All About Documentation for Tax Audit U/S 44AB

All About Documentation for Tax Audit U/S 44AB

• The main objective of the tax audit is to compute the taxable income according to the law and to maintain transparency in the financial statements filed by the assesses with the Income-tax department. The tax audit u/s. 44AB of the Income-tax Act 1961 is significant
• The assessee must appoint a Chartered Accountant (CA) to conduct the audit. The CA will prepare and verify the financial statements and other documents.
• Practice area for Chartered Accountants. Since the introduction of tax audit, we have been given responsibilities to discharge the duties as tax auditors for the proper compliance of tax law by the assessees.
• Form 3CD: The Practice area for Chartered Accountants will prepare Form 3CD, which is a detailed statement of particulars required to be furnished under Section 44AB. The Practice area for Chartered Accountants will submit the audit report in Form 3CA or 3CB, along with Form 3CD. The audit report, along with Form 3CD, must be filed electronically with the Income Tax Department before the due date.

DOCUMENTATION FOR TAX AUDIT UNDER SECTION 44AB

A tax audit under Section 44AB of the Income Tax Act, 1961, is conducted to verify the accuracy of the income tax returns filed by an assessee. This ensures that the books of accounts and other financial records are maintained in accordance with the provisions of the Income Tax Act. Here is the documentation required for a tax audit under Section 44AB:

• Basic Documents
  • PAN card of the assessee
  • Tax Audit Report in Form 3CA or 3CB, as applicable
  • Statement of particulars in Form 3CD

• Financial Statements

  • Balance Sheet: As on the last day of the financial year
  • Profit and Loss Account: For the financial year
  • Cash Flow Statement: If applicable
  • Trial Balance

• Books of Accounts

  • Sales Register
  • Purchase Register
  • Journal Ledger
  • General Ledger
  • Cash Book
  • Bank Book
  • Fixed Assets Register
  • Inventory Register

• Supporting Documents

  • Bank Statements
  • Bank Reconciliation Statements
  • Vouchers for expenses, payments, and receipts
  • Invoices for sales and purchases
  • Investment Records
  • Loan Agreements and statements

• Tax-related Documents

  • Tax Deducted at Source (TDS) Certificates
  • Details of Advance Tax and Self-Assessment Tax paid
  • Challans of tax payments
  • Tax Computation Statement
  • Previous year’s Income Tax Returns and assessments

• Statutory Compliance

  • GST Returns and Audit Reports
  • Provident Fund (PF) Returns and challans
  • Employee State Insurance (ESI) Returns and challans
  • Professional Tax (PT) Returns and challans

• Additional Documents (if applicable)

  • New Clause 4 inserted
    • Identity proof
    • Residence/Address Proof
    • PAN Card
    • In case of
      • An individual : a propritary letter/Shops and Establishment Licence
      • A firm : Partnership deed ; Registration Certificate
      • A company – Certificate of incorporation; Certificate to commence business (in case of public companies)
      • Any other entity : Incorporation/registration certificate or formation deed
    • Last Balance Sheet or date of commencement of business
  • Partners and their Profit Sharing Ratios
    • Partnership Deed Amendment or Addendum to Deed of partnership
  • Nature of Businesses or Professions
    • Management Representation letter
    • Extracts of Objects Clause of the Memorandum of Association
    • Extract of the Deed of Partnership
    • Sales Tax/ VAT registration Certificate
    • Excise Registration certificate
    • Any other specific registrations such as NBFC,
    • Chemists and Druggists etc.,
    • Copy of last return of income filed
  • List of Books maintained
  • Any law requiring the assessee to maintain the books of accounts for such businesses e.g.
  • professionals under the Income Tax Act, 1961;
  • Traders under the VAT Laws etc.,
  • Last audit report
  • Details of foreign transactions and foreign assets
  • Provisions of law such as companies can maintain only accrual method of accounting
  • Final statement of accounts for the year under audit and the immediate preceding financial year.
  • Details of related party transactions
  • Whether Section 145A applicable
  • Deviation, if any and the quantification thereof.
  • Details of the Capital Asset, Reasons for conversion, Impact of conversion
  • Claims made and Refund Orders
  • Details of loans and advances to and from related parties
  • Documentary evidence depending on nature of capital receipt and reasons for not crediting the profit and loss account
  • Copies of bills in respect of assets purchased during the audit period
  • Details of fixed assets sold, scrapped or discarded or impaired
  • Computation of addition/reduction in value on account of MODVAT Credit or exchange difference or Government subsidy
  • Rates of depreciation applicable to each type of asset
  • Extracts of Fixed Assets Register
  • Details of contingent liabilities
  • Amounts Admissible various clauses of – {Clause 19} [Old Clause 15]
    • Details of such expenses and the category of such assets
    • Documentary evidence as to its payment/receipt-
  • Amount Paid / Received from the Employees
    • List of employees and their salaries, applicability of PF and the contribution of the employer/employee
    • Terms of employment, In case of any agreement with any trade union, copy thereof

  • Amount Debited to Profit and Loss Account

    • Query sheet in respect of Ledger Scrutiny
    • Details of such payments on scrutiny of such expenses/cash or bank book, receipts thereof.
    • Management representation letter
    • Note on such expenses
    • Certificate from the assessee
    • Details of such payments made
    • Relevant query sheet
    • Amounts paid and the amounts payable as per law
    • List of contingent liabilities
    • Contingent liabilities provided for in the books of accounts
    • Details of Total income
    • Details of Exempt income
  • Amount of Interest u/s. 23 of MSME Act, 2006
    • Correspondence with suppliers ascertaining their registration under the MSMED Act, 2006
    • Management representation letter
    • Amounts outstanding to such enterprises
    • Calculation of interest
  • Payments made to Persons specified u/s. 40A(2)(b)
    • Details of specified persons under Section 40A(b)
    • Ledger Scrutiny and the scrutiny of cash and bank books
  • Deemed to be Profits
    • Types of business
    • Profits during the period
    • Transfer of profits to Reserve/Fund and investment thereof as per law
    • Board resolution
  • Sum Referred u/s.43B
    • List of payments specified in Setion 43B
    • The provisions made thereof
    • The amounts paid thereof
  • Brought forward loss or depreciation
    • Last Assessment Order(s)
    • Last Return(s) of income filed
  • Chapter VI A –Documents :
    • 80 C – Copy of Receipts Copies
    • 80 D – Copy of Insurance Premium Receipts
    • 80 E – Copy of Interest statement or Payment confirmation
    • 80 G – Copy of deduction Certificate or the payment receipt
    • 80 IA, IAB, IB, etc. – Copy of Chartered Accountant Certificate.
  • Details of capital gains transactions
  • Evidence of deductions claimed under various sections

CHECKLIST FOR CONDUCTING TAX AUDIT

Sample checklist for conducting tax audit & it documentation for tax audit

Pre-Audit Planning

• Obtain a signed engagement letter from the client & Gain a thorough understanding of the client’s business and industry. Conduct initial meetings with the client to discuss the audit scope and process.

Review of Financial Statements

• Balance Sheet
• Profit and Loss Account

Examination of Books of Accounts

• Verify total sales with invoices and GST returns. Match total purchases with invoices and GST returns. Ensure all journal entries are supported by proper documentation. Cross-check ledger balances with trial balance and financial statements. Review cash transactions for accuracy and completeness. Reconcile bank statements with bank book entries.
• This checklist and documentation outline should help streamline the tax audit process and ensure comprehensive coverage of all necessary aspects. A reasonable sample checklist for conducting tax audit

• • Appointment Letter defining scope SA-210
  • Management representation letter SA-580
  • List of related parties & transactions AS-18 & SA- 550
  • Trial Balance SA-500
  • Financial statements duly signed by the owners SA-500
  • Notes on accounts and Disclosure of accounting Policies AS-1
  • Valuation of Inventories and for the total year quantitative inflow, outflow statement AS-2
  • Bank balance confirmation SA-505
  • Bank loan statements SA-505, Sec 43B of I.T Act
  • Major sundry debtors and creditors balance Confirmation SA-505
  • Analytical Ratio analysis SA-520
  • Sample purchase and sales bills SA-500
  • Proof of assets purchased & revenue expenditure capitalized SA-500, A.S 10, AS- 11 & A.S 16, Sec 36(1)(iii) & 43A of I.T Act
  • Extraordinary Items nature & disclosure        AS-5
  • Notes on the nature of business                   SA-310
  • Depreciation calculation statement           AS-6, Sec 32 of I.T Act
  • Liabilities including contingent liabilities Estimation AS 29 with detailed working
  • Statutory Compliances Relevant P.F, ESI, Bonus, VAT Act’s provisions
  • Register for Tax Audits carried out during the year
  • Documentation for 3CD should be separate
  • Check list for 3CD, if possible
  • For debatable issues, separate management representations, if required
  • Important for Peer Review since tax audit is also an attest function.

Verification of Supporting Documents

• Ensure all sales and purchase invoices are present and correct. Verify vouchers for all expenses and payments. Reconcile all bank accounts with the bank book. Verify investments and related income. Check the terms and conditions of loans taken or given.

Review of Tax Compliance

• Check TDS returns and certificates. Verify payment challans and calculations. Review GST returns and payments. Check PF, ESI, and PT returns and payments.

Verification of Other Critical Areas

• Physical verification and depreciation. Physical verification and valuation methods. Review and document any contingent liabilities. Ensure proper disclosure and arm’s length pricing. Verify transactions involving foreign exchange and assets. Review loans and advances to ensure proper documentation and terms.

Preparation and Filing of Tax Audit Report

• Form 3CA/3CB: Prepare and review the audit report.
• Form 3CD: Prepare and review the statement of particulars.
• Discuss findings with the client and obtain their inputs Finalize the audit report and ensure all documentation is complete. Submit the audit report and Form 3CD electronically with the Income Tax Department.

Due Date of Tax Audit :

• For assessees requiring audit: 30th September of the assessment year (e.g., for FY 2023-24, the due date would be 30th September 2024).

Penalty for Non-compliance of Tax Audit

• Proper documentation and compliance with the audit process under Section 44AB are crucial for the accurate assessment of tax liabilities and to avoid penalties.
• If an assessee fails to get the accounts audited or fails to furnish the audit report, a penalty of 0.5% of the total sales, turnover, or gross receipts, subject to a maximum of ₹1,50,000, may be levied under Section 271B of the Income Tax Act.