assist the Assessing different provisions of the Act. Therefore, even if the total income of a person is below the maximum exemption limit, he will get his accounts audited and furnish the audit report if any condition prescribed under
Rs. 10 crores for the tax audit?
775 FAQs on Tax Audit under Section 44AB for AY 2022-23
Receipts 2010 20 Unsecured loan 10
cash receipts and cash payments during the year do not exceed 5% of of business transactions should be done through banking channels. It should be noted that any payment or receipt by cheque drawn on a bank or by a bank draft, not being an account payee cheque or draft, should be considered payment or receipt in cash. For example, any payment or should be considered as payment or receipt in cash. It may be noted that conditions in respect of ‘amounts received’ and is prescribed separately for receipts/payments and should be applied enhanced turnover limit will not apply. 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 not be imposed.
Cash
For example, Mr. A is engaged in the business of trading readymade year: Mode of transaction (Rs. in Bank (Rs. in 100 40 600
Clause (a) of Section 44AB talks about a person carrying on a business, proviso 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
8 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 Mode of transaction Cash (Rs. in Bank (Rs. in Payments Purchase 15 Rent Nil 50 5 50 20 500 crores. He shall not be liable for tax audit if his cash receipt and payment during the year do not exceed 5% of the total receipt or payment, as the case may Computationbe. of percentage of cash receipts & payments: % in cash Receipts 6.25% Payments 520 20
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%. audit?
975 FAQs on Tax Audit under Section 44AB for AY 2022-23
10 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 FAQ 7. Whether a person opting for a presumptive taxation scheme under section 44AD is required to get his accounts audited?
Section 44AB 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 the turnover of the business does not 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 the cash receipt and payment do not exceed 5% of the total receipt and payment, respectively. If an assessee is covered under both the clauses, that is For example, if the turnover of an assessee is more than Rs. 1 crore and Let’s understand this with the help of the table below:
Situation* Turnover Whether liable for a tax audit? The assessee has last 5 years but is not opting for the same in the current year.
Up to Rs. 1 crore the maximum amount notUp to Rs. 2 Morecroresthan Rs. 2 crores but up to Rs. 10 crores. Proviso More than Rs. 10 crores Yes The assessee has not last 5 years and is not opting for the same during the current year as well. Up to Rs. 10 crores Proviso More than Rs. 10 crores Yes * Assuming cash receipts or payments do not exceed 5% of the aggregate amount received or paid during the year.
It should be noted that Clause 8 of Form 3CD requires the auditor to provide the relevant clause under which the tax audit has been conducted.
The gains or losses arising from trading in F&O are always taxable under loss from dealing in F&O shall be deemed as normal business income Totransactions.checkthe applicability of tax audit in such cases, the turnover (Refer FAQ 16). The receipt from the business during the previous year exceeds Rs. 1 crore, the tax audit shall be required in such cases. However, the increased cash payments during the year do not exceed 5% of the total receipt or transactions should be done through banking channels. For example, during the year, Mr. A has earned salary income and his transactions are as under: Transaction Buy Value Sell Value Total turnover from F&O exceeds Rs. 1 crore. However, the tax audit shall not transactions, the trading shall be through digital means only, the enhanced
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as futures and options?
P&LRealised ofComputationTurnover Transaction 1 Transaction 2 Transaction 5
Case GrossceiptsRe Whethertaxaudit Reason
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Nothing in the Act suggests that tax audit under Section 44AB shall apply heads of income.
Gross receipts are less than Rs. 50 lakhs and the gross receipts. Yes 50% of total gross re exceeds the maximum exemption limit. than 50% of total gross income is less than the maximum exemption limit. Yes Gross receipts exceed Rs. 50 lakhs. Yes Gross receipts exceed Rs. centage is irrelevant here.
1375 FAQs on Tax Audit under Section 44AB for AY 2022-23 the charitable institutions to get the accounts audited under Section 44AB. However, such organisations are subject to the audit under section read with
As per ‘Guidance Note on Terms Used in Financial Statements’ published by the ICAI, the meaning of the term’ sale turnover’ shall be the aggregate of the amount for which sales are affected by an enterprise. The terms gross turnover and net turnover are sometimes used to differentiate the turnover before and after deducting returns and discounts.
Computation of Gross receipts or Turnover
Applicability of tax audit under Section 44AB depends upon gross receipts, sales, or turnover of an assessee, so the foremost thing is their calculations. Sales turnover
14 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 for a tax audit?
An invoice may involve various extra and ancillary charges. Some of these charges may form part of the sale turnover, whereas some may be excluded while determining the value of sales turnover. The treatment thereof is explained in the below table.
Treatment Trade discount or turnover discount To be excluded from sales turnover if discounts are allowed in the sales
Tooverinvoicebeexcluded from sales turnover if it is in the nature of trade discount. If it is in the nature of commission on
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securities held as stock-in-trade Tooverbe excluded from sales turnover unless the assessee is engaged in the business of dealing in scrap.
Gross receipt
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Treatment Tooverbe
To be excluded from sales turnover investment
To be excluded from sales turnover
‘Guidance Note on Tax Audit’ issued by ICAI provides that in the case of professionals, ‘Gross receipts’ includes all receipts arising from carrying on a profession. However, there are certain receipts which may or may not be included in the gross receipts, which are as follows.
Following receipts shall be included in the gross receipts: (a) would form part of gross receipts. (b) receivable by any person against exports under any scheme of government. (d)(c)
excluded from sales turnover
The aggregate gross interest income received by a money charges received in the business of chit funds. (e) this account should be added to gross receipts or turnover. (f) Hire charges of cold storage. (h)(g) assets.
(a) Out-of-pocket expenses recovered separately from the client shall not form part of gross receipts.
(g) Income by way of interest unless assessable as business income.
(n)(m) Following receipts shall be excluded from the gross receipts:
(e)(d)(c)
(b) Where a professional received an advance for services which till the services are rendered.
(i) The amount received by travel agents from clients for payment reimbursement of expenses incurred on behalf of the client. members of the group tour should form part of gross receipts.
(i) income account. (k)(j) investment and services.
(h) Reimbursement of customs duty and other charges collected by a clearing agent.
(j) The amount of advertising charges recovered by an advertising agent from his clients by way of reimbursement shall be recovered by him will form part of his gross receipts.
(l) Hire charges and installments received in the course of hire purchase.
Rental income unless the same is assessable as business income. (f) in shares.
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(k) be excluded from the total income of the partner.
(l) Write back amounts payable to creditors or provisions for expenses or taxes no longer required.
In case of sale by a commission agent or by a person on a consignment ownership of goods continue to belong to the principal, the relevant sale price shall not be part of the turnover of the commission agent. In this case, the turnover shall be the amount of commission earned by the of ownership belongs to the commission agent, the sale price received/ receivable shall form part of his turnover. agent?
Turnover of a commission agent or a person selling goods on a consignment of ownership of goods continue to belong to the principal, the relevant sale price shall not form part of the turnover of the commission agent. In this case, the turnover shall be the amount of commission earned by the of ownership belong to the commission agent, the sale price received/ receivable shall form part of his turnover. relationship, the revenue of an agent shall be the amount of commission KachhaCBDT Arahtias, the turnover does not include the sales effected on behalf of the principals and only the gross commission has to be considered. business should be taken into consideration.
When a share broker purchases securities on behalf of his customers, he does not get them transferred in his name, but they are delivered in the name of the customer. The same is true in the case of sales also. The share broker holds the delivery merely on behalf of his customer. The
1975 FAQs on Tax Audit under Section 44AB for AY 2022-23
The gains or losses arising from trading in F&O are always taxable under transactions are completed without delivery of shares or securities,
While computing the turnover of Mr X, all the differences, whether positive or negative, shall be aggregated. derivatives?
A ‘speculative transaction’ means a transaction in which a contract for purchase or sale of any commodity or securities is periodically or ultimately settled otherwise than by the actual delivery or transfer of commodity or scrips. Thus, in speculative transactions, both positive and negative differences can arise from the settlement of contracts. Each transaction, whether resulting in a positive or negative difference, is an independent transaction. In such transactions, though the contract notes are issued for the full value of the purchased or sold asset, the entries in the books of account are made only for the differences. Accordingly, the aggregate of both positive and negative differences is considered as the turnover. For example, Mr X is an assessee engaged in speculative business. He Securities Amount of gain or (loss)
property in securities does not get transferred to the share-brokers. Only brokerage, which is being accounted for in the books of share brokers, should be considered for calculating the turnover. However, in the case of transactions entered into by a share broker on his personal account, the sale value should be considered while calculating the sales turnover. The case of a sub-broker is not different from that of a share broker.
transaction?
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22 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 and they are squared up by the payment of differences. A derivatives transaction has all features which a speculative transaction has.
The Income-tax Act does not contain any provision or guidance for computation of turnover in F&O trading. However, the Guidance Note on Tax Audit issued by the ICAI prescribes the method of determining turnover, which shall be as under:
(b) Premium received on the sale of options is also included in included separately. (c) also form part of the turnover. All the favourable or unfavourable differences are aggregated to calculate the turnover. For example, year: nameSecurity Type receivedPremium AmountBuy Amount Put 500 500 Put Reliance Put In derivative transactions, the aggregate of both favourable and turnover. Further, the premium received on the sale of options is also included in turnover if the same is not included while determining the net follows:
(a) The total of favourable and unfavourable differences is taken as turnover.
2375 FAQs on Tax Audit under Section 44AB for AY 2022-23 Security Name 500 * businesses?
Where an assessee is carrying on more than one business, sale turnover or gross receipts from all businesses shall be clubbed together. However, if the assessee is opting for the presumptive taxation scheme, the turnover of such businesses shall be excluded while determining his total sales turnover or gross receipts. carrying on business and profession?
The ICAI in the guidance note on tax audit provides that if an assessee is carrying on a business and a profession, then a tax audit is required if turnover/receipts from either business or profession exceed the prescribed threshold limit.
For example, the professional receipts of an assessee are Rs. 54 lakhs, and for him to get the accounts of the profession and business audited or turnover from a profession or business does not exceed the limits
of sale, purchase, and inventory. However, the purpose of this provision applied for the calculation of ‘sales turnover’ for Section 44AA, Section 44AB, Section 44AD, and Section 44ADA has always been a matter of disagreement between the revenue and taxpayer.
Where an assessee has opted for Composition Scheme under the GST GST paid by an assessee does not form part of his gross turnover. In the case of other assessees, as GST is charged from the customer and is recognised separately in the books of accounts, it is not clear whether the amount of GST shall be included in the turnover for calculation of taxable this matter, it would be appropriate to ignore the amount of GST while calculating the gross turnover or gross receipts because of the following reasons: (a) purposes. (b) payments to the authority are also debited to the said separate they would not be included in the turnover. (c) as presumptive income would be computed on the component
24 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 gross turnover or receipt?
For detailed analysis and illustrations on the valuation of sale, purchase, and inventory, refer to ‘Treatment of Tax paid on Goods (Inclusive v. Exclusive Approach)’
2575 FAQs on Tax Audit under Section 44AB for AY 2022-23 report would be as under: Type of Assessee yearAssessment Due date of tax reportaudit Due date ITRfurnishingforof obliged to furnish the tax audit report to the transfer pricing provisions FAQ 20. How to furnish the tax audit report to Income-tax Dept.? at https://www.incometax.gov.in. However, to furnish the report, the assessee Theaccount.date of approval of the report by the taxpayer is considered the date Due Date & Process to file TAX REPORTAUDIT
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FAQ 21. How many tax audit reports a Chartered accountant can Sign? an assessment year. requires the assessee to furnish an audit report in the form as prescribed under Section 44AB of the Income-tax Act shall not be considered for provide that the audits conducted under Sections 44AD, 44ADA, and 44AE may be distributed between the partners in any manner whatsoever. For FAQ 23. Does the tax auditor need to generate UDIN for the tax audit report? all Corporate/ Non-Corporate Audit, Attest, and Assurance Functions.
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While issuing the tax audit report under section 44AB of the Income-tax FAQ 24. Whether a tax audit report can be revised?
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3 that if there is a payment by a person after furnishing of original report which necessitates a recalculation of be obtained from an accountant and furnished before the end of the relevant assessment year for which the report pertains, return, the assessee may make payment of TDS or of tax, duty, cess, fee, report.
‘Guidance Note on Tax Audit under Section 44AB’ issued by the ICAI provides that the audit report under section 44AB should not normally be revised. However, sometimes a member may be required to revise his tax audit report on grounds such as: annual general meeting. mentioned above.
2975 FAQs on Tax Audit under Section 44AB for AY 2022-23 report? person to pay a penalty of a sum equal to lower of following: However, no penalty shall be imposed if such failure is due to a reasonable responsibilitycause. of the tax auditor will depend on the facts and circumstances of the case. Normally, it is the professional duty of the Chartered Accountant to ensure that the audit accepted by him is completed before the due date. If there is any unreasonable delay on his part, he is answerable to the Institute if a complaint is made by the client. However, if the delay in the completion of the audit is attributable to the client, the tax auditor cannot be held responsible. It is, therefore, necessary that no Chartered Accountant should accept audit assignments that he cannot complete within the prescribed time frame.
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The preamble of the ICDS provides that the ICDSs are applicable for of business or profession’ or ‘Income from other sources’ and not for maintenance of books of accounts. Further, the CBDT4 maintained in accordance with the accounting policies applicable to the assessee. Thus, it can be concluded that the reporting in Form 3CD shall be in accordance with the books of account maintained by the assessee. in Clause 13 of Form 3CD.
books of account or after adjustment as per the
Disclosure & Reporting in FORM 3CD
5 the Income Computation and bring uniformity in the accounting policies governing the computation of income for taxability under the Income-tax Act and to reduce litigations.
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32 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 from business or profession’ or ‘Income from other sources’ or both is However, the ICDS shall be followed only if the assessee maintains accounts per the ‘Mercantile system’ of accounting.
There is no threshold limit on the amount of turnover or taxable income for the applicability of ICDS. Thus, every assessee earning business income or residuary income shall be required to follow ICDS for the computation of income. The applicability of ICDS shall be subject to certain exceptions. that the general provisions of ICDS shall apply to all persons, including banks, NBFCs, insurance companies, etc., unless For example provisions for the insurance business.
Exception 1: Exemption to Individual or HUF not liable for tax audit
Exception 2: Exemption for MAT Computation 8 that the provisions of ICDS are applicable for the computation of income under the regular provisions of the Act. the computation of MAT. However, where the assessee is liable to pay AMT under the provisions of Section 115JC, the provisions of ICDS shall be applicable for the computation of AMT as AMT is computed on adjusted income computed as per the regular provisions of the Act.
An Individual or HUF, who is not required to get his books of account audited for the previous year under section 44AB, shall not be required to comply with the requirements of ICDS.
A person opting for a presumptive taxation scheme is not required to maintain the books of account and get them audited. In this regard, that the relevant provisions of ICDS shall apply taxation scheme. For instance, for computing the presumptive income of a construction contracts or revenue recognition shall apply for determining the receipts or turnover, as the case may be.
Professions
Individual or years previousprecedingimmediatelytheyear. Professions Others years previousprecedingimmediatelytheyear. Individual or years previousprecedingimmediatelytheyear. Others years previousprecedingimmediatelytheyear.
Nature Businessof Professionor Category of Taxpayer Limits Incomefor Gross Turnover or Receipts Mandatory in every case except assessee.presumptivewhentaxation
Presumptive Tax IndividualResident or Taxpayer opted for the scheme in any of the last 5 previous years but does not opt for it in the current year.
Presumptive Tax PartnershipResident Taxpayer opted for the scheme in any of the last 5 previous years but does not opt for it in the current year.
Section 44AA provides for maintenance of books of account by an assessee under the Income-tax Act. The table below demonstrates the requirement for maintaining books of accounts by different taxpayers:
3375 FAQs on Tax Audit under Section 44AB for AY 2022-23 FAQ 29. Who is required to maintain books of accounts as per Section 44AA?
Taxpayer claims that than the deemed
7
constructioninengagedcivil
Taxpayer claims that than the deemed Presumptive Tax
34 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 Nature Businessof Professionor Category of Taxpayer Limits Incomefor Gross Turnover or Receipts Presumptive tax scheme under Resident Taxpayer exemptionexceedsandthanprofessionclaimsarelowerthosecomputedtotalincomethemaximumlimit. Presumptive Tax carriagegoodsleasingengaged
Taxpayer claims that than the deemed
Film artist includes actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue writer, and dress designer.
Presumptive Tax ofexplorationinengagedassesseethemineraloil
‘Authorised Representative’ means a person, who represents any other person, in lieu of fee or remuneration, before any Tribunal or statutory authority, but does not include an employee of the person so represented or a person carrying on legal profession or a person carrying on the profession of accountancy.
3575 FAQs on Tax Audit under Section 44AB for AY 2022-23
maintenance of books of accounts as per
following
should be
Gross receipt exceeds preceding the previous year are maintained according to the mercantile system of carbonaccountingcopies or counterfoil of receipts issued by the assessee be machine numbered or 5. Original bills issued to the assessee and receipts in respect of the expenditures incurred by thehimamount of expenditure cash book does not contain adequate particulars in respect of these expenditures
36 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
to comply with the requirement of maintenance of books of accounts: Nature Businessof Professionor
** Where business or profession has been set up during the previous year, the threshold limit of income or gross receipts of the current year shall be checked. In other words, in the case of a new business or profession, if income or turnover or receipt of the current year, as the case may be, are not likely to exceed the threshold limit, the assessee shall not be required to maintain the books of account. Section 44AA?
of Accounts to be
The documents maintained taxpayers Books maintained other
by the
Professions
than technologyInformationsecretarycompanyand
ProfessionsMedical
Nature Businessof Professionor Books of Accounts to be maintained
Gross receipt exceeds preceding the previous year
FAQ 31. Mr. A is maintaining books of accounts at more Clause 11 of Form 3CD requires a list of books maintained and the address at which such books of accounts are kept. If such books of accounts are kept at multiple locations, then the auditor is required to mention the address of all the locations along with the details of books of accounts maintained at each location. In the case of a company assessee, Registrar of Companies under the Companies Act to maintain books of
3775 FAQs on Tax Audit under Section 44AB for AY 2022-23
professionsotherconsumable accessories used for the purpose of last day of the previous year. Professions irrespective of gross receipts and Income compute the taxable income. Professions Income and turnover do not exceed the threshold limit as accounts Income and turnover do not exceed the threshold limit as accounts Professions Income and turnover exceed the threshold above compute the taxable income. Income and turnover exceed the threshold above compute the taxable income.
FAQ 32. An assessee has changed the method of accounting required in Form 3CD? Clause 13 of Form 3CD requires every assessee to report the method of accounting employed in the previous year. Further, if there was a change in the method of accounting employed in the immediately preceding previous year, then the same is to be reported. The assessee is also required to disclose the effect of a change in the method of accounting on the method of accounting, appropriate disclosure should be made under this clause. A change in accounting policy will not amount to a change in the method of accounting, and hence any change in the accounting policies need not be considered a ‘Change in Method of Accounting’ Method of Accounting refers to the basic rules and guidelines under statements. There are two main accounting methods used for recordkeeping - the Cash Basis and the Accrual Basis. In contrast, the Accounting Standards or Ind AS pre-requisite the accrual basis of accounting. the principles and procedures for the calculation and recognition of accounting. When an entity switches from Accounting Standards to Ind AS, it does not change its method of accounting. Thus, the transition to Ind AS should not be treated as a change in the method of accounting.
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The auditor’s duties regarding ‘books of account maintained’ is not is required to examine the books of account maintained. Based on such examination, he is required to state in Form No. 3CB whether books of account kept are ‘proper books of account’.
FAQ 36. What information is to be reported by the auditor Clause 44 of Form 3CD seeks details of the total expenditure incurred during the year. The break-up needs to be given for the expenditure in respect of entities registered under GST and relating to entities not registered under GST. However, the CBDT11 44 of the tax audit report in abeyance until 31st st Clause 44 requires the details in the following format: (b)(a) Relating to goods or services exempt from GST; Relating to entities falling under the composition scheme; 11
3975 FAQs on Tax Audit under Section 44AB for AY 2022-23
FAQ 34. Whether GST registration no. of the assessee has to pay tax under reverse charge? The ICAI, vide mechanism, the fact of being liable to GST needs to be answered in the reverse charge mechanism. no. needs to be furnished in Form 3CD? 3CD.
Relating to other registered entities; Total payment to registered entities; (c) reporting under this clause: Whether every head of expenditure is to be reported?
40 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
Expenses of branch
This report may be prepared for an entity as a whole or a branch thereof, as it may be audited. Accordingly, the information in these columns may GST registrations.
The guidance may be taken from the heading of the table, which starts with the words “Breakup of total expenditure”. Hence, the total expenditure, including purchases as per the above format, may be given. It appears that head-wise/nature-wise expenditure details are not envisaged in this clause.
Reporting of claims clause. Transactions not considered as supply are neither treated as a supply of goods nor a supply of services. Thus, expenditure incurred in respect of such activities need not be reported under this clause. For example the employer in the course of or in relation to his employment”. Thus, remuneration to employees need not be reported.
Allowability of expense
Any expenditure incurred, wholly and exclusively, for the business or Registration or otherwise of the payee under the GST Act has no relevance in considering the allowability of expenditure.
Reporting of capital expenditure In the table under clause 44, the language used is “expenditure in respect of.” Since the word used is ‘expenditure’, it is necessary that the capital expenditure should also be reported in the format prescribed. Separate reporting of capital expenditure will provide ease in reconciliation.
the previous year to all the parties to such arrangement. year, declared any arrangement as IAA. If any arrangement has been declared to be an IAA, the tax auditor should further examine whether any transaction pertaining to or in connection with such declared IAA has taken place during the previous year under the audit. If yes, the tax auditor is expected to report this fact in the audit report. The tax auditor should to all the parties to the arrangement. If he is unable to ascertain the tax arrangement, he should indicate the same in Form 3CA or Form 3CB, as the case may be. The auditor should examine if any reference has been made for declaring an arrangement as an impermissible avoidance arrangement in any earlier previous year. If such references have been made, the auditor should report the fact in Form 3CA or Form 3CB, as the case may be.
FAQ 39. How can the tax auditor report payments referred to in Section 43B if the same is unpaid as on the date of submission of the tax audit report but paid previous year and was paid or not paid on or before the due date for furnishing the Return of Income of the previous year. report but before the due date of return of income.
provide that the tax audit report may be revised by the person by getting such accountant, and furnish it before the end of the relevant assessment year for which the report pertains, if there is payment by such person after
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Arrangement entered into by the assessee?
Any material change in the nature of business should be precisely disclosed. The change will include a change from manufacturer to trader as well as a change in the principal line of business. Any addition to or permanent discontinuance of a particular line of business may also amount to change requiring reporting. However, temporary suspension of the business may not amount to change and, therefore, need not be reported.
42 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
The auditor should verify that the auditee has disclosed the information statements under audit. If no disclosure is made by the auditee in the report in Form No. 3CB and also report the fact of non-disclosure in clause businesses carried on by the assessee and any change therein? or profession carried on by an assessee during the previous year.
furnishing of the report which necessitates a recalculation of disallowance FAQ 40. If shares of members of AOP are unknown during Form 3CD?
If shares of members are unknown during the previous year, the auditor FAQ 41. How does the auditor need to report the interest 2006? irrespective of whether the amount of such interest has been debited to
4375 FAQs on Tax Audit under Section 44AB for AY 2022-23
FAQ 45. How to compute the amount of increase or decrease taking into consideration the ICDS IV, shall be calculated in the following manner. The net result of the table shall be reported in the said clause:
FAQ 43. Mr. A has opted for the presumptive scheme under Section 44AD in respect of one of his businesses. such business in the audit report? of Form 3CD. The tax auditor is not required to indicate if the amount of presumptive income has been correctly computed under the relevant section relating to presumptive taxation. The reporting requirement is income, the common business expenditure has to be apportioned to arrive assessable on a presumptive basis. The tax auditor, in such a situation, should arrive at a fair and reasonable estimate of such expenditure on the basis of evidence in possession of the assessee or by asking the assessee to prepare such estimate, which should be checked by him. It is also necessary to mention the basis of apportionment of common reasonableness of such apportionment, he should indicate such fact under this clause by a suitable note.
44 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 Accounting Standards (AS) – Reconciliation Amount Add: as assessee followed service completion method for his books of account Less 1. Excess revenue recognised in the current year as assessee followed service completion method for his books of account 2. Interest on income-tax refund accrued in the current year xxxxxxxxxxxxxxx xxx
4575 FAQs on Tax Audit under Section 44AB for AY 2022-23 Indian Accounting Standards (Ind AS) – Reconciliation Amount Add: assessee followed revenue recognition principles as per of money 7. Interest on compensation or enhanced compensation Less 1. Excess revenue recognised in the current year as assessee followed revenue recognition principles as per 2. Interest on income-tax refund accrued in the current interest rate method 5. Interest on compensation or enhanced compensation xxxxxxxxxxxxxxxxxxxxxxxx xxx
46 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 with the provisions of ICDS. Whether such The tax auditor needs to enter a consolidated amount by which the required to be bifurcated between the different heads of income. is required in Form 3CD?
If the claim has been lodged during the previous year but has been admitted as due after the relevant previous year, it need not be reported account but netted against the relevant expenditure/income heads, such a fact should be brought out.
The other view is that such other income should be reported. The arguments in favour of such a conclusion are that Section 44AB starts with the expression “every person” carrying on business or profession shall get his accounts of such previous year audited. The audit under Section 44AB
If a claim for a refund of SAD has been admitted as due and accepted
Whether certain incomes taxable under any other head need not be
4775 FAQs on Tax Audit under Section 44AB for AY 2022-23 is not only for the books of account relating to business or profession but for the taxpayer. Thus, income chargeable to tax under the head house property, capital gains, and other sources are also disclosed in clause
If the second view is followed, one may receive the tax demand as a result without taking note of the fact that those incomes are taxable under other taxheads.audit report is meant for the taxpayer and not explicitly limited to business or profession needs to be appreciated in the overall context of tax compliance. Such disclosure provides wholesome information to the department about the taxpayer. However, when such information is it with incomes offered under other heads. If they are equivalent to or in this regard.
FAQ 49. Whether an auditor has to quantify whether the No, the auditor is not required to quantify whether the payment is disallowance if, in his opinion, the expenditure is unreasonable.
It may be advisable for the tax auditor to clarify that what has been previous year. These are not necessarily the amounts claimed in/debited
The tax auditor is only required to give particulars of payments to persons give his opinion on the unreasonably/excessiveness of the payments, and expenditure incurred by the assessee?
As the clause requires an auditor to report all the payments made to the be considered for reporting under this clause. st March and paid during the current year to be reported? Or taxpayer is required Under this clause, the auditor is required to furnish detailed information in are required to be reported. tax auditor should verify such amount from the books of account as of assessee had disputed the levy or calculation of interest under TRACES, reporting under this clause and mention the fact in his observations paragraph provided in Form No. 3CA or Form No. 3CB, as the case may be.
48 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
4975 FAQs on Tax Audit under Section 44AB for AY 2022-23 th nature of revenue expenditure deserving deduction in the computation of income. Therefore, the converted interest, by whatever name called, in the wake of its conversion into a loan or borrowing or advance, will be eligible for deduction in the computation of income of the previous year in which the converted interest is ‘actually paid’. In other words, the nomenclature of the sum of converted interest will make no difference as the payment of converted interest will not represent principle remains that once an amount has been determined as interest nomenclature of interest will not affect its allowability, and deduction in terms of section 43B will have to be allowed on its actual payment. The
If the payment is being made by an advertising agency to the railways for putting up hoardings or display panels on railway premises, such payment will amount to the payment for the use of railway assets, as the payment is for the use of space on the premises. However, where an advertiser is making payment to the railways for the display of advertisements on hoardings or displays on railway premises, such a payment is in the nature of payment for the services of advertisement, and not for the use of railway assets. Any sum payable to Indian Railways for the use of railways assets shall be allowed on a payment basis. Any sum payable to Indian Railways for its services shall be allowed as per the method of accounting regularly employed by the assessee.
It may be noted that there is a difference between the expenditure of any relating to an earlier year, which has crystallised during the relevant year. An expense, though related to previous periods, which has been determined in the current period, would not be considered a prior period Initem.such cases, though the expenditure may relate to the earlier year, it can be considered as arising during the year on the basis that the liability materialised or crystallised during the year, and such cases will not be reported under this clause.
50 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 registered under GST/Central Excise should provide the relevant details in Form 3CD ensure that details are reconciled with the books of account vis-à-vis details available on the GST portal. The assessee shall maintain a proper reconciliation with respect to the same. However, an assessee may adopt either book of account or GST portal to provide the information under this clause, provided the same basis is adopted consistently. The tax auditor should verify that there is a proper reconciliation between the balance of CENVAT/Input credit in the accounts and relevant excise and GST records. The tax auditor should report the amount of CENVAT/Input availed and utilised under this sub-clause.
FAQ 57. If the statutory auditor does not consider an item
The auditor is not required to report any such forfeited amount in respect of a personal capital asset or stock-in-trade. Any advances received and forfeited towards the sale of stock-in-trade would be taxable under section The requirement of reporting arises only on forfeiture of advance. If an advance has been received and has been outstanding for a considerable time, there is no requirement to report such amount unless and until it is forfeited by an act of the assessee. Loans or deposits are generally squared off by repayment of the sum to the lender. While as in the case of advance for the sale of goods, the
If the tax auditor and client have a difference of opinion with respect to the applicability of the TDS/TCS provision, such concern shall be reported received as an advance in the course of negotiations for the transfer of a capital asset, and such sum was forfeited due to non-transfer of report any advance received from the buyer but forfeited due to the nonmaterialisation of a deal to the sale of the capital asset.
5175 FAQs on Tax Audit under Section 44AB for AY 2022-23 auditor, the opinion of the tax auditor shall prevail, and the information thereof shall be reported in Form 3CD. FAQ 58. There is a difference in opinion between the tax report such differences in the tax audit report?
enterprise required to be repatriated to India as per the the prescribed time. money has not been repatriated within the prescribed time. need to be repatriated after a primary adjustment? calculated on excess money or part thereof which is not repatriated within the time limit. Where the international transaction is denominated in Indian rupees, the rate of interest will be the one-year marginal cost of fund lending rate of the State Bank of India as of 1st April of the relevant previous year, plus transaction is denominated in foreign currency, the rate of interest shallth September of the relevant previous year plus
party’s ledger is squared off by the delivery of goods or services. Thus, an advance received against the agreement of sale of goods could not be deemed a loan or deposit. Accordingly, details of advances shall not be that the advance received against the agreement of sale of goods is not a loan or deposit.
FAQ 61. ABC Ltd. has rendered services to its Associated made an adjustment. Is it required to be reported in Form 3CD?
52 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
The excess interest, which is disallowed, can be carried forward for 8 assessment years following the year of disallowance, to be allowed as a years, to the extent of maximum allowable interest expenditure under this provision. of such interest payment with the following disclosures: incurred. This clause shall not be applicable in the case of a company that is engaged in the business of banking or insurance.
It is possible that the amount of imputed interest income on the excess money not repatriated to India may relate to more than one year. Having Accordingly, for the relevant year under audit, such liability in respect of imputed interest may extend not only to the primary adjustment but may also relate to the primary adjustment made in the earlier years.
interest in excess of Rs. 1 crore to the associated enterprise, the deduction for interest shall be restricted to lower of the following:
5375 FAQs on Tax Audit under Section 44AB for AY 2022-23
Nature of Transaction during the year Mode
54 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 of account or as per provisions of Income-tax? adjusted for the income tax computation after various allowances and disallowances.
To be reported in Others Receipt of advance for transfer of Immovable Property Receipt of advance for transfer of Immovable Property Others Other Receipt of Rs. 2 lakhs or Othermore
Receipt of Rs. 2 lakhs or Paymentmore in excess of Rs. 2 lakhs Payment in excess of Rs. 2 lakhs advance for transfer of Immov able advancePropertyfor transfer of Immov able Property Others Repayment of loan or deposit or advance for transfer of Immov Repayment of loan or deposit or advance for transfer of Immov through cheque or draft not be
5575 FAQs on Tax Audit under Section 44AB for AY 2022-23 returns in form 3CD? regarding furnishing of statement of tax deducted or tax collected under requires such details even if the assessee has submitted the statements within prescribed time limits. Further, if the assessee failed to report all transactions in statements of TDS/TCS, then unreported transactions have to be disclosed in clause from such expenditure? deducted or after deduction is not paid to the government. Whether this provision shall be applicable only in the case of revenue expenditure or in respect of capital expenditure as well has been a matter of dispute between taxpayer and revenue. The revenue always argues for reducing of CIT v. Plasmac Machine Mfg. Co. Ltd. [1993] 201 ITR 650 (Bom.) and Sumilon Industries Ltd. v. ITO [2010] 3 taxmann.com 187 (Ahmedabad-ITAT), it was held that disallowance under this section could be made only from an payment.Clause35 requires quantitative details of ‘principal items’ of raw materials principal items.
The ratios have to be given for the business as a whole and not productprevious year’s audit report. If the previous year is not subject to audit, nothing should be mentioned in the relevant column. The tax auditor is not to sit in judgment over whether ratios calculated
5. produced
turnoverturnover
If the assessee is engaged in the manufacture of goods, the yield and shortage cannot be ascertained if the input of raw materials and the If the end product is a standard item and can be converted back and related to the input of the raw material in the same unit of measurement, it should be done to ascertain the shortage, yield, etc. If it is not possible, the tax auditor should state the fact under this clause. preceding previous year.
1.
56 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
S.No. Previous Year Preceding Previous Year Total turnover of the assessee 2.
The courts have held that if the provision for gratuity is computed be denied. If any liability increases due to a change in the actuarial assumptions, the resultant expense is recognised in OCI by virtue of Ind AS changes in the assumptions, such as discount rate, mortality rate, etc., the additional expenses recognised in OCI should be allowed as a deduction while computing the taxable business income. If an increase in provision
5775 FAQs on Tax Audit under Section 44AB for AY 2022-23 statements? in case of transition from AS to Ind AS, the opening balances and the The Income-tax Act does not provide any mechanism for calculation of accordance with AS or Ind AS. As the entity has to present the comparative to disclose the desired information in Form 3CD.
58 75 FAQs on Tax Audit under Section 44AB for AY 2022-23 for gratuity is attributable to such change in actuarial assumption, it shall the Income-tax Act? institutions in respect of borrowings have to be amortised over the tenure of the loan. In other words, the amount of borrowing cost recognised during the year shall be the sum of actual interest paid or payable to the bank and the amortised amount of processing fees. The deduction for such borrowing cost under the Income-tax Act shall be subject to Section 43B. The deduction for interest and processing fees shall be allowed on a payment basis. Thus, if the processing fee has been paid to the bank, the deduction for the entire fee shall be allowed in the year of payment itself. Irrespective of the amount of borrowing cost recognised in the books of account, the Income-tax Act shall allow a deduction for the entire amount of interest or process fees paid to the FAQ 74. A demand was raised with respect to Custom duties the refund due in his name. So no amount was paid Yes, an auditor is required to report the details of demand raised or refund issued to the assessee during the previous year, irrespective of the fact that it was adjusted against any pending demand or refund. Details are to be shown under Clause 41 of Form 3CD. issues unquoted shares at a premium. In such case, the excess of the premium over the fair market value of the shares shall be taxable as income from other sources in the hands of the company.
persons on the following two dates: (b)(a) forward loss has to be set off. 13
5975 FAQs on Tax Audit under Section 44AB for AY 2022-23
start-ups that satisfy the condition for exemption. If the private limited remarks should be made regarding the applicability of the exemption and prescribe various conditions for a start-up to claim exemption from payment of tax under this provision. In case of failure to comply with these conditions, the consideration received from the issue of shares, as exceeding the fair market value of such shares, shall be deemed to be the income of the company chargeable to tax for the previous year in which such failure takes place. When the exemption is withdrawn, it shall be deemed that the company has underreported the income in consequence of the tax payable on the underreported income shall be levied as per Section 13.
. Therefore, Clause
3CD? b (companies in which change in shareholding of the company in the previous year due to which the losses incurred before the previous year cannot be allowed to be any year before the previous year shall not be carried forward and set off against the income of the previous year unless the shares of the company
Hence,company.thetaxauditor
60 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
The losses incurred by an eligible start-up shall be allowed to be carried forward and set off against the income of the previous year on the Condition 1: Continued 51% shareholding held by the same persons who held them as on the last day of the year in which loss was incurred; or Condition 2: Continued 100% shareholders with the same voting rights was incurred, should continue to hold the same shares on the last day of the previous year in which loss is to be set off. Further, such losses should of the should check whether a change in shareholding as of shareholding as of the last day of the current previous year should be compared with the composition of shareholding as at the last day of each previous year in which loss was incurred. The comparison should be made by reference to the Register of Members. The carry-forward of loss incurred in respect of different previous years should be determined the previous year-wise.
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62 75 FAQs on Tax Audit under Section 44AB for AY 2022-23
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