Tax Audit Report (TAR) Certain exceptions and increased limits according to number of partners and considering nature of activity are desirable

[CA DEV KUMAR KOTHARI]

Maintenance of accounts and Tax Audit Report (TAR):

Provisions relating to maintenance of accounts and obtaining of TAR are old provisions and we find that very low limits fixed long ago have remain in force for long time. Even revisions in limits was meagre and did not kept pace with inflation. We still find limit of ₹ 50/- for bills and receipts in Rule 6F (2) (v). The limits u/s 44AA and S. 44AB have almost remained stagnant for long periods.  The law has changed about number of partners, now a firm can have 100 partners, however, there is no difference in a firm having two partners and another having 100 partners so far maintenance of accounts and obtaining and furnishing of TAR is concerned.

There is no difference between a trader having shop and selling goods in small quantities with at higher margin and another trader supplying large quantity of goods to industries at very low margins.

Many businesses have reporting system through stock exchanges, and reporting is on real time basis. The volumes in such business is huge and that too on click of mouse. Therefore, applying same Limits to such business is not proper, In fact such business should be exempt from TAR.

Therefore, there must be consideration of relevant aspects and different limit should be provided for different type of businesses. Businesses which are carried online and which have reporting system throughout side agencies like stock exchanges, must be exempted from requirement of TAR.  Limits should also be made flexible with number of partners in a firm.

Government/ RBI is unable to control inflation, public including tax payers are  suffering due to inflation but there being no corresponding relaxations in basic exemptions, and compliance requirements like maintaining books of account and obtaining TAR.

Furthermore limit should be linked to inflation and should be revised to nearest lakh of rupees every year based on rate of inflation.

Purpose of provision for maintaining accounts:

Purpose of provision  directing maintenance of books of account is that tax department is able to get such information and records as are considered necessary for ascertaining income of assessee carrying a business or profession( except cases in which income is disclosed on presumptive basis.) This purpose we find on reading of S. 44AA about maintaining of account. The section is reproduced in this write-up with highlights added  by author. The section includes sentences like “…. keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act.

Purpose of Tax Audit:

Purpose of tax audit is also to enable the AO to get information in standard format duly checked and verified by an Accountant. This is also to enable AO to compute total income of assessee as per law. TAR make work of AO easy.

Business turnover or gross receipts:

Basis for applicability of TAR is turnover or gross receipts in business carried by assessee. There is no difference between different kinds of businesses, though nature of turnover differ very widely.

In case of professions also, the basis for applicability of TAR is gross receipts from profession, and there is no difference between different types of professions. Though nature of receipts and volumes differ. In case of professional activities which require more man power and incidental expenses, fixed overheads, gross receipts will be higher whereas in case of personalized services gross receipts will be lower.

Number of owners (as partners/ members)

In case of a firm, the firm is considered as carrying business or profession. A firm may consist of minimum of two partners and maximum of 100 partners in case of business other  than banking. In case of firms carrying profession, governed by Special Act. there is now no limit on maximum number of partners. In this regard we can refer to:

http://www.icai.org/new_post.html?post_id=10927

The Council of the Institute has clarified that the earlier restriction of maximum of 20 partners permitted for firms under section 11 of the Companies act, 1956 is no more applicable to the firms as Section 464 of the Companies Act, 2013 has been notified w.e.f 01.04.2014 wherein sub-section (1) provides for a maximum number of partners permissible for business firms at 100 and sub-section (2) provides that nothing in sub section (1) shall apply to an association or partnership, if it is formed by professionals who are governed by special Acts.

Accordingly, as per proviso to the said section, Chartered Accountants firms are now allowed to be registered/reconstituted with more than 20 partners w.e.f. 01.04.2014 under the Indian Partnership Act as in the case of a firm under the Limited Liability Partnership Act.

There must be some consideration of number of partners a firm have for requirement of TAR. A firm having two partners and another having 100 partners should not be considered equally for the purpose of TAR and also taxation. With changes in time, provisions relating to imposition of   Income-tax  and related procedures must also be changed.

High Volume low margin business:

Some business have very high volumes but very low margins. The volume of gross receipts can cross limits within a day or few days depending on volume of activity undertaken by assessee. For example, business of supply of raw materials to industries is generally very low margin business but have high volumes.

Business where transactions are recorded/ reported by other agencies:

In case of business carried through electronic platform and where each transactions and turnover of different types are reported and recorded by concerned exchanges, and volume is also very high, it is desirable that such business should be exempted from TAR. For example, in case of transactions carried through stock exchanges and their members, particularly when transactions are carried out electronically, each transaction is reported on the stock exchange. If a person carry transactions through more than one member of exchange, transactions done through each member is recorded by stock exchange and is reported on daily basis. Reports are complied with annually also and Income-tax Department also has access to the same.

Section 44AA:

[Maintenance of accounts by certain persons carrying on profession or business.

     44AA. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.

      (2) Every person carrying on business or profession not being a profession referred to in sub-section (1)] shall,-

           (i) if his income from business or profession exceeds [one lakh twenty] thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds [ten lakh] rupees in any one of the three years immediately preceding the previous year; or

           (ii) where the business or profession is newly set up in any previous year, if his income from business or profession is likely to exceed one lakh twenty thousand rupees or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed [ten lakh] rupees, [during such previous year; or

           (iii) where the profits and gains from the business are deemed to be the profits and gains of the assessee under [section 44AE] [or section 44BB or section 44BBB], as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, during such [previous year; or],]

          [(iv) where the profits and gains from the business are deemed to be the profits and gains of the assessee under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax during such previous year,]

keep and maintain such books of account and other documents as may enable the [Assessing] Officer to compute his total income in accordance with the provisions of this Act.

      (3) The Board may, having regard to the nature of the business or profession carried on by any class of persons, prescribe, by rules, the books of account and other documents (including inventories, wherever necessary) to be kept and maintained under sub-section (1) or sub-section (2), the particulars to be contained therein and the form and the manner in which and the place at which they shall be kept and maintained.

      (4) Without prejudice to the provisions of sub-section (3), the Board may prescribe, by rules, the period for which the books of account and other documents to be kept and maintained under sub-section (1) or sub-section (2) shall be retained.]

 ¹[Audit of accounts of certain persons carrying on business or profession.

     44AB. Every person,-

           (a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds ¹⁹[one crore rupees] in any previous year ²[***]; or

           (b) carrying on profession shall, if his gross receipts in profession exceed ²⁰[twenty-five lakh rupees] in any ³[previous year; or

           (c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under ¹⁶[ section 44AE ] ⁴[or section 44BB or section 44BBB ], as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any ¹⁷[previous year; or],]

          ¹⁸[(d) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,]

          ⁵[***] get his accounts of such previous year ⁶[***] audited by an accountant before the specified date and ⁷[furnish by] that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :

     ⁸[Provided that this section shall not apply to the person, who derives income of the nature referred to in ⁹[***] section 44B or ¹⁰[section 44BBA], on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later :

     Provided further that] in a case where such person is required by or under any other law to get his accounts audited ¹¹[***], 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 ¹²[furnishes by] that date the report of the audit as required under such other law and a further report ¹³[by an accountant] in the form prescribed under this section.

     Explanation.-For the purposes of this section,-

           (i) "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288;

          ¹⁴[(ii) "specified date", in relation to the accounts of the assessee of the previous year relevant to an assessment year, means the ¹⁵[the due date for furnishing the return of income under sub-section (1) of section 139]]

  Limits  of  turnover or gross receipts were as follows in case of business:

Period	Rs. In lakh	Remarks
01.04.1985 to 31.03.2010 -(AY 1985-86 to 2010-11)	40
From 01.04.2011- (AY 2011-12 and 2012-13)	60
From 01.04.2013 - from AY 2013-14- continuing	100

Limits  of gross receipts were as follows in case of profession:

Period	Rs. In lakh	Remarks
01.04.1985 to 31.03.2010 -(AY 1985-86 to 2010-11)	10
From 01.04.2011- (AY 2011-12 and 2012-13)	15
From 01.04.2013 - from AY 2013-14- continuing	25

From the above tables it is clear that limits were not revised in view of inflation. Originally fixed limits of ₹ 40 lakh in case of business and ₹ 10 lakh in case of profession remained stagnant for long fifteen years. The revision made from 01.04.2011 was meagre and then from 01.04.2013 also has not kept pace in tandem with inflation.

Presumptive tax and TAR if income is less- no limit of turnover:

In case provision of presumptive tax is applicable and assessee has not earned income as per presumptive provisions, then he has to maintain books of account and get audited, irrespective of amount of turnover. This is also not justified. There must be some minimum limit up to which TAR is not required.