TAX AUDIT OF INDIVIDUALS , HUF AND OTHER CLIENTS WHO ARE NOT FULLY ORGANIZED - INFORMATION SHOULD BE IN RESPECT OF ALL UNITS AND PERSONS WHOSE INCOME IS CLUBBED otherwise litigation may take place for penalty.

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Section 44AB.

Rule 6G

Form 3CB

Form  3CD.

[ACIT and The Commissioner of Income Tax Versus Dr. K. Satish Shetty 2009 (2) TMI 207 - KARNATAKA HIGH COURT]

Individuals and Tax Audit:

An individual engaged in any business and / or profession is required to maintain books of account and to get them audited and obtain and furnish Tax Audit Report under section 44AB of the Income Tax Act, 1961 (The Act) from a Chartered Accountant if the sale, gross receipts or turnover etc. exceeds prescribed limit. An individual being a businessperson or professional person does not (generally) have much knowledge, expertise and organizational strength hence he may rely heavily on the Chartered Accountant for compliance of formalities and representation etc. Therefore, professional, legal and moral obligation of the C.A. is more exacting than in case of assignments by large companies who have expert accountants and tax auditor can rely on the system and internal checks and controls.

Particularly in case of professionals from science and technology fields like Doctors, Engineers, Architects, etc. the client has hardly knowledge for tax matter and he also cannot spare sufficient time for such matters, therefore, for a better job and client's satisfaction the tax auditor may render value added service by making full compilation.

Various accounts for Tax Audit in case of Individual assessee:

An individual may carry business and profession in his personal name as well as in one or more trade/ business/ professional names - known as proprietary concerns. Besides in case income of minor children is to be clubbed with the individual or income of some other person is to be clubbed, and the minor children and such other individual also carry some business or profession, then tax audit must cover transactions relating to such persons whose income is to be clubbed.

Tax audit :

Tax Audit is for the purpose of timely compilations, certification and furnishing of certain relevant information about accounts and transactions of an assessee to be placed before the Assessing Officer in standard form which can be relied by the Assessing Officer so that he can complete assessment effectively, quickly and easily. Tax audit report speaks about vital information about allowability or dis-allowability of expenses, allowances, and also about certain statutory compliance. It also gives vital information as to funds raised and paid, which can be subject matter of certain legal requirements as well as inquiry or investigation. If proper and complete information is given in the Tax Audit Report the burden of the assessee as well as the Assessing Officer is reduced considerably.

Audited accounts are to be annexed to TAR. Therefore, audited accounts of each unit is to be attached.

There may not be significant information in such sub accounts, however, omission of any information, may be a reason to hold Tax Audit Report incomplete. Furthermore, whether there is any relevant information is also to be ascertained by way of Tax Audit Report. For example, suppose a minor child of client obtained some interest free loans during the year and the loans were squired-up. There is no hint about such loan in the profit and loss account by way of claim of interest, there is no such hint in the balance sheet by way of out standing loan, yet it was required to be informed about loans taken and  squire up during the year in the Tax Audit Report. Therefore, in respect to each sub account relevant information is required to be given, if there is no relevant information, nil or not applicable has to be mentioned.

Tax Audit must be complete

TAR  must be complete for the assessee as a whole. In case of an individual his personal account, accounts of his proprietary concerns, account of persons whose income is to be clubbed are to be considered as a whole. The total turnover in all such accounts is to be considered to find out whether tax audit is required or not.

Suppose an individual A has turnover of Rs.15 lakh in his personal account, and Rs.26 lakh in a proprietary concern A & Co., he is required to obtain and furnish Tax Audit Report.

Suppose an individual has turnover in his personal account of Rs.37 lakh and Rs. 5 lakh in account of his minor children whose income is to be clubbed with the individual. In this case total turnover which is subject to assessment related inquiry exceed Rs.40 lakh therefore Tax Audit Report is required to be obtained and furnished in respect of entire turnover of Rs.42 lakh.

Suppose an individual has turnover of Rs.10 lakh in his personal account and Rs.50 lakh in his farm account - the income is agricultural income and is exempt under section 10, yet he is required to obtain and furnish Tax Audit Report because total turnover exceeds prescribed limit. In this case Tax Audit Report must include information about personal account as well as the account of the farm.

Information as to all relevant accounts and transactions is required:

It has come to notice that many Chartered Accountants have while dealing individuals cases has rendered Tax Audit Report only in respect of individual's proprietary concerns only, and have not taken information relating to the personal account and the accounts of minor children or other person whose income is clubbed. In such cases it is possible for the Revenue Department to take view that the Tax Audit report is not complete.

For example certain records/ books may be maintained in different names (individual, minor children) transactions entered into - purchase and sale of some items e.g. shares and securities, loans received and repaid, depreciable assets held - B/F, purchased, sold and c/f, payments covered under section 43B, profits and gains under section 41, in individual's personal account or accounts of minor children needs to be considered for assessment.

In such cases the Tax Audit Report is required in totality of all relevant accounts otherwise the Assessing Officer may take a view that the Tax Audit Report is not complete, the return is defective and the assessee is liable for penalty under section 271B of the I.T. Act.

Preparation for Tax Audit for P.Y.E. 31.03.2009

Suitable steps can be taken right now to review clients profile and advise them in case additional information is to be compiled with , checked and incorporated  to make tax audit complete. Care should be taken to consider all concerns owned by assessee, even if transactions in some concerns are not substantial.

Revision of Tax Audit Report of earlier years:

In case in earlier years complete Tax audit report was not filed along with the return, the clients may be advised to file revised tax audit report or relevant annexure or information to complete the tax audit report voluntarily during course of hearing for assessment or after receiving notice under section 143(2). In case of completed assessments it may not be advisable to furnish such details unless there is glaring and material omission. 

Suggestions:

Professional colleagues are suggested that while conducting tax audit of individuals special care may be taken to ensure that all accounts and transactions, which have relevance for assessment of the individual, are incorporated.

 In case audit of some units / branch or accounts is conducted by other Chartered Accountant then the fact must be stated that the report covers only specific units or set of accounts. In such cases the client may be advised to furnish a consolidated tax audit report based on facts and figures covered in different tax audit reports of different units/ branches / set of accounts. In such case a columnar / consolidated report may be prepared with appropriate disclosure as to conducting of audit by other C.A.'s. 

It is hoped that the care on the above lines will go a long way in full and better compilation of requirement of tax audit, it will help clients and Assessing officers to have a consolidated and complete tax audit report and incidentally it will also improve quality of  professional services and generate additional business.

Columnar profit and loss account, balance sheet and TAR can be considered when there are few entities. However in case there are several entities, report for each entity/ unit is to be made out and then consolidated statements are to be prepared.  Penalty under section 271B

In case Asstt. CIT & Anr. v. Dr. K. Satish Shetty[2009 -TMI - 33016 - KARNATAKA HIGH COURT]  The assessee, a doctor by profession  got TAR only in respect of one of its concerns though he carried profession/ business in three proprietary  firms. The A.O. imposed penalty under section 271B as he found TAR incomplete. The penalty was deleted by the Tribunal however, the revenue carried matter before the High Court. The High Court considered findings that the assessee being a doctor was not fully aware of legal position and relied on tax auditor, there was bonafide on his part and there was no dishonest intention in not obtaining TA for two units. In view of these aspects the High Court confirmed the order of Tribunal.

Lesson from this case:

Chartered Accountants must learn from this judgment and while working for individuals, HUF and other less organized clients must be more careful and advise them to complete the work so that there is full compliance. In this case the tax auditor and / or tax advisor (both may be the same person as per general practice) must have advised the client that TAR is required for each of his business unit- the three concerns in this case. In this regard the following observations of the court are very important:

17. No doubt it is true that the assessee was being represented by his chartered accountant and he should have been little more careful and cautious in applying the legal proposition to the facts of the case. He should have added the aggregate of all the three businesses so as to have full compliance with section 44AB of the Act. But for the mistake or default of the chartered accountant, who may have also acted bona fide, being unaware of the correct interpretation of law, the assessee cannot be held responsible, even though the said chartered accountant acted as an agent of the assessee. Since the issue involved was complicated, the clarification was issued by the Institute of Chartered Accountants of India subsequently.

More care is required:

While performing audits the auditors must be more careful. It is true that one has to rely on assistants and all aspects cannot be checked by the person who is has to sign the report, but overall all aspects need to be examined from client and assistants. In this case the court has noted that the ICAI has issued directions subsequently, and therefore the matter was complicated. However, on plain reading of provisions it is clear that the turnover of assessee rather say turnover which is subject matter of consideration of the A.O. is relevant and therefore, there was to some extent it can be said that a lapse  on the part of tax auditor in this case.