Disqualifications as Tax Auditor under section 44AB – Income Tax Act

Are you familiar with the term ‘tax audit’? Well we all know the concept behind auditing which is to carefully review and inspect financial records to ensure compliance with the Income Tax Act 1961 and other relevant related laws, and detect any fraudulent activities. It is mandatory to conduct an audit of the accounts of individuals belonging to specific professions or Tax Auditor whose businesses exceed a certain turnover as per Section 44AB of the Income Tax Act, 1961 by a certified chartered accountant (CA). Now we will have a look into who is a tax auditor & Disqualifications as Tax Auditor under section 44AB – Income Tax Act.

Who is a Tax Auditor?

An expert who assesses financial documents to ascertain whether they abide by relevant laws is known as a tax auditor. Accounting principles are used by all tax auditors in the course of their work. 

To be eligible to work as a tax auditor under the Income-tax Act of 1961, a person must be a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949. In addition, the person must have a current certificate of practice issued under sub-section (1) of section 6 of the Chartered Accountants Act, 1949. This guarantees that tax audits can only be performed by licensed experts who possess the required qualifications.

Role of a Tax Auditor

The role of the tax auditor during tax audit is to accomplish the following goals:

• Assure that the accounting books are correctly maintained and verified by the tax auditor.
• Following a systematic audit of the accounting records, the tax auditor discovered errors in reporting.
• Report required data, including tax write-offs and compliance with several Income Tax Act rules, among other things.

Who must have a Tax Audit conducted?

The tax audit limit for professionals includes receipts above Rs. 50 lakhs. The professionals here include an architect, interior decorator, lawyer, engineer, and doctor. 

The persons are required to conduct a tax audit if they choose not to use the presumptive methods described in sections 44AD, 44ADA, or 44AE of the Income-tax Act of 1961, reach a particular income threshold, maintain financial records, and receive income from a business or profession. Turnover limit for tax audit

• A business owner whose annual sales or turnover topped Rs. 1 crore in the prior year.
• A person who is employed if their gross annual revenue was more than Rs. 50 lakhs.

The business person threshold has been increased from Rs 1 crore to Rs 5 crore in the following situations to lessen the compliance load on SMEs:

• The total of all cash receipts for the year prior will not surpass 5% of all payments, and 
• The total of all cash receipts for the year prior does not surpass 5% of all receipts.
• A tax audit is also required for someone who previously chose to include profits and gains from their business on a deemed basis under section 44AD and who hasn’t had a tax audit for five years, but who has opted out of such deemed income and whose income exceeds the threshold for incurring tax liability.
• If a person has chosen to use the presumptive tax under section 44ADA and their income exceeds the tax liability ceiling while still being less than the presumed profits.
• The assesses choosing the presumptive tax under sections 44AE, 44BB, and 44BBB.

Who can appoint a Tax Auditor?

The board of directors has the authority to designate tax auditors for the company. The CEO or CFO, among other executives, may also receive this authority from the board. A partner, the owner, or someone designated by the assessee may appoint auditors for a company or piece of real estate. Furthermore, in order to do a tax audit, the taxpayer may choose two or more chartered accountants as joint auditors. If all of the joint auditors agree with the audit report in this instance, then they all need to sign it. If there are disagreements, the auditor needs to provide a different report with his own opinion expressed separately.

Disqualifications as Tax Auditor

The Disqualifications as Tax Auditor are as follows:

Firms/AOP/HUF

• The assess in no other case including firms, association of persons, Hindu undivided families can appoint the assesse himself or any partner of the firm, member of the association or family as a tax auditor. 
• The employees and officers of the assesse cannot be the tax auditors. 

Trusts

Trusts or institutions may not appoint any person referred to in clauses 3 (a), (b), (c) and (cc) of sub-section (3) of section 13 as their tax auditor (author of the trust, person who contributed materially to the trust, family member HUF author of the trust fund, agent or manager, relatives of the above persons and any concern in which the above persons have a substantial interest).

 Individuals

• For natural persons who do not fall into the above categories, the tax auditor must be a person who is qualified to verify the return according to S.139 in accordance with the provisions of S.140.
• Individuals who are partners or employed by an officer or employee of the assessee are also disqualified.
• The law prohibits persons who have been convicted by a court for the crime of fraud and ten years have not passed since the date of conviction, from performing the activities of tax auditors.
• As per ICAI, the other disqualification of tax auditor can be seen as follows-
• A close business relationship of the auditor or his immediate family member with the audited entity may create a threat of self-interest or intimidation by his management.
• The existence of a close business relationship is considered a criterion for excluding an auditor, and for a business relationship to be considered a close business relationship, there should be a significant financial interest or said business relationships are significant to the client or its management.

As per ICAI, the tax audit ceiling limit for chartered accountants i.e. the number of tax audit reports that can be filed by chartered accountants is 60.

What is included in a Report from a Tax Audit?

The tax auditor must file his report using the appropriate form, which can be either Form 3CB or Form 3CA. Form No. 3CA is filed when an individual conducting business or practising a profession is already required by another law to have their accounts audited.
If another law exempts someone who owns a business or practices a profession from having their accounts audited, they must use Form No. 3CB.
The tax auditor must supply the required information on form No. 3CD, which is a part of the inspection report, in the event of any of the aforementioned inspection reports.

Conclusion

Hope this article has given you an insight on the Disqualifications as Tax Auditor stated in the Income Tax Act of 1961. It plays a very crucial role in upholding integrity within the Indian taxation regime. By encouraging honesty and transparency in financial reporting, these disqualifications aim to establish a strong foundation for the effective execution of tax auditors’ responsibilities. This comprehensive list ensures that tax auditors possess the necessary qualifications, maintain independence, and uphold transparency.