Introduction and background of provisions of section 44AB

[Tax Audit Report]

The purpose of this guidance note/tax audit manual is to make available most updated online back ground study material not only to the Chartered Accountants but also the assessee and general members who have no idea of income tax provisions and related issues hence it is apologised to the learned professional colleaques to bear some basic provisions of law which have been placed for the benefit of the general users from all corners of the world since this E literature is read world wide. But definitely, sometimes, it gives an easy reference to the Chartered Accountants for quoting or sharing the specific provisions of law with their clients.

The tax audit was introduced by section 11 of the Finance act, 1984 by insertion of a new section 44AB to the Income Tax Act, 1961 w.e.f 1st April, 1985.

This section creates an obligation on a person carrying on business to get his accounts audited by a chartered accountant and to furnish by the specified date, the report in prescribed form of such audit,

if the total sales, turnover or gross receipts in business in the relevant previous year exceed or exceeds Rs. 40 lakhs (increased to Rs. 60 lakhs from financial year 2010-11). For the professionals, tax audit is mandatory if the gross receipts in profession exceeds Rs.10 lakhs (increased to Rs. 15 lakhs from the financial year 2010-11)in the relevant previous year.

The purpose of tax audit had been stated by CBDT Circular No. 387 dated July 6, 1984 as under:

“Compulsory audit of accounts of certain persons carrying on business or profession

17.1 Accounts maintained by companies are required to be audited under the Companies Act, 1956. Accounts maintained by co-operative societies are also required to be audited under the Co-operative Societies Act, 1912. There is, however, no obligation on other categories of taxpayers to get their accounts audited.


17.2 A proper audit for tax purposes would ensure that the books of account and other records are properly maintained, that they faithfully reflect the income of the taxpayer and claims for deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of Assessing Officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the Assessing Officers thus saved could be utilised for attending to more important investigational aspects of a case.”

[Tax Audit Report]

An assessee whose income is not chargeable to income-tax
by reason of a specific exemption contained in the law or otherwise, as to whether he is required to get his accounts audited and to furnish such report under section 44AB.

Such cases may cover those assessees

• who are wholly outside the purview of income-tax law
• those whose income is otherwise exempt under the Act.

It is felt that neither section 44AB nor any other provisions of the Act stipulate exemption from the compulsory tax audit to any person whose income is exempt from tax as per Guidance note issued by ICAI as

This section makes it
mandatory for every person carrying on any business or profession to get his accounts audited where conditions laid down in the section are satisfied and to furnish the report of such audit in the prescribed form.


In Asstt. CIT v. India Magnum Fund [2002] 81 ITD 295 (Mum.), the Tribunal held as under:

“…….The income of the assessee before us is admittedly wholly exempt under section 10(23D) of the Act. Section 10(23D) is part of Chapter III of the Act. The heading of Chapter III is “Incomes which do not form part of total income”. It is therefore plain to us that provisions of section 44AB cannot and do not have any application in relation to incomes which are enumerated under Chapter III and are expressly excluded from total income. ………...”

[Tax Audit Report]

Section 44AB makes no distinction between a resident or non-resident.

Therefore, a non-resident assessee is also required to get his accounts audited and to furnish such report under section 44AB if his turnover exceeds the prescribed limits.

This audit, however, would be confined only to the Indian operations carried out by the non-resident assessee,
since he is not chargeable to income-tax in India in respect of income accruing or arising or received outside India.

[Tax Audit Report]

The Act provides for audit of accounts and/or report/certificate of a chartered accountant in the following cases :

(i) Public charitable or religious trusts or institutions under section 12A(b). (Form No.10B)

(ii) Assessees carrying on the business of growing and manufacturing tea claiming deduction under section 33AB. (Form No.3AC)

(iii) Assessees carrying on business consisting of the prospecting for, or extraction or production of, petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement for the purpose of deposit in Site Restoration Account under section 33ABA. (Form No.3AD)

(iv) Assessees other than companies or co-operative societies claiming amortisation of certain preliminary expenses under section 35D and deduction for expenditure on prospecting etc. for certain minerals under section 35E. (Form No.3B)

(v) Assessees incurring any expenditure on or after 1.4.1999 wholly and exclusively in respect of a non-Y2K compliant computer system under section 36 (1)(xi). (Form No.3BA)

(vi) Assessees carrying on business or profession whose sales, turnover or gross receipts exceed Rs.40 lakhs (Rs.10 lakhs in the case of profession), and assessees who claim their income to be lower than the profits or gains deemed to be the profits and gains of their business under sections 44AD, 44AE or 44AF. (Forms No.3CA/3CB/ and 3CD)

(vii) Assessees who have been ordered by the Assessing Officer with the previous approval of the Chief Commissioner or Commissioner under section 142(2A) to get their books of account audited having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue. (Form No. 6B)

(viii) Assessees other than companies or co-operative societies claiming deduction under section 80HH in respect of profits from newly established industrial undertakings or hotel business in backward areas. (Form No.10C)

(ix) Assessees other than companies or co-operative societies claiming deduction under section 80HHA in respect of profits from newly established small scale industrial undertakings in rural areas. (Form No.10C)

(x) Assessees other than companies or co-operative societies claiming deduction under section 80HHB in respect of profits from projects outside India. (Form No.10CCA)

(xi) Assessees claiming deduction under section 80HHBA in respect of profits and gains from housing projects. (Form No.10CCAA)

(xii) Assessees being supporting manufacturers claiming deduction under section 80HHC in respect of profits on sale of goods and the merchandise to the recognised Export House/Trading House. (Form No.10CCAB)

(xiii) Assessees claiming deduction under section 80HHC in respect of export profits. (Form No.10CCAC)

(xiv) Assessees claiming deduction under section 80HHD in respect of profits from services provided to foreign tourists. (Form No.10CCAD)

(xv) Assessees claiming deduction under section 80HHE in respect of profits from the export of computer software. (Form No.10CCAF)

(xvi) Assessees being supporting software developers claiming deduction under section 80HHE in respect of profits on sale of computer software to exporting company. (Form No.10CCAG)

(xvii) Assessees being Indian companies, claiming deduction under section 80HHF in respect of profits derived from the business of export or transfer out of India of film software etc. (Form No.10CCAI)

(xviii) Assessees other than companies or co-operative societies claiming deduction under section 80-I in respect of profits and gains from newly established industrial undertakings, ships or hotel business set up after 31st March,1981. (Form No. 10CCB)

(xix) Assessees other than companies or co-operative societies claiming deduction under section 80-IA in respect of profits and gains derived from industrial undertakings etc. (Form No. 10CCB)

(xx) Assessees claiming deduction under sub-section (7A) of section 80-IA in respect of profits and gains of business of housing or other activities which are an integral part of a highway project. (Form No. 10CCC)

(xxi) Assessees, being Indian companies, claiming deduction under section 80JJAA, in respect of employment of new workers. (Form No. 10DA)

(xxii) Persons entering into international transactions under section 92E with regard to transfer pricing ( Form 3CEB)

[gopalji]

Hon,ble Supreme Court of India had upheld the constitutional validity of section 44AB of the Income Tax Act, 1961 as made the following signification observations:

Chartered accountants, by reason of their training have special aptitude in the matter of audits. It is reasonable that they, who form a class by themselves, should be required to audit the accounts of businesses whose income exceeds Rs. 40 lakhs and professionals whose income exceeds Rs.10 lakhs in any given year. There is no material on record, and indeed, in our view, there cannot be, that an income-tax practitioner has the same expertise as chartered accountants in the matter of accounts. For the same reasons, the challenge under article 19 must fail, and it must be pointed out that these income-tax practitioners are still entitled to be authorised representatives of assessees

[GJAFCA]

¹[Audit of accounts of certain persons carrying on business or profession.

44AB. Every person,—
(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds ²[sixty lakh rupees] in any previous year ³[***]; or
(b) carrying on profession shall, if his gross receipts in profession exceed ⁴[fifteen lakh rupees] in any ⁵[previous year; or
(c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under ⁶[section 44AE] ⁷[or section 44BB or section 44BBB], as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any ⁸[previous year; or],]
⁹[(d) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,]
¹⁰[***] get his accounts of such previous year ¹¹[***] audited by an accountant before the specified date and ¹²[furnish by] that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :
¹³[Provided that this section shall not apply to the person, who derives income of the nature referred to in ¹⁴[***] section 44B or ¹⁵[section 44BBA], on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later :
Provided further that] in a case where such person is required by or under any other law to get his accounts audited ¹⁶[***], it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and ¹⁷[furnishes by] that date the report of the audit as required under such other law and a further report ¹⁸[by an accountant] in the form prescribed under this section.
Explanation.—For the purposes of this section,—
(i) "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288;
¹⁹[(ii) "specified date", in relation to the accounts of the assessee of the previous year relevant to an assessment year, means the ²⁰[30th day of September] of the assessment year.]]



Notes-
1. Inserted by the Finance Act, 1984, w.e.f. 1-4-1985.
2. In clause (a), for the words "forty lakh rupees", the words "sixty lakh rupees" has been substituted vide Finance Act, 2010 w.e.f. 01.04.2011.
3. Words "or years relevant to the assessment year commencing on the first day of April, 1985, or any subsequent assessment year" omitted by the Finance Act, 1988, w.e.f. 1-4-1989.
4. In clause (b), for the words "ten lakh rupees", the words "fifteen lakh rupees" shall be substituted vide Finance Act, 2010 w.e.f. 01.04.2011
5. Substituted for "previous year," by the Finance Act, 1997, w.e.f. 1-4-1998.
6. Substituted vide Finance (No. 2) Act, 2009 with effect from 1-4-2011, before it was read as, "section 44AD or section 44AE orsection 44AF"
7. Inserted by the Finance Act, 2003, w.e.f. 1-4-2004.
8. Substituted vide Finance (No. 2) Act, 2009 with effect from 1-4-2011, before it was read as, "previous year
9. Inserted vide Finance (No. 2) Act, 2009 with effect from 1-4-2011
10. Words "or years relevant to the assessment year commencing on the first day of April, 1985, or any subsequent assessment year," omitted by the Finance Act, 1988, w.e.f. 1-4-1989
11. Words "or years" omitted by the Finance Act, 1988, w.e.f. 1-4-1989.
12. Substituted for "obtain before" by the Finance Act, 1995, w.e.f. 1-7-1995.
13. Substituted for "Provided that" by the Finance Act, 1992, w.r.e.f. 1-4-1985.
14. Words "section 44AC or" omitted by the Finance Act, 1995, w.e.f. 1-7-1995.
15. Substituted for "section 44BB or section 44BBA or section 44BBB" by the Finance Act, 2003, w.e.f. 1-4-2004.
16. Words "by an accountant" omitted by the Finance Act, 1985, w.e.f. 1-4-1985.
17. Substituted for "obtains before" by the Finance Act, 1995, w.e.f. 1-7-1995.
18. Inserted by the Finance Act, 2001, w.e.f. 1-4-2001
19. Substituted by the Finance Act, 2001, w.e.f. 1-4-2001. Prior to its substitution, clause (ii), as substituted by the Finance Act, 1988, w.e.f. 1-4-1989 and later on amended by the Finance Act, 1994, w.e.f. 1-4-1994, read as under :
'(ii) "specified date", in relation to the accounts of the previous year relevant to an assessment year means,—
(a) where the assessee is a company, the 30th day of November of the assessment year;
(b) in any other case, the 31st day of October of the assessment year.'
20. Substituted for "31st day of October", by the Finance Act, 2008, w.e.f. 1-4-2008.

[GJAFCA]

Delhi High Court held that merely because an audit report is available there is no fetter on the powers of the ITO to require the assessee to justify its claim with reference to records, materials and evidence. Such a power is inherent in an Assessing Officer in the scheme of the Act.
Goodyear India Ltd. v. CIT [2000] 112 Taxman 419

So Tax audit does not provide any immunity from scrutiny or investigation by income tax department.

[GJAFCA]

The Supreme Court held in the case of Sahara India (Firm) v. CIT [2008] 169 Taxman 328 that tax audit under section 44AB is not an investigation unlike audit under section 142(2A).

[GJAFCA]

The audit is an exercise to examine on scientific test check basis the books of accounts and various financial transactions by a person having specialized knowledge, training, experience, authority of law keeping in his armory various tools and techniques. These tools and techniques are not arbitrary or imaginative but well established laid down internationally recognized auditing principles, standards and practices. The person who carries on this audit exercise is known as the auditor. The auditor is duty bound professional to follow these laid down auditing principles, standards and practice and maintain the highest degree of independence, professional skills and competence. The auditors are also regulated by the apex body of accounting of the country like The Institute of Chartered Accountants of India.

The term "Audit" has also been judicially defined time to time as under:

‘But the word, “audit” is a well known English word, and the general nature of what constitutes an audit seems plain enough. The Oxford English Dictionary defines the noun “audit” as “an official examination of accounts with verification by reference to witnesses and vouchers”. Mr. R.A. Irish in his book “Practical Auditing” (p.1) says : “An audit may be said to be a skilled examination of such books, accounts and vouchers as will enable the Auditor to verify the Balance Sheet. The main objects of any audit are : (a) To certify to the correctness of the financial position as to shown in the Balance sheet, and the accompanying revenue statements, (b) The detection of errors, (c) The detection of fraud. The detection of fraud is generally regarded as being of primary importance.’
-Frankston and Hastings Corporation v. Cohen [1960] 102 C.L.R. 607

[GJAFCA]

It is a matter of great trust posed by the government in the certificate issued for fringe benfits as per annexure II to Tax Audit report as Finance Minister himself expressed his view on the floor as under while deliberating on the subject

The Finance Minister’s Speech in Lok Sabha on 2-5-2005:

“This is a presumptive tax. A presumptive tax is necessary because you have to avoid inventive accounting practices. People can shift the classification of expenditure from one head of account to another. So, if we have a presumptive tax and have an exhaustive list of accounting heads and have a uniform base, the scope for evasion is very very limited. What we are doing is eliminating the entire discretion. What we are now asking him is to file a tax audit certificate saying according to his auditor these are the expenditures under the various heads included in the new Chapter, that the whole Chapter be replaced in the amendment. If the tax auditor certifies these are the heads, the officer has no discretion. The Income-tax Officer has to accept that tax audit certificate unless it turns out to be a patently false certificate. We will accept that certificate of the auditor.”