Are You Covered Under Tax Audit

canikhil

Well-Known Member
#1
Well the annual tax return season is just about to start and its the right time for you to evaluate whether you are supposed to anything more than just filing your tax returns.

This posts attempts to cover the issue of applicability of tax audit under various circumstances.

Till a few years ago, applicability of tax audit was a simple issue: If your turnover crosses a particular limit, you were required to get your accounts audited. However, since the introduction of refurbished Section 44AD, the applicability of audit has become a cumbersome issue.

So to make it easier for you all to know whether tax audit is applicable to you or not, I have shared below a few simple examples. (these examples have been shared at an earlier discussion in this forum too)

Case 1.

Turnover : Below Rs 1 cr
Gains/Loss from Business: 240000
Salary Income: No
any other income: Nil

Audit not required as condition of income exceeding maximum exemption limit not fulfilled

Case 2

Turnover: below Rs 1 cr
Gains: Rs 50000 (assumed)
Salary: Rs 250000

Audit required as condition of income exceeding maximum exemption limit and profit less than 8% fulfilled

Case 3

Turnover: Below Rs 1cr:
losses: 5 lakhs (assumed)
Interest Income: Rs 5 lakhs

Audit not required as losses will get set off against Interest income resulting in maximum income not exceeding maximum exempted limit.

In the above case, had the interest income exceeded Rs 7.5 lakhs, the audit would have become applicable.

Case 4

Turnover: Below Rs 1 cr

losses 5 lakhs (assumed)

Interest Income: Rs 2.5 lakhs,

Salary: Rs 3 lakhs

Audit required as only Rs 2.5 lakhs losses are set off against interest and remaining losses are to be carried forward (set off against salary not allowed). So income exceeds exempted limit.

Case 5

Turnover: Below Rs 1 cr

Speculative Losses: 2 lakhs

Interest Income : Rs 2.6 lakhs,

Salary: Ni

Audit required as speculative losses cannot be set off against interest income and both the conditions : income exceeding basic exemption limit and profit less than 8% are satisfied.

Case 6:

Turnover : Above Rs 1 cr. Don't bother. Audit is compulsory.

Kindly note that in the above examples it has been assumed there are no deductions available under section 80C, 80D etc.

Regards

Nikhil Kaushik
 

TradeOptions

Well-Known Member
#2
Thanks a lot canikhil, for providing the valuable information. :)
 
#3
Hi,

Will you explain, what are the meaning of the word " Profit " and the word " Loss " with respect to Income Tax Act ?

In my opinion, this is important because in case you have incurred a " Loss " how does the clause " profit less than 8 % " apply for determining audit applicability.

Here the words " Profit " and " Loss " are the key.

" Profit " and " Loss " are two different terms with different meaning. When one uses the word " Profit " it is clearly different from the word " Loss ".

" Profit " means receiving or gain or earning or receipt or positive cash flow or benefit or something which is more than what you started with.

" Loss " means giving or losing or expense or negative cash flow or charge or penalty or something is less than what you started with.

Income tax philosophy is to give to government part of some thing which you earn or gain or profit or end up with more than what you started with.

The words are " income tax " and not " expense tax ".

Please correct my understanding, if wrong.

Rgds,
Oscar
 

Rehab

Active Member
#5
Nikhil Ji,What IF a CA forces an Audit even if a client doesn't fall under audit case?
many CA's are confused on these issues.Innocent clients has to go auditing.Some CA's dont meet clients,their punters(newbie CA's) handle most of the work and they suggest to go for auditing only.
 

canikhil

Well-Known Member
#6
Rehab,

an auditor can give you an opinion that audit is required....you may feel pressured to go for it...but no one can force to appoint the same auditor or stick to one already appointed. It is within your discretion to whether continue with a CA or not.

Whether audit is applicable or not is a black and white question. So there can't be any grey area here. What is important that you ask the CA to give his opinion in writing with proper legislative and legal back up.
 

mechtrader

Well-Known Member
#7
Hi CA nikhil,

Gr8 informative post by you.
Can you pls explain how do we calculate turnover here assuming we trade only in Futures.

Thanks,
MT
 
#8
Hi,

Will you explain, what are the meaning of the word " Profit " and the word " Loss " with respect to Income Tax Act ?

In my opinion, this is important because in case you have incurred a " Loss " how does the clause " profit less than 8 % " apply for determining audit applicability.

Here the words " Profit " and " Loss " are the key.

" Profit " and " Loss " are two different terms with different meaning. When one uses the word " Profit " it is clearly different from the word " Loss ".

" Profit " means receiving or gain or earning or receipt or positive cash flow or benefit or something which is more than what you started with.

" Loss " means giving or losing or expense or negative cash flow or charge or penalty or something is less than what you started with.

Income tax philosophy is to give to government part of some thing which you earn or gain or profit or end up with more than what you started with.

The words are " income tax " and not " expense tax ".

Please correct my understanding, if wrong.

Rgds,
Oscar
isn't it as as simple as loss is included in less than 8% of turnover!

Don't know where or why you are getting confused.
Hi,

With all due respect to your knowledge, expertise and experience.

I dont want to debate or argue or challenge you. I am genuinly trying to unnderstand the real intention or purpose of the condition " Profit less than 8 % ".

As everybody is convinced "Loss" means " Profit less than 8 %", I will have to follow suit else face critcism and penalty.

But, having said that I fail to understand how should I assume or understand or accept " Loss " as " Profit less than 8 % ".

When reading the IT Act each and every word matters. The use of words, the framing of sentences is what makes the "intention" or "purpose" of the law or rule or regulation clear and unambiguous.

The words "and" "or" "either" "not" "nor" "but" "if" etc. are used freely in the IT Act.

This makes IT rules more confusing and open to interpreation and hence varying opinions and conclusions.

Rgds,
Oscar
 

canikhil

Well-Known Member
#9
the logic of 8% is that govt wanted to capture the small businesses/shops/retailers under tax net. So they offered a simple provision - if your sales are below Rs 1 cr, then just offer 8% of the sales to tax and avoid maintaining books of accounts etc as it is a general complaint that for small businesses maintaining books is a cumbersome task and costly task. This % could have been fixed at 10%, 15%, 20% too. At the end of the day it is an arbitrary number. At the time of amending 44AD, no explanation was given for fixing at 8%. But then income-tax act is full of such provisions, 44BB, 44AE etc etc.

the F&O traders just got caught in the side-effects of this simple provision!

With regards to your problem with loss not being income or form of income, I actually can't help you much! There are certain things that are obvious in life. For eg, when you are driving your car in reverse gear, will you say it is not moving just because it is not going forward! moving forward or backward is a movement and so is the concept of income. Govt wont tax you for negative income but it has a right to ask you to undergo an audit to ensure that you are claiming genuine expenses!
 

canikhil

Well-Known Member
#10
the logic of 8% is that govt wanted to capture the small businesses/shops/retailers under tax net. So they offered a simple provision - if your sales are below Rs 1 cr, then just offer 8% of the sales to tax and avoid maintaining books of accounts etc as it is a general complaint that for small businesses maintaining books is a cumbersome task and costly task. This % could have been fixed at 10%, 15%, 20% too. At the end of the day it is an arbitrary number. At the time of amending 44AD, no explanation was given for fixing at 8%. But then income-tax act is full of such provisions, 44BB, 44AE etc etc.

the F&O traders just got caught in the side-effects of this simple provision!

With regards to your problem with loss not being income or form of income, I actually can't help you much! There are certain things that are obvious in life. For eg, when you are driving your car in reverse gear, will you say it is not moving just because it is not going forward! moving forward or backward is a movement and so is the concept of income. It is just a result of Revenue - Expenses. it can be positive and it can be negative. If Loss is not Profit less than 8% of revenue, then God save tax lawyers and advisors.

Regardless, Govt wont tax you for negative income but it has a right to ask you to undergo an audit to ensure that you are claiming genuine expenses!
 

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