LLPs AUDIT MANDATES FOR THE FISCAL YEARS 2022–23 AND 2023–24

LLPs AUDIT

LLPs AUDIT MANDATES FOR THE FISCAL YEARS 2022–23 AND 2023–24

LLPs AUDIT

Tax Audit by LLP

Objective

An LLP’s audit largely checks the completeness and quality of the financial and tax-related data disclosed in the LLP’s tax returns. Ensuring conformity with tax rules and regulations is the key goal.

Mandatory Prerequisite

The Income Tax Act of 1961 mandates that LLPs perform tax audits if certain conditions are met, including exceeding a predetermined turnover threshold. LLPs that meet these requirements are required to undergo the tax audit.

Carried out by

A competent chartered accountant or tax expert often conducts a tax audit, which involves reviewing the LLP’s financial documents and tax reports to determine its taxable revenue and spot any inconsistencies.

Report

A tax audit report, also known as Form 3CD, is produced by the auditor at the conclusion of the audit and includes numerous details on the audit’s findings, tax compliance, and other pertinent information.

LLP's audit

LLPs Audit

Objective

For the purpose of determining accuracy, fairness, and compliance with statutory obligations, a statutory audit of an LLP entails a more thorough investigation of its financial statements and accounting records.

Essential Requirement

According to the Limited Liability Partnership Act of 2008 and its implementing Rules, LLPs must perform statutory audits. No matter how much business they do, LLPs must participate in a statutory audit.

Carried out by

The LLP’s partners employ an independent certified chartered accountantto undertake a statutory audit. To give an unbiased evaluation, the auditor’s independence is crucial.

Report

The auditor delivers a Statutory Audit Report following the completion of the statutory audit, which contains an opinion on whether the financial statements provide a true and fair assessment of the LLP’s financial situation and if they are in compliance with applicable laws and accounting standards.

Professionals

A tax audit is necessary if a professional’s gross receipts are greater than Rs. 50 lakhs. A tax audit is necessary if a professional asserts a profit that is lower than the allowed threshold and is eligible for the presumptive taxation plan under Section 44ADA.

Penalty for Noncompliance with Tax Audit

A penalty of 0.5% of the total sales, turnover, or gross revenues, or Rs. 1,50,000, whichever is less, would be assessed if a tax audit is applicable and the assessee fails to have their accounts audited.

Penalty for Noncompliance with Tax Audit

A penalty of 0.5% of the total sales, turnover, or gross revenues, or Rs. 1,50,000, whichever is less, would be assessed if a tax audit is applicable and the assessee fails to have their accounts audited.

Income Tax Return Filing Deadlines for LLPs (FY 2022-23)

LLPs must submit their income tax returns by July 31st even if a tax audit is not necessary. LLPs needing a tax audit are required to submit their income tax returns by September 30. – Even LLPs that did not conduct any activity during the financial year are required to file Nil Income Tax Returns.

Examples of the requirements for LLP audits

Demands for LLP Financial Audits

According to the LLP Act and Income Tax Act, XYZ LLP must have its financial records audited if it earned yearly revenues of Rs. 45 lakhs in the prior fiscal year.

 

Application of Tax Audits for AY 2023–24

Business Example

ABC Enterprises would not need a tax audit if they had a turnover of Rs. 1.2 crores in the assessment year 2023–2024 and their cash transactions made up less than 5% of the total. Regardless of the percentage of cash transactions, they would need a tax examination if their revenue exceeded Rs. 10 crores.

Professional Example

During the assessment year, Dr. Smith, a physician, made gross receipts of Rs. 60 lakhs. Dr. Smith would need a tax audit in this situation because their professional gross receipts surpassed Rs. 50 lakhs.

LLPs Audit

Penalty for Failure to Comply with Tax Audit

Imagine that XYZ Traders, a partnership firm, was qualified for a tax audit but chose not to have their books examined. If their annual sales totaled Rs. 2 crores, they would be subject to a fine of 0.5% of Rs. 2 crores, or Rs. 1,00,000, because this sum is less than the Rs. 1,50,000 minimum penalty threshold.

 

Read More: The Top 10 Red Flags for a Tax Audit

Deadlines for LLPs to file their income tax returns (FY 2022-23)

1. DEF LLP must submit their income tax returns by July 31st even if they did not need a tax audit for the fiscal year 2022–2023 (if required).

2. On the other hand, GHI LLP would have to submit their income tax returns by September 30th if they were subject to a tax audit for the same fiscal year.

3. JKL LLP must still submit Nil Income Tax Returns even if they had no commercial activity throughout the fiscal year.

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Applicability of Tax Audit under section 44AB or 44AD or 44ADA

Applicability of Tax Audit under section 44AB or 44AD or 44ADA

Audit of accounts of certain persons carrying on business or profession:

Section 44AB, initially introduced by Finance Minister Shri Pranav Mukharji in the Finance Act, 1984, taking effect from April 1, 1985. There was a lot of opposition to this section at the time, from business people, professionals, and especially Tax Advocates and Tax Practitioners, because auditing books of account is required of every person carrying on business if his total sales, turnover, or gross receipts, as the case may be, in business exceeds or exceeds rupees Forty Lakhs, and for professional persons whose gross receipts exceed or exceed rupees Forty Lakhs. Many representations were made, and even writ petitions were filed in various High Courts, however, section 44AB remained unchanged, and no revisions were made until March 31, 2010.

With effect from April 1, 2011, the ceiling on gross turnover for businesses has increased to rupees sixty lakhs, and the limit for professionals has increased to rupees fifteen lakhs.

With effect from April 1, 2017, the ceiling on gross turnover for businesses has been raised to Rs. One Crore, while the maximum for professionals has been raised to Rs. Twenty-five Lakhs.

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With effect from April 1, 2020, i.e. the Assessment Year 2020-21 and onwards, a proviso to section 44AB(a) stipulates that in the instance of a person whose:

  • 1. The total amount received in cash during the preceding year, including sums received for sales, turnover, or gross receipts, does not exceed 5% of the amount; and

  • 2. The total of all payments made in cash during the preceding year, including payments for costs, does not exceed 5% of the amount,

Then such a person is exempt from having their accounts audited if their total sales, turnover, or gross receipts do not exceed Rs. 5 crores, as opposed to Rs. 1 crore.

Similarly, if a person’s gross profits in a profession exceed Rs. 50,00,000 in any prior year, he or she must have his or her accounts audited [Section 44AB(b)]. From the foregoing, we can deduce that the time limit for having books of accounts audited varies depending on the type of business or profession.

Assume that in the previous year, certain individuals were involved in both business and profession at the same time. Now, in the instance of an Assessee who is both a business owner and a professional, the question may arise as to what the limit is for obtaining books of accounts audited under section 44AB.

It is preferable to first discuss the boundaries set in the case of a business, and then the limits set in the case of a profession.

u/s 44AB/44AD Business Turnover:

Less than Rs. 1,00,00,000 in turnover, sales, or gross receipts Although section 44AB does not apply, he may elect to use section 44AD and declare revenue according to his books of account. This option should be chosen for the next five years. Section 44AB applies if income exceeds the maximum taxable amount.

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If your turnover, sales, or gross receipts exceed Rs. 1,00,00,000, you have the choice of opting for section 44AB or section 44AD. These provisions do not apply if total sales, turnover, or gross receipts and payments for expenditure during the previous year do not exceed 5% of total sales, turnover, or gross receipts and payments for expenditure during the preceding year, as the case may be.

Gross receipts for professionals u/s 44AB/44ADA

In reference to the assessment year 2017-18 and on thereafter, Section 44ADA provides for the computation of profit and gain on profession on a presumptive basis. In the case of an assessee who is a resident of India and who is engaged in a profession referred to in section 44AA(1) and whose total gross receipt does not exceed Rs. 50,00,000 in a previous year, a sum equal to 50% of the assessee’s total gross receipt in the previous year on account of such profession, or, as the case may be, a sum higher than aforesaid sum claiming to have been earned by the assessee.

Please keep in mind that if an assessee’s professional receipts are Rs. 60,00,000 and his total sales, turnover, or gross receipts in business are Rs. 35,00,000, he will need to have his books of accounts audited for both his profession and his business because the gross receipts from the profession exceed the Rs. 50,00,000 limit.

If, on the other hand, the professional receipts are Rs. 27,00,000 and the total sales turnover or gross receipts from the business are Rs. 95,00,000, he will not need to have his books of accounts audited under the above section because his gross professional receipts, as well as total sales, turnover, or gross receipts from the above business, are less than the prescribed limit of Rs. 1,00,00,000.

There are various types of business professions that are related to each other.

  • A doctor who does medicine while also selling pharmaceuticals;
  • An architect who creates building designs and sells construction materials.
  • A teacher who gives lessons as well as publishes and sells books.

Tax Audit – Limits & Applicability, FnO cases

Tax Audit – Limits & Applicability, FnO cases

S-44AB of IT Act, 1961 (as amended through Finance Act, 2021)

LIMITS ARE AS UNDER:-

1. Business where turnover exceeds Rs. 1 Cr in any PY
Limit is Rs. 10 Cr where aggregate receipts/ payments in cash do not exceed 5% of said receipts/ payments
(both Conditions satisfy individually)

Note- non-account payee cheque/ bank draft is treated as cash

2. Profession where Gross Receipts exceed Rs. 50 Lacs in any PY

Opting for Presumptive Tax Provisions?

Audit Required if:-

1. Business Income Claimed to be lower than Profits deemed u/s 44AE/ 44BB/ 44BBB in any PY

2. Income from Business/ Profession Claimed to be lower than Profits deemed u/s 44AD/ 44ADA in any PY & TI > Basic Exemption

Limits will be as under:-

Business – S-44AD – Rs. 2Cr
Profession – S-44ADA – Rs. 50Lac

Dealt in F&O transactions but have no Idea about the applicability of Tax Audit?

Normal business turnover is based on sales & thus reaching the limit takes time.

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But in F&O it reaches the limit easily as each lot is valued high, Limit is reached easily.

S-43(5) of the IT Act, 1961 has excluded transactions of F&O (Equity) from speculative transactions. However, the exemption is available only for equity.

F&O (commodities) are Speculative in Nature.

i.e. F&O (equity) income will be treated as Normal business Income

Any expense done in connection to this business will be allowed as an expense and can be claimed while preparing Tax computation.

Anchorage Infrastructure Investment Holding’s FDI request of Rs 15,000 crore has been approved by the CCEA.

For computing the T/O limit, the following things should be added:

  • a. Profits from the trade

  • b. Loss from the trade

  • c. Premium received from the sale of Options

  • d. In the case of Reverse Trade, the difference should also be added

(Limit as applicable in other cases discussed earlier)

NOTE: In the case of Delivery Based Transactions, Gains would be treated as Capital Gains.

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