There are various kinds of audit being conducted under different laws such as company audit, statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’. Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity.
As per these provisions, tax audit shall be conducted by a Chartered Accountant who ensures that the taxpayers has maintained proper books of account and complied with the provisions of the Income-tax Act. Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department in Form no. 3CA/3CB and Form no. 3CD along with the income tax return.
What is Tax Audit under section 44AB?
- Tax Audit refers to the independent verification of the books of accounts of the assessee to form an opinion on the matters related to taxation compliances carried out by the assessee.
- While preparing the books of accounts of the business or profession for the purpose of income tax filing, the assessee has to comply with the provisions of Income-tax Act, 1961.
- Tax audit can be conducted by a Chartered Accountant who holds the certificate of practice and is in full-time practice.
- However certain classes have been defined who cannot conduct tax audit under section 44AB.
- The tax auditor (CA) carries out a systematical examination of books of account as per the formats prescribed by the department.
Who has to get tax audit under section 44AB done?
Every person who derives income by way of Business or profession and maintains books of accounts and has not opted for computation of income on presumptive basis under section 44AD, 44ADA or 44AE of the Income-tax Act, 1961 has to get tax audit done provided his income exceeds the prescribed threshold limit of:-
- A person carrying on business if the total sales/ turnover exceed Rs 1 crore during the previous year.
- A person carrying on profession if the Gross receipts exceed Rs 50 lakhs during the previous year.
In order to reduce compliance burden on small and medium enterprises, the threshold limit for a person carrying on business was increased from 1 crore rupees to 5 crore rupees in cases where,-
- aggregate of all receipts in cash during the previous year does not exceed 5% of such receipt &
- aggregate of all payments in cash during the previous year does not exceed 5% of such payment
Also, the person who has opted for computing profits and gains of business on presumptive basis under section 44AD earlier and 5 years has not lapsed since then but the assessee has opted out of such presumptive income and his income exceeds the ceiling for chargeability of income tax, is also required to get tax audit done.
If a person has opted for presumptive scheme under section 44ADA and he claims his income lower than the deemed profits and his income exceeds the ceiling for chargeability of income tax, is also required to get tax audit done.
Tax audit is also mandatory for the assessees opting for presumptive scheme under section 44AE, 44BB and 44BBB and claiming income lower than the deemed profits.
Given below are the situations where CA cannot conduct tax audit:-
1) A CA cannot sign the Tax Audit Report of the assessee in which he has substantial interest
An auditor will be guilty of professional misconduct if he audits an assesse where –
- Where the member, his firm or his partner or his relative has substantial interest in the business or enterprise.
- Where the member or his partner or relative is a director or in the employment of an officer or an employee of the Company.
The expression “relative”, in relation to a member means the husband, wife, brother or sister or any lineal ascendant or descendant of that member; and
A member shall be deemed to have a “substantial interest” in a concern –
- in a case where the concern is a Company, if its shares carrying not less than 20% of voting power at any time, during the relevant years are owned beneficially by such member or by any one or more of the following persons or partly by such member and partly by one or more of the following persons:
- One or more relatives of the member
- Any concerns in which any of the persons referred to above has a substantial interest
- in the case of any other concern, if such member is entitled or the other persons referred to above or such member and one or more of the other persons referred to above are entitled in the aggregate, at any time during the relevant years to not less than 20% of the profits of such concern.
2) CA not holding Certificate of Practice (COP)
Any member wanting to engage in public practice has to first apply for and obtain a Certificate of Practice from the Council of ICAI. Only members holding a Certificate of Practice may act as auditors or certify documents required by various tax and financial regulatory authorities in India. In India, an individual Chartered Accountant, a firm or a Limited Liability Partnership of Chartered Accountants can practice the profession of Chartered Accountancy.
A practicing member who does not hold full time Certificate of Practice (COP) or person who is in full time employment elsewhere cannot sign the Tax Audit Report. Therefore, Valid COP is must to sign any Tax Audit Report.
3) Employee of the assessee cannot sign tax audit report
Section 2(59) of the Companies Act defines officer as “officer” includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the board of directors or any one or more of the directors is or are accustomed to act. The term ‘employee’ has not been defined under the act. Hence, in the layman sense, a person employed for wages or salary (temporary or permanent) can be considered as an ‘employee’. Therefore, all persons providing any form of services to the company are barred from being an auditor.
4) A person who is a partner or who is in the employment, of an officer or employee of the assessee cannot sign tax audit report
This disqualification bars any person related to the officer or employee of the assessee as a partner or an employee to conduct tax audit of the said assessee.
For instance, If Mr. A is an employee of company B, then he cannot be an auditor and if Mr. C is either a partner or employee of Mr. A, he is again barred by virtue of indirect connection with the company to act as its auditor.
5) A person whose relative is a director or is in the employment of the company as a director or any other key managerial post of the assessee cannot sign tax audit report
The term “relative” is defined under section 2(77) of the companies act and it includes
- Members of HUF and
- Husband and Wife. Further, Companies (Specification of Definition Details) Rules 2014 have given another list to include relatives that if they are related to each other as either father, step father, mother, step mother, son, step son, son’s wife, daughter, daughter’s husband, Brother, Step Brother, Sister or Step Sister
If such relative is in the employment of the company as a director or any other key managerial post of the assessee is barred from being the tax auditor of the assessee.
6) CA, his Relative or Partner holding security or interest in the company cannot sign tax audit report
A person who, or his relative or partner cannot sign tax audit report, if such person is holding any security or interest in the company or the subsidiary or the holding or its associate company (holding of such security or interest is exempted to the extent of Rs. 1 Lakh)
7) CA, his Relative or Partner who is indebted to the company cannot sign tax audit report
A person who, or his relative or partner cannot sign tax audit report, is indebted to the company or its subsidiary or its holding or associate Company or subsidiary of such holding company above Rs. 5 Lakh
8) CA, his Relative or Partner who has provided guarantee to the company cannot sign tax audit report
A person who, or his relative or partner cannot sign tax audit report, if he has provided the guarantee or any security in the connection with the indebtedness of any third person to the company or its subsidiary or its holding or associate company or subsidiary of such holding company above Rs. 1 Lakh.
9) CA who is in business relationship with the Assessee cannot sign tax audit report
A person or a firm who directly or indirectly has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company cannot conduct tax audit of such company. The term “business relationship” is wide in nature and includes ample number of instances in its ambit.
The term “business relationship” has been defined under the Companies (Audit and Auditors) Rules, 2014. It says that a business relationship includes any transaction entered into for a commercial purpose except:-
- Transactions at arm’s length price in the ordinary course of business
- in the nature of professional services that an auditor is capable of rendering
10) CA who renders service referred to in section 144 of Companies Act cannot conduct tax audit
Any person who directly or indirectly renders any service referred to in section 144 to the company or its holding company or its subsidiary company cannot conduct tax audit of the said company. Section 144 deals with services that auditors are specifically barred from rendering which are in the nature of accounting and book keeping services, actuarial services management services and others.
The potential auditor must not be engaged in rendering services to any related companies of the concerned company.
For instance, Mr. A provides investment banking services to a company “XYZ Ltd”. “XYZ Ltd” is a holding company of “ABC Ltd.” Therefore, Mr. A cannot be appointed as an auditor of “ABC Ltd”
11) CA exceeding the ceiling limit of cannot conduct tax audit
ICAI increased the “specified number of tax audit assignments” for practicing Chartered Accountants, as an individual or as a partner in a firm, from 45 to 60 from financial year 2014-15 and onwards. A person holding appointment as tax auditor for 60 audits, cannot accept another audits at a time. However, this does not include audits conducted under section 44AD, 44ADA and 44AE of Income Tax Act, 1961.
12) CA involved in fraud and a period of ten years has not elapsed cannot conduct tax audit
A person who has been convicted by the court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction cannot be appointed as a tax auditor.
The grounds for disqualification of auditors are very elaborate and cover all such instances wherein the duties of the auditor are likely to be compromised owing to the nature of relation he shares with the company or financial interest in the company or possibility of any conflict of interest.