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TAX DEDUCTION AT SOURCE

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					TAX AUDIT UNDER SECTION
          44AB

      LEGAL
        &
 PRACTICAL ISSUES
                     Made by:
                PRIYANKA SHARMA




                              1
          Presentation

Basics
Legal provisions
Practical issues
Conclusion

                         2
                    Basics
Background
1.Section 44AB of the Income-tax Act, 1961 was
introduced by section 11 of the Finance Act, 1984 with
effect from 1st April, 1985.

2.Under section 44AB of the Income-tax Act, audit of the
accounts of certain assessees is required if the total
sales, turnover or gross receipts for the previous year
exceeds the prescribed limits. In common parlance,
section 44AB audit is popularly known as „tax audit‟.


                                                           3
                   Basics
  What Is Tax
• A tax is a financial charge or other levy imposed
  on an individual or a legal entity by a state.

• A tax may be defined as a "pecuniary burden laid
  upon individuals or property to support the
  government as a payment enacted by a
  legislative authority.



                                                      4
                   Basics

• What is auditing?

    “Auditing is a systematic and independent examination
    of data, statements, records, operations and
    performances(financials or otherwise) of an enterprise
    for a stated purpose.” ---- ICAI




                                                        5
                     Basics
          Objectives of Tax Audit
 To ensure that the books of account and other records
  of the assessee are properly maintained.
 To ensure that the records faithfully reflect the correct
  income of the tax-payer and claims for deduction are
  correctly made.
 To facilitate administration by proper presentation of
  accounts before the tax authorities and to save
  Assessing Officer’s time in carrying out routine
  verification.
 To ensure that the revenue authorities are provided
  with audited financial statements along with the
  relevant data and information for assessment.

                                                              6
                   Basics

Applicability of Tax Audit
Cases                 Applicability
In the case of a      Every assessee whose
business              total sales, turnover or
                      gross receipts for the
                      previous year exceeds
                      Rs. 40 lakhs has to get
                      his accounts audited.
In the case of a      Every assessee whose
profession            gross receipts for the
                      previous year exceed
                      Rs.10 lakhs has to get
                      his accounts audited.


                                                 7
                   Basics
   Who can conduct tax audit?
A chartered Accountant        YES
o Payment as tax
Firm appointed
consultant

A Credit
o statutory auditor of        YES
assessee company
Internal Auditor of the       YES
company in his professional
capacity
Partner or employee of a      NO
firm which has to get his
accounts audited under
sec 44AB


                                    8
                           Basics
Due Date of getting Books audited

Different Persons          Audit    Statement     Due
                           Form No. Particulars   Date
In case of Person who      3CA      3CD           31st
carries on Business or                            October
profession and who is
required by or under any
law to get its account
audited.

In case of a person who    3CB      3CD           31st
carries on Business or                            October
Profession and not being
a person referred above


                                                            9
                            Basics
                            Penalty
  U/s 271B, if a person fails to get his accounts audited as required
  under section 44AB or to furnish the report of such audit, then:

  The Penalty imposed shall be, lower of

• ½ % of sales or gross receipts
• Rs 1,00,000/-

  NO PENALTY IS IMPOSABLE U/S 271B, IF THE ASSESSEE
  PROVES THAT THERE WAS A REASONABLE CAUSE FOR THE
  FAILURE..
                                                                    10
                Legal provisions
Business:- Sec 2(13) includes
• Any trade, commerce or manufacture
  Or
• Any adventure
   Or
• Concern in the nature of
   Trade, commerce or manufacture


Barendra Prasad Roy v. ITO
  Activity carried on continuously and systematically by applying of
  his labour or skill with a view to earning an income.


                                                                       11
                Legal provisions
                 Some of the activities as business :

   Advertising Agent
   Clearing ,forwarding and shipping agents.
   Couriers
   Insurance Agent
   Nursing Home
   Stock & Share broking and dealing in share & securities.
   Travel Agents etc.


                                 `
                                                               12
                 Legal provisions
Profession-Sec 2(36) includes
 Vocation which is only way of living

Profession involves the idea of an occupation , requiring purely
intellectual skill or manual skill controlled by the intellectual skill
of operator -Cit v. Man Mohandas

List of Profession
      Accountancy
      Authorised Representatives
      Company Secretary
      Engineer



                                                                      13
                 Legal provisions
Sales & Turnover
   – Not defined in the Income Tax
   – Explained as per publications and guidance notes issued by ICAI
Turnover means
   – total sales minus
   – goods returned
   – trade discount
   – cancellation of bills for the period of audit
   – price adjustment

Adjustment which do not relate to turnover should not be made
Example
   – Writing of bad debts
   – Royalty
   – Sale proceed from fixed assets etc                                14
             Legal provisions
Purchases will be treated as turnover

Turnover for transactions in shares, securities and derivatives.

   – Transactions of purchase or sale of stock and shares in course of
     business shall be covered under sec 44AB

Total value of the sales from the transactions such as speculative
transactions, Derivatives, future & option and delivery based
transactions to be considered as turnover u/s 44AB.




                                                                      15
                 Legal provisions
Gross receipts
   – Not defined
   – Explained by CBDT vide its circular no.684 dated 10th June 1994
   – Means amount received from the client excluding value of
     material supplied

Brijbhusanlal Pardumankumarv.CIT the gross receipts if not contain
profit element will not include the value of materials supplied to
assessee.

Deputy Commissioner of Income Tax v. Global Krishnan builders
Advance received for booking of flats towards cost of construction has
an element of profit, therefore it should be included in words „gross
receipts‟.


                                                                       16
         Legal provisions
 Items covered under Gross Receipt
      Profits on sale of a licence
      Interest received by the money lender
      Hire charges of cold storage;
      Liquidated damages;
      Insurance claims - except for fixed assets etc
 Items not covered under Gross Receipt
      Sale proceeds of fixed assets including advance
         forfeited, if any;
      Sale proceeds of assets held as investments;
      Rental income unless the same is assessable as business
         income;




                                                           17
       Legal provisions
“GROSS RECEIPTS” IN CASE OF PROFESSION
  Out of pocket expenses specifically utilised
  for making payments for stamp duties etc,
  should not form part of the "gross receipts".




                                            18
         Legal provisions
            Coverage of Tax Audit

 Income exempt under section 10 are also required to audit
  of accounts under section 44AB.
 A non-resident is also required to get his accounts audited
  and to furnish report under sec 44AB, but only pertaining to
  Indian operations.
 An agriculturist need not required to get his accounts
  audited u/s 44AB even though the total sales of agricultural
  products may exceed Rs 40 lakhs.
 Institutions/associations of persons (Co-operative society)
  will have to get their accounts audited and to furnish such
  audit report for purposes of section 44AB if their turnover
  in business exceeds Rs.40 lakhs.
                                                            19
              Legal provisions
 No double jeopardy
  The assessee is not put to double jeopardy in having to get
  his account audited under section 142 (2A) and again
  section 44AB
 special audit under section 142(2A) is discretionary to be
  ordered only, when it is found after examination of
  accounts that the accounts are complex and require special
  audit with the approval of the commissioner.

 Constitutionality
  The provisions of this section are not violative of article 14
  or 19(1)(g) of the constitution



                                                                   20
           Legal provisions
  Venkata rao (T.D.) V Union of India (1999) 237
  ITR 315 (SC).

 Chartered Accountants by reason of their training have special
  aptitude in the matter of audits. Therefore only CA allowed
  under this section to make audits.
 Article 14 provides that “ the state shall not deny to any
  person equality before law or the equal protection of the laws
  within the territory of India”
 Article 19(1)(g) guarantees all citizens with the right to
  practice any profession, or to carry on any occupation, trade
  or business


                                                              21
            Legal provisions
                           Penalty u/s 277A
Falsification of book of accounts or documents etc.
• A person shall be Punishable with rigorous imprisonment , which
   may extend from 3 months to 3 year And shall be liable to fine if
   following condition are satisfied:
 he willfully and with intent to enable any other person (assessee)
   to evade any tax or interest or penalty chargeable and impossible
   under Income Tax Act
 he makes or causes to be made, any entry or statement in any
   books or other documents relevant for any proceedings under the
   Act which is false.
 he knows it to be false or does not believe it to be true.
• No such other prosecution shall be launched by any income tax
   authority without prior permission of the CIT of Appropriate
   authority.
                                                                   22
                  Conclusion

Importance of Tax Audit
 To ensure proper maintenance of books of accounts and other
  records,
 To facilitate the administration of tax laws
 Also, it would save the time of the Assessing Officers




                                                                23
              Conclusion
Action on incomplete audit reports

1. Incomplete Information/Non Commitable replies
 Report by AO to Commissioner of IT

2. If professional negligence is reflected
 Initiation of Disciplinary proceedings
   (with the approval of CCIT)




                                               24
              Conclusion
PIB Press Release dated 10.12.1999

The CBDT has instructed its field officers to report any
professional negligence on the part of CA in preparing tax
audit report to ICAI in terms of section 288 of the IT Act as
the ICAI is entitled to institute proceedings against its
member chartered accountants who submit faulty tax audit
reports.




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Thank You



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