[FAQs] Essential Tax Audit Report Compliance – Deadline | Procedure | Penalties – A.Y. 2024-25

For the Assessment Year 2024-25, the deadlines to submit the tax audit report are outlined below:

These dates are crucial for ensuring compliance with tax obligations.

To successfully file the tax audit report, the following steps should be adhered to:

1. PAN Verification – Initially, the assessee must possess a Permanent Account Number (PAN). This is particularly crucial for non-corporate assessees who might not already have a PAN. If an assessee lacks a PAN, the e-filing portal will not permit the uploading of the tax audit report. Therefore, tax auditors must verify the assessee’s PAN before accepting any tax audit assignments. If the assessee does not have a PAN, tax auditors are advised to inform the assessee about potential e-filing delays due to this and clearly state this responsibility in the engagement letter.
2. Document Preparation and Signing – The tax auditor must complete and sign the Tax Audit Report (TAR) forms 3CA/3CB and 3CD in hard copy. The ‘Date of Signing Tax Audit Report’ must be entered in the e-filing utility when uploading these documents. Note that the date of signing may differ from the date of uploading.
3. E-Filing Procedure – The assessee must authorize a Chartered Accountant in their e-filing account, who will then e-file the audit report using Form 3CA/3CB and the particulars in Form 3CD in JSON format. This submission should include the audited financial statements and must be done via https://www.incometax.gov.in using the Chartered Accountant’s digital signature.
4. Approval Process – After the submission, the assessee needs to approve the filed forms via their e-filing account. The approval date is recognized as the official filing date of the Audit Report. If the assessee fails to approve the forms, the tax audit report is considered pending and not filed.

Following these procedures ensures compliance and timely filing of the tax audit report with the Income Tax Department.

A Chartered Accountant in practice is permitted to conduct 60 tax audits per assessment year.

The 2023 Guidance Note omits an illustration from Para 9.31 of the 2022 edition regarding the limit on the number of tax audit assignments that a firm or LLP of Chartered Accountants can accept. The omitted illustration suggested that if a firm consists of 10 partners, they could collectively sign 600 tax audit reports in any distribution, even allowing for one partner to sign all 600 if the other nine do not sign any.

However, this depiction might lead to the mistaken belief that a CA could be a partner in multiple firms, aggregating to a potential 720 audits annually across 12 firms, or 780 if they also run a proprietary firm. This interpretation is incorrect due to the following stipulations:

• The scenario only holds if none of the 10 partners owns a proprietary firm or holds partnerships in other CA firms.
• The CA partners in the scenario have not used any of their individual quotas of 60 audits in other firms or in their proprietary practices.

In reality, every CA in full-time practice is restricted to 60 tax audit assignments per financial year across all engagements, whether in a proprietary firm or as a partner in CA firms/LLPs. The assignments must be apportioned among the CA’s engagements so that the total does not exceed 60. For instance, if CA X partners with CA firms A&Co and B&Co, and in his own practice, where A&Co has accepted 25 audits, B&Co 15, and he has undertaken 9 in his proprietary practice, he can only accept 11 more audits through any additional partnerships like C LLP.

Further clarification from the ICAI specifies that audits mandated under any law requiring an audit report as prescribed by Section 44AB, if the auditee’s turnover falls below the specified limit in Section 44AB, are not counted towards the 60 audit cap. Additionally, the guidelines updated on August 23, 2018, state that audits under Sections 44AD, 44ADA, and 44AE, which pertain to Presumptive Taxation Schemes, are also excluded from the cap on tax audit assignments.

In the case of Shaji Poulose v. Institute of Chartered Accountants of India [2024] 162 taxmann.com 685 (SC), the Supreme Court confirmed the Institute of Chartered Accountants of India’s (ICAI) imposition of a 60 tax audit limit per CA, effective from April 1, 2024. The Court provided several reasons for its decision:

• Privilege vs. Right – The Court clarified that performing mandatory tax audits under Section 44AB is a privilege, not a fundamental right of a Chartered Accountant. Consequently, the limit of 60 tax audits per CA does not infringe on the fundamental right to practice their profession, as defined under Article 19(1)(g) of the Constitution.
• Nature of Tax Audits – Tax audits are not an inherent or essential part of a Chartered Accountant’s duties that could be classified as a fundamental right. The introduction of Section 44AB was primarily to aid the Revenue Department, making tax audits a statutory privilege rather than a right.
• Future Legislative Changes – The Court noted that future technological advancements or other factors might lead Parliament to remove the tax audit requirement by repealing Section 44AB. Such a change would not reduce the rights granted under Article 19(1)(g) since these audits are not a fundamental right.
• Scope of Privilege and Restrictions – When a privilege granted by statute can be completely withdrawn, it is permissible to impose reasonable restrictions on this privilege. The restriction of audit limits is considered less severe than a total prohibition.
• Legal Proceedings and Equity – The Court dismissed the special leave petition challenging the Madras High Court’s judgment as it was deemed ineffective. The Court recognized that only the writ petitioners had been disciplined for exceeding the audit limits during a period of legal uncertainty, which arose from the High Court quashing earlier guidelines and the interim stay of its decision. Meanwhile, approximately twelve thousand other Chartered Accountants who had also exceeded these limits faced no action, highlighting a disparity in the enforcement of guidelines. This recognition of selective enforcement and legal ambiguity led to the quashing of disciplinary proceedings against the petitioners.

Conclusion of the Court’s Decision:

• The court affirmed that Clause 6.0, Chapter VI of the Guidelines issued on August 8, 2008, along with its subsequent amendments, are lawful and do not infringe upon Article 19(1)(g) of the Constitution. These are seen as reasonable restrictions on the right to practice as a Chartered Accountant, justified under Article 19(6) of the Constitution.
• However, the enforcement of Clause 6.0, Chapter VI of the Guidelines and its amendments, will be delayed until April 1, 2024.
• As a result, all legal actions initiated under the questioned Guideline concerning the petitioners and other Chartered Accountants in similar positions are hereby nullified.
• The respondent-Institute retains the discretion to increase the allowed number of tax audits per Chartered Accountant under Section 44AB if it considers it appropriate.
• The court also grants the petitioners and any other members of the respondent-Institute the opportunity to submit representations in this regard. These may be reviewed if the respondent-Institute opts to revise the Guidelines according to the discretion noted in (d).
• The writ petitions and all related cases are resolved in accordance with the terms outlined above.

Section 44AB specifies that a tax audit must be conducted by a Chartered Accountant, but it does not require that this accountant also be the statutory auditor appointed under the Companies Act or similar statutes. Therefore, either the existing statutory auditor or another Chartered Accountant in full-time practice can perform the tax audit. The choice to continue with M/s ABC or to engage a different auditor for the tax audit is at the discretion of XYZ Private Limited.

The ICAI’s Guidance Note on Tax Audit advises that if the statutory auditor is also tasked with the tax audit, it is beneficial to conduct both audits simultaneously.

Regarding the Form 3CA report, it should document that the statutory audit was performed by a Chartered Accountant, or another auditor as required by the relevant Act. This report must include the audit report, the audited profit and loss account, balance sheet, and any other documents required by the act, which are annexed to Form No. 3CA. If the tax auditor is different from the statutory auditor, the report should include the statutory auditor’s name. If the statutory auditor is also the tax auditor, it should be clearly stated that they have conducted both audits under the provisions of the relevant Act.

Chartered Accountants who hold a full-time Certificate of Practice are required to register on the UDIN Portal (www.udin.icai.org) to generate a Unique Document Identification Number (UDIN). The UDIN is an 18-digit unique number that must be generated for every document certified or attested by practicing Chartered Accountants. It has been made mandatory for all corporate and non-corporate audit, attest, and assurance functions.

For tax audits conducted under Section 44AB, the auditor must generate an appropriate UDIN and update it on the income tax e-filing portal. This UDIN must be generated and updated within 60 calendar days following the date of the tax form submission on the e-filing portal.

Para 9.38 of the 2022 GN stated,

“If the UDIN for any audit report/ certificate is not updated within the 60 days provided for the same, the department will treat such audit report/certificate as invalid submission”.

The 2023 GN omits this sentence. No provision in the Income-tax Act treats audit reports or certificates as invalid on not updating UDIN. This might be the reason for omitting the relevant sentence.

The 2023 GN also omits another sentence from Para 9.38 of 2022 GN, stating,

“The verification of UDIN is in line with the ongoing initiatives of the Income Tax Department (ITD) for integrating with other government agencies and bodies”.

According to the ‘2022 GN’ issued by the ICAI, a tax audit report under Section 44AB is not typically subject to revision. However, there are instances where revision might be necessary, including:

• The revision of a company’s accounts post-approval at the annual general meeting.
• Changes in law, for example, retrospective amendments.
• Changes in interpretation, such as new CBDT Circulars or judicial decisions.

Once filed, revisions to the tax audit report are permissible based on the aforementioned circumstances.

Moreover, Rule 6G(3) specifies that a tax audit report submitted under this rule may be revised by obtaining a revised audit report from an accountant. This revised report must be signed, verified, and submitted before the end of the relevant assessment year, particularly if payments made after the original submission necessitate recalculations under Sections 40 or 43B.

In scenarios where payments related to tax deductions at the source under Sections 40(a)(i)/(ia) or payments concerning tax, duty, cess, or fee under Section 43B are made after the audit report but before the filing deadline of Section 139(1), the tax auditor may revise the audit report in accordance with Rule 6G(3).

Para 15.13 of 2022 GN stated,

“However, it is not mandatory to revise tax audit report in the circumstances mentioned in Rule 6G(3). If the tax audit report is revised, while revising the tax audit report, prescriptions in ‘Guidance Note on Revision of the Audit Report’ should be considered.”

Notably, the ‘2023 GN’ no longer includes this provision, and the CBDT has also notified[1]  the necessity of revising the audit report if post-report payments affect disallowances under Sections 40 or 43B.

It is essential to recognize that as per Section 143(1)(a)(iv), revisions to the tax audit report are crucial to prevent disallowances or additions during the processing of returns filed under Section 139 or in response to notices under Section 142(1).

Tax auditors are advised to inform their clients through the engagement letter that:

• Clients should settle any dues under Section 40(a)(i)/(ia) or Section 43B prior to the signing of the tax audit report to ensure all payment details are included in the report.
• Any revised tax audit reports that cover payments made between the original report date and the dues settlement date will incur additional audit fees.

The e-filing utility provides an option to select “Original” or “Revised” in the “Filing Type.” Tax auditors should choose “Revised” when issuing a revised tax audit report.

Yes, there is a penalty for the late filing of an audit report under Section 271B of the Income Tax Act. If a person fails to have their accounts audited or to furnish the audit report as required, the Assessing Officer has the authority to impose a penalty. The penalty will be the lesser of the following two amounts:

1. 0.5% of the total sales, turnover, or gross receipts in business for the year; or
2. ₹1,50,000.

However, it is important to note that no penalty will be imposed if the person can demonstrate that the failure to comply was due to a reasonable cause.

Under Section 271B of the Income-tax Act, a penalty can only be imposed if the assessee fails to get their accounts audited as required by Section 44AB, and there is no reasonable cause for such failure. The term “reasonable cause” is not explicitly defined within the Act. Initially, the burden lies with the assessee to demonstrate the existence of a reasonable cause for their failure to comply with the auditing requirements. Subsequently, it is the responsibility of the assessing officer to evaluate whether the assessee’s explanation constitutes a reasonable cause.

A reasonable cause is generally understood as a circumstance that would prevent an individual of average intelligence and ordinary prudence from fulfilling their obligations under normal conditions, without negligence, inaction, or lack of good faith. For example, in the case of [Azadi Bachao Andolan v. Union of India [2001] 116 Taxman 249 (Delhi)]. It was described as a cause that leads an ordinarily prudent person to believe that their actions were appropriate under the given circumstances.

‘Reasonable cause’ in the context of human action refers to conditions that would compel a person of average intelligence and ordinary prudence to act in a certain way. This concept is often likened to probable cause, signifying an honest belief based on reasonable grounds. Specifically, it pertains to the existence of circumstances that, if assumed true, would logically lead any ordinarily prudent and cautious individual in a similar position to conclude that their actions were appropriate. This definition was exemplified in the case of [Woodward Governors India (P.) Ltd. v. CIT [2001] 118 Taxman 433 (Delhi)].

Here are examples where penalties under Section 271B were waived due to “reasonable cause”:

• Books of account were damaged by a flood [2017] 85 taxmann.com 274 (Mumbai – Trib.)
• An illness of the assessee’s auditor caused a delay in filing the audit report [2013] 35 taxmann.com 235 (Madras)
• A bona fide interpretation of ‘turnover’ based on expert advice was accepted [2009] 223 CTR 152 (Gujarat)
• Accounts were unavailable due to seizure by the customs department [2003] 126 Taxman 28 (Rajkot)(MAG)
• Derivative turnover computed according to the ICAI Guidance Note did not exceed the threshold [2022] 143 taxmann.com 318 (Rajkot – Trib.)
• Future and option turnover calculated per ICAI Guidance Note [2023] 147 taxmann.com 221 (Mumbai – Trib.)
• A delay by the auditor occurred even though the assessee had submitted books on time [CIT v. U.P. Rajya Sahkari Evam Bhoomi Vikas Bank Ltd., (2013) 35 taxmann.com 471 (All)]

These instances highlight various scenarios where the penalty under Section 271B was waived, providing clarity on what may be considered as a reasonable cause.

Paragraph 13.2 of the 2022 Guidance Notes (GN) stated that

“Section 143 of the Companies Act 2013 grants auditors the authority to request books of account, information, documents, explanations, etc., and to access all books and records. No such powers are conferred upon tax auditors appointed under Section 44AB.”

However, the 2023 GN has removed the statement,

“No such powers are given to the tax auditor appointed under section 44AB” from Paragraph 13.2.

There is indeed no provision within the Income Tax Act that grants tax auditors similar powers as those outlined in Section 143(1) of the Companies Act, 2013. The reason for the omission of this specific sentence in the latest guidance notes remains unclear.

Whether a tax auditor can be held accountable for not finishing and submitting the tax audit report by the stipulated deadline is contingent on the specific details of each case. According to Para 7.2 of the 2022 Guidance Notes (GN):

• The responsibility of the tax auditor depends on the individual facts and circumstances surrounding each case.
• Should there be any undue delays caused by the tax auditor, they may be answerable to the Institute, particularly if a complaint is lodged by the client.
• On the other hand, if the delay in completing the audit arises due to issues on the client’s part, the tax auditor is not considered responsible.
• As a best practice, chartered accountants are advised against accepting audit assignments that they cannot complete within the prescribed timeframe.

It is important to note that the 2023 Guidance Notes have omitted these opinions, suggesting a shift in the regulatory focus or interpretation, though the reasons for this change are not detailed in the guidance.

Before initiating entries in Form No. 3CD on the tax audit report e-filing utility, it is essential to first complete Form No. 3CA or Form No. 3CB, as relevant. Access to Form No. 3CD is contingent upon the completion of Form No. 3CA or Form No. 3CB. This preliminary step requires the entry of the Permanent Account Number (PAN) and the Assessment Year (AY), and specification of whether the tax audit report is original or revised. The e-filing utility does not permit the filling and uploading of tax audit reports without the PAN, which, once entered, automatically populates in Form No. 3CA or Form No. 3CB and in Clause 3 of Form No. 3CD.

Therefore, the process should begin with the entry of PAN and AY, followed by completing the necessary fields in Form 3CA or Form 3CB to unlock access to Form 3CD, and then proceed to fill out Form 3CD.