Audit of business income under 44AB-income tax act and other CA certifications

Sec 44AA & 44AB & 44AD of Income Tax Act, 1961


Sec 44AA:- Maintenance Of Accounts required by Certain Persons Carrying On Business Or Profession
    • U/s Sec 44 AD maintenance of books is required when two conditions are satisfied:-
      1. Claim lower profit than limit specified u/s 44AD
      2. Total Income exceed basic exemption limit
Prescribed Books means:- Cash Book, Journal, Ledger etc. In case of Medical Profession, Daily Case registers in Form No. 3C and Stock Register are also to be maintained.
Books of accounts are required to be maintained for 6 Years from the end of relevant Assessment Year.

Sec 44AB:- Audit Of Accounts under Income tax
  • Audit of accounts is compulsory;
    • In case of Business: - If Total Sales/ Gross Turnover exceeds Rs 2 Crore in any previous Year.
    • In case of Profession: - If Gross Receipts exceeds Rs 25 Lakh in any previous Year.
    • Assessees covered u/s 44AD/44AE/44BB/44BBB are also required to audit of accounts if they claim that their profit will be less than limit specified in respective section. e.g. u/s 44 AD Audit of accounts is required when two conditions are satisfied:-
      1. Claim lower profit than limit specified u/s 44AD 
      2. Total Income exceed basic exemption limit.
  • TAX Audit Report


What is the objective of tax audit?
One of the objectives of tax audit is to ascertain/derive/report the requirements of Form Nos. 3CA/3CB and 3CD. Apart from reporting requirements of Form Nos. 3CA/3CB and 3CD, 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 accounts before the tax authorities and considerably save the time of Assessing Officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched for or not. The time of the Assessing Officers saved could be utilised for attending to more important and investigational aspects of a case.
As per section 44AB, who is compulsorily required to get his accounts audited, i.e., who is covered by tax audit?
As per section 44AB, following persons are compulsorily required to get their accounts audited :
·         A person carrying on business, if his total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore.
·         A person carrying on profession, if his gross receipts in profession for the year exceed Rs. 50 lakhs.
·         A person who is eligible to opt for the presumptive taxation scheme of section 44AD (*) but claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of section 44AD and his income exceeds the amount which is not chargeable to tax.
·         If an eligible assessee opts out of the presumptive taxation scheme, after specified period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter.
·         A person who is eligible to opt for the presumptive taxation scheme of section 44ADA (*) but he claims the profits or gains for such profession to be lower than the profit and gains computed as per the presumptive taxation scheme and his income exceeds the amount which is not chargeable to tax.
·         A person who is eligible to opt for the presumptive taxation scheme of sections 44AE (*) but he claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of sections 44AE.
·         A person who is eligible to opt for the taxation scheme prescribed under section 44BB (*) or section 44BBB (*) but he claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections.
(*) section 44BB is applicable to non-resident taxpayers engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire basis to be used in exploration of mineral oils. section 44BBB is applicable to foreign companies engaged in the business of civil construction or erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project.
If a person is required by or under any other law to get his accounts audited, then is it compulsory for him to once again get his accounts audited to comply with the requirement of section 44AB?
Persons like company or co-operative society are required to get their accounts audited under their respective law. Section 44AB provides that, if a person is required by or under any other law to get his accounts audited, then he need not again get his accounts audited to comply with the requirement of section 44AB. Is such a case, it shall be sufficient if such person gets the accounts of such business or profession audited under such law and obtains the report of the audit as required under such other law and also a report by the chartered accountant in the form prescribed under section 44AB, i.e., Form No. 3CA and Form 3CD.
What are Form Nos. 3CA/3CB and 3CD?
The report of the tax audit conducted by the chartered accountant is to be furnished in the prescribed form. The form prescribed for audit report in respect of audit conducted under section 44AB is Form No. 3CB and the prescribed particulars are to be reported in Form No. 3CD.
In case of persons covered under previous FAQ, i.e., who are required to get their accounts audited by or under any other law, the form prescribed for audit report is Form No. 3CA and the prescribed particulars are to be reported in Form No. 3CD.
What is the due date by which a taxpayer should get his accounts audited?
A person covered by section 44AB should get his accounts audited and should obtain the audit report on or before the due date of filing of the return of income, i.e., on or before 30th September (*) of the relevant assessment year, e.g., Tax audit report for the financial year 2013-14 corresponding to the assessment year 2014-15 should be obtained on or before 30th September, 2014.
(*) In case of a taxpayer who is required to furnish a report in Form No. 3CEB under section 92 in respect of any international transaction or specified domestic transaction, the due date of filing the return of income is 30th November of the relevant assessment year.
The tax audit report is to be electronically filed by the chartered accountant to the Income-tax Department. After filing of report by the chartered accountant, the taxpayer has to approve the report from his e-fling account with Income-tax Department (i.e., at www.incometaxindiaefiling.gov.in).
What is the penalty for not getting the accounts audited as required by section 44AB?
According to section 271B, if any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:
(a) 0.5% of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such year or years.
(b) Rs. 1,50,000.
However, according to section 273B, no penalty shall be imposed if reasonable cause for such failure is proved.


Negligence in reporting 40A(3) & 40(a)(ia) violation is Professional Negligence – CA awarded punishment of removal of his name from the Register of Members  19th October 2018

Negligence in reporting 40A(3) & 40(a)(ia) violation is Professional Negligence – CA awarded punishment of removal of his name from the Register of Members Negligence in reporting 40A(3) & 40(a)(ia) violation is Professional Negligence – CA awarded punishment of removal of his name from the Register of Members  Ignorance & caaualness may be a costly. There is not only penalty u/s 271J but also chances of Discplinary action by ICAI. 

Income Tax Department is taking all such matters for disciplinary action with ICAI. One such instance was found in CA Ishaq Esmail Lakkadghat Versus Income Tax Officer, 11 (3) -1 Mumbai case wherein the Tax auditor was held guilty by the disciplinary committee of ICAI of lack of exercising due diligence, or gross negligence in the conduct of his professional duties.
1.The Reporting Auditor (CA) stated NIL in the column  “amount admissible u/s 40A (3) read with rule 6DD and computation thereof”
2. The error was deducted in scrutiny assessment for AY 2007-08, when it was found that the assessee has made payment of consultancy charges amounting to Rs. 5, 45,715/- to various Doctor which exceeds Rs. 20, 000/-. The assessee has made this payment in cash which is exceeding Rs. 20, 000/- and no tax has been deducted which is required u/s 194J of the Income Tax Act, 1961. These facts have not been mentioned in the Tax Audit Report certified by the CA
3. The matter was reported to the Disciplinary Committee of the ICAI which that on perusal of Profit & Loss Account of the Hospital vis-à-vis working papers of the Respondent, it has been noted that consultancy charges were shown as expenses in the Profit & Loss Account of the Hospital.
 4. The CA submitted
 a. “……since the Doctors did not provide any professional service to the Hospital, the provisions of Section 194J would not be attracted.
b. As per the judgment passed by the Special Bench in case of “Merilyn Shipping and Transports-vs ACIT, Section 40 (a) (ia) is applicable only to the amounts of expenditure which are payable as on 31st March of every year and it cannot be invoked to disallow the amounts which have been actually paid during the previous year, without deduction of tax at source. Further, all payments were made to the respective doctors before 31st March, 2007. As per his belief, the payment made to the Doctors by way of reimbursement of the fees does not fall under the TDS Act and even if it falls, these payments would not be disallowable u/s 194J of the Income Tax Act.
5. However the Committee was of the view that it is for the assessee to reply on any judgment for making deduction of TDS on payment of consultancy fees u/s 194J. As per provision of the Income Tax Act, 1961 and Guidance notes on Tax Audit issued by the Institute, the Auditor is required to report as to whether any amount is inadmissible under Section 40 (a) the Income Tax Act, 1961. If the Assessee did not deduct TDS based on a judgment given in a particular case, the Respondent being a Statutory Tax Auditor was required to disclose the same in his report so as to enable the Income Tax Department to know the reason as to why TDS was not deducted by the Assessee u/s 194J of the Income Tax, 1961.

6. On appeal against the order of the disciplinary committee of ICAI, the Appellate Authority – ICAI the CA further added that as he has  passed Chartered Accountancy only in 2005, he was very new in the profession and it is possible that he did not understand the proper interpretation of Section 194J of the Income Tax Act 1961. Therefore he prayed that his mistake may be condoned and lenient view may be taken.

7. The Appellate Authority – ICAI held as under: a. It is very clear that the CA was required to report instances where tax was deductible by the auditee but not deducted by him. The CBDT vide Notification No. 208/2006 dated 10th August, 2006 had widened reporting requirements of Form 3CD and thus it was the duty of the CA  to report such transactions in the Form 3CD, which he failed to do. b. The CA being new in the profession and not being able to understand properly the ambit of section 194J of the Income Tax Act, can’t be a ground to completely ignore the new reporting requirements imposed by the CBDT from 10th August, 2006. (Ignorance of Law in No EXCUSE- supplied) c. Held that CA did not exercise due diligence in carrying out his professional duties, which is expected from him. d. As regards to the issue of quantum of punishment, the CA prayed for taking lenient view and explained that he was very new in the profession and he might not have been fully aware of the recent amendments in the law, and he also pleaded that the default was for a very small quantum. e. Looking to all the facts involved and the fact that the Appellant fully co-operated in all proceedings at every level of enquiry, we feel that the “ends of justice” would meet, if the Appellant is awarded punishment to “Reprimand”. We, accordingly modify the Impugned Order of the Disciplinary Committee to this extent. Though, *further, we direct the Appellant to be more cautious in future while dealing with such situation

Share trading turnover - Tax Audit impact
Sep 08, 2016
N ANUSH SHANKERPARTNERV NARAYANAN & CO, CHARTERED ACCOUNTANTS

DETERMINATION OF TURNOVER IN CASE OF TRADING OF SHARES EITHER ON SPECULATION OR NON SPECULATION BASIS 
1. Preamble:
1.1 The broad legal positions are as follows- Dealing in shares whether Investment or Business
Dealing in shares can result either in "Business income" (chargeable as Profits & Gains of Business or Profession chargeable under section 28 of the Income Tax Act, 1961) or "Capital Gains" (chargeable under Sec.45 of the Act). Thus, dealings in shares could either be in the course of business - chargeable as Business Income, OR for the purpose of investment - chargeable as Capital Gains. Classification into Business Income and Capital Gains depends on facts & circumstances of each case. However, as a very broad guideline, as held in many cases, it can be said that - ordinarily, the purchase and sale of shares with the motive of earning a profit, would result in transaction being in the nature of trade, but where the object of investment in shares of a company is to derive income by way of dividend etc., then the profit accruing by sale of shares will yield capital gains and not revenue gains (business income).

2. This article deals with the situation where trading in shares have been considered as business income
3. Explaining Speculation and Non Speculation Business:
Trading in shares can be of two types namely
A) Delivery based trading 
B) Non delivery based (also called intraday trading)

3.1. DELIVERY BASED TRADING:
Under this type of trading, the share transaction is said to be complete only when there is actual delivery of shares/securities upon the settlement of transaction i.e. in other words, when shares are purchased/ sold on delivery basis, then those shares will be transferred to/from Demat account of the buyers/sellers. The buyer of the share will have to pay the full value of share and the share will become his asset with that either he can trade in his business or hold for investment.
3.2. NON DELIVERY BASED TRADING (or intraday trading):
Intraday trading by the name itself one can get a view that it refers to the trading system where the traders have to square-off their trade on the same day. Squaring off the trade means that the traders have to do the buy and sell or sell and buy transaction on the same day before the market close. In other words in this trading, shares are not actually transferred to the DEMAT account of the buyer instead they have to square off their position before the market close on same day by selling the same number of shares. The buyer of the shares will not pay the full value of shares instead he will pay only the difference margin arising on account of such buy/sell transaction.
3.3 Speculative Business Income:
3.3.1. Income from intra-day trading is considered as speculation income and taxed as such.
3.3.2. As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. Income from speculation gains is taxed at the normal rates.
3.3.3. Intra-day trading is the trading of shares within the same day. Generally, delivery is not taken in case of intra-day trading, and thus, these are said to be speculative transactions. As per Section 43(5) of the Income Tax Act, 1961, the said transactions shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses.
3.3.4. For a person earning income from any head of income, intra-day trading in shares is always treated as speculative business. Section 43(5) of the Income Tax Act, 1961, deals with speculative transaction. It states that a transaction of purchase or sale of a commodity including stocks and shares settled otherwise than by actual delivery or transfer of the commodity or scrip is a speculative transaction.
3.3.5. In intra-day trading in shares, there is no actual delivery as the shares enter and exit from the trading account on the same date and it does not enter the DEMAT account at all.
3.4 Non Speculative Business Income:
3.4.1. Income from trading F&O (both intraday and overnight) on all the exchanges is considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of underlying contract. Even though currently almost all equity, currency, & commodity contracts in India are cash settled, but by definition they give rise to giving/taking delivery (there are a few commodity future contracts like gold and almost all agri-commodity contracts with delivery option to it).Income from shorter term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.
3.4.2. Profit / Loss in derivatives (futures and options) is treated as non-speculation business even though delivery is not effected in such transactions.
3.4.3. From the reading of the above it is clear that trading in derivatives including commodity derivatives on a recognized stock exchange will not be considered as a speculative transaction and hence not treated as speculative business. Therefore since these are not considered as speculative business, therefore income from such transactions will be considered as normal business income and loss from such transactions will be considered as normal business loss.
4. How is turnover computed.?

DETERMINATION OF TURNOVER:

                
DETERMINATION OF TURNOVER IN RESPECT OF SPECULATIVE TRANSACTION
Now, your attention may be directed to the Para 5 of “Guidance Note on Tax Audit under Section 44AB of the Income Tax Act,1961" issued by The Institute of Chartered Accountants of India (ICAI), which provides the guidelines regarding "Turnover or Gross Receipts in respect of transactions in shares.." as follows:
a) In a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note.
b) The contract is settled otherwise and squared up by paying out the difference which may be positive or negative. As such, in such transaction the difference amount is 'turnover'.
c) In the case of an assessee undertaking speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction.
d) Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. In such transactions though the contract notes are issued for full value of the purchased or sold asset the entries in the books of account are made only for the differences.
e) Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vides section 44AB, whether the differences are positive or negative.
DETERMINATION OF TURNOVER IN RESPECT OF NON SPECULATIVE TRANSACTION
Determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:
1. The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
2. Premium received on sale of options is to be included in turnover.
3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.
Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.
DETERMINATION OF TURNOVER IN RESPECT OF DELIVERY BASED TRANSACTION:
Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sales is to be considered as turnover.
5. When is audit required?
An audit is required if you have a business income and if your business turnover is more than Rs 2 crores (was Rs 1 crore until FY 16/17) for the given financial year. Audit is also required as per section 44AD in cases where turnover is less than Rs.2 Crores but profits are lesser than 8% of the turnover and total income is above minimum exemption limit.
Therefore, the applicability of tax audit will be as follows in case of F&O Trading:
5.1 In case of Profit from transactions of F&O trading
a) In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. 1 crore.
b) Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 8% of the turnover from such transactions.
5.2 In case of Loss from F&O Trading
In case of Loss from derivative trading, since profit (Loss in this case) is less than 8% of the turnover, therefore Tax Audit will be applicable u/s 44AB read with section 44AD.
6. Tax Treatment:
Business income: If you are trading in the stock market frequently (mostly non-delivery trade), returns from it can be classified as follows:
6.1. Speculative Business income:  Profit from intraday trading is categorized under speculative business income. Tax treatment is similar to your Business income tax. It is taxed as per the tax slab you fall in while losses can be offset only against speculative gains. 
6.2. Non-speculative Business income: Income from trading futures & options on recognized exchanges (equity, commodity, & currency) is categorized under non-speculative business income. Tax on share trading in such cases is similar to your business income tax. The profits on F/O trading are taxed as per the tax slab you fall in whereas losses on such F/O trading can be set off against business profit.

7. Treatment of Adjustment for loss
7.1 Loss in respect of non speculative business income:
As per the Section 71 of the Income Tax Act, loss in respect of such business can be set off against any other heads of income including income from speculative business but excluding  income under the head “salaries” of that year.
As per Section 72 of the Income Tax Act, if there is any such loss which is not set off against the above said incomes, such losses are eligible to be carried forward and set off against the other incomes excluding income from salary for a period of 8 subsequent assessment years in the manner as specified in the above order of set off.

7.2 Loss in respect of speculative business income:
As per the Section 73 of the Income Tax Act, loss in respect of speculative business cannot be set off against any other heads of income i.e. it can be set off only against other speculative incomes if any in that year.
If there is any such loss which is not set off, such losses are eligible to be carried forward and set off only against speculative incomes for a period of only 4 subsequent assessment years.
   

Other Certifications by CA under Income tax

FMV of Unqouted shared
The Indian Government has in 2017 notified final rules to compute fair market value of unquoted shares which are to be used in determining quantum of: 1. Capital gains on transfer of shares in a company; and 2. Income in the hands of a recipient of shares if consideration paid by him is lower than its fair market value The final rules specify, among others, that fair market value of securities and shares (other than unquoted equity shares) owned by a company would be the value as certified by a merchant banker or a chartered accountant on the valuation date.