[Opinion] Does ‘Tax Audit’ u/s 44AB apply to Business Income of Charitable Trusts?

Dr. Manoj Fogla, CA Suresh Kejriwal & CA Tarun Kumar – [2022] 142 taxmann.com 125 (Article)

1. Introduction

Section 44AB of the Income-tax Act, 1961 (herein referred to as ‘the Act’) provides for mandatory audit of books of account of an assessee who is engaged in business or profession. The audit report under Section 44AB shall be furnished in Form No. 3CA/3CB-3CD. In this article, we have analysed the applicability of ‘Tax Audit’ under section 44AB to Charitable and Religious institutions registered under section 12AB. These institutions are subject to Sections 11 to 13, which are special provisions governing the taxation of charitable or religious institutions.

On the study of the relevant provisions of the Act applicable to institutions registered under section 12AB, it seems that the requirement of Tax Audit does not exist even if these institutions are engaged in incidental business activities under section 11(4A) or even holding businesses as property of trust under section 11(4) of the Act.

2. Controversy surrounding the issue

This issue remains controversial and debatable due to the contradictory requirements in the Income-tax Rules and the interpretations by recognised bodies such as the Institute of Chartered Accountants of India (ICAI).

The following requirements suggest the relevance and applicability of ‘Tax Audit’ to charitable institutions.

2.1. Requirement to Submit Audit Report along with Form 10A/10AB

The application for registration of trust is required to be filed in Form 10A or Form 10AB. Form 10A shall be filed for provisional registration of a new trust under Section 12AB. Application in Form 10AB shall be filed for the renewal of registration of a trust already registered under Section 12AB. These forms shall be filed electronically under DSC or EVC.
Rule 17A of the Income-tax Rules 1962 provides the list of documents to be accompanied by the application in Form 10A or 10AB. It requires the submission of audit report under Section 44AB in the following cases:

• • where a business undertaking is held by the applicant as per the provisions of sub-section (4) of section 11 and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business undertaking relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and self-certified copy of the report of audit as per the provisions of section 44AB for such period; [Emphasis Supplied]
  • where the income of the applicant includes profits and gains of business as per the provisions of sub-section (4A) of section 11 and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and self-certified copy of the report of audit as per the provisions of section 44AB for such period;[Emphasis Supplied]

Thus, Form 10A and Form 10AB require the audit report under Section 44AB as an attachment to the form while filing an application for registration under Section 12AB.

2.2. Guidance Note on Audit of Public Charitable Institutions

The ICAI has issued a ‘Guidance Note on Audit of Public Charitable Institutions under the Income-tax Act, 1961’

We have reproduced Para 9.8 on Page 16 of this Guidance Note:

It may be noted that mere filing of the audit report under section 12A(1)(b) may not fulfill the requirement of filing tax audit report in appropriate cases. For example, where an institution is carrying on a business whose objects are incidental to the attainment of the objectives of the institution and separate books are maintained in respect of such business, audit under section 44AB of the Act may become necessary if the sales, turnover or gross receipts from such business exceed Rs.40 lakhs. In that case the institution has to get its accounts audited under section 44AB and furnish the audit report along with return of income before the specified date. [Emphasis Supplied]

So the guidance note issued by ICAI suggests the filing of an audit report under Section 44AB if the charitable institution is carrying on a business incidental to the attainment of the objectives of the institution and separate books are maintained in respect of such business and turnover from such business exceeds the specified limit.

2.3. Guidance Note on Tax Audit under Section 44AB

The ICAI has issued a revised edition of the ‘Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961′. This is effective for the A.Y. 2022-23 and the subsequent years.

We have reproduced Para 6.1 on Page 22 of this Guidance Note:

A question may arise in the case of an assessee whose income is not chargeable to income-tax by reason of a specific exemption contained in the law or otherwise, as to whether he is required to get his accounts audited and to furnish such report under section 44AB. Such cases may cover those assessees who are wholly outside the purview of income-tax law as well as those whose income is otherwise exempt under the Act. It is felt that neither section 44AB nor any other provisions of the Act stipulate exemption from the compulsory tax audit to any person whose income is exempt from tax. This section makes it mandatory for every person carrying on any business or profession to get his accounts audited where conditions laid down in the section are satisfied and to furnish the report of such audit in the prescribed form. A trust/association/institution carrying on business may enjoy exemptions as the case may be under sections 10(21) or 10(23A) or 10(23B) or section 10(23BB) or section 10(23C) or section 11. A co-operative society carrying on business may enjoy deduction under section 80P. Such institutions/associations of persons will have to get their accounts audited and to furnish such audit report for purposes of section 44AB if their turnover in business exceeds the prescribed limit (Presently Rs. 1 crore and Rs 10 crore in certain specified cases). But an agriculturist, who does not have any income under the head “Profits and gains of business or profession” chargeable to tax under the Act, need not get his accounts audited for purposes of section 44AB even though his total sales of agricultural products may exceed the prescribed limit). [Emphasis Supplied]

The guidance note on Tax Audit suggests that even if the business income of the trust is to be computed under Section 11, it will have to get its accounts audited and furnish such audit report for purposes of section 44AB if its turnover in business exceeds the prescribed limit.

Therefore, we can see that the recently amended rule 17A(2), the ICAI Guidance Note on Audit of Public Charitable Institutions, and Guidance Note on Tax Audit under Section 44AB suggest that the Tax Audit is a requirement applicable to Charitable Institutions which are governed by provisions of Sections 11 to 13. However, this requirement of ‘Tax Audit’ provided under the Income-tax Rules and the position taken in the Guidance Note publications of ICAI doesn’t seem consistent with the law applicable to charitable institutions.

In the coming paragraphs, we have analysed the various provisions of the Act and legal jurisprudence to decipher the applicability of the tax audit to charitable institutions.

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