The print and social media is abuzz with accounting professionals lamenting about the non-availability of time and representations being made by the premier accounting body, ICAI for extension of time. Previously an amendment in the tax audit report form created an issue with the Board deferring the implementation of some of the changes.
The term ‘audit’ is defined by the Oxford English Dictionary as ‘an official examination of accounts with verification by reference to witnesses and vouchers’.
Section 44AB prescribes a specific class of taxpayers who must get their accounts audited by a chartered accountant mandatorily. Under this section, the following taxpayers are covered: -
(1) A person carrying on a business if total sales, turnover or gross receipts are more than Rs. 1 crore
(2) A person carrying on a profession if gross receipts are more than Rs.50 lakhs
(3) A person claiming that his income is lower than profits and gains deemed under Section 44AE, Section 44BB, Section 44BBB.
(4) A person claiming that his income is lower than the profits and gains deemed under Section 44ADA and his income exceeds the maximum amount not chargeable to income tax.
(5) A person carrying on business if Section 44AD(4) is applicable and his income exceeds the maximum amount not chargeable to income tax.
Section 44AB further provides that where such person is required by or under any other law to get his accounts audited, 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 furnishes the report of the audit as required under such other law and a further report by an accountant in the form prescribed under this section.
Amendment to Form 3CD
The CDBT has vide Notification No.33/2018, dated July 20th, 2018 amended the Income Tax Audit Form No. 3CD with effect from 20th August, 2018 to include further requirements in reporting. This has effectively increased the role and responsibility of the auditor compelling him to travel beyond business or profession. When Section 44AB was introduced for the first time by Finance Act, 1984, with effect from 01.04.1985, the scope of the provision was explained by the Board Circular No.387 dated 06.07.1984 in the following manner:-
A proper audit for tax purposes would ensure that the books of accounts and other records are properly maintained, that they faithfully reflect the income of the tax payer and the claim for deduction are correctly made by him.
It can facilitate the administration of tax laws by proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officer in carrying out routine verification, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not.
While the current thinking is with reference to extension, it is important to examine whether the objective of Section 44AB as originally envisaged has been obliterated in the light of the various amendments to the tax audit report over a period of time. This notification enlarges the scope of tax audit by requiring the auditor to play multiple roles including that of an investigator which is not the object or purpose of the provision.
Scope of Audit under Section 44AB
The Supreme Court in the case of T.D Venkata Rao Vs. Union of India and Ors. [TS-5069-SC-1998-O] on a challenge by income tax practioners claiming violation of Article 14, held that the Chartered Accountants by reason of their training have special aptitude in the manner of audit. The Court negatived the challenge.
In the case of Ghai Construction, Aurangabad Vs. State of Maharashtra and Ors [TS-5381-HC-2007(Bombay)-O], a tender was floated by the MSRDC required furnishing of tax audit report under Section 44AB. On a challenge to the rejection of bid the Bombay High Court examined the question as to whether an individual who has income from different sources including income from business is bound to have his income from sources other than the business, also audited under Section 44AB of the Income Tax. The Bombay High Court held that
- the language of section 44AB is clear. The requirement of compulsory audit is only in respect of the business carried on by the person and not in respect of his income from other sources.
- The form itself indicates that the audit report is required only in respect of the books of accounts pertaining to the business. This is clear from the requirement that the Accountant is required to state that in his opinion proper books of accounts have been kept by the head office and the branches of the assessee.It does not require the accountant to opine regarding the other records of the assessee.
- The recommendations of the Wanchoo Committee is for the presentation of audited account was in all “cases of business or profession” and not in respect of the entire income of a person carrying on a business or a profession.