TAX AUDIT REPORT- LIMIT SHOULD BE RAISED AND MADEFLEXIBLE BY WAY OF RULES.

[C.A. DEV KUMAR KOTHARI]

Purpose and utility of Tax Audit Report (TAR):

Tax audit report is to assist the assessee as well as the Assessing Officer in proper computation of income and to ascertain certain compliances of tax law. Tax Audit is to ensure timely compilations, certification and furnishing of prescribed information about accounts and transactions of an assessee to be placed before the Assessing Officer in prescribed and standardized  forms which can be relied by the Assessing Officer so that he can complete assessment effectively,  quickly and  easily.

In TAR vital information about method of accounting, books of account maintained and allowabilty or disallowability of expenses, allowances, and also about certain statutory compliance are provided. 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 by the Assessing officer. 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.

Along with the tax audit report audited accounts of assessee are to be annexed. Therefore, audited accounts of each unit or consolidated accounts of assessee consisting of different units or accounts is to be attached. In case of an individual all proprietary concerns accounts can be consolidated with his personal account. In case income of any person is to be clubbed, the accounts of such person is also required to be  audited and relevant information on points covered in Form No. 3CD are to be given.

 TAR is rendered (generally) by chartered Accountants therefore, it is one source of reliable information as to completeness and correctness of relevant information about assessee and related persons.  

Limit of turnover etc. for TAR needs revision in view of inflation:

The past and present of TAR:

Section 44AB was proposed about twenty five years ago vide the Finance Bill 1984 and got   inserted in the Income -tax Act, 1961 vide the Finance Act,1984 w.e.f. 01.04.1985. Thus it became applicable from accounting year 2004-05. Over this period the section , related Rules and Forms have undergone several amendments. However, the prescribed limits for obtaining TAR have remained stagnant.

Logic and reasons for increasing limit for TAR:

1. Over this period basic exemption allowed to individuals, HUF, BOI, AOP etc. have also been raised several times and other deductions have also been raised. Therefore, if we consider tax free income vis a vis limit of turnover for tax audit, there is valid case for increasing the limit for obtaining TAR. For example, in 1984-85 on a gross receipt or turnover of Rs.30,00,000 a trader might have earned income which was above basic exemption. Now with the same turnover, and income his income may not be taxable because basic exemption has been increased.    
2. In case of assessees who do not have basic exemption, the above logic may not be applicable. However, we find that the rate of tax on companies and firms have been reduced considerably. Furthermore, in open economy margins of profit have reduced. These reasons require upward increase in turnover limits.
3.  The cost inflation index(CII), as announced for the purpose of capital gains was 116 when the proposal for made to insert the section, now  CII  is 582. Therefore even on the basis of CII there is more than 5 times increase in CII. The CII takes into account only 75% of inflation. Therefore, actual inflation is  6.67 times. Even if we consider the CII the limits for obtaining TAR should be increased to Rs. 200 lakh  and 50 lakh in case of business and profession respectively.
4. TDS - the business or profession which are subject to TDS on their business receipts, may have some relaxation in limit for TAR.

In view of above reasons, the limit for TAR should be increased in the next budget.

Flexibility of limits u/s 44A is desirable by authorizing the Board to fix such limits:

The income-tax is concerned with tax on income and not tax on turnover or receipts. Therefore, the system of monitoring should be related with income. In different trades and different type of trades different profit ratios apply. In case of a whole sellers the margins are low, in case of retailers the margins are higher but turnover is low. In trading of fast moving items rise in turnover is very fast but the profit margins are low. In case of slow moving items turnover is low but margins are high. Depending on geographical consideration also the amount of turnover resulting into taxable income vary. For example, in hilly and interior areas, turnover of stock  is very low but margins are high.

Therefore, it is not proper to prescribe a single limit for sale, turnover or gross receipt for all type of businesses.   

Similarly in case of different professions it depends on the nature of profession as well as organization and nature of services rendered by a professional or his/ their firms. For example, a CA who renders only personalized services will have lower gross receipts whereas a CA or firm of CA which employ many people and carry profession as a commercial concern will have higher receipts. Therefore, in case of professionals also the limit should be fixed on the basis of number of partners in the firm and also keeping in mind the nature of profession.

In view of the above factors, it is desirable that the limits should be raised and revised from time to time. The Board may be authorized to fix limits with power to fix different limits for different type of business/ profession and different type of organization and different limits may be fixed for different  geographical areas after considering expected rate of net profit in any business or profession. 

 For example, the following type of limits can be fixed:

Nature of business or profession	Limit for obtaining TAR Rs. in lakh
Whole seller of grains, cereals, pulses, sugar,  edible oils, oil seeds, industrial raw/ process or consumable material, etc.	1000
Whole seller of general provisions, fruits and vegetable	500
Retailer of general provisions fruits and vegetables	200
Manufacturer of general and competitive items like textiles, edible oil	500
Manufacturer of specialized items like industrial or domestic equipments	200
CA,  engineer, architect etc. whose receipts are generally subject to higher TDS	Rs.50 lakh for each professional as owner (proprietor or partner of the firm). And Rs.30 lakh for each regular employee who is qualified in the profession
Doctors ( they are not subject to TDS except in case of professional fees from  hospitals and institutions) and their margins are also better.	Rs. 25 lakh for each doctor as owner of business and Rs.20 lakh for each doctor employed.