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September 17, 2021

In case of Future and options loss? Is Tax audit Mandatory

by Mahesh Mara in Income Tax

In case of Future and options loss? Is Tax audit Mandatory

There are various kinds of audits being conducted under different laws such as company audit, statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’. Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity.

As per these provisions, tax audit shall be conducted by a Chartered Accountant who ensures that the taxpayers have maintained proper books of account and complied with the provisions of the Income-tax Act. Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department in Form no. 3CA/3CB and Form no. 3CD along with the income tax return.

What is Tax Audit under section 44AB?

  • Tax Audit refers to the independent verification of the books of accounts of the assessee to form an opinion on the matters related to taxation compliances carried out by the assessee.
  • While preparing the books of accounts of the business or profession for the purpose of income tax filing, the assessee has to comply with the provisions of Income-tax Act, 1961.
  • Tax audit can be conducted by a Chartered Accountant who holds the certificate of practice and is in full-time practice.
  • However certain classes have been defined who cannot conduct tax audit under section 44AB. 
  • The tax auditor (CA) carries out a systematically examination of books of account as per the formats prescribed by the department. 

What assessee’s are required to get their accounts audited?

Category of personThreshold limit exceeding which tax audit is mandatory
The person carrying on businessTotal sales / turnover / gross receipts exceed Rs 1 Crore in any previous year.
The person carrying on professionGross receipts exceed Rs 50 Lakhs in any previous year.
The person carrying on business covered under section 44AE or section 44BB or section 44BBBIncome claimed by the person is lower than the deemed profit under respective sections in any previous year.
The person carrying on profession covered under section 44ADAIncome claimed by the person is lower than the deemed profit and income exceeds the specified threshold exemption limit in any previous year.
The person carrying on business to whom provisions of section 44AD (4) are applicableIncome exceeds the specified threshold exemption limit in any previous year.

What is the effect when tax audit is not conducted under section 44AB?

Section 271B of the Income Tax Act imposes a penalty on taxpayers for not getting accounts audited or failure to furnish a tax audit report. The penalty under Section 271B is imposed on defaulting taxpayers for not getting the accounts audited or failure to submit to the Income Tax Department the report furnished by the tax auditor. The penalty is applicable exclusively if the taxpayer is unable to state a reasonable cause for the lapse.

Is it compulsory to do Tax audit in case of F&O transactions?

First of all it is important to note that futures and options (F&O) transactions are treated as business income under the Income tax act. Hence, If your turnover from F&O transactions is less than INR 2 crore, you are eligible to use Section 44AD. If your actual profit is less than 6% of turnover or you have made a loss or If you don’t show 6% of turnover as profit, you are an “eligible assessee” who has not declared profits from business in accordance with Section 44AD. Hence, you will need to get a tax audit done.

Note: Turnover is calculated by adding the following:

  • The total of positive and negative or favorable and unfavorable differences
  • Premium received on sale of options
  • Reverse trade difference

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