Conducting Financial Audits For Businesses

KEY POINTS:

• With effect from FY2011-12, as per Section 44AB, the following assessees shall have to get their accounts for the previous year audited by an accountant before the specified date and submit their report in the prescribed format along with the returns of income:

1. Every person carrying on business who shows an income lower than the amount specified in Section 44AD; and
2. Whose income exceeds the maximum amount which is not chargeable to income tax.

• Income shown under the head ‘Income from Other Sources’ certain expenditure can be claimed as deduction, provided that it fulfils certain conditions.

Q) I have a business with a turnover of about Rs 55 lakh. In this financial year, I have incurred a loss. I am told that conducting an audit is compulsory for filing the returns of income, which was not required earlier. Is this true?

- Faroukh Taybani, Mumbai

Reply -

In view of the provisions of Section 44AD, notwithstanding anything to the contrary contained in Section 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such a business chargeable to tax under the head ‘Profits and gains of business or profession’.

An eligible business means –

(i) Any business except the business of plying , hiring or leasing goods carriages referred to in Section 44AE; and

(ii) Whose total turnover or gross receipts in the previous year does not exceed an amount of Rs 60 lakh.

An eligible assessee means –

(I) An individual, Hindu Undivided Family or a partnership firm, who is a resident but not a limited liability partnership; and

(II) Who has not claimed deduction under Sections 10A, 10AA, 10B, 10BA or deduction under Chapter VIA of the said Act.

It may be pertinent to note that with effect from FY2011-12, as per Section 44AB:

a) Every person carrying on business who shows an income lower than the amount specified in Section 44AD (as stated above); and

b) Whose income exceeds the maximum amount which is not chargeable to income tax;

Shall have to get his/her accounts for the previous year audited by an accountant before the specified date and submit his/her report in the prescribed format along with the returns of income.

As your income does not exceed the maximum amount chargeable to income tax, an audit is not mandatory in your case.

Q) I am a visiting faculty at various management institutes which pay me honorarium for the same. The institutes deduct TDS on the payments made to me. In the course of my work, I incur expenditure on the purchase of books as also on conveyance by taxi/auto for my visits to the institutes. I show the above income under the head ‘Income from Other Sources’. Would I get deduction in respect of my expenses on books and conveyance? Please advise.

- Prof. Dayanand

Reply –

It may be noted that under the head ‘Income from Other Sources’ any expenditure is allowed to be claimed as deduction, provided that:

i. The expense is in the nature of revenue expenditure (capital nature only if specifically allowed by the provisions of the Act).

ii. The expense is not a personal expense of the assessee.

iii. The expense is laid out or expended wholly or exclusively for the purpose of earning that source of income.

iv. The expense relates to the income earned.

v. The expense is incurred in the previous year.

Both your expenses viz. the purchase of books and the conveyance for your visits satisfy the conditions of allowability as stated above.