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THE CHAMBER OF TAX CONSULTANTS
TAX AUDIT - CLAUSES ISSUES & DOCUMENTATION
– CA Ketan L. Vajani
caketanvajani@gmail.com
27th August, 2014
Let’s Warm Up ….
Purpose of Tax Audit
Relevance of Accounting Standards andPrinciples of commercial accounting
Materiality
Prudence
Substance Vs. Form
Concept of Test Check
True & Fair Vs. True & Correct
Guidance Note issued by ICAI
Section 44ABDifferent
Tax PayersA Person
Carrying on Profession
If his Gross Receipts
exceed 25 Lakhs Rupees in any Previous
Year.
A Person Carrying on Business
If his total SalesTurnover or
GrossReceipts, as the case may be in
business exceed or exceeds 1 Crore rupees
in any Previous Year
A Person covered U/sec. 44AD,44AE,44
AF,44BB or 44BBB
If such person claims that the profits and
gains from the business is lower than as computed
under above sections irrespective
of his turnover.
Clause 26
26. In respect of any sum referred to in clause (a),(b), (c), (d), (e) or (f) of section 43B, the liabilityfor which:
A. Pre-existed on the first day of the previous yearbut was not allowed in the assessment of anypreceding previous year and was:
(a) paid during the previous year;(b) not paid during the previous year.
B. Was incurred in the previous year and was:(a) paid on or before the due date for furnishing
the return of income of the previous year undersection 139(1);
(b) not paid on or before the aforesaid date.
Section 43B - Provisions
Deduction allowed only if actually paid Any tax, duty, cess or fee Contribution to PF, super annuation fund,
gratuity fund etc. Bonus or commission to employees Interest on loan from Financial Institution,
State Financial Corpn etc. Interest on loan from any scheduled bank Payment in lieu of Leave Salary
No disallowance if paid within due dateof filing Return of Income
Section 43B – Documents
Copies of paid challans / vouchers
Computation and Return copy forearlier years – confirm disallowancein earlier years for non payment
Earlier Years’ TAR - givingdisallowance
Section 43B
Exclusive Method of accounting – Service Tax shown as liability– Not paid whether disallowance is to be made u/s. 43B CIT Vs. Noble & Hewitt (India) Pvt. Ltd. 305 ITR 324 (Del.) Shri Kalu Karman Budhelia Vs. ACIT TS-749-ITAT-2012(Mum)
Whether Service Tax collected is Income Chowringhee Sales Bureau P. Ltd. Vs. CIT 87 ITR 542 (SC) – Sales tax
collected is Income ACIT Vs. Real Image Media Technologies P. Ltd. 114 ITD 573 (Chennai)
– Service provider is agent of government and analogy of Sales Tax /Excise does not apply to Service Tax
Effect of Section 145A – Applies to Purchase, Sales andInventories
Taxes paid after the completion of audit but before filing of report- Effect in Audit Report and computation
Clause 27
27. (a) Amount of Central Value Added Taxcredits availed of or utilized during theprevious year and its treatment in theprofit and loss account and treatmentof outstanding Central Value AddedTax credits in the accounts.
(b)Particulars of income or expenditureof prior period credited or debited tothe profit and loss account.
Clause – 27(a)
Earlier MODVAT – Now CENVAT
Give details about Cenvat Creditavailed and also utilised for paymentof Service Tax / Excise
Refer Service Tax / Excise Returns
Also refer to RG23 registersmaintained for excise
Take required copies as supportingdocuments
Prior Period Items
Short Provision for expenses made in earlieryear – what about differential payment made inthe current year on receipt of the bill.
Expenses of earlier year for which bills were alsoreceived in the earlier year but left out to bebooked due to error or omission
Liability under dispute in earlier year – Now paid Section 43B items – Sales tax paid of earlier
year during the current year Due to order passed in the current year Order passed earlier but not paid then and paid
now
Documentation
Clause 28
28.Whether during the previousyear the assessee has receivedany property, being share ofa company not being acompany in which public are
substantially interested, withoutconsideration or for inadequateconsideration as referred to insection 56(2)(viia),if yes, pleasefurnish the details of thesame.
Section 56(2)(viia)
Applies to firms or closely heldcompanies
Applies when company / firmsreceives shares of a closely heldcompany Without consideration – FMV exceeds
50000 – FMV taxable
Inadequate consideration – If FMV minusConsideration is > 50000 then –difference is taxable
Section 56(2)(viia)
FMV to be computed as per Rule11UA
Documentation
Valuation of shares received as per Rule11UA
Transfer document specifyingConsideration
Clause 29
29.Whether during theprevious year the assesseereceived any considerationfor issue of shares whichexceeds the fair marketvalue of the shares asreferred to in section56(2)(viib), if yes, pleasefurnish the details of thesame
Section 56(2)(viib)
Applies to closely held companies who hasissued shares to a resident at premium
Consideration received for issue of sharesin excess of FMV is taxable
Benefit of Rs. 50,000/- not available –contra to 56(2)(viia)
FMV is to be determined under Rule 11UA
Company can justify higher FMV before AOon the basis of value of intangible assets inits possession at the time of issue of shares
Section 56(2)(viib) –Documentation
Details of shares issued – ROCrecords
Rule 11UA valuation
If company claims higher valuationon the basis of intangible assets –take copies of valuation reports ofthe respective assets
Clause 30
30.Details of any amount borrowed onhundi or any amount duethereon(including interest on theamount borrowed) repaid, otherwisethan through an account payeecheque [Section 69D].
Section 69D
What is Hundi – Promissory Note drawn ina vernacular language
Amount borrowed on Hundi or Repaymentof the same has to be made by accountpayee cheque – Even Interest
If not through account payee cheque, theamount borrowed or repaid will beconsidered as Income in the year ofborrowing or repayment
If borrowing is taxed then repayment willnot be taxed again in the year ofrepayment
Clause 31
31. (a) Particulars of each loan or deposit in an amountexceeding the limit specified in section 269SS takenor 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 acceptedotherwise than by an account payee cheque or an accountpayee bank draft.
(These particulars need not be given in case of a Govt. company abanking company or a corporation established by a CentralState or Provincial Act.)
(b) Particulars of each repayment of loan ordeposit in an amount exceeding the limitspecified in section 269T made during theprevious year:(i) name, address and permanent accountnumber (if available with the assessee) of thepayee;(ii) amount of the repayment;(iii) maximum amount outstanding in theaccount at any time during the previous year;(iv) whether the repayment was madeotherwise than by account payee cheque oraccount payee bank draft.
Clause 31 Cont….
Loans Accepted or Repaid
Certificate from assessee about compliance is not tobe obtained – Whether increases the scope of TaxAudit - Whether still certificate can be obtained ?
Amount received from customers against Sale ofGoods
No Transaction in Loan Account – Whether to bereported
Running current account – Loans taken and repaidfrom time to time – How to report
Op. Balance in Loan account is 15000/- - Currentyear Loan taken in cash Rs. 15,000/- - Whethervioldation of section 269SS
Op. Balance – 1 Lakh – Rs. 15,000/- received in cashin the year – Whether violation of section 269SS
Transactions by Journal Entries
Transactions by Journal entry whether covered :
CIT Vs. Triumph International Finance (I) Ltd. 345 ITR 270(Bom)
CIT Vs. Noida Toll Bridge Co. Ltd. 262 ITR 260 (Del.) / CIT Vs.Worldwide Township Projects Ltd. – Del HC – itatonline.org
CIT Vs. Bombay Conductors & Electricals Ltd. 301 ITR 328(Guj)
CIT Vs. Saurabh Enterprises – All HC. – itatonline.org
Lodha Builders Vs. ACIT – Mum Trib – itatonline.org
CBDT Circular No. 387 Dated 6-7-1984
Clause 32
32.(a) Details of brought forward loss or depreciation
allowance, in the following manner, to the extent
available:
SI.No
AssessmentYear
Nature ofloss/allowance(in rupees)
Amount asreturned(in rupees)
Amount asassessed (givereference torelevant order))
Remarks
(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 Sec 79
Clause 32 Cont…
(c) Whether the assessee has incurred anyspeculation loss referred to in section 73 duringthe previous year, If yes, please furnish thedetails of the same.
(d) Whether the assessee has incurred any lossreferred to in section 73A in respect of anyspecified business during the previous year, Ifyes, please furnish the details of the same.
(e) In case of a company, please state that whetherthe company is deemed to be carrying on aspeculation business referred in explanation tosection 73,If yes, please furnish the details ofspeculation loss if any incurred during theprevious year.
Clause – 32(b) – Section 79
Applies to a company in which public arenot substantially interested
No Loss will be allowed to be set off orcarry forward unless 51% of shares havingvoting power as at the end of the year areheld by persons holding 51% of shareshaving voting power at the end of the yearin which loss was incurred
Exception : Transfer of shares due to deathor gift to a relative
Clause – 32(b) – Section 79
Exception : Does not apply to Indiancompany which is subsidiary of a foreigncompany on Amalgamation or Demergeretc.
Does not apply to Unabsorbed Depreciation
Documentation : List of shareholders andholding as on last date of year and also lastdate of year where loss was first computed.
Brought Forward Losses
When the matter is subject to Litigation at various levels– How to report the figures of losses
How to confirm the figures of brought forward losses /depreciation
Section 79 - Loss of A.Y. 2011-12
Share holding as on 31-3-11
Share holding as on 31-3-14(Option A)
Share holding as on 31-3-14(Option B)
A 25 20 25
B 25 20 25
C 25 20
D 25 20
E 20 50
Section 73 / Section 73A
Section 73 - Speculation Loss can be setoff against only speculation profit –carry forward for 4 years
Section73A – Loss of specified businessu/s. 35AD can be set off against profitsof specified business only – If not set offthen Carry forward to subsequent years– No restriction about No. of years.
Explanation to Section 73
Business of a company consisting ofpurchase and sale of shares of othercompanies is deemed to be speculationbusiness
Exceptions Company whose GTI is mainly consisting of
Incomes other than Business Income
Company whose principal business is (a)banking or (b) granting of loans andadvances or (c) trading in shares
Clause 33
33. Section-wise details of deductions, ifany, admissible under Chapter VI-A orChapter – III (Section 10A, Section10AA)
Section underwhich deductionis claimed
Amounts admissible as per the provision ofthe Income-tax Act, 1961 and fulfills theconditions, if any, specified under therelevant provisions of Income Tax Act,1961 or Income-tax Rules, 1962 or anyother guidelines, circulars etc., issued inthis behalf.
Deductions
Certificates issued under the relevantsections by other CAs. – Whether reliable?
Deduction u/s. 80-I / 80-IA etc. computedin earlier year and accepted in the earlieryear’s assessments – Whether Auditorneeds to verify the claim again every year?
LIC / Mediclaim etc. Payments made fromIncomes other than Business Income -whether needs to be mentioned here ?
Clause 34
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:
1. TAN No.2. Section3. Nature of Payment4. Total amount of payment or receipt of
the nature specified in 35. Total amount on which tax was required
to be deducted or collected out of 4
Clause 34
6. Total amount on which tax was required to be deducted or collected at specified rate out of 5
7. Amount of Tax deducted or collected out of the 6
8. Total amount on which tax was deducted or collected at less than the specified rate out of 7
9. Amount of tax deducted or collected on 8
10. Amount of tax deducted or collected not deposited to the credit of the Central Government out of 6 and 8
Clause 34 Cont…
(b) Whether the assessee has furnished the statementof tax deducted or collected within the prescribedtime. If not, please furnish the details:
(i) TAN No.(ii) Type of Form(iii) Due date for furnishing(iv) Date of furnishing, if furnished(v) Whether the statement of tax deducted or
collected contains the information about all thetransactions which are required to be reported
If returns filed in time – whether the aboveinformation is not required ?
Clause 34 Cont…
(c) Whether the assessee is liable to paythe interest under section 201(1A) orsection 206C (7),if yes, pleasefurnish:
• TAN No
• Amount of Interest under section201(1A)/206C(7) is payable
• Amount paid out of above alongwith date of payment.
Clause – 34 – TDS Compliance
Complete details need to be given for payments liableto TDS including the cases where deduction is madeat lesser rate
Also details of tax deducted but not deposited needsto be given
In case of Multiple TAN – Details are to be givenseparately for each TAN
Dates of filing the TDS Statements are to be reported
Auditor needs to certify that the TDS Statementfiled by assessee contains information about allthe transactions
Interest Working is required to be given – Section201(1A) – Interest Calculation
Clause 35
35.(a) In the case of a trading concern,give quantitative details of principalitems 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 Contd.
b) In the case of a manufacturing concern, givequantitative details of the principal items ofraw material, finished products and byproducts;
A. Raw Materials;(i) Opening Stock;(ii)Purchases during the previous year;(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.
Clause 35 – Contd.
B. Finished Products/ By- products:
(i) Opening Stock;
(ii) Purchases during the previous year;
(iii)Quantity manufactured during the previousyear;
(iv)Sales during the previous year;
(v) Closing stock;
(vi)Shortage/ excess, if any.
(Information may be given to the extentavailable.)
Quantitative Details
Retail Traders dealing in many items– Stock details not maintained – Howto Report
Whether MR Letter shall be sufficientcompliance for Auditor
Other possible Documentation
Difference in units – Items purchasedin Kilos but sold in Pieces or Dozens
Clause 36
36.In the case of a domestic company, details oftax on distributed profits under section 115-0in the following form:
(a) total amount of distributed profits;(b)Amount of reduction as referred to in section
115-O(1A)(i); - Dividend received fromsubsidiary
(c) Amount of reduction as referred to in section115-O(1A)(ii); - Dividend received from NewPension System Trust
(d)Total tax paid thereon;(e) dates of payment with amounts.
Clause 37 & 38
37.Whether any cost audit was carried out? if yes,give the details, if any, of disqualification ordisagreement on any matter/item/value/quantity as may be reported/identified by thecost auditor. – Whether report to be attached ?
38.Whether any audit was conducted under theCentral Excise Act, 1944, if yes, give thedetails, if any, of disqualification ordisagreement on anymatter/item/value/quantity as may bereported/identified by the auditor.
Clause 39
39.Whether any audit was conductedunder section 72A of the FinanceAct,1994 in relation to valuation oftaxable services, if yes, give thedetails, if any, of disqualificationor disagreement on anymatter/item/value/quantity as maybe reported/identified by the auditor.
Clause 40
40. Details regarding turnover, gross profit,etc., for the previous year and preceding previous year:
S.No Particulars Previous Year
Preceding Previous Year
1 Total Turnover of the assessee
2 Gross Profit/Turnover
3 Net profit/turnover
4 Stock-In-Trade/Turnover
5 Material Consumed/Finished Goods Produced
Accounting Ratios
Total Turnover needs to be given
With Taxes or without Taxes ?
Whether the Turnover for the businesscovered by Presumptive Tax Scheme isto be excluded here
Figures of the earlier financial yearare to be given
When earlier year was not under Audit,How to confirm the figures
Clause 41
41.Please furnish the details of demandraised or refund issued during theprevious year under any tax lawsother than the Income Tax Act,1981and Wealth Tax Act 1957 along withdetails of relevant proceedings.
Demand Raised / Refund Issued
Details are to be given about demandraised or refund issued under anytax law other than Income Tax andWealth Tax
How to confirm that all details areprovided by the assessee
Auditor’s Responsibility wheninformation withheld by the assessee
What details are required to be given
Extension of Date, But which ???
Due Date extended for Tax Audit Report
Due Date for Section 44AB is the one specified in section 139(1)
Both are interlinked
Whether both extended or only date for Audit Report is extended
Filing of Return without Audit Report – Possible ? Desirable ?
Chalte Chalte …….
CA – Consistent Achiever
CTC – Capitalising The Challenges
Do Remember : When the going gets tough…. the Tough gets going
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