Tax Audit – a refresher - Rajkot ICAI · Page 1 Tax Audit under the Income Tax Act, 1961 Rajkot...

Tax Audit under the Income Tax Act, 1961 Rajkot Branch, WIRC, ICAI

Tax Audit

as per

the Income Tax Act, 1961

Presented by:

CA. Shreyans Ravrani Rajkot branch,

WIRC, ICAI


Agenda

► Applicability

► General Principles

► Clause wise analysis

► E-Filing Protocol

► Key Documents


Tax Audit Applicability ► Section 44AB of the Act, inter alia, provides that every person:-

a. carrying on business shall, if his total sales, turnover or gross receipts as the case maybe, in business exceed or exceeds one crore rupees in any previous year;

b. carrying on profession shall, if his gross receipts in profession exceed twenty five lakh rupees) in any previous year;

c. if the profits & gains from the business are deemed to be the profits & gains of

such person under section 44AE or section or section 44BB or section 44BBB and he has claimed his income to be lower than such profits & gains computed

under these sections irrespective of the turnover,

d. if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be

lower than the profits and gains so deemed to be the profits and gains of his

business and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year


Exemption from tax audit provision

The exempted businesses are:

► Sec 44B – income from shipping business in case of non residents

► Sec 44BBA – profits and gains of business of operations of aircraft in case of non residents

Conditional exemption (tax audit applies when assesse claims income lower than the presumptive income)

► Sec 44BB - profits and gains in connection with the business of exploration of mineral oils (10% of the income taxable)

► Sec 44BBB - profits and gains of foreign companies engaged in civil construction, in certain turnkey power projects (10% of the income taxable)

► Sec 44AD - civil construction or supply of labour (8% of the income taxable)

► Sec 44AE - business of plying and hiring carriages (Rs. 7,500 for every month or part of month for each truck )

► As per ICAI guidance note the sales / turnover and receipts from such businesses shall not be included in the total sales / turnover / gross receipts for determining the applicability of sec 44AB.


“Accountant” under the Income Tax Act, 1961

► As per the provisions of the section 288, An “Accountant” includes a chartered accountant holding a valid certificate of practice as per the provisions of the chartered Accountant’s Act, 1949.

► But Excludes:

► For an assessee being a company, the person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of the Companies Act, 2013.

► As per section 144 of the Companies Act, 2013, the auditor can not provide the following services to company, its subsidiary of associate company:

► accounting and book keeping services;

► internal audit;

► design and implementation of any financial information system;

► actuarial services;

► investment advisory services; Investment banking services

► rendering of outsourced financial services;

► Management services; Any other services as may be prescribed


“Accountant” under the Income Tax Act, 1961

►For all other assesses, following persons cannot be considered as an accountant:

(i) The assessee himself or any partner of the firm, or member of the association or the family;

(ii) In a trust or institution, any person referred to in clauses (a), (b), (c) and (cc) of sub-section (3) of section 13;

(iii) The person who is competent to verify the return under section 139 in accordance with the provisions of section 140;

(iv) Any relative of any of the persons referred to in sub-clauses (i), (ii) and (iii);

(v) An officer or employee of the assessee;

vi) An individual who is a partner, or who is in the employment, of an officer or employee of the assessee;

vii) An individual who, or his relative or partner-

(I) is holding any security of, or interest in, the assessee exceeding the face value of one hundred thousand rupees;

(II) is indebted to the assessee for an amount exceeding one hundred thousand rupees;

(III) has given a guarantee or provided any security in connection with the indebtedness of any third person to the assessee exceeding value of one hundred thousand rupees;

(viii) A person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;

(ix) A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.’;


Turnover

► “Turnover” under this act means the aggregate of the sale prices received and receivable by any dealer in respect of sales of any goods in the course of inter-State trade or commerce made

► Treatment of various extra and ancillary charges.

► The invoices may involve various extra and ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc.

► ordinarily the value of turnover should be disclosed exclusive of such ancillary and extra charges,

► except in those cases where because of the accounting system followed by the company, separate demarcation of such charges is not possible from the accounts or where the company’s billing procedure involves a composite charge Inclusive of various services rather than a separate charge for each service.

► Few points to be considered in the computation of the turnover:

► Discount allowed in the sales invoice will reduce the sale price and therefore, the same can be deducted from the turnover.

► Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover.


Other provisions

► Turnover discount is normally allowed to a customer if the sales made to him exceed a particular quantity. This being dependent on the turnover, as per trade practice, it is in the nature of trade discount and should be deducted from the figure of turnover even if the same is allowed at periodical intervals by separate credit notes.

► Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. If it is in the nature of commission on sales, the same cannot be deducted from the figure of turnover.

► Price of goods returned should be deducted from the figure of turnover even if the returns are from the sales made in the earlier year/s.

► Sale proceeds of fixed assets would not form part of turnover since these are not held for resale.

► Sale proceeds of property held as investment property will not form part of turnover.

► Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover.


Other provisions

► Question:

► Whether the sales by a commission agent or by a person on consignment basis forms part of the turnover of the commission agent and/or consignee?

► Whether the purchase and sale of securities by share brokers on behalf of their client with third parties amounts to turnover?


Gross Receipts

► The term "gross receipts" is also not defined in the Act. It will include all receipts whether in cash or in kind arising from carrying on of the business which will normally be assessable as business income under the Act.

► The following items of income / receipts would be covered:

► Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India.

► Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India.

► The aggregate of gross income by way of interest received by the money lender

► Commission, brokerage, service and other incidental charges received in the business of chit funds.

► Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, travelling etc.)

► The net exchange rate difference on export sales during the year on the basis of the principle explained in (v) above will have to be added.


Other provisions

► Hire charges of cold storage

► Liquidated Damages

► Insurance Claims – Except for Fixed Assets

► Sale proceeds of scrap, wastage etc. unless treated as part of sale or turnover, whether or not credited to miscellaneous income account.

► Gross receipts including lease rent in the business of operating lease.

► Finance income to reimburse and reward the lessor for his investment and services.

► Hire charges and instalments received in the course of hire purchase

► Advance received and forfeited from customers.

► The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.


Other provisions

► The following items of income / receipts would not be covered under Gross Receipts under the section 44AB of the Act:

► Sale proceeds of fixed assets including advance forfeited, if any.

► Sale proceeds of assets held as investments.

► Rental income unless the same is assessable as business income.

► Dividends on shares except in the case of an assessee dealing in shares.

► Income by way of interest unless assessable as business income.

► Reimbursement of customs duty and other charges collected by a clearing agent.

► In the case of a recruiting agent, the advertisement charges received by him by way of reimbursement of expenses incurred by him.

► In the case of a travelling agent, the amount received from the clients or payment to the airlines, railways etc. where such amounts are received by way of reimbursement of expenses incurred on behalf of the client.

► However, income from group members of a packaged tour will be a part of the gross receipts for the agent.


Other provisions

► In the case of an advertising agent, the amount of advertising charges recovered by him from his clients provided these are by way of reimbursement. But if the advertising agent books the advertisement space in bulk and recovers the charges from different clients, the amount received by him from the clients will not be the same as the charges paid by him and in such a case the amount recovered by him will form part of his gross receipts.

► Share of profit of a partner of a firm in the total income of the firm excluded from his total income under section 10(2A) of the Income-tax Act.

► Write back of amounts payable to creditors and/or provisions for expenses or taxes no longer required.

► Hence, the general principle to be remembered is that if the assessee is just being reimbursed for the expenses incurred, the same will not form a part of his gross receipts. But if the charges recovered does not only contain the actual expenses incurred, they will form a part of his gross receipts.


General principles for tax audit

The tax auditor should obtain from the assesse, the statement of particulars in Form No.

3CD duly authenticated by him

Following considerations can be taken by assesse while preparing form 3CD:

► Relying on judicial pronouncements for inclusion / exclusion of any items in any clause

of the form

► In case of conflict of judicial opinion on any particular issue, he may refer to the view

which has been followed while giving the particulars under any specified clause.

Following considerations can be taken by auditor while auditing form 3CD:

► A particular item of income / expenditure if covered in more than one of the specified

clauses, care should be taken to make a suitable cross reference to such items at the

appropriate places.

► Any difference in the opinion of the tax auditor and that of the assesse in respect of any

information, the tax auditor should state both the view points and also the relevant

information in order to enable the tax authority to take a decision in the matter.

► In computing the allowance or disallowance, he should keep in view the law applicable in

the relevant year, even though the form of audit report may not have been amended to

bring it in conformity with the amended law.


Forms to be used

Under rule 6G, the forms to be used for furnishing the audit report and additional particulars have been prescribed as follows:

S.no. Situation Form to be used

i) Person carrying on business or profession and whose accounts are required to be audited under any other law

3CA

ii) Persons carrying on business or profession and not falling under the above category

3CB

iii) Particulars to be furnished in case of i) and ii) referred above

3CD


Tax Audit under Section 44AB of the Income Tax Act, 1961

► What are the tax audit requirement for foreign companies having no permanent establishments in India?

“A foreign Company has some business income from India. It has no permanent establishment in India. Income of the foreign company chargeable under the Income Tax Act cannot be precisely determined. Also, there are no separate books of account for the Indian business”

i) What are the tax audit requirements?

ii) Should Form No. 3CD be submitted in respect of such a foreign company?


Part A (Clause 1 to Clause 8)-Form 3CD

► Clause 1. Name of the assesse:- The name of the assessee should be as per the incorporation certificate / partnership deed, as the case may be.

► Clause 2. Address of the assessee:- The address should be of registered office.

► Clause 3. Permanent Account Number :- As per the PAN card or letter received from the Income tax authorities

► Clause 4. Whether the assessee is liable to pay indirect tax like excise duty, service tax, sales tax, customs duty, etc. If yes, the registration or the identification number should be furnished.

► Clause 5. Status :- The status is the different class of assesses included in the definition of person under section 2(31). The status should be as per the return of Income tax. The residential status is not required.

► Clause 6. Previous year from :- April 1 to 31st March

► Clause 7. Assessment year :- If the financial year is 31st March 2015, the assessment year is 2015-2016

► Clause 8. Indicate the relevant clause of section 44AB under which the audit has been Conducted


Part-B: Clause 9

► Clause 9(a). If firm or association of persons, indicate names of partners/members and their profit sharing ratio.

► Clause 9(b).If there is any change in the partners or members or in their profit sharing ratio since the last date of the preceding year, the particulars of such change


Clause 10

► Clause 10(a). Nature of business or profession (if more than one business or profession is carried on during the previous year, nature of every business or profession)

► For this reference can be made to the director’s report, abstract under Part IV of Schedule VI, Part B of annexure to Form 3CD.

► Clause 10(b). If there is any change in the nature of business or profession, particulars of such change

► Some examples of change in nature :-

1. From manufacturer to trader or vice versa

2. Change in principal line of business

3. In case of amalgamation / demerger in similar line of activity will not amount to change in the nature.

► The tax auditor should review the minutes of meeting, director’s report, etc.

► Any amalgamation / merger / restructuring resulting in a new line of activity being added or hived off, need to be stated.

► As per ICAI guidance note - Refer the Business Reports, MIS, Minutes of meetings, etc.


Clause 10

► E – Filing portal requires:

► Nature of business or profession (Clause 10a)

► If there is any change in the nature of business or profession, the particulars of such change (Clause 10b)

► Yes No

* Business added or discontinued during the previous year with respect to the preceding year.

Sector Sub sector Code

Business* Sector Subsector Code


Clause 11

► Clause 11(a). Whether books of account are prescribed under section 44AA, if

yes, list of books so prescribed.

Rule 6F has prescribed books of account for the persons carrying on profession

under section 44AA.The tax auditor is required to give list of books so prescribed.

This applies to specified profession (like legal, medical, engineering). For a person

whose accounts are audited under any other laws , the requirement of

maintenance of books of accounts contained in the relevant laws.

► Clause 11(b). List of books of account maintained and the address at which the

books of accounts are kept.(In case books of account are maintained in a

computer system, mention the books of account generated by such computer

system). If the books of accounts are not kept at one location, please furnish the

addresses of locations along with the details of books of accounts maintained at

each location.

► The tax auditor is required to obtain list of books both financial / non financial

records from the assessee.

► Location of the server also needs to be stated


Clause 11 (Cont’d.)

► Following are the list of books to be maintained by the assessee for the purpose of tax audit:

1) Cash / Bank book

2) Petty Cash book

3) Journal register

4) Purchase / Sales Register

5) Debtors / Creditors Ledger

6) General Ledger

7) Inventory Records

8) Fixed Asset Register

9) Excise records

► This is not an exhaustive list. Also, Use of excel worksheets is not computer generated record.

► Clause 11(c). List of books of account examined and nature of relevant documents examined:

► Bills, vouchers, receipts, debit note, credit note, inventory register, agreements, orders, etc. has been examined


Clause 12

► Whether the profit and loss account includes any profits and gains assessable on presumptive basis, if yes, indicate the amount and the relevant sections (Sec 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other relevant section) :

► This relates to civil construction, Business of plying, hiring or leasing goods carriages, retail business, shipping business, business of exploration of mineral oils, operation of aircraft by non-resident, foreign companies engaged in civil construction .

► In case books of accounts are maintained for other businesses, then it is necessary to apportion the common expenses to various businesses on a logical basis

► In case the net income is credited to P&L account and the auditor is unable to verify the same, the tax auditor should make necessary disclosure and may qualify the report.


Clause 13

► Clause 13(a). Method of accounting employed in the previous year:-

► Assessee can follow either cash or mercantile system of accounting. From A.Y 1997-98, hybrid system is not permitted. However assessee can adopt cash system for one business and mercantile for other business. But the assessee has to consistently follow the method of accounting.

► As per Section 128/129 of the Companies Act 2013, every Company is required to keep books of account under accrual / mercantile basis. The tax auditor should refer the notes to account.

► Normally mercantile system of accounting is followed with certain exceptions e.g. export incentives (Duty drawback), interest (e.g. On MSEB deposit) which may be accounted for on cash / realization basis.

► All significant policies should be disclosed.


Clause 13 (cont’d.)

► Clause 13(b). Whether there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year :

► The method of accounting can be changed provided changed method is regular method and the assessee has not merely abandoned or changed it for a casual period to suit his own purposes.

► Any change in accounting policy to be accepted even if it leads to reduction in tax liability.

► Any change in accounting policy is not a change in method of accounting and hence need not be disclosed as a change in method of accounting. Change in inventory valuation is not a change in the method of accounting and need not be mentioned under clause 13(b) .

► Clause 13(c). If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss :-

► The concept of materiality is the basic governing factor. If it is not possible to quantify effect, disclosure of such fact should be stated.



► Clause 13(d). Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect there on the profit and loss :-

Only 2 Accounting standards have been prescribed under the Income Tax Act

► AS(IT)-I “Disclosure of Accounting Policies”

► AS(IT)-II “Disclosure of prior period and extra ordinary items and changes in Accounting Policies”.

The tax auditor has to report details of deviation in method of accounting in the previous year from Accounting standards and effect on profit and loss.


Clause 14

► Clause 14(a). Method of valuation of Closing stock employed in the previous year :-

► The tax auditor can refer the method of valuation in the significant accounting policies in the notes to accounts. The word “Closing Stock” includes all items of inventory including WIP, loose tools, etc.

► Consistency in valuation cannot justify wrong valuation method.

► Clause 14(b). Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss:

► Inclusive method prescribed under Section 145A and the exclusive method followed as per AS 2 are revenue neutral, whether a note to this effect is sufficient in Form 3CD or whether the deviation need to be quantified and explained under this Clause?


Clause 15

► Give the following particulars of the capital asset converted into stock in trade :

► Description of capital asset

► Date of acquisition

► Cost of acquisition

► Amount at which the asset is converted into stock-in-trade

► In case the auditor is convinced that the converted amount is not in line with the GAAP (e.g. AS 2) he may qualify the report .

► Also – a note may be considered that the value at which it is converted may not be fair market value of the asset on the date of conversion .


Clause 16

► Amounts not credited to the profit and loss account, being :-

a) The items falling within the scope of section 28

► Section 28 prescribes certain items to be treated as income e.g. sum received

under Keyman insurance policy including the sum allocated by way of bonus on

such policy, etc.

► Under this clause various amounts falling within the scope of section 28 which are

not credited to the profit and loss account are to be stated.

► Such items include compensation on termination of agency, any sum received for

not carrying on any activity in relation to business, not sharing any know how,

patents, cash assistance against exports.



b) The proforma credits, drawbacks, refund of duty of customs or excise or service tax, or refund of sales tax or value added tax, where such credits, drawbacks or refunds are admitted as due by the authorities concerned

► The tax auditor has to examine all relevant correspondence, records and evidence in order to determine whether any claim has been admitted as due within the relevant previous year.

► If cash system is followed, even if it is admitted within the previous year, but not actually received during the previous year, it need not be reported here.

► Where such amounts have not been credited in the profit and loss amount but netted off against the relevant expenditure heads ,such fact should be clearly brought out .



c) Escalations claims accepted during the previous year

► Escalation claims would normally arise pursuant to a contract. Only those claims, to which the other party has signified unconditional acceptance need to be reported here. If cash basis of accounting is followed the same should be clearly brought out in the form .

► Mere claims being made or claims under negotiation or claims which are sub judice cannot be deemed as claims accepted .

d) Any other item of income which tax auditor considers as income based on verification of records, but not credited to Profit and loss account to be reported under this clause

► In giving details under sub clauses (c) and (d), due regard should be given to AS – 9 Revenue Recognition.



e) Capital receipt, if any.

► An illustrative list of capital receipts include the following:

1) Capital subsidy received in the form of government grants which are in the nature of promoters’ contribution.

2) Government grants in relation to a specific fixed asset where such grant has been shown as a deduction from gross value of Fixed asset.

3) Compensation for surrendering certain rights.

4) Profit on sale of fixed assets / investments to the extent not credited to the profit and loss account.

► Loans and borrowings need not be stated under this clause.



Question – Clause-16

► Example:

1. During the year ended March 31, 2015 based on a legal dispute the assessee had paid Rs. One million towards customs duty under protest. Also it had created a provision of another Rs. One million there against. The amount paid was charged to expense along with the provision made.

2. Subsequent to the year-end but prior to filing return of income, it received a decision in its favor. Therefore the provision was reversed and the refund of Rs. One million was accounted as ‘Other Income’ in the books for the year-ended March 31, 2015.

Whether such refund should be disclosed under Clause 16(b) for March 2015?


Clause 17

► Where any land or building or both is transferred during the previous year for a consideration less than value adopted or assessed or assessable by any authority of a State Government referred to in section 43CA or 50C, the following details needs to be furnished:

Details of property

Consideration received

or accrued Value

adopted or assessed or

assessable

Details of property

Consideration received

or accrued Value

adopted or assessed or

assessable

Details of property

Consideration received or

accrued Value adopted or

assessed or assessable

1 2 3


Clause 18

► Particulars of depreciation allowable as per the Income tax Act, 1961 in respect of each asset or block of assets-

a) Description of asset/block of assets

b) Rate of depreciation

c) Actual cost or the WDV as the case may be.

d) Additions/deductions during the year with dates; in case of any addition of an asset, date put to use; including adjustments on account of Modvat, change in rate of exchange of currency, subsidy or grant or reimbursement, by whatever name called.

e) Depreciation allowable

f) Written down value at the end of the year

► Note : For classification of assets , recent judgments have come wherein it was held that UPS, scanners and printers would be considered as computers and eligible for depreciation at that rate .



Tax Auditor needs to examine:

► Classification of block of assets

► Working of actual cost and the WDV

► Date of acquisition and date put to use

► Applicable rate of depreciation

► Date and sale value in case of deduction

► Adjustments required on account of CENVAT, exchange difference and subsidies/grants and on account of sale .



► Actual Cost as defined in Section 43(1)

► Exchange difference (on imported assets only) to be adjusted to the carrying cost

of the fixed asset as per Section 43A i.e. on payment basis

► If there is any dispute with regard to the classification of an asset in a particular

block or the rate of depreciation applied, the tax auditor must give his working with

suitable reasons

► The adjustments on account of exchange difference, CENVAT to be verified by the

auditor

► Subsidy or grant received from the Government against the particular asset /

assets to be reduced from the actual cost of the asset

► Interest to be capitalised till the time the asset is put to use

► Auditor should verify the compliance with conditions for additional depreciation

claimed by the Company

► Dispute in earlier Income tax assessment relating to classification of assets should

be adequately disclosed along with management view



► E – Filing portal requires:

(a) Description of assets/ block of assets

(b) Rate of description ( In percentage)

( c ) Actual cost or written down value, as the case may be

A- Add, D- Deduct (d) Additions/ Deletions during the year with dates; in the case

of any addition of any asset, date put to use; including

adjustments on account of Date of additions/ deductions

Particulars

Amounts

In case of additions date put to use. In case

of deduction NA

(i) Modified Value added tax credit claimed

and allowed under Central Excise Rules,

1944, in respect of assets acquired on or

after 1st March, 1994

Adjustments on account of

(ii) Change in rate of exchange of currency

(iii) Subsidy or grant or reimbursement, by

whatever name called

(e) Depreciation allowable

(f) Written down value at the end of the year.


Clause 19

► Amounts admissible under sections 32AC, 33AB, 33ABA, 33AC, 35, 35ABB, 35AC,

35AD, 35CCA, 35CCB, 35CCC, 35CCD, 35D, 35DD, 35DDA, 35E

a) debited to the profit and loss account (showing the amount debited and deduction

allowable under each section separately);

b) not debited to the profit and loss account

► Tax auditor to state the amount debited in the profit and loss account and the

amount actually admissible in case of sub clause (a).

A brief about the above mentioned sections :

► Sec 32AC- Investment in New Plant & Machinery

► Sec 33AB– Tea / coffee / rubber development account

► Sec 33ABA- Site restoration fund

► Sec 33AC- Reserves for shipping business



► Sec 35 – expenditure on scientific research

► Sec 35ABB- Amortization of telecom license fees

► Sec 35AC- expenditure on eligible projects

► Sec 35AD- expenditure on specified business

► Sec 35CCA- expenditure on payment to association for rural development schemes

► Sec 35CCB- expenditure on payment to association for Conservation of Natural resources

► Sec 35CCC- expenditure on agricultural extension projects notified by the board

► Sec 35CCD- expenditure on Skill development projects notified by the board

► Sec 35D- amortization of preliminary expenses

► Sec 35DD- expenditure in case of amalgamation / de merger

► Sec 35DDA- amortisation of expense under VRS

► Sec 35E- deduction in respect of prospecting minerals



► In sub clause (b), the amount not debited to the profit and loss account and admissible as a deduction under any of the above sections is to be stated.

► If assessee is eligible for deduction under one or more of the above sections, the tax auditor has to state the deduction allowable under each of the above sections separately.

► Can auditor rely on the work of other auditors for certification under various sections

► Example :

► W Ltd offered their shares for sale to the public (IPO). In view of poor response from the public the IPOs was withdrawn. The company incurred certain expenses in the process of raising capital by making an IPO.

► Whether expenditure incurred in relation to IPOs that are subsequently withdrawn can be claimed as deduction under Section 35D of the Income Tax Act, 1961?


Clause 20

► Clause 20(a). Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend

► If any such sum is paid, this would not be normally allowed as deduction.

► The requirement is only in respect of disclosure, the tax auditor is not expected to express an opinion about the allowability or otherwise.

► The tax auditor should verify the contract with the employees so as to ascertain the nature of payments

► Clause 20(b). Any sum received from employees towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x); and due date for payment and the actual date of payment to the concerned authorities under section 36(1)(a)

► Deduction of such sums received from the employees is allowed, if it is credited by assessee to the account of employees on or before the due date as per the applicable law.

► Otherwise, the same is treated as his income under Section 2(24)(x)



► Tax auditor should get a list of various contributions recovered from the employees and verify the actual payments from the evidence available.

► To report cases where the payment is beyond the due date

► Also if there is grace period, then the payment shall be treated as payment made before the due date if the same is made before the grace period . However, grace period considered shall be adequately disclosed.

► E – Filing portal requires under :

Clause 20 (a)

Clause 20 (b)


Clause 21

► Amounts debited to Profit and loss account, being:-

► Clause 21(a). Expenditure of Capital nature

► General tests should be applied to determine whether a particular expenditure is of a

capital nature i.e. where it brings into existence an asset or advantage of enduring

benefit, whether it relates to the frame work of the assessee’s business, etc.

► For capital expenditure which are fully deductible in the computation of total

income, maintain particulars regarding Amount & nature of the expenditure incurred

and the admissibility of such expenditure.

Clause 21(a). Expenditure of personal nature

► Tax auditor needs to scrutinize the ledger to verify whether any expenses of

personal nature have been incurred by the assessee

► Section 227(1A) requires the auditor to inquire whether personal expenses have

been charged to the revenue account.

► Check whether the personal expenses are covered by the contractual obligations or

accepted business practices .



► Word “Personal” :

► Can a tax auditor rely on the report of the statutory auditor for reporting that no personal expenses have been charged to profit and loss account?

► Director is allowed to use the car for his personal purposes, as per the terms of his appointment

► Part of House property used for personal residence (other part being used for business), how will the element of personal expenses be determined in respect of use of house property, electric charges, water charges, use of telephone etc.?

► Clause 21(a). Expenditure on advertisement in any souvenir, brochure, tract, pamphlet, or the like, published by a political party

► If there is any such expenditure debited to the profit and loss account, the same will be disallowed under section 37(2B) and has to be reported under the above clause.

► Advertisement Expenditure in souvenir, brochure, tract or pamphlet published by Trade Union or Labour Union formed by a political party?



► Clause 21(a). Expenditure incurred at clubs being entrance fees and subscriptions -

► As entrance fees and subscriptions as cost for club services and facilities used

► The expenditure may be incurred for directors, employees, partner, proprietors.

► The fact that whether they are of personal nature or incurred in the course of business should be ascertained. If they are of personal nature, they should be shown under clause 17b.

► The tax auditor should make a close scrutiny of the ledger in such cases

► Purpose of Reporting: To determine whether expenditure qualifies to be perquisite

► Membership fees of Lions / Rotary Club are not covered under this clause as they are considered as service associations.

► All payments made through credit cards should be carefully scrutinized in order to determine any payments made to clubs.



► Clause 21(a).

(i) Expenditure by way of penalty or fine for violation of any law for the time being in force

(ii) Any other penalty or fine

(iii) Expenditure incurred for any purpose which is an offence or which is prohibited by law

It is an accepted principle that penalty and fine of infringement of law is inadmissible infraction of law is not a normal incident and no expenditure will be allowed

► Tax auditor should obtain in writing the details of all payments made by way of penalty or fine from the assessee and how such amounts have been dealt in the books of accounts

► The tax auditor is not required to express any opinion as to allow ability or otherwise of amount.

► It does not cover payment for contractual breach.


Clause 21(a) (Cont’d.)

► E-filing requires only total amount of expenditure to be reported.

► Tax auditor should maintain following information:

► Nature and particulars of expenditure

► Account head under which debited

► Amount of expenditure

► Name of the club

► Entrance fees, Subscription on expenses, Cost of club services, etc

► Remarks



► Clause21(a). Do this item need to be disclosed in tax audit?

► Nature of penalty or Fine – Compensatory or Penal

► Petty fines and penalties like violation of traffic rules, vehicles parked in wrong zones and etc.

► Compounding Fees

► Compensation to distributors for penalty payable by such distributors

► Expenditure for any purpose which is yet to be proved an offence

► Legal expenses paid for defending a suit for violation of law

► Interest paid to enterprises as per MSMED Act, 2006?



► Clause 21(b). Amounts inadmissible under section 40(a):

It mainly includes :

► I) Interest, royalty, fees for technical services or any other sum payable outside India or in India to a non resident or a foreign company

► Ia) Any payment to resident on which tax is deductible

► Ic) Fringe Benefit tax

► Iia) Wealth tax

► Iib) Royalty, License Fees, Service Fees, Privilege Fees, Service Charges or any other fees or charges State Government undertaking by the State Government

► Iii) Salaries to non-resident or payable outside India

► Iv) Contribution to any provident or other fund established for employee, unless payment from such fund is chargeable under the head salaries

► V) tax actually paid by an employer referred to in clause (10CC) of section 10.



► Amounts inadmissible under section 40(a)

Defaults and possible consequences under this section can be classified as follows:

From AY 2015-16, disallowance is only 30% of any sum payable to a resident on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction has not been paid on or before the due date specified under section 139(1)

Default Allowance

Tax not deducted Expense Disallowed. However, allowed in year in which deducted and paid

Tax deducted and deposited in the financial year but before the due date specified in section 139(1)

Expense will be allowed in current year

Tax deducted and deposited in the financial year but after the due date specified in section 139(1)

Expense Disallowed. However, allowed in year in which it is paid



► Amounts inadmissible under section 40(a)(i)

Date on which tax should be deducted

Actual date of tax deducted

Due date for tax deposit

Date of tax deposit PY in which it will deductible

June 26, 2014 June 26, 2014

July 7, 2014

Sept 1, 2014 (i.e. deposited during the current FY but after due date)

2014-15

March 31, 2015 Mar 31, 2015 Apr 30, 2015

Apr 30, 2015 (paid in next FY but within due date)

2014-15

March 31, 2015 Mar 31, 2015 Apr 30, 2015

December 1, 2015 (paid in next FY but after due date)

2015-16


Case study – 1

A Company liable to deduct 6,000 as TDS on interest

A Company deducts and deposits within the time prescribed only Rs 5,000

Whether disallowance under section 40a(ia) attracted ?

(Deductable TDS – Deducted TDS) X Gross Amount

Deductable TDS


Case study – 2

► A Company constructs a Plant for which it utilises the professional services of an engineering firm

► Fee for professional services capitalised as part of cost of Plant in books and also for tax purposes

► TDS on such fees not paid within the prescribed period

► A Company claims depreciation under section 32

Whether disallowance under section 40a(ia) attracted ?



► Reporting requirements:

► Details of payment on which tax is not deducted:

Date of payment; amount of payment; nature of payment and \name and address of the payee

► Details of payment on which tax has been deducted but has not been paid during the previous year or in the subsequent year before the expiry of time:

Date of payment; amount of payment; nature of payment; name and address of the payee and amount of tax deducted and subsequent deposit of TDS if any

► Details of salaries to non-resident or outside India:

► Date of payment; amount of payment; name and address of the payee



► Clause 21(c). Amounts debited to profit and loss account being, interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/40(ba) and computation thereof;

► Tax auditor is required to state the inadmissible amount under this clause after applying the conditions for allowance or disallowance and accordingly determine the prima facie inadmissibility of the deduction and also quantify the same

► Conditions for admissibility:

a) Remuneration to working partner

b) Remuneration / interest is authorized by partnership deed

c) The interest should not exceed 12% p.a. and the remuneration should not exceed the maximum permissible limits.

d) The same should not pertain to a period prior to the date of partnership deed



► Clause 21(d). Disallowance/deemed income under section 40A(3):

► Section 40A(3) provides that where assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs. 20,000 (Rs. 35,000 in case of plying, hiring or leasing of goods carriage) otherwise than by a account payee cheque / account payee bank draft, 100% of such expenditure shall not be allowed as deduction.

► Tax auditor should obtain a list of all payments exceeding Rs. 20,000 made by the assessee during the previous year which should also include the list of payments exempted in terms of Rule 6DD (Rule 6DD has been explained in the next slide) with reasons.

► Details of payments which do not satisfy the above conditions should be stated under this clause.

► Serial number

► Date of payment

► Nature of payment

► Amount

► Name of PAN of payee, if available



► Rule 6DD – Disallowance of cash payments

► As per Rule 6DD as amended by Rules 2007 ‘no disallowance shall be made even if payment is made in excess of Rs. 20,000, in the cases and circumstances specified hereunder, namely:-

a) Where payment is made to-

i) RBI

ii)SBI

iii)Any co-operative bank or land mortgage bank

iv)Any primary agricultural credit society

v)LIC

b) Where the payment is made by-

i) Letter of credit or any other Bill of exchange

ii) Mail or telegraphic transfer

iii) Book adjustment from one bank account to any other account

iv) Use of electronic clearing system through bank account

vi) Credit card or Debit Card



► In case of no proper evidence for verification of the payment made by account payee Cheque / account payee bank draft is available, the following standard note should be inserted in

► “It is not possible for us to verify whether the payments in excess of Rs.20,000 have been made otherwise than by account payee cheque or account payee bank draft as the necessary evidence is not in the possession of the assessee “

Questions:

► Individual payment lower than Rs 20,000 but exceeding such sum to single person in a day – whether require reporting under this clause



► Clause 21(e). Provision for payment of gratuity not allowable under section 40A(7)

► As per section 40A(7), deduction of any provision is allowable only if provision is made for contribution to any approved gratuity fund or the provision relates to the amount of gratuity which has become payable during the previous year.

► The tax auditor should call for the order of Commissioner of I.T granting approval for gratuity fund, verify the date from which it is effective and also verify whether the provision has been made as provided in the trust deed.

► In case the provision is made for payment of gratuity is not allowable under sec 40A(7) the same is to be stated under this sub clause .

► Clause 21(f). Any sum paid by the assessee as an employer not allowable under section 40A(9)

► Under section 40 A(9), any payments made by an employer towards the setting up or formation of or as contribution to any fund, trust, company, or other institutions (other than contributions to recognised provident fund or approved superannuation fund or approved gratuity fund )is not allowable.

► Tax auditor should furnish the details of payments which are not allowable under this section



► Clause 21(g). Particulars of any liability of a contingent nature

► Detailed scrutiny of account heads like outstanding liabilities, provision etc to be made to ascertain any such particulars of contingent nature debited to profit and loss account. Also to check whether any contingent liability of the previous year has been provided for and whether the liability continues to be contingent in nature . A suitable note may be given by the tax auditor as to the non availability of such particulars relating to contingent liabilities .

► Reference may be made to AS-29 ‘ Provisions, contingent liabilities and contingent assets’ to determine what should normally be treated as contingent liability.

► Note : warranty provision is not a contingent liability .( ROTORK CONTROLS S C )

► E-filing portal requires following:

Nature of liability Amount



► Clause 21(h). Amount of deduction inadmissible in terms of section 14A in respect

of the expenditure incurred in relation to income which does not form part of the

total income.:-

► Section 14A provides that no deduction shall be made in respect of expenditure

incurred by assessee in relation to income which is exempt from tax.

► The tax auditor has to verify the details furnished by the assessee and should

satisfy himself that the inadmissible amounts have been worked out correctly.

► Where an assessee claims that no expenditure has been incurred by him in relation

to income which does not form part of the total income under the Act and does not

furnish the necessary particulars for the purpose of ascertaining the inadmissible

expenditure under section 14A, the tax auditor has to make a proper disclaimer /

qualification.



► Clause 21(h). Rule 8D(2) provides below computation of expenditure in relation to

income not forming part of total income:

► Direct expenses like demat charges of demat accont

► Indirect expenses

► Interest expenses / Average of opening & closing assets * Average of

investments (whose income is not chargeable to tax)

► 0.5% of average of opening and closing investments, whose income is not

chargeable to tax



Clause 21(I). Amount inadmissible under the proviso to section 36(1)(iii)

► Section 36(1)(iii) provides that interest on borrowed capital would be deductible only if :

a) The assessee has borrowed money.

b) It is used for the purpose of business and profession.

c) Interest is paid / payable on such money.

► The proviso to the above section requires that capital borrowed for acquisition of asset for extension of existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as a deduction

► Tax auditor has to thus report the amount inadmissible under the above proviso.

► Borrowing Cost-Qualifying Asset under the AS -16 V/s 36 (1) (iii)?


Clause 22

► Amount inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006

► Sec 23 of the MSMEDA,2006 lays that interest payable under sec 23 shall not be allowed as a deduction in the computation of income . The act requires separate disclosure of the principal and interest amount separately in the statement of accounts .

► Check whether the payment is made to the vendor as per the time limit specified in the MSMED Act ,2006 .

► If not verify whether the interest has been calculated on delayed payments and disclosed in the notes on accounts .

► Tax auditor should report the amount of interest inadmissible under sec 23 of the MSMED act 2006.

► If the auditor is not able to get the required information he should make appropriate mention in the report .



► Tax auditor should take following steps:

► Seek information regarding the status of the enterprise i.e. whether the same is under the MSME development, Act. This should be reported in Form 3CD. If information not available, this should also be disclosed.

► Should verify the financial statements audited by him contain the information as prescribed u/s 22 of MSME Act. If no disclosure, should give appropriate qualification in Form 3CEB.

► Obtain and review full list of suppliers of the assessee which fall within the definition of “Supplier” under section 2(n) of the MSMED Act, 2006.

► Verify from the books of account whether any interest payable or paid to the buyer has been debited to the books

► Verify the interest payable on test basis

► Verify additional information provided by the auditee.

► If on the test check basis, the auditor is satisfied, then the amount so debited to the profit account should be reported


Clause 23

► Particulars of payments made to persons specified under section 40A(2)(b)

► Section 40A(2) provides that expenditure for which payment has been or is to be made to specified persons may be disallowed (excess portion) if in opinion of A.O, such expenditure is excessive or unreasonable having regard to,

1) Fair Market value of the gods or services for which the payment is made.

2) Legitimate needs of business / profession of the assessee

3) Benefit derived by assessee from such expenditure.

► Proviso to section 40A(2)(a) provides that no disallowances on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of specified domestic transactions (SDT) referred to in section 92BA, if such transaction is at arm’s length price as defined in clause (ii) of section 92F.



► This provision operates only on the expenditure side and would not have any impact in the hands of the recipients of such payments. Thus only the persons/entities incurring such expenditure would be subject to SDT under this provision.

► Assessing officer has the power to fix quantum of disallowance.

► Tax auditor should obtain a full list of specified persons as contemplated in this section and obtain details of expenditure / payments made to specified persons Tax auditor should scrutinize all items of payments to above persons

► Points to be considered:

► Difference in scope of AS and section 40A(2)(b)

► Completeness of specified persons

► Perquisite value for Managerial Remuneration

► Hints :

► Related Party schedule as disclosed in Notes to Accounts

► Disclosure made in Form 3CEB certification


Clause 24

► Amounts deemed to be profits and gains under section 32AC, 33AB or 33ABA or 33AC:

► Section 32AC lays down the circumstances under which the company can avail an additional deduction over and above the depreciation on investment in plant and machinery.

► Sections 33AB and 33ABA lay down the circumstances under which amount withdrawn from deposits covered thereby for purposes other than specified purposes, is to be deemed income chargeable as profits and gains. Tax auditor is required to report such amounts

► Similarly Section 33AC(3) lays down the circumstances in which the amount of reserve account shall be deemed to be profits and gains chargeable to tax

► E-filing portal requires information in following format:

Section Description Amount


Clause 25

► Any amount of profit chargeable to tax under section 41 and computation thereof

► Section 41 mainly includes

a) Recovery of any loss, expenditure or trading liability, earlier allowed as deduction.

b) In case of undertaking engaged in generation/ distribution of power, if building, machinery, plant or furniture is sold/discarded/demolished or destroyed.

c) When an asset used for scientific research is sold and the sale proceeds exceed the amount of capital expenditure ,such surplus or the amount of deduction allowed whichever is less is chargeable to tax in the year in which the sale took place . If the asset is used for other purpose then S 41(3) would not be applicable and S 41(1) would be applicable .

d) Subsequent recovery of bad debt, earlier allowed as deduction.

e) Amount withdrawn from special reserve created under section 36(1)(viii).



► Question:

► During year-ended March 31, 2009 the Company has written off Rs. two million towards bad debts;

► During year-ended March 31, 2014 the Company has recovered Rs. one million towards such bad debts written–off.

► What amount should the Company disclose under Section 41(4) ?

i) Rs. One million;

ii) Rs. Two million.

► If a liability becomes unenforceable due to expiry of period of limitation or otherwise, but is not written back in the books of account of the borrower, would it be an income under section 41?

► A liability is written back in the books because it remained unclaimed, but the claim is not barred by operation of law. Would it be treated as remission/cessation under section 41?


Clause 26

► In respect of any sum referred to in clause (a), (b), (c), (d), (e) or (f) of section 43B, the liability for which;

(A) pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was

i) paid during the previous year;

ii) not paid during the previous year;

(B) was incurred in the previous year and was

i) paid on or before the due date for furnishing the return of income of the previous year under section 139(1);

ii) not paid on or before the aforesaid date



Section 43B mainly includes:

► Any tax, duty, cess or fee payable under any law for the time being in force

► Employer’s contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees

► Any bonus or commission payable by the assessee to its employees

► Interest on any loan or borrowing from any public financial institution, state financial corporation or a state industrial investment corporation

► Interest on any loan or advances from a scheduled bank

► Sum payable by the assessee in lieu of any leave at the credit of employees



► In respect of the specified sums incurred during the previous year, the deduction for liability is available for payments actually made till the due date of filing the tax return for the said year

► The deduction for payments made against liability that pre-existed on the first day of the relevant previous year is restricted to only those payments made up to the close of the relevant previous year.

► Above particulars are required irrespective of the fact whether they have been debited to profit and loss account or not and such a fact should be stated under this clause

► Tax auditor is not require to determine any admissible or inadmissible amounts

► Even though reporting is required for amount paid on or before due date of filling return, which means amount paid during the entire financial year, disclosures are given for amount unpaid at the end of financial year and paid on or before the due date



► When the provident fund contributions are deposited by cheques and such payments are “subject to realisation of cheques”, what date should the tax auditor give as the actual date of payment.?

► Any tax, duty etc. referred to in section 43B may be paid after tax audit is completed but before the due date of filing of the return of income. How should the tax auditor deal with such a situation?

► Note : date of deposits and not the date of realization of cheques .

► E- filing requires information in each sub clause of clause 26 in following format:

*State whether sales tax, custom duty, excise duty or any other indirect tax, levy, cess, impost etc. is passed through the profit and loss account. Yes No


Clause 27

► Clause 27(a). Amount of Modified Value Added Tax credits availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of outstanding Modified Value Added Tax credits in the accounts.

► This clause requires the factual reporting about the CENVAT credit availed and utilized during the year as well as its treatment in profit and loss account and treatment of outstanding MODVAT credits in the accounts

► Tax auditor should verify that there is a proper reconciliation between balance of CENVAT credit in the accounts and relevant excise records.

► Tax auditor should verify that the information furnished under this sub-clause is compatible with the information under clause 12(b)

► Service tax credit also needs to be reported in this clause.



► E-filing requires information in following format:

► Amount of Modified Value Added Tax credits availed of or utilized during the previous year and its treatment in the profit and loss account.

Yes No

► Treatment of outstanding Modified Value Added Tax credits in the accounts.

Yes No

Amount Treatment in Profit and Loss account

Amount Treatment of outstanding Modified Value

Added Tax Credits in the accounts



► Clause 27(b).Particulars of income or expenditure of prior period credited or debited to the profit and loss account.

► Information may be available from the annual accounts, where accounts of the assessee are audited under any other law

► In other cases, a close scrutiny of the ledger in regard to the period for which expenditure or income is entered in the account books is required

► There is difference between expenditure of any earlier year debited to the profit and loss account and the expenditure relating to any earlier year, which has crystallised during the relevant previous year

► Material adjustments necessitated by circumstances which though related to previous periods but determined in the current period, will not be considered as prior period items. The tax auditor has to make a judgmental call on the same .



► Questions:

► Wage disputes started during the year ended on 31.3.2014 but settled during the year ended on 31.3.2015 .During the year ended on 31.3.2015, Rs.5 lakhs were paid towards increase in wages pertaining to earlier years?

► Sales returns debited to sales account of financial year 2014-15 relating to sales effected during earlier years?

► If the statutory auditor of a company has not considered a particular item as prior period expenditure but the tax auditor considers it as a prior period expenditure and vice versa, what is the duty of the tax auditor?

► E- filing requires information is following format:

Type Particulars Amount Prior period to which it relates

(Year in yyyy-yy format)


Clause 28

► Whether during the previous year the assessee has received any property, being share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia).

► Since section 56(2)(viia) is applicable to firms and companies in which public is not substantially interested, reporting under this clause is required only for them and not for other assessees.

► the auditor has to consider the provisions of Rule 11UA(1)(c) which provides for manner of determining:

► fair market value of quoted shares and securities received by way of transaction carried out through any recognized stock exchange;

► fair market value of quoted shares and securities received by way of transaction carried out OTHER THAN through any recognized stock exchange

► fair market value of unquoted equity shares

► fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange


Clause 29

► Whether during the previous year the assessee received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib).

► Since section 56(2)(viib) is applicable to companies in which public is not substantially interested, reporting under this clause is to be done only for corporate assessees

► the fair market value shall be the value as may be determined in accordance with such method as prescribed under Rule 11UA or as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher


Clause 30

► Details of any amount borrowed on hundi or any amount due thereon (including interest on the amount borrowed) repaid, otherwise than through an account payee cheque [Section 69D]:

► Statute: As per Sec 69D, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year in which the amount was borrowed or repaid in case such repayment is made by otherwise than by way of account payee cheque.

► Audit procedures: The Tax auditor to obtain a complete list of borrowings and repayments of hundi loans otherwise than by account payee cheques and verify the same with the books of account. Where records are not available auditor to give a disclaimer.

► E-fling requires information in following format:

► Details of any amount borrowed on hundi or any amount due thereon (including interest on the amount borrowed) repaid, otherwise than through an account payee cheque [Section 69D]

► Yes No


Clause 31

► Clause 31(a) Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year :—

i) Name, address and permanent account number (if available with the assessee) of the lender or depositor;

ii) Amount of loan or deposit taken or accepted;

iii) Whether the loan or deposit was squared up during the previous year;

iv) Maximum amount outstanding in the account at any time during the previous year;

v) Whether the loan or deposit was taken or accepted otherwise than by an account payee cheque or an account payee bank draft.

► Statute: No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft if,

► the amount of such loan or deposit or the aggregate amount of such loan and deposit ; or



► on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid ; or

► the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), is [twenty] thousand rupees or more

► Audit Procedures: The Tax auditor to obtain details of all loans or deposits taken and verify the same with records maintained by the assessee. Where records are not available auditor to give a disclaimer

► Sale proceeds collected by a selling agent will not be considered as loan or deposit Current account will not be excluded from the purview of the deposit .

► The provisions of section 269SS shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by Government, any banking company, post office savings bank or co-operative bank any corporation established by a Central, state or provincial Act, any Government company, and such other institution, association or body or class of institutions, associations or bodies which the Central Government may notify



► Few points to be considered for the application of clause 31(a):

► Advance against agreement for sale of goods is not a loan or deposit.

► opening balances to be considered for giving the maximum amount due in the year .

► Even if the loan is taken interest free the information has to be given security deposits are covered under the definition of deposits and hence need to be given.

► Loans and deposits by transfer of book entries constitute loans and deposits taken by way otherwise than by way of account payee cheques hence should be reported.

► E fling requires information in following format:



► Clause 31(b) * Particulars of each repayment of loan or deposit in an amount exceeding the limit specified in section 269T made during the previous year :

(i) Name, address and permanent account number (if available with the assessee) of the payee;

(ii) Amount of repayment;

(iii) Maximum amount outstanding in the account at any time during the previous year;

(iv) Whether the repayment was made otherwise than by account payee cheque or account payee bank draft.

► Statute: No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit if

► The amount of the loan or deposit together with the interest, if any, payable thereon, or



► The aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, is twenty thousand rupees or more:

► Audit procedures: The Tax auditor to obtain details of all loans or deposits repaid and verify the same with records maintained by the assessee. Where records are not available auditor to give a disclaimer


Name of

the

payee

Address of

the payee

PAN of the

payee

Amount

of loan or

deposit

taken or

accepted

Amount of

repayment

Maximum

amount

outstanding

in the

account at

any time

during the

previous

year

Whether the

repayment

was made

otherwise

than by an

account

payee bank

cheque or

account

bank draft



► Clause 31(c). Whether the taking or accepting loan or deposit, or repayment of the same were made by account payee cheque drawn on a bank or account payee bank draft based on the examination of books of account and other relevant documents


► Whether the certificate has been obtained from the assesse regarding taking or

accepting loan or deposit, or repayment of the same through an account payee

cheque or an account payee bank draft

Yes No

Question:

► Mr. X has taken a loan of Rs. 18000/- by cheque each from ‘A’ three times during the year. The aggregate loan is therefore Rs.54000/-. Will reporting be required under loan / deposit taken or accepted?


Clause 32

► Clause 32(a). Details of brought forward loss or depreciation allowance, in the following manner, to the extent available :

► Audit procedures: The Tax auditor to study the assessment records i.e. income tax returns filed, assessment orders, appellate orders and rectification/revised orders and trace the amounts of loss/allowance from the income tax returns and the assessment orders. Brought forward losses for different heads of income should be disclosed separately .

► The additional information regarding the order no. The information is required to be disclosed to the extent available.

► The loss will have to be reported as a negative figure whereas the relevant column accepts only numeric, non negative and non decimal data. Accordingly suitable clarification will have to be mentioned in remarks column.

S.

no.

Assessment

year

Nature of loss /

allowance

(in rupees)

Amount as

returned

(in rupees)

Amount as assessed

(give reference to

relevant order)

Remarks



► Clause 32(b). Whether a change in shareholding of the company has taken place in the previous year due to which the losses incurred prior to the previous year cannot be allowed to be carried forward in terms of section 79

► Note : Inter se transfers and if the overall percentages remain same before and after transfer, losses would be permitted to be set off

► In case there is change in the beneficial ownership , then the provisions of sec 79 would be applicable

► Doesn’t apply to change in voting power due to death of shareholder; transfer by way of Gift to their relatives by shareholder; amalgamation between subsidiaries of foreign company

► Clause 32(c). Whether the assessee has incurred any speculation loss referred to in section 73 during the previous year

► The details of any such speculative losses incurred by the company during the previous year are to be furnished under this clause.

► Clause 32(d). Whether the assessee has incurred any loss referred to in section 73A in respect of any specified business during the previous year

► Clause 32(e). In case of a company, please state that whether the company is deemed to be carrying on a speculation business as referred in explanation to section 73,


Clause 33

► Section-wise details of deductions, if any, admissible under Chapter VIA.

Audit Procedures: Tax Auditor to perform corroborative inquiry with the entity to

ascertain if there are any deductions

(i) In respect of certain Payments

(ii) In respect of certain Incomes

(iii) Others



► Audit procedures :

► Tax auditor to scrutinize books of account and other documents for ascertaining value of deductions under Chapter VIA

► To consider branch books when giving the details for the head office .

► Aggregate deductions cannot exceed aggregate total income.

► There may be cases where there is a difference between the amount claimed by the assessee and the amount computed out by the tax auditor.

► In such case, it is advisable for the tax auditor to report the amount admissible. The amount claimed, the background and the basis of the claim of the assessee may form part of the working papers.


Clause 34

► Clause 34(a). Whether the assessee is required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB, if yes please furnish

► Clause no 34(b): Whether the assesse has furnished the statement of tax deducted or tax collected within the prescribed time. If not, please furnish the details:

► Clause no 34(c): Whether the assesse is liable to pay interest under section 201(1A) or section 206C(7). If yes, please furnish:



► Audit Procedures:

► Management to prepare a statement in this regard and ensure that the reconciliation is made available for all expenses on which TDS is deductible

► Auditor is expected to verify the tax auditor is required to verify that no items have been omitted in the information furnished to him and reasonable test checks would reveal whether or not the information furnished is correct. The extent of check undertaken would have to be indicated by the tax auditor In his working papers and audit notes. The tax auditor would be well advised to so design his tax audit programme as would reveal the extent of checking and to ensure adequate documentation in support of the information being certified We will verify the returns filed by the assesse and compare the actual date of filing with the statutory deadline.

► If an assesse does not deduct the whole or any part of the tax or after deduction fails to pay the tax as required by the provisions under the Income Tax Act, 1961, is required to pay interest.

► We will verify the calculation of the interest amount payable by the assesse.

► We will verify the amount and the date of interest actually paid from the challan



► E-filing requires following information for each of the sub clause

Clause 34(a):



Clause 34(b):

Clause 34(c):



► Disclosures:

► The details relating to tax deduction / collection reported in Clause 34 is based on transactions

recorded in books of account maintained by the company.

► Our verification of the Company's compliance with the provisions of Chapter XVII-B [and Chapter

XVII-BB] regarding deduction / collection of tax at source and payment thereof to the credit of the

Central Government, has been carried out in accordance with auditing standards generally

accepted in India, which includes examination on a test check basis and having regard to

materiality of the items involved. Based on the test checks carried out by us, having regard to the

Company's existing policies and procedures as well as the specific representation given by the

assessee, which has been relied upon by us for the purposes of reporting under Clause 34.

► In view of the voluminous level of information involved, the information provided in column 4

(Total amount of payment or receipt of the nature specified in column (3)) in relation to clause

34(a) of the attached Form No. 3CD is restricted to those payments in respect of which the

assessee is required to deduct tax at source, and does not include all the entire value of payments

of each such nature required to be disclosed in the said clause. The assessee, however, has

prepared reconciliation between the total of such amounts, and the amounts in respect of which it

is required to deduct tax at source, on a sample basis, which has been examined by the tax

auditor.


Clause 35

► Clause 35(a) In the case of a trading

concern, give quantitative details of

principal items of goods traded:

i) Opening stock;

ii) Purchases during the previous year;

iii) Sales during the previous year;

iv) Closing stock;

v) Shortage / excess, if any.

► Clause 35(b) In the case of a

manufacturing concern, give quantitative details of the principal

items of raw materials, finished products

and by-products :

A. Raw materials :

i) Opening stock;


iii) Consumption during the previous

year;

iv) Sales during the previous year;

v) Closing stock;

vi) Yield of finished products;

vii) Percentage of yield;

viii) Shortage / excess, if any.



B. Finished products/by-products :

i) Opening stock;


iii) Quantity manufactured during the previous year;

iv) Sales during the previous year;

v) Closing stock;

vi) Shortage/excess, if any.

*Information may be given to the extent available

► Audit procedures:

► Tax Auditor to obtain certificates from the assessee in respect of principal

items of goods traded, manufactured ( raw materials, finished goods and by-

products).

► Auditor to verify the figures reported on a sample basis, in order to satisfy

himself as to the correctness of the figures furnished



Questions:

► What to disclose in case of multiple finished goods with one raw materials?

► What to disclose in case management has disclosed different opening stock

quantity from previous year’s closing stock, claiming the later one to be incorrect?


Clause 36

► In the case of a domestic company, details of tax on distributed profits under section

115-O in the following form:—

a) Total amount of distributed profits;

b) Amount of reduction as referred to in section 115-O(1a)(i) and (ii)

c) Total tax paid thereon;

d) Dates of payment with amounts.


► The reporting is for dividend paid in financial year including interim dividend and

not dividend provided for at year end

► Tax Auditor to verify the statutory records / minutes to ascertain the amount of

profits distributed

► Auditor to verify the tax paid thereon and the date of payment, on the basis of

duly received challan and books of account


Clause 37-39

► Clause 37. Whether any cost audit was carried out, if yes, enclose a copy of the

report of such audit [See section 139(9)]

► Clause 38. Whether any audit was conducted under the Central Excise Act, 1944,

if yes, enclose a copy of the report of such audit.

► Clause 39. Whether any audit was conducted under section 72A of the Finance Act, 1994 in relation to valuation of taxable services


► The tax auditor to ascertain from the management whether an audit was

carried out and if yes enclose a copy of the report of such audit.

► Where an audit may have been ordered and is not completed by the time the

tax auditor gives his report, he has to state the same in his report.

► E-filing requires to report in : Yes No N/A

► Even though the tax auditor is not required to make nay detailed study of such

report, he has to make a note of any material observation which may have

relevance to the tax audit. The tax auditor need not express an opinion in a

case where such audit has been ordered but the same has not been carried out.


Clause 40

► Accounting ratios with calculations as follows for current and previous year:—

a) Total turnover;

b) Gross profit/Turnover;

c) Net profit/Turnover;

d) Stock-in-trade/Turnover;

e) Material consumed/Finished goods produced.


► The Tax auditor to verify the ratios.

► The tax auditor should assign meaning to the terms used in the above ratios having due regard to the generally accepted accounting principles.

► Ratios mentioned in this clause are to be calculated in terms of value only.



Questions:

► What should be method of determination of gross profit?

► Only direct costs like raw material consumption / trading goods consumption,

packing materials, power & fuel, stores & spares, etc., which are directly traced

from financial should be considered

► Indirect costs like proportionate salary costs, depreciation, etc. which is

considered for inventory valuations could be considered

► If the turnover includes service income like AMC Income, Installation Services,

Repair Services, etc. should we consider related costs for determination of gross

profit?


Clause 41

► Details of demand raised or refund issued during the previous year under any tax laws other than Income Tax Act, 1961 and Wealth tax Act, 1957, to be furnished along with details of relevant proceedings.



E-filing of tax audit reports

► CBDT Notification No. 34/2014/F. No. 142/5/2014-TPL dated 1 May 2014 amended Rule 12 of Income tax Rules, 1962 (Rule) with effect from 1 April 2014 to make procedural changes in return filing compliance for tax year 2012-13. Notification requires taxpayers liable to obtain following audit reports to e-file respective reports independently in addition to e-filing of return of income:-

1. Tax audit under s.44AB

2. Transfer pricing audit report under s.92E2

3. MAT audit report under s.115JB

► Tax auditor is required to upload the tax audit report directly in the e-filing portal.

► Procedure for e-filing given in Rule 12 of Income tax Rules, 1962.


E-filing : Protocols and responsibility

► The assessee provides the information requested for compilation of the Form No. 3CD duly authenticated – this could be done by providing a Proforma copy of the information required in Form No. 3CD, that is signed off by them physically. [Assessee]

► We perform the audit of the Form No. 3CD, after which we input the relevant details in the E-Form 3CA / 3CD based on information provided by the assessee. [Auditor]

► After due validation, the XML copy of the E-Form 3CA-3CD for the assessee be uploaded to the e-filing portal. Other mandatory attachments in the e-filing portal like BS, PL, other attachments (like standard notes etc.,) also to be uploaded in the relevant section of the e-filing portal. [Auditor]

► After the above documents are digitally signed by the concerned engagement partner, they are uploaded on the e-filing portal and submitted. [Auditor]

► After submission by us, the Form No. 3CD filed in the e-filing portal is downloaded as a PDF file by the assessee, and two copies (or more if needed) are printed. [Assessee]


E-filing : Protocols and responsibility

► The assessee affixes their seal on all pages of the Form 3CD, and physically signs the copies of the Form No. 3CD and sends them to us. [Assessee]

► We sign the Form No. 3CA (which is on plain paper, not letterhead) and also countersign the Form No. 3CD, as signed by the client. We include the round seal of the relevant audit firm, on all pages of the Form No. 3CA and Form No. 3CD, during this process. Thereafter, we return one copy of both to the client, and retain one copy for our records. [Auditor]

► The assessee approves the E-Form 3CA / 3CD uploaded by the auditor in the e-filing portal to complete this process. This is the acceptance of the Form No. 3CA and Form No. 3CD by the client. [Assessee]

► We retain one copy of the acknowledgement of the filing (available from the e-filing portal), along with the Form 3CA and 3CD in paragraph 7 above, in our records. [Auditor]


E-filing Procedure


E-filing Procedure

► Form No. 3CA requires the tax auditor to upload Form No. 3CD along with a copy of:

a. Statutory Audit Report

b. audited Profit and Loss Account/ Income & Expenditure Account, audited

c. Balance Sheet and documents declared by the said Act to be a part of / or annexed to the Balance Sheet, Profit and Loss Account in Word, Excel Format, etc signed as “sd/-” can be converted in to ‘.pdf’ file and uploaded on the portal. However, the auditor should maintain the physically signed Audited Report in his records and ensure from that there is no difference between physical report and PDF file uploaded.


Few issues/ concerns relating to E- Fling

► Form 3CA and 3CB required to be filed in e-filing mode does not allow edits and as a result:

► There is no scope for qualifications or other explanatory statements on the face of the report.

► No space for the auditor to indicate the division of responsibility between the assessee and the auditor.

► Edits to report for including the reference to application of materiality in the course of audits not possible which is otherwise permitted by guidance note.

► The auditor preparing the form 3CD while E-filing and also reporting his opinion on the form 3CD

► Limit on the text which can be entered in E-filing. Limit upto 100 characters, in some cases.

► Standard notes on representations, case laws, etc which we add to our Form 3CD cannot be added.


Some key documents – financial statements

► If the company has December as Statutory year end and has to prepare financial statements for March Year end.

► How should these accounts to be prepared?

► Financial statements should be prepared based on Schedule III of the Companies Act, 2013 and in accordance with the accounting standards. However disclosures which are not warranted for determination of book profit under section 115JB of the Income Tax Act can be excluded unless they are required by accounting standards or necessary for true and fair presentation of financial statements

► Disclosures related with additional statutory information as per schedule III need not be provided in tax financial statements as same is not relevant for providing true and fair view.


Some key documents

► Some key documents:

► Audited financial statements

► Excise records

► VAT / Sales Tax Returns

► Assessment orders of completed Income Tax Assessments including transfer pricing assessment orders

► TDS - Annual Returns filed by client

► Tax returns of earlier years

► Engagement Letter and Letter of Representation


Some key documents – assessment orders of completed Income Tax assessments...

► Assessment orders of the ITO, CIT or Appellate Tribunal, as the case may be. It would also include appeals filed by the client against orders of the Tax department.

► To be reviewed to find out and understand the stand taken by the Income Tax Department and by the company in respect of various items.

► Highlight different view taken by the Income Tax Department in respect of:

► Capital expenses debited to P&L Account - say major renovation costs may be disallowed

► Certain expenses may be treated as personal expenses and disallowed

► Highlight different view taken by the Income Tax Department in transfer pricing assessments for related party transactions

► Classification of fixed assets into different block of asset

► Disallowance of amounts claimed under Chapter VI A, say, Section 80 HHC, 80 IA, 80 O

► Disallowance in respect of prior year expenses

► Unabsorbed Losses and depreciation


Questions

Tax Audit – Basics

August 2015

Rajkot Branch WIRC, ICAI

C.A. Shreyans Ravrani

Thank You!

Thank You!

Contact details:

[email protected]

mailto:[email protected]



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