Download - Bangalore Branch of SIRC

8/23/2011
ISSUES IN TAX AUDIT U/S. 44AB AND U/S. 44AD
AND CLAUSE TO CLAUSE ANALYSIS OF FORM
NO 3CD
CA NAVEEN KHARIWAL G.
B.COM,FCA
9880683725
Finance Act, 1984
Hon. Finance Minister:
“Tax Audit intended to ensure that the books
of account and other records are properly
maintained and faithfully reflect the true
income of the taxpayer”
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Circular No. 387 dt 06-07-1984
A proper audit for tax purposes would ensure:
That books of accounts and other records are
properly maintained
That they faithfully reflect the income of the taxpayer
Claims of deductions are correctly made by him
Circular No. 387 dt 06-07-1984
Such audit would also help in checking
practices
fraudulent
Facilitate administration of tax laws by proper presentation
of accounts
Considerable saving of time of the AO in carrying out
routine verifications
Checking correctness of totals and verifying
purchase and sales are properly vouched
whether
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[Audit of accounts of certain persons carrying on business or
profession.
44AB. Every person,—
(a)
carrying on business shall, if his total sales, turnover or gross
receipts, as the case may be, in business exceed or exceeds 6
[sixty lakh rupees] in any previous year; or
(b)
carrying on profession shall, if his gross receipts in profession
exceed 8 [fifteen lakh rupees] in any [previous year; or
(c) carrying on the business shall, if the profits and gains from the
business are deemed to be the profits and gains of such person
under [section 44AE ] [or section 44BB or section 44BBB], as
the case may be, and he has claimed his income to be lower than
the profits or gains so deemed to be the profits and gains of his
business, as the case may be, in any [previous year; or]]
(d) carrying on the business shall, 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,]
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get his accounts of such previous year audited by an accountant
before the specified date and [furnish by] that date the report of
such audit in the prescribed form duly signed and verified by
such accountant and setting forth such particulars as may be
prescribed :
Provided further that] in a case where such person is required by
or under any other law to get his accounts audited, it shall be
sufficient compliance with the provisions of this section if such
person gets the accounts of such business or profession audited
under such law before the specified date and [furnishes by] that
date the report of the audit as required under such other law and a
further report [by an accountant] in the form prescribed under
this section.
Explanation.—For the purposes of this section,—
(i) ―accountant‖ shall have the same meaning as in the
Explanation below sub-section (2) of section 288;
[(ii) ―specified date‖, in relation to the accounts of the assessee
of the previous year relevant to an assessment year, means the
[30th day of September] of the assessment year.]]
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Liability of Tax Audit
A charitable trust , cooperative society etc., though their
income may be exempt, even if turnover exceed the
threshold limit, they should get their account audited.
If income of an assessee is below the taxable limit, he will
also liable to get his account audited, if the turnover in
business exceed the threshold limit.
Section 44AB not applicable to assessee covered us 44B
and 44BBA.
‣ A non-resident is also required to get his accounts
audited and to furnish report under sec 44AB, but
only pertaining to Indian operations.
‣ An agriculturist is not required to get his accounts
audited u/s 44AB even though the total sales of
agricultural products may exceed Rs 60 lakhs.
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Total Sales, Turnover or Gross Receipts
‣Not defined in Sec. 44AB or any other provision of the
Act.
‣Can be interpreted as volume of business, total is for all
three expressions.
‣Sale denotes sale of movable commodity.
‣Turnover is aggregate amount for which sales effected
or services rendered (as per guidance note of ICAI).
‣Gross receipt to include all receipts whether in cash or
kind from carrying of business.
‣Sales, turnover & gross receipts should be determined
as per method of accounting regularly employed.
ISSUE NO. 1 whether the sales by commission agent or by
person on consignment basis forms part of turnover
The position that emerges from ICAI‘s Guidance Note and CBDT‘s
Circular No. 452, dated 17.03.1986 is as under:
If the property in the goods or all significant risks and rewards of
ownership of goods belongs to the commission agent or consignee
immediately before the transfer by him to a third party, then the sales
price received / receivable by the commission agent or consignee shall
form part of his sales / turnover.
If the property in the goods or all significant risks and rewards of
ownership in the goods continue to remain with the principal
(consignor) immediately before the transfer by him, (the commission
agent or consignee) to a third party, then the sales price received /
receivable by the commission agent or consignee shall not form part
of the sales / turnover of the commission agent or consignee. The sales
price received / receivable by him shall form part of the sales /
turnover of the principal (consignor).
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ISSUE NO. 2 In case of share brokers
Share brokers, on purchasing securities on behalf of their customers,
do not get them transferred in their names but deliver them to the
customers who get them transferred in their names.
The same is true in case of sales also.
The share broker holds the delivery merely on behalf of his
customer.
The property in goods does not get transferred to the share brokers.
Only brokerage which is being accounted for in the books of account
of share brokers should be taken into account for considering the
limits for the purpose of section 44AB.
However, in case of transactions entered into by share broker on his
personal account, the sale value should also be taken into account for
considering the limit for the purpose of section 44AB.
The case of a sub-broker is same as that of a share broker.
Issue No. 3 - Speculation Transaction 43(5)
It means a transaction, in which a contract for the
purchase or sale of any commodity, including stocks
and shares, is periodically or ultimately settled
otherwise than by the actual delivery or transfer of the
commodity or scrips.
Thus, in a speculative transaction, the contract for
sale or purchase which is entered into is not
completed by giving or receiving delivery so as to
result in the sale as per value of contract note.
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The contract is settled otherwise and squared up by
paying out the difference which may be positive or
negative.
As such, in such transaction the difference amount is
'turnover'.
In the case of an assessee doing speculative
transactions there can be both positive and negative
differences arising by settlement of various such
contracts during the year.
Each transaction resulting into whether a positive or
negative difference is an independent transaction.
Further, amount paid on account of negative
difference paid is not related to the amount received
on account of positive difference.
In such transactions though the contract notes are issued
for full value of the purchased or sold asset the entries in
the books of account are made only for the differences.
Accordingly, the aggregate of both positive and negative
differences is to be considered as the turnover of such
transactions for determining the liability to audit vide
section 44AB.
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Issue No. 4 - Derivatives, futures and options:
Such transactions are completed without the delivery of
shares or securities.
These are also squared up by payment of differences.
The contract notes are issued for the full value of the
asset purchased or sold but entries in the books of
account are made only for the differences.
The transactions may be squared up any time on or
before the striking date. The buyer of the option pays the
premia.
(I)
(II)
(III)
The turnover in such types of transactions is to be
determined as follows:
The total of favourable and unfavourable differences
shall be taken as turnover.
Premium received on sale of options is also to be
included in turnover.
In respect of any reverse trades entered, the
difference thereon, should also form part of the
turnover.
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Issue No. 5 - Delivery based transactions: Where the
transaction for the purchase or sale of any commodity
including stocks and shares is delivery based whether
intended or by default, the total value of the sales is to be
considered as turnover.
Issue No. 6 - Capital Gains Vs. Business
CBDT‘s Instruction No. 1827 dated 31.08.1989 r.w. Circular
No. 4/2007, dated 15.06.2007.
Depends on facts and circumstances of each case taking into
consideration nature, frequency and volume of transaction.
Landmark Judgments :
i. CIT v. P.K.N. and Co. Ltd. (1966) 60 ITR 65 (SC).
ii. Saroj Kumar Mazumdar v. CIT (1959) 37 ITR 242 (SC).
iii. CIT v. Sutlej Cotton Mills Supply Agency (1975) 100 ITR 706
(SC).
iv.
CIT (Central), Cal Vs. Associated Industrial Development
Co.(P.) Ltd. [1971] 82 ITR 586 (SC).
v. Venkataswami Naidu & Co.(G) v. CIT (1959) 35 ITR 594
(SC).
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The Authority for Advance Rulings (AAR) (288 ITR 641), referring to
the decisions of the Supreme Court in Several Cases, has culled out the
following principles:-
(i)
(ii)
―Where a company purchase and sells shares, it must be shown that
they were held as stock-in-trade and that existence of the power to
purchase and sell shares in the memorandum of association is not
decisive of the nature of transaction;
The substantial nature of transactions, the manner of maintaining
books of account, the magnitude of purchases and sales and the ratio
between purchases and sales and the holding would furnish a good
guide to determine the nature of transactions;
(iii) Ordinarily the purchase and sale of shares with the motive of
earning a profit, would result in the transaction being in the
nature of trade / adventure in the nature of trade; but where the
object of the investment is shares of a company is to derive
income by way of dividend etc., then the profits accruing by
change in such investment (by sale of shares) will yield capital
gain and not revenue receipt.‖
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Board Circular No. 4/2007, dated 15-6-2007
It is possible for tax payer to have two portfolios,
i.e., an investment portfolio comprising of securities
which are to be treated as capital assets and a trading
portfolio comprising of stock in trade which are to
be treated as trading assets. Where an assessee has
two portfolios, the assessee may have income under
both heads i.e., capital gains as well as business
income.
Issue No. 7 - The following items would not form part of "gross
receipts in business” for purposes of section 44AB
In the case of a traveling agent, the amount received from the clients for
payment to the airlines, railways etc. where such amounts are received by
way of reimbursement of expenses incurred on behalf of the client. If,
however, the travel agent is conducting a package tour and charges a
consolidated sum for transportation, boarding and lodging and other
facilities, then the amount received from the members of group tour
should form part of gross receipts
and
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.
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The principle to be applied is that
if the assessee is merely reimbursed for certain expenses
incurred, the same will not form part of his gross receipts.
But in the case of charges recovered, which are not by way
of reimbursement of the actual expenses incurred, they will
form part of his gross receipts.
Issue No. 8 - An assessee own 4 proprietorship businesses. The
aggregate annual turnover of all the concerns exceeds Rs. 60
lakhs but individually each business‘s turnover is below Rs. 60
lakhs. Further, separate books of account are maintained for
each business and profit and loss account and balance sheet are
prepared separately.
(a) will tax audit under section 44AB be applicable ?
(b) If yes, should the particulars of all busineses be reported in
a single Form No. 3CD ? If so, how ?
(c) Should the tax auditor give a consolidated Form No. 3CD in
respect of all the concerns ?
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Ans : (a) The requirement of tax audit in the case of an
assessee is to be determined taking into consideration the
‗sales‘, ‗turnover‘ or ‗gross receipts‘ of all the businesses
carried on by him. If the aggregate annual turnover of the
four proprietary concerns exceed Rs. 60 lakhs, section
44AB would be clearly applicable.
(b) In regard to audit report and furnishing of particulars in
Form Nos. 3CA/3CB and 3CD, there are two possibilities,
Firstly, separate tax auditors may be appointed in respect of
individual businesses in which case Form Nos. 3CB and 3CD
have to be submitted separately for each business.
Alternatively, one tax auditor may undertake the audit of all the
businesses. Here also the tax auditor can prepare Form Nos.
3CA/ 3CB and 3CD separately for each business. The need for
separate forms for each business arises particularly where
reliefs are claimed in respect of individual businesses.
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(c) However it may be noted that tax audit as such is
conducted in respect of an assessee and hence the question
of consolidating the separate forms into a single form
assumes importance. Further, without consolidating the
separate Form Nos. 3CD into a single form particulars like
deduction permissible under chapter VIA cannot be given.
Hence it is advisable to prepare a consolidated form. The
auditor consolidating the report / form can rely on the work
of the other auditor (AAS -10) (Revised).
Issue No. 9 - (i) The assessee is the proprietor of the following
businesses:
(a) cloth business at Bangalore – Sales Rs. 30 Lakhs.
(b) yarn business at Chennai – sales Rs. 25 lakhs.
(c) hosiery business at Calicut – Sales Rs. 22 lakhs.
Separate sets of books are maintained at each of the above places.
The business are carried on in different names viz., (a) Vinay
Cloth Stores (b) Nagaraj Yarn Merchants and (c) Natesh hosiery
Mart. Should the assessee get his accounts audited under section
44AB in respect of each of the above proprietary concerns ?
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(ii) If, in the above case, the hosiery business is carried on by the
assessee‘s wife from the funds gifted by the assessee and the
income of the business is includible in the income of the assessee
under section 64, what will be te position of audit under section
44AB ?
(iii) If the assessee is a partner in (a) M/s. A & Co., (Sales Rs. 45
lakhs) (b) M/s. B & Co., (Sales Rs. 48 lakhs) and (c) M/s. D. &
Co., (Sales Rs. 40 lakhs) and he has 60% share in each of the
above firms, should each of the above firms get its accounts
audited under section 44AB ? Should the asseessee who is a
partner in the above firms get his personal accounts audited under
section 44AB as the aggregate of his share in the turnover of the
three firms exceeds Rs. 60 lakhs.
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Ans: (i) Even if the assessee carries on business at different
places in different names and deals in different commodities, it
will be necessary to get the accounts audited if the aggregate
amount of sales of all the businesses exceed Rs. 60 lakhs. In the
given case the total sales of the three businesses amount to Rs.
77 lakhs Therefore, it will be necessary to get the accounts of
all the three concerns belonging to this assessee audited. It may
be noted that the emphasis is on the total sales. Therefore, even
if the assessee carries on one or more businesses the sales of all
the businesses will be taken into consideration.
Ans: (ii) If the business is carried on by the wife of the
assessee, it cannot be said that it is carried on by the assessee
merely because the income from the business is includible in
the income of the assessee under section 64. Therefore, the wife
of the assessee carrying on hosiery business with turnover of
Rs. 22 lakhs will not be required to get the accounts audited
under section 44AB.
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Ans: (iii) Each firm is a separate person / assessee for the
purpose of Income-tax Act. Therefore, the figures of sales of
each firm will have to be considered. In the given case, it will
not be necessary for A & Co., B & Co., or C & Co., to get their
accounts audited as the sales of any one of these firms do not
exceed Rs. 60 Lakhs.
Similarly, any partner of these firms will not be required to get
his personal accounts audited if he is not carrying on any
personal business having sales / turnover exceeding Rs. 60
lakhs. The sales / turnover of the firms in which he is a partner
cannot be taken into consideration for this purpose.
Issue No. 10 - (i) A & Co. (Partnership firm) is appointed as
selling agent of a textile mill. The firm canvasses orders for the
mill. The goods are despatched by the mill to the customers
introduced by A & Co. The sales bills are prepared by the mill.
A & Co., recovers the sale proceeds and remits the same to the
mill. The total sales organised by A & Co., during the year
ended 31.03.2011 amounted to Rs. 20 crores. The commission
@ 1% earned by A & co., amounted to Rs. 20 lakhs. Should A
& Co., get their accounts audited under section 44AB ?
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(ii) In the above case if A & Co., had purchased cloth for Rs.
55 lakhs and sold cloth worth Rs. 50 lakhs will the provisions
of section 44AB apply ?
Ans : (i) In this case, A & Co. is a selling agent of the textile
mill. From the facts stated in the above issue, it is evident that
the selling agent does not become the owner of the goods. The
ownership continues to be that of the mill and it passes from the
mill to the customer. The goods are despatched directly by the
mill to the customers and sales bills are prepared by the mill.
Therefore, the amount of the sales made by the mill
cannot be taken into consideration for determining the
liability of A & Co., to get its accounts audited under
section 44AB. Since the commission income of A & Co.
is only Rs. 20 lakhs and if there are any sales or other
trading receipts of A & Co., which are less than Rs. 40
lakhs, it will not be required to get its accounts audited
under section 44AB.
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(ii) As stated above, because the commission income of
A & Co. is Rs. 20 lakhs and the sales of cloth amount to
Rs. 50 lakhs the total turnover and gross receipts of A &
Co. will exceed Rs. 60 lakhs and it will be necessary for
it to get its accounts audited under section 44AB.
Issue No. 11 - Mr. ‗B‘ has received goods worth Rs. 50 lakhs on
consignment from P & Co. These goods were sold by Mr. ‗B‘ at
Bombay for Rs. 62 lakhs. He has issued his own bills disclosing
therein that the goods belong to P & Co. On completion of sales
he had rendered accounts sales to P & Co. and remitted the sale
proceeds after deducting Rs. 1 lakh being expenses incurred for
sales and Rs. 50,000/- being his commission. For sales-tax
purposes, he is required to record the above sales in his sales
records. Should Mr. ‗B‘ get his accounts audited under section 44
AB ?
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Ans : In this case, Mr. B is acting as consignment agent
for P & Co. The sales made by Mr. B at Bombay for Rs.
62 lakhs are made on behalf of P & Co. These sales
cannot be considered as sales of Mr. B. He is only
entitled to his commission of Rs. 50,000/- which will
form part of his gross receipts. Therefore, Mr. B. will not
be required to get his accounts audited under section 44
AB if his total sales and gross receipts including
commission income of Rs. 50,000/- does not exceed Rs.
60 lakhs.
Issue No. 12 - Sankhla industries is engaged in the manufacture of
electrical goods. The total sales / turnover exceeds Rs. 60 lakhs. It
owns the following industrial units.
(i) Enterprise engaged in infrastructure development deduction
available under section 80IA.
(ii) Industrial Unit in a backward are – deduction under section
80IB.
If the assessee gets its accounts audited under section 44AB, is it
necessary to get separate audit reports under section 80IA(7) and
80IB(13) read with 80IA(7)? In case audit is conducted under section
80IA (7) and / or 80IB (13) read with section 80IA(7) which form
should be used, Form No. 3CA or 3CB.
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Ans: Yes. It will be necessary to get a separate audit report under
section 80(IA)(7) and 80(IB)(13) for each of the industrial unit.
The finance Act, 2002 has amended these provisions making it
mandatory for all assessees including companies and cooperative
societies to submit a report under these sections. It is to be noted
that audit report under section 80(IA)(7) and 80(IB) (13) is in
respect of an industrial unit covered by the relevant provision
whereas audit under section 44AB is in respect of an assessee
covered by any of the clauses (a), (b) or (c).
It is to be clarified that audit report in such cases will be
in form No. 3CB in case the accounts of the assessee
have not been audited under any other law such as
Companies Act or Cooperative Societies Act etc. Audit
under section 80(IA) or 80(IB) of the Income-tax Act
will not be considered as audit under any other law. The
requirement of section 44AB is a general one covering
the overall position of the accounts of the assessee.
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This applies to the accounts of the assessee for the
relevant year covering the results of all the industrial
units situated at different places. Therefore, when the
sales/turnover of all the units put together exceeds Rs.
60lakhs the assessee will have to get the audit conducted
under section 44AB and obtain the audit report in Form
No. 3CB.
Non Resident-Indian Operations:
Issue No. 13- A foreign company has some business
income from India. It has no permanent establishment
in India. Since the income of the foreign company
chargeable under the Income tax Act can not be
precisely determined, the same has been assessed on the
basis provided in Rule 10 of the Income tax Rules,
1962. There are no separate books of account for Indian
business. What are the tax audit report requirements?
Should Form No. 3CD be submitted in respect of such a
foreign company?
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Ans: Paragraph 6.3 clarifies that section 44AB does not make any
distinction between a resident and a no-resident. Therefore, a nonresident
assessee is also required to get his accounts audited and to
furnish such report under section 44AB if his turnover exceeds the
prescribed limits. This audit, however, would be confined only to the
Indian operations carried out by the non-resident assessee since he is
not chargeable to Income- tax in India in respect of income accruing or
arising or received outside India. In the given issue, since there are no
separate books of account for the Indian business, the tax auditor has to
necessarily obtain relevant information from the overseas auditor for
the purpose of enabling him to make the audit report and also furnish
the necessary particulars.
So far as audit report is concerned, Form No. 3CB should be used
even if the accounts of the non-resident have been subject to audit
by an auditor qualified to audit the accounts under the relevant
statute of the country. It is also necessary to segregate the data
relating to income chargeable under the Income-tax Act. The tax
auditor has to make appropriate disclosures based on AAS-
10(Revised) ―Using the work of another auditor‖.
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Issue No. 14 - Surrender of Stocks:
A survey was conducted during the financial year
2010/11 and the assessee surrendered stocks worth of
Rs. 22 lakhs. During the financial year 2010/11 the
assessee is having a turnover of Rs. 49 lakhs. Should
the value of surrendered stock be included in the
turnover for determining the applicability of section
44AB?
Ans: The surrender of stock worth Rs. 22 lakhs during the survey
does not mean that the turnover of the assessee for the relevant
year exceeded Rs. 60 lakhs. Therefore, the value of surrendered
stock cannot be treated as part of turnover for determining the
applicability of section 44AB. It is also significant to note that
paragraph 5.18 clarifies that section 44AB applies only if the
turnover exceeds the prescribed limit according to the books
maintained by the assessee.
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Issue No. 15 - Additional sales found as a result of search
In Brijlal Goyal v. Asstt. CIT [2004] 88 ITD 413 (Delhi),
The Tribunal held as under :
―….. Admittedly, the additional sales found as a result of search, was not
recorded in the books of account regularly kept in the course of
business by the appellant. Merely because the appellant accepted the
additional sales for the purpose of assessment of the relevant year on
the basis of entries in the seized documents, the same would not
constitute accounts of the appellant maintained in the regular course of
business and on that basis alone liability cannot be fastened on the
assessee by holding him to have committed the default.
Issue No. 16 - Sale of car:
Sale of car is not included in sales for the purpose of
tax audit but according to some Supreme Court
judgments under Sales tax Act, the sale of a car is to be
treated as sales and sales tax has to be charged. Then,
why should the same be excluded for tax audit
purposes?
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Ans: The sale of car is nothing but a sale of capital asset. The
expression ‗total sales‘, ‗turnover‘ or ‗gross receipts‘ used in
clause (a) of section 44AB should be understood in the context of
the expression ‗in business‘ appearing immediately thereafter in
that very clause. The definition of ‗sales‘ under the Sales-tax Act
of any state is not relevant for determining the applicability of
section 44AB. Paragraphs 5.8(vi) and 5.13 (i) clarify that the sale
proceeds of fixed assets would not from part of turnover gross
receipts since these are not held for resale.
Issue No. 17 - Write back:
As a result of writing back the account of a creditor, the
turnover/gross receipt has exceeded Rs. 60 lakhs.
Will the assessee be liable for tax audit?
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Ans: Writing back of the amount payable to a creditor of
which a deduction has been claimed is deemed as
income for the purpose of section 41(1) of the Incometax
Act, 1961. The amount so written back would not
form part of gross receipt and as such will not be
includible while determining the quantum for
applicability of section 44AB (para 5.13 (xi) of
guidance note on tax audit revised 2005 edition). It is
also neither sales not turnover.
Issue No. 18 - Inclusion of Sales-tax:
16. A, an assessee, provides the following figures:
Sales
Rs. 58 lakhs
Vat tax collected
Rs. 3 Lakhs
Is A liable for tax audit under section 44AB?
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Ans: The words ‗sales‘, ‗turnover‘ and gross receipts‘
are commercial terms and they should be construed in
accordance with the method of accounting regularly
employed by the assessee. If the Vat tax collected is
credited separately to Vat tax account and payments
thereof are debited in the same account, they would
not be included in the turnover. (Para 5.5 and 5.6 of
ICAI‘s guidance note on tax audit revised 2005
edition).
Issue No. 19 - Sales through stalls:
‗AK‘ Pvt. Ltd. is running a departmental store. There are
several stalls. Each stalls belongs to a different person.
According to the arrangement by the stall owners with ‗AK‘
Pvt. Ltd., all sales proceeds are to be collected on the printed
bills of ‗AK‘ Pvt. Ltd. The delivery counter is common for all
stall owners and the same is managed by ‗AK‘ Pvt. Ltd The
premises belongs to ‗AK‘ Pvt. Ltd. who takes out insurance and
also makes security arrangements. The proceeds of all sales
made by various stall owners are collected by ‗AK‘ Pvt, Ltd.
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At the end of every week ‗AK‘ Pvt. Ltd. makes up the
sales account of each stall owner and after deducting
charges/commission at the agreed rate remits the
balance amount to each stall owners. The total
turnover on the above basis works out to about Rs. 3
crores. However, the income of ‗AK‘ Pvt. Ltd. from
charges/commission recovered from the stall owners is
Rs. 30 lakhs. Is ‗AK‘ Pvt. Ltd. liable to get its
accounts audited under section 44AB?
Ans: It will not be necessary for ‗AK‘ Pvt Ltd. To get its
accounts audited under section 44AB. The sales in this case
cannot be considered as the sales of ‗AK‘ Pvt. Ltd. These are
sales of the stall owners. ‗AK‖ Pvt Ltd. has only undertaken to
render services like providing space, making security
arrangements, taking out insurance, collection of sale proceeds
on behalf of the stall owners and rendering account to them.
The commission earned for these services does not exceed the
limit of Rs. 60 Lakhs prescribed in section 44AB. Therefore,
the provisions of section 44AB are not attracted in this case.
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Discuss the following issues:
Issue No. 20 - Leasing
a) In the case of a company engaged in the business of equipment
leasing will the provisions of section 44AB for tax audit apply
b) In the case of a company engaged in leasing finance, will the
provisions of section 44AB for tax audit apply?
c) In the above cases how will the monetary limit of Rs. 60 lakhs
for turnover or gross receipts be computed?
d) In the case of a company supplying equipment on hire purchase
basis how will the monetary limit of Rs. 60 lakhs be computed
for the purpose of section 44AB?
Ans: (i) In the case of a company engaged in the
business of equipment leasing the provisions of section
44AB for tax audit will apply if its gross receipts from
lease rent exceed Rs. 60 lakhs.
(ii) In the case of a company engaged in the
business of leasing finance, the provisions of section
44AB for tax audit will apply if its gross receipts from
the leasing finance exceed Rs. 60 Lakhs.
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(iii) The monetary limit of Rs. 60 lakhs will be computed in the above
cases with reference to lease rent or interest on financing. The value
of the equipment given on lease or the amount advanced under
leasing finance cannot be considered for this purpose.
(iv) When equipment is supplied on hire-purchase basis, the sale is
complete when the person taking the equipment exercises his option
to purchase. Therefore, during the years when hire charges (excluding
instalments of principal amount) are received by the company, the
figure of such charges will from part of its gross receipts. When the
purchaser exercises his option to purchase, the price at which the
equipment is sold to him will form part of total sales or turnover of
that year.
Issue No. 21 - Form No. 3CA/3CB:
a) The accounting year of an assessee has been changed
from calendar year to April to March. Accordingly, the
accounts have been drawn for the period from January,
2010 to March 31,2011 which have already been
audited for tax audit. Which form of audit report
should be used? Form No. 3CA or Form No. 3CB?
Should separate accounts have to be drawn for the
period from 1 st April, 2010 to 31 st March, 2011?
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(b) Rule 6G(a) provides that in the case of a person who
carries on business or profession and who is required by or
under any other law to get his accounts audited the audit
report should be in Form No. 3CA. Under the Companies
Act, all companies are required get their accounts audited.
However the accounting year for the Companies Act can
be different from that of the previous year under the
Income tax Act e.g. under the Companies Act it may be,
say, 30 th September. In such cases how can the company
comply with the requirements of Form No. 3CA?
Ans: Issues (a) and (b) are answered together. The previous
year for tax purposes shall always be the financial year as
per section 3 of the Income-tax Act. Therefore the final
accounts along with tax audit report have to be of the
financial year. Accordingly in case the annual accounts
i.e. balance sheet and profit and loss account have not
been audited and certified, it cannot fulfill the
requirement of Form No. 3CA which requires the tax
auditor to enclose the ‗audited‘ profit balance sheet as at
31 st March.
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Hence, in such cases the tax payer is required to prepare a separate
profit and loss account and balance sheet as at 31 st March and get
the same audited and the tax auditor is to give the report in Form
No. 3CB whereby he is required first to certify the true and fair
view of the balance sheet and profit and loss account and furnish
statement of particulars in Form No. 3CD.
Though Rule 6G(1)(a) provides that a person who carries on
business or profession and who is required by or under any other
law to get his accounts audited the tax audit report should be in
Form No. 3CA, the word ―accounts‖ here has to be interpreted in
terms of the requirement of Form No. 3CA.
―Accounts‖ here will mean the accounts i.e. profit and loss
account and the balance sheet and tax audit report. In case
the accounts i.e. profit and loss account and balance sheet
with tax audit report has not been audited under any other
law, the correct form will be Form No. 3CB. [Circular No.
561 dated 22.05.1990 vide page 167 of guidance note on tax
audit revised 2005 edition.]
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Issue No. 22 - Revision of Tax Audit Report:
Can a tax auditor revise his tax audit report and Form No.
3CD?
Ans: A tax auditor should exercise extreme care and caution
while discharging his responsibilities. He should ensure that
correct information has been given in Form No. 3CA/3CB
and 3CD. However, if he feels that there is a need for revising
the audit report and / or Form No. 3CD, it is advisable to do
so in a timely manner and he should clearly indicate the
reasons for giving a revised report. Attention is also invited to
paragraph 13. 9 and to the guidance note on revision of Audit
Report which deals with this aspect elaborately.
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Issue No. 23 - Relying on the work of statutory
auditor
(i) A tax auditor does not agree with the treatment given
in the audited financial statements in respect of (i)
personal expenses, (ii) capital expenditure, (iii)
valuation of stock-in-trade (iv) method of accounting
or (v) other matters covered in Form No. 3CD.
(ii) If the statutory auditor has not qualified his audit
report on these matters, can the tax auditor qualify his
report in Form No. 3CA and make appropriate
comments in Form No. 3CD?
Ans: (i) In case where statutory audit under any other law has
been conducted by an auditor other than the tax auditor the
requirement of section 44AB read with Rule 6G(1)(a) is to
enclose a report of such audit and the tax auditor is required
to furnish statement of particulars in Form No. 3CD and
certify that the particulars given in the said Form No. 3CD are
true and correct. The tax auditor is not required to comment
upon the audit report given by the statutory auditor. As such
there will be no requirement on the part of tax auditor to
qualify his report in Form No. 3CA.
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(ii) The tax auditor, however, has the primary responsibility of
the verification of the particulars prescribed in Form No. 3CD
and he should ensure that the particulars stated are in
conformity with the provisions of the Income-tax Act.
Normally the tax auditor should accept the treatment given to
various items in the financial statements which have been
audited by the statutory auditor. If, however, while conducting
tax audit he is unable to agree with the treatment given to a
particular item in the audited financial statement, he should first
ascertain preferably from the statutory auditor, the reasons for his
giving such a treatment in his statement.
It is possible that statutory auditor while considering the items
on (i) personal expenses, (ii) capital expenditure, (iii) valuation
of stock and trade, (iv) method of accounting or other matter
covered in Form NO.3CD might have dealt with the item from
the angle of generally accepted accounting principle or statutory
provisions covering the entity. The responsibility of furnishing
true and correct particulars in Form NO.3CD is that of the entity.
For this purpose, statutory provision and judicial pronouncement
under tax laws have to be taken into consideration.
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The tax auditor should verify and ensure that particulars in
respect of the above items such as personal expenses, capital
expenditure, valuation of stock and trade, method of accounting
etc. are given on the basis of explanations above. However, any
difference between the figures given in the audited financial
statements and figures given in Form No.3CD should be
explained by giving appropriate notes. If, however, there is any
difference in the opinion of the tax auditor and that of the entity
in respect of any information furnished in Form No.3CD, the tax
auditor should state both the view points and also the relevant
information. Attention is invited to paragraph 16.3. of revised
guidance note on tax audit 2005 edition.
Issue No. 24 – Advance received for services are rendered.
These are liabilities and not part of gross receipts until services are
rendered. -
For contrary viewpoint- see Dy. CIT v. Gopal Krishan
Builders.[2004] 91 ITD 124 (Lucknow)(SMC).
The Tribunal held that each and every word used in any statute has
its importance and is used by legislature after a lot of deliberations.
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The words used in section 44AB: ―total sales‖, ―turnover‖ or
―gross receipts‘ have been used specifically and the scope of the
words ‗gross receipts‘ is quite wide otherwise legislature would
have stopped after using the words ‗sales‘ or ‗turnover‘,
Further, these advances were having an element of profit. The
amount was to be adjusted towards the cost of flats booked by each
customer and the amounts will have an element of construction
cost as well as profit which might be bigger in proportion when
whole of the cost is realized.
What assessees should do to determine applicability of tax audit
u/s 44AB is as under (in the light of Tribunal‘s decision):
a) In cases of business which do not have ―turnover‘ or ―total sales‖
and ―professions‖
Determine gross receipts – i.e. total amounts received (including
advances) which have profit-making quality about them. If ―gross
receipts‘ exceed Rs. 60 lakhs / Rs. 15 lakhs as the case may be, tax
audit is applicable.
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b) In cases of businesses in manufacturing / trading sector-i.e.
businesses which have ―turnover‖ / ‗sales‖ – The following steps are
necessary:
1. Determine ―Sales‘ / Turnover‘ as per the method of accounting
regularly employed by the assessee – (Cash or mercantile system) and
excluding sales tax / duty / other taxes.
2. Determine gross receipts- i.e. total amounts received (including
advances) which have profit – making quality about them (as per
Tribunal‘s decision above).
3. If ―Sales‖ or ―Turnover‖ or ―Gross receipts‖ exceed Rs. 60 Lakhs, tax
audit is applicable.
c) If there is no sales / turnover / work done or completed
during the financial year but only advances have been received
(to be adjusted against value to be provided by way of goods /
services); then if total advances received exceeds Rs. 60 Lakhs /
Rs. 15 Lakhs, as the case may be, tax audit under section 44AB
is applicable.
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Special provision for computing profits and gains of business
on presumptive basis.
(1) Notwithstanding anything to the contrary contained in
sections 28 to 43C, in the case of an eligible assessee engaged
in an eligible business, a sum equal to eight per cent of the total
turnover or gross receipts of the assessee in the previous year
on account of such business or, as the case may be, a sum
higher than the aforesaid sum claimed to have been earned by
the eligible assessee, shall be deemed to be the profits and
gains of such business chargeable to tax under the head ―Profits
and gains of business or profession‖.
(2) Any deduction allowable under the provisions of sections 30
to 38 shall, for the purposes of sub-section (1), be deemed to
have been already given full effect to and no further deduction
under those sections shall be allowed :
Provided that where the eligible assessee is a firm, the salary
and interest paid to its partners shall be deducted from the
income computed under sub-section (1) subject to the
conditions and limits specified in clause (b) of section 40.
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(3) The written down value of any asset of an eligible business
shall be deemed to have been calculated as if the eligible
assessee had claimed and had been actually allowed the
deduction in respect of the depreciation for each of the relevant
assessment years.
(4) The provisions of Chapter XVII-C shall not apply to an
eligible assessee in so far as they relate to the eligible business.
(5) Notwithstanding anything contained in the foregoing
provisions of this section, an eligible assessee who claims that
his profits and gains from the eligible business are lower than
the profits and gains specified in sub-section (1) and whose
total income exceeds the maximum amount which is not
chargeable to income-tax, shall be required to keep and
maintain such books of account and other documents as
required under sub-section (2) of section 44AA and get them
audited and furnish a report of such audit as required under
section 44AB.
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Explanation.—For the purposes of this section,—
(a)
―eligible assessee‖ means,—
(i) an individual, Hindu undivided family or a partnership firm, who is a
resident, but not a limited liability partnership firm as defined under clause (n)
of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6
of 2009) and
(ii) who has not claimed deduction under any of the sections 10A, 10AA,
10B, 10BA or deduction under any provisions of Chapter VIA under the
heading ―C. - Deductions in respect of certain incomes‖ in the relevant
assessment year;
(b) ―eligible business‖ means,—
(i) any business except the business of plying, hiring or leasing goods
carriages referred to in section 44AE; and
(ii) whose total turnover or gross receipts in the previous year does not
exceed an amount of [sixty lakh rupees].]
Critical analysis of section 44AD
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Till the 31 st March,2010, the Chapter Profit & gains of
Small business on Presumptive Basis was having majorly 3
sections for Indian entities.
> Section 44AD civil construction
> Section 44AE Transporters
> Section 44AF Retail Traders
From 01.04.2010 the honorable finance minister Mr.
Pranab Mukherjee has amended the first section i.e.
44AD along with 5 sub sections to facilitate the business
operations of small taxpayers
Earlier this section was extended to civil constructions
only but now this section has been extended to all small
businesses.
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The new section 44AD is as follows: 44AD
(1)
Notwithstanding anything to the contrary contained
in sections 28 to 43C, in the case of an eligible
assessee engaged in an eligible business, a sum equal
to eight per cent of the total turnover or gross
receipts of the assessee in the previous year on
account of such business or, as the case may be, a
sum higher than the aforesaid sum claimed to have
been earned by the eligible assessee, shall be deemed
to be the profits and gains of such
business chargeable to tax under the head “Profits
and gains of business or profession”.
For better understanding of sub section 1 of newly
inserted section 44AD, we must know the meaning of
following:
> Eligible Assessee
> Eligible Business
> Total Turnover/Gross receipts
> Significance of Word Gross Receipts
> Claimed to have been earned
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1. Who is an Eligible Assessee?
(explanation to Section 44AD)
(a) ―eligible assessee‖ means:-
(1) an individual
(2) Hindu undivided family
(3) or a partnership firm
who is a resident.
but not a limited liability partnership firm as
defined under clause (n) of sub-section (1) of section 2
of the Limited Liability Partnership Act, 2008 (6 of 2009);
and
(explanation to Section 44AD)
(ii) who has not claimed deduction under any of the sections
10A, 10AA, 10B, 10BA or deduction under any provisions of
Chapter VIA under the heading ―C. - Deductions in respect
of certain incomes‖ in the relevant assessment year;
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Who all are the aseessees not covered under Section 44AD?
> Individual who is not resident
> HUF who is not Resident
> Association of Person
> Firm having non resident Status.
> A local Authority
> A co-operative Society
> Limited Liability Partnership both Indian as well as Foreign
> Companies both Domestic and Foreign company
> Every Artificial Juridical Person
> Individual/HUF/Firms claiming deduction under chapter III of the Act
i.e Section 10A,10AA,10B,10BA relating to units located in FREE
Trade Zone, Hardware & Software Technology Park etc.
> Individual/HUF/Firms claiming deduction under Chapter VIA Part-C
(deductions in respect of certain Incomes) i.e Section 80H to 80TT.
2. What is eligible Business ?
(explanation to Section 44AD)
(b)eligible business means,
(i) any business except the business of plying, hiring or leasing
goods carriages referred to in section 44AE; and
(ii) whose total turnover or gross receipts in the previous
year does not exceed an amount of[sixty lakh rupees].
Meaning of the above section:
Eligible Business covers any business except Transport
Business (Transportation Business has special treatment under
section 44AE).
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This provision is straightforward and includes all the
business whether it is:
.
> Manufacturing
> Trading
> Wholesale
> Retail
> Job Work
> Service business
> Speculative/ Non speculative.
The only criteria is that, the turnover of eligible
Business should not exceed Rs. Sixty lakhs in the
previous Year.
What is not included in the Business?
.
The profession is not included in the business because:
There is specific reference to the word Business in
Section 44AD, which does not include profession, and
There is specific Turnover limit of Rs. 15 Lakhs for
Profession under section 44AB, which means that
profession is totally separate from Business.
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How to calculate limit of 60 lakhs?
The Total Turnover and Gross receipts should be less than 60 lacs in
the previous Year.
It includes all the eligible businesses carried on by a eligible assessee
during the previous year and the 60 lakhs will be for all of them
cumulatively.
Few Examples:
1. Manish, a resident individual, is carrying on three eligible
businesses, the turnover of which is as under :
> Business A (Manufacturing) Rs. 25 Lac
> Business B (Trading) Rs. 15 Lac
> Business C (Service) Rs. 25 Lac
Whether section 44AD is applicable on him?
The Answer is NO because turnover of eligible business
exceed Rs. 60 Lakhs.
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2. Manish, a resident individual, is carrying on two businesses, the
turnover of which is as under :
> Business A (Eligible Business) Rs. 55 Lacs
> Profession Rs. 10 Lacs
> Business B (Transport u/s 44AE) Rs. 6 Lacs
Section 44AD and 44AE both are applicable, as profession is not
included under section 44AD and section 44AD and 44AE are
independent of each other.
Who bears the onus of proof to prove the turnover?
The onus of proof is on the assessee. It is his duty to prove the
turnover. If the assessee is maintaining the books of accounts, then it
will be easy for him to prove the same, but if he is not maintaining
the books of accounts, then it will be very difficult for him to prove,
because there is no specific provision for the same.
What documents you should provide to the AO to prove
the turnover?
- copies of invoices issued during the PY
- copies of cash memo
- copies of Purchase bill
- Bank statement
- Inventory details, if any maintained
- Average G.P rate applicable to Particular business
- Returns filed under sales tax/vat/excise/service Tax laws.
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What is the meaning of Notwithstanding
Anything to contrary contained in section 28 to
43C
Section 44AD(1) starts with wording Notwithstanding Anything to contrary contained in
section 28 to 43C it means section 28 to 43C of Income Tax Act, 1961 is not applicable on
eligible assessee carrying on small business.
The some of the benefits & losses of this wording is enumerated as under by way of examples
:
Manish has paid Rs. 28000/- for purchase of goods in cash. No disallowance can be made
under section 40A(3) for the same.
Ashish has paid Rs. 42000/- to transporter for freight in cash. No disallowance can be made
under Section 40A (3).
Vipin has contributed certain sum to national Laboratory which qualifies for deduction under
section 35(2AA), if he chooses section 44AD , he will not eligible for benefit of this section.
Vicky has recovered certain bad debts written off in earlier years of Rs. 35000/-. It may not be
added in specified amount declared
What is the meaning of Claimed to have
been earned?
By the introduction of these words in section 44AD(1), the
legislature shows its intention to accept specified income as
returned income even if higher sum is earned by eligible
assessee unless it is claimed by assessee in his Income Tax
Return.
Example
Manish is carrying on small business . The Turnover is Rs. 50
lakhs. The profit as per his books or calculation is Rs. 8 Lakhs.
However, he opts to return the income under section 44AD
@ 8% i.e Rs. 4 Lakhs. The proceeds of business are deposited
in a bank account.
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Can the AO assess the difference
amount as undisclosed income?
Section 44AD(2)
(2) Any deduction allowable under the provisions of sections
30 to 38
shall, for the purposes of sub-section (1), be deemed to have been
already given full effect to and no further deduction under those
sections shall be allowed
.
Provided that where the eligible assessee is a firm, the salary
and interest paid to its partners shall be deducted from the
income computed under sub-section (1) subject to the
conditions and limits specified in clause (b) of section 40
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Computation of Taxable Profit u/s 44AD in case of
Partnership Firm
Profit from Business
Particulars
Amount
44 AD ( Say the turnover is Rs. 50 lacs) then the 4,00,000
income would be 8%
Less:
Interest allowable u/s 40(b) 1,20,000
Remuneration to partners allowable 1,80,000
Total Income of the Firm U/s. 44AD 1,00,000
Section 44AD (3)
The written down value of any asset of an eligible
business shall be deemed to have been calculated as
if the eligible assessee had claimed and had been
actually allowed the deduction in respect of the
depreciation for each of the relevant assessment
years.
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Few Examples
Manish a resident individual having a machinery
of Rs. 2,00,000/- as on 31-03-2011 eligible for depreciation
under section 32 @ 15%.In A.Y 2011-12, he opts for Section
44AD. In the Assessment Year 2012-13, his turnover is Rs. 70
lakh, so he calculated his profit as per normal provisions of
the Act. In A.Y 2013-14, he again opts for Section 44AD, In
this Assessment year he sold the Assets for Rs. 1,50,000/-.
Calculation of WDV:
Particulars
Amount
WDV as on 31-03-2011 2,00,000
Less: Depreciation @
30,000
15%
WDV as on 31-03-2012 1,70,000
Less: Depreciation @
25,500
15%
WDV as on 31-03-2013 1,44,500
Less : Sale Price 150,000
WDV as on 31-03-2014
Nil
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Calculation of Capital Gains
Particulars
Amount
Sale Consideration 1,50,000
Less WDV as on 31-03-2013 1,44,500
Short Term capital gain U/s 50 5,500
Whether the Assessee can carry forward unabsorbed
depreciation?
As per the subsection (3) of section 44AD, the Act clearly
states that the depreciation is deemed to have been
allowed u/s. 32 and the same has been deemed to have
been set off against the profit. Hence the same cannot be
allowed to be allowed to be carried forward.
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Section 44AD(4)
The provisions of Chapter XVII-C shall not apply to an eligible
assessee in so far as they relate to the eligible business.
Chapter XVII-C deals with provisions relating to Advance Payment of Tax.
On plain reading of this subsection, we conclude that eligible assessees are exempt
from payment of Advance Tax. But the second part of Provision creates a blunder so
far it relates to eligible business, which creates lot of doubt.
The following example will better clear your understanding :
Profit under section 44ADRs. = 4.00 lacs
(Say Turnover is Rs. 50 lakhs)
Interest Income = Rs.5.00 Lacs
Total Income = Rs.9.00 lacs
In this situation, whether the assessee is exempted from provisions of advance tax
in all or whether the assessee is liable to Pay advance Tax on interest income of
Rs.5.00 lac.
From the understanding of Law, it is clear that the assessee have to pay advance tax
on interest income of Rs.5.00 lac. But how this tax calculation is to be made is no
where defined in legislature?
SECTION 44AD(5)
This sub-section has created lots of doubts and debates in the
mind of all the CAs and Tax consultants. This Sub-section is
very much important for all the very small businessmen. Please
give attention and read it care fully.
.
Notwithstanding anything contained in the foregoing
provisions of this section, an eligible assessee who claims
that his profits and gains from the eligible business are
lower than the profits and gains specified in sub-section
(1) and whose total income exceeds the maximum
amount which is not chargeable to income-tax, shall be
required to keep and maintain such books of account and
other documents as required under sub-section (2)
of section 44AA and get them audited and furnish a
report of such audit as required under
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section 44AB
The assessee is bound to get the books of accounts
audited, if the following two conditions are satisfied:-
1. His profits and gains from the eligible business
are lower than the profits and gains specified in
sub-section (1) i.e. his net profit is lower than 8%
of turnover.
and
2. Whose total income exceeds the maximum
amount which is not chargeable to income-tax.
Here see both the conditions are simultaneous and the assessee
required to get his accounts audit only and only if his profits from
the business u/s 44AD are lower than 8% of this turnover and
further his total income is more than maximum amount which is
not liable to tax.
The minimum amount which is not liable to tax for Assessment Year
: 2011 -12 is Rs. 1.60 Lakh and the turnover of the eligible business
is Rs. 38 Lakhs and the Net profit is Rs. 1.52 lacs which comes to
only 4% hence the first condition for the compulsory audit is there
but since the income is only Rs.1.52 Lakhs hence the second
condition of section 44AD(5) is not complete, hence the audit is not
mandatory.
If whatever mentioned above is the intention of law then in most of
the cases where the income of the assessee is below taxable limit,
they are not required to get their books of accounts audited, even if
the rate of profit is below 8%
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Exception to Tax Audit:
Once a person gets covered under any one of the four categories, Tax audit
becomes mandatory. But there are two exceptions to tax audit. The first
proviso to Section 44AB, exempts business covered under Section 44B and
44BBA from the purview of tax audit. But the second proviso is something
more interesting. The second proviso says that if the accounts of a person
are to be audited under any other law, it would be sufficient if the accounts
are audited under that law before the 30 th of September. The accounts need
not once again be audited by an Accountant but the report in form 3CA
and 3CD needs to be obtained from an Accountant.
The effects of this section arouse much fascination. Since Companies are
required to be audited under the Companies Act, 1956, they need not be
audited once again under Section 44AB. It is sufficient if the audit reports in
the prescribed forms are obtained. This is even more fascinating in the Case
of Co-operative Societies. Co-ops are required to be audited under the
Co-operative Societies Act, but the auditor of a co-op need not be a CA.
Even then a co-op need not be once again audited under Section 44AB.
Case Studies u/s. 44AD:-
NATURE OF
BUSINESS
CIVIL
CONSTRUCTION
CIVIL
CONSTRUCTION
STATUS
GROSS
TURNOVER/
RECEIPTS
NET
PROFIT
WHETHER LIABLE TO AUDIT
U/S. 44AB
INDIVIDUAL RS. 50 LAKHS Rs. 410000/- No Since Net profit is more
than 8% of Turnover.
INDIVIDUAL Rs. 50 lakhs Rs. 85000/- No since his total amount does
not exceed the maximum
amount not chargeable to tax
CIVIL
CONSTRUCTION
PARTNERSHIP
FIRM
Rs. 50 lakhs Rs. 85000/- Yes since his Net Profit is
below deemed income
prescribed u/s. 44AD
BUILDING
MATERIAL
SUPPLIER
PARTNERSHIP
FIRM
Rs.70 lakhs Rs. 580000/- Yes since his turnover is
exceeding Rs. 60 lakhs not
eligible u/s. 44AD
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AN INDIVIDUAL HAVING FOLLOWING 3 PROPRIETORY BUSINESS :-
CIVIL
CONSTRUCTION
RS. 30/- LAKHS Rs.250000/-
No. since Net Profit is
more than 8% of Gross
Turnover
BUILDING
MATERIAL
SUPPLIER
RS. 70/- LAKHS Rs. 600000/- Yes because Turnover is
exceeding Rs. 60 lacs
STONE CRUSHER Rs. 15/- Lakhs Rs. 100000/- Yes because Net Profit is
less than 8% of Turnover
Thus assessee is required to get accounts audited in respect of Building Material
supplier business & Stone Crusher Business
AN INDIVIDUAL HAVING FOLLOWING 3 PROPRIETORY BUSINESS :-
CIVIL
CONSTRUCTION
RS. 30/-
LAKHS
Rs.250000/-
No. since Net Profit is
more than 8% of Gross
Turnover
BUILDING
MATERIAL
SUPPLIER
RS. 20/-
LAKHS
Rs. 180000/- No. since Net Profit is
more than 8% of Gross
Turnover
STONE CRUSHER Rs. 35/- Lakhs Rs. 300000/- No. since Net Profit is
more than 8% of Gross
Turnover
Even though aggregate turnover of all the business exceeds Rs. 60/- lakhs, Assessee is
not liable to audit u/s. 44AB in respect of any of the business.
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ISSUE - 1
Sanjay, a resident individual, carrying on five businesses the
turnover of which are as under:
a) Manufacturing Rs 30/- lakhs
b) Service Rs 15/- lakhs
c) Wholesale trading Rs 10/- lakhs
d) Retail trading Rs 5/- lakhs
e) Interest from money lending Rs 5/- lakhs
ISSUE - 2
Deepak & Co, a resident firm having two businesses, the
turnover of which is as under:
a) Trading Rs 40/- lakhs
b) Transportation business Rs 30/- lakhs
.
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ISSUE - 3
Sachin, a resident individual has given the following details:
a) Professional gross receipts Rs 30/- lakhs
b) Manufacturing business turnover Rs 35/- lakhs
ISSUE – 4
XYZ, a resident HUF carrying on trading activities. Total
turnover of the business is Rs 40/- lakhs. Profit as per books is
Rs 6.5 lakhs. However, it wants to file the return of income
under section 44AD and claim profit at 8% i.e. 3.2 lakhs. Can
it do so?
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ISSUE – 5
Srinidhi a resident individual covered under section 44AD, for
three consecutive assessment year 2011-12 to 2013-14, WDV
of furniture as on 31-03-2010 is Rs 50,000/-. He sells the
furniture for Rs 42,000/- on 01-01-2013.
Compute WDV of furniture for assessment year 2013-14?
ISSUE – 6
Mamta an individual resident, assessed under section 44AD
has made the following payments (previous assessment year
assessed under section 44AB):
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Case 1:
Cash payment of Rs 32,000/- for purchases
Single cash payment of Rs 51,000/- for repair expenses
(contract without TDS)
Payment of interest of Rs 18,000/- without TDS.
Case 2:
The following disallowances were made in the previous
assessment year:
Cash payment exceeding Rs 20,000/- for purchases
Interest expenditure of Rs 25,000/- for non-remittance of TDS
with in due date. TDS amount being paid in the next year.
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ISSUE NO - 7
Sapna is a resident individual assessed under section 44AD
recovered bad debts written-off in earlier years Rs
23,000/-.
ISSUE NO - 8
Mitesh is a resident individual submits the following details:
Net profit from trading business
(TO Rs 40/- lakhs) 1,80,000.00
Other income 10,000.00
80C deductions to be allowed 35,000.00
Compute his total income, whether section 44AD and section
44AB would be applicable?
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ISSUE NO - 9
In case of an assessee being an individual or HUF liable to
audit under section 44AB because of section 44AD, would
TDS provisions apply to him in the next year?
ISSUE NO – 10
Would audit under section 44AB for the purpose of section
44AD be counted in the limit of tax audits for tax auditors?
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ISSUE NO – 11
Speculation:
The following is the profit & loss account of Mr Ashish, a
resident individual dealing in shares. Whether section 44AD
would apply?
Profit & Loss Account
To Loss on sale of
shares
20,00,000.00 By Profit on sale of
shares
65,00,000.00
To Net profit 45,00,000.00
65,00,000.00 65,00,000.00
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In case of a person who is doing speculation business in
shares with no intention of taking or giving delivery but
merely earning or losing through squaring up of
transactions, what will constitute the turnover / gross
receipts of the business?
ISSUE NO – 12.
Nimita & Co, a resident firm, submits the following details for
the previous year 2010-11:
Total turnover : 20,00,000.00
Loss from trading business (as per P & L A/c): 1,50,000.00
Salary and interest to partners,
debited to P & L A/c: 1,70,000.00
& 1,15,000.00 respectively
Is section 44AD applicable?
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ISSUE NO – 13.
Sneha an individual resident, carrying on trading activity
submits the following:
Compute total income.
Turnover : 40,00,000.00
Net profit as per normal
provision books : 2,00,000.00
B/f depreciation allowance: 2,00,000.00
B/f business loss AY 08-09: 1,50,000.00
Net profit as per normal provisions is 5%. Assessee opts
for section 44AD and offers Rs 3,20,000.00 i.e., 8% of Rs
40 lakhs as his profit from business.
Computation of income from business?
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ISSUE NO. - 14
Mr Prem, an individual resident, submits the following details?
Compute tax liability for assessment year 2011-12?
Income from business to be assessed
under section 44AD 4,00,000.00
Income from other sources 10,00,000.00
Deduction under section 80C 1,00,000.00
Advance tax paid
Nil
Presumptive taxation – Plying,
hiring or leasing goods carriage
Section 44AE: In case of the business of plying, hiring or leasing
goods carriages, higher income is to be deemed: - w.e.f.
01.04.2011 (FY 2010-11)
Type of vehicle
Heavy goods vehicles
Other than heavy goods
vehicles
Estimated income per vehicle
Rs. 5,000/- per month or part of the
month. (Earlier Rs. 3,500/-)
Rs. 4,500/- per month or part of the
month. (Earlier Rs. 3,150/-)
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FORM NO. 3CD
[See rule 6G(2)]
Statement of particulars required to be furnished under
section 44AB of the Income-tax Act, 1961
Amendment
Central Law Board of Direct Tax has amended tax audit
form no. 3CD vide notification dated 10thAugust, 2006
and 13thApril 2009
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PART A
Clause (1 to 6)
1. Name of the assessee
2. Address
3. Permanent Account Number
4. Status
5. Previous year ended
6. Assessment year
Issues on Clause(1 to 6)
1) If assessee is proprietor give his/her name along with all
Proprietary Firm‘s name.
2) As per income tax record, if any change in address must be
given.
3) If PAN has been applied and allotment is pending mentioned
not yet allotted.The copy of application of applied PAN must be
kept by the Auditor.
4) ‗Status‘ means as per sec. 2 (31) of Income Tax Act & not
‗residential status‘ [Sec 2(31) – ―Person‖ includes an Individual,
HUF, Firm etc.
5) As per sec. 3 of Income Tax Act, previous year should end on
31st March.
6) Assessment year according to the relevant Previous Year
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PART B
Clause 7 to 32
Clause 7a. If firm or association of persons, indicate names of
partners/members and their profit sharing ratio
Clause 7b. 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
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ISSUES ON Clause 7:
Ans: (i) What is the date with reference to which the
information in subclause (a) is to be given? Is it on the first
day of the previous year or last day thereof?
Paragraph 18.1, inter alia, clarifies that the details of partners
or members during the entire previous year will have to be
furnished. Hence, the names of partners of the firm or
members of the association of persons and their profit
sharing ratios during the entire previous year will have to be
stated and not merely on the first day of the previous year or
last day thereof.
(ii) Should the dates on which the change referred to in sub-clause
(b) occurred, be mentioned?
Paragraph 18.2 clarifies that if there is any change in the partners
of the firm or members of the association of persons or their profit
or loss sharing ratio, the particulars of such change must be stated.
The word "particulars" is significant and it includes the relevant
dates also. The date on which there is a change in the membership
of partner(s) of a firm or member(s) of an association of persons
or a change in the profit sharing ratios (including changes, if any,
in the terms of remuneration, interest) is extremely significant data
for the purpose of calculating interest, remuneration etc.
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Further, once there is a change in the partners/members or their
profit sharing ratio, it will obviously be reflected either in a fresh
partnership deed or a supplementary partnership deed. Hence, it is
necessary to mention the dates on which such changes occurred.
Even in a case where there is a change in the salary to partners it is
necessary to mention the dates on which such changes have
occurred, as change in salary to partners is as significant as
changes in the profit sharing ratios among the partners.
(iii) Keeping in view the requirements of section 184, is it
necessary to confirm the particulars of change with the records of
Registrar of Firm ?
Ans: Paragraph 18.3 gives guidance about the supplementary
documents which the tax auditor may verify in order to satisfy
himself about the genuineness of change in the partners or change
in the profit sharing ratios. Sub point (ii) of the above paragraph
points out that the tax auditor may verify whether notice of
change, if required, has been given to the registrar of firms. Thus
the verification of records of the registrar of firms is discretionary
and has to be done in accordance with the professional judgement
of the tax auditor.
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(iv) When a partner in a representative capacity, say, karta of HUF,
retires from a firm and is admitted to that firm in his individual
capacity, is it a change in the constitution of the firm as envisaged
by this clause ?
Ans: It is a change in the constitution of the firm as envisaged by
this clause.
Clause 8a. 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 and / or
abstract under Part IV of Schedule VI.
Clause 8b. 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 In case of amalgamation /
demerger, if similar line of activity, it would not amount to change
in the nature.
The tax auditor should make proper enquiries, review the minutes
of meeting (if made available), director‘s report, etc.
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Issues on Clause 8
Permanent discontinuanceof a particular product
line of business need to be reported not temporary
suspension.
―Nature of business or Profession‖given must be same as
Annexure -I.
Effect on Carry or forward of losses :-from A.Y. 2000-01
losses will be carried forward, even if the business or
profession is discontinued (Sec 72(1)(i))
Clause 9
(a)Whether books of account are prescribed under
section 44AA, if yes, list of books so prescribed.
(b) Books of account maintained. (In case books of
account are maintained in a computer system, mention
the books of account generated by such computer
system)
(c) List of books of account examined.
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Sec 44AA
Specified Profession
Limit Rs 1,50,000 Receipts
Non Specified Profession or
Business
Limit Total income Rs 1,20,000 or
Total Sale Receipts Rs 10,00,000
Exceeds
Does not
Exceeds
Exceeds
Does not
Exceeds
Prescribes
Books Rule 6F
Any books
Any books
No books are
mandatory
Note: Any books means the books so as to enable the
Assessing Officer to compute his total income in
accordance with the provisions of this Act.
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Cont.
Prescribed Books:
Cash book
Journal (if the accounts are kept on mercantile bases)
Ledger
Serial numbered carbon copies of the bills and receipts issued
Original purchase bill/payment vouchers.
If person carrying on medical profession in addition to above books a daily case
register in form no. 3C. and stock register
[RULE 6F (2) &(3) ]
Prescribed books of account are to be kept at the place of profession or principal
place of profession if carried at more than one place[s.rule(4)] and for a period of 6
years from the end of the relevant assessment year. [ rule 6F(5)]
Specified Profession
Legal, medical, engineering, accountancy, architectural
profession, technical consultancy, interior decoration or
other notified profession.
vide notification : No. SO 17(E), dated 12-1-1977.,
notified professions are the profession of authorised
representative and the profession of a film artist.
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Sec 2(12A) Books or Books of account includes:-
Ledgers
Day-Books
Cash books
Account books
Others
Whether kept in the written form or as print-outs of data
stored in a floppy, disc, tape or any other form of electromagnetic
data storage device.
If case of books of accounts generated by the Computer
system; the proper print out are mandatory.
ISSUES ON Clause 9:
Books of Account:
In case where stock records are not properly maintained
by the assessee due to big volume of operations e.g.
particularly in case of retail trade how should the tax
auditor report on such imperfect records maintained by
the assesse.
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Ans : Paragraph 20.6 advises the assessees engaged in trading/
manufacturing activities to maintain quantitative details
principal items of stores, raw material and finished goods.
Inventories normally constitute a significant portion of the total
assets particularly in the case of manufacturing and trading
entities as well as some service rendering entities. The Auditing
Practices Committee has issued a Guidance Note on Audit of
(b) Inventories.
Under the paragraph entitled "examination of records" it has
been observed in the above Guidance Note that the auditor may
come across cases where the entity does not maintain detailed
stock records" other than basic records relating to purchase and
sales. In such situations, the auditor would have to suitably
extend the extent of application of the audit procedures in
regard to the inventories.
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While giving the particulars in Form NO.3CD the concept of
materiality has to be kept in mind. If the value of inventories
constitutes a very significant portion of the total assets and even
then the assessee does not maintain proper stock records, the
auditor will have to exercise his professional judgement
whether the absence of such records would affect his reporting
requirements.
Clause 10. 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)
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SL. NO. Section
Business Covered
1 44AD
Civil construction business
2 44AE Transport business
3 44B
Shipping business of a non-resident
Providing service or facilities in connection with, or
supplying plant and machinery on hire used, or to be
used, in the prospecting for, or extraction or
4 44BB
production of, mineral oils.
5 44BBA Operation of aircraft by non-resident.
This refers to the sections not listed above under
which income may be assessable on presumption
basis like section 44D and sec 115A(1)(b) and will
include any other section that may be enacted in
6 Any other relevant section future for presumptive taxation.
Clause 11a. Method of accounting employed in the previous year
‣ Assessee can follow either cash or mercantile system of
accounting, 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 209 of the Companies Act 1956, every Company is
required to keep books of account under accrual basis. The tax auditor
should refer the notes to the accounts.
‣
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Clause 11b. 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 change in the accounting policy may not be a change in
accounting method. Hence, it need not be reported here.
‣ 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.
Clause 11c. 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.
Reference can be made to the notes to the accounts.
Clause 11d. 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 or loss
U/s 145(2)- Accounting Standard to be followed by all assessee
following mercantile system of accounting .
The Central Government has notified two Accounting Standards [CBDT
C.No. 9949 dated July25,1996]
(A) Accounting Standard – I
Relating to ― Disclosure of Accounting Policies‖.
B) Accounting Standard – II
Relating to Disclosure of ―Prior Period and Extraordinary Items
and changes in Accounting Policies‖.
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Reporting of treatment of Excise Duty, VAT etc
Clause 12
12(a) Method of valuation of closing stock employed in the
previous year
(b) Details of deviation, if any, from the method of valuation
prescribed under section 145A, and the effect thereof on the profit or
loss.
Clause 21: Residuary note
State whether sales tax, customs duty, excise duty or any other
indirect tax, levy, cess, impost etc. is passed through the profit and loss
account.
Clause 22(a):
22. (a) Amount of Modified Value Added Tax credits availed of
or utilised 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.
Clause 12a. Method of valuation of closing stock employed
in the previous year
The tax auditor should refer the method of valuation in
significant accounting policies in the notes to the accounts.
The word the ―Closing Stock‖ includes all items of inventory.
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Clause 12b. Details of deviation, if any, from the method of valuation
prescribed under section 145A, and the effect thereof on the profit
or loss
Section 145A has come into force from A.Y 1999-2000. It is not
necessary to change the method of valuation of purchase / sale and
inventory regularly employed in books of account.
The adjustments provided under the section can be made while
computing the income for the return. The adjustments will affect
opening stock, purchases, sales and closing stock. The adjustments
are as follows:
any tax, duty, cess or fee actually paid or incurred on inputs, sales,
inventory should be added, if not already added (to gross up)
Issues on Clause 12(a) :
Valuation of Closing Stock:
Where an assessee is following cash system of
accounting, should he account for the closing stock or
alternatively, can the entire purchases be claimed as
an expense?
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Ans: Even if the assessee is following cash system of
accounting, he should account for the closing stock as per the
principles laid down in Accounting standard – 2 (Revised)
valuation of inventories. The trading account has to be
prepared and the opening stock, purchases and closing stock
have to be kept in mind while making valuation of closing
stock.
In this connection, a reference may be made to the decision
of the Supreme Court in CIT v. A. Krishnaswami Mudaliar
(53 ITR 122, 132), wherein it was held ―But whatever may
be the system, whether it is cash or mercantile,…, in a
trading venture it would be impossible accurately to assess
the true profits without taking into account the value of the
stock in trade at the beginning and at the end of the year‘.
In clause 3(i) of the old Form No. 3CD, reference
was to ―opening and closing stock-in-trade‖. In sub
clause (a) of clause 12 of revised Form No. 3CD, the
reference is to closing stock . What is the significance
of this change?
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Ans: The significance of this change is explained in paragraph 23.3.
of guidance note on tax audit revised 2005 edition. In clause 3(i)
of the old Form No. 3CD reference was to ―opening and closing
stock-in-trade‘. In sub-clause (a) of clause 12 of revised Form No.
3CD, the reference is to ―closing stock‖. The expression ―stock-intrade‖
means finished goods and raw materials. Since subclause(b)
refers to section 145A where the term ― inventories‖ is
used, the term ―closing stock‖ will include all items of inventories.
AS-2 defines the term ―inventories‖ to include finished goods, raw
material maintenance supplies, consumables and loose tools.
Therefore, method of valuation of items of closing inventories will
have to be given under sub-clause (a).
Issues on Clause – 12(b)
Please clarify whether adjustment of Cenvat against
excise duty payable is considered as ―paid‖ for the
purposes of section 43B?
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Ans : Yes, adjustment of Cenvat against excise duty
payable is considered as ―actually paid‖ for the
purpose of allowance under section 43B. It is a
constructive payment. Reference can also be made to
the Hon‘ble Supreme Court decision in standard
Triumph Motor Company Limited v CIT 201 ITR 391.
Section 145A is supposed to be tax neutral This
argument does not hold good in a case where excise
duty is payable by a manufacturer in a financial year
on account of his sales exceeding the basic exemption
limit, but in the next year the turnover is within the
basic exemption limit and the unit is not liable to pay
the excise duty. In such a situation, how can the credit
of excise duty on closing stock be claimed?
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Ans: In the first year debit of excise duty adjustment of excise
duty to the closing stock would offset each other and as such
there would be no impact on the profit as per accounts.
However, the debit on account of excise duty would be
disallowed under section 43B. In the next year the opening
stock would be closing stock of the first year, duly adjusted
with excise duty. The earlier year‘s excise duty debit would be
credited to profit and loss account of the next year. However,
this credit would not be taxable in view of disallowance of the
amount in the first year under section 43B.
It is also significant to note that paragraph 13 of AS 4 –
Contingencies and events occurring after the balance sheet date
provides that assets and liabilities should be adjusted for events
occurring after the balance sheet date that provide additional
evidence to assist the estimation of amounts relating to
conditions existing at the balance sheet date.
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Liability on closing stock of finished goods are
provided The goods are yet in the godown. There is a
fire and goods are destroyed. Is the assessee required
to include the amount of excise duty in the valuation
of stock for the purpose of section 145A?
Ans: Excise is a duty on manufacture of goods and the
liability for duty arise as soon as such goods are
manufactured. The duty payable on such goods will
have to be included for the purpose of valuation of
closing stock. If such goods are lost or destroyed in
storage, remission of duty can be given by the
commissioner on application. However, once the goods
are cleared from the factory and subsequently they are
destroyed there is no provision for granting refund of
duty.
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During the year after announcement of AS-2 as
mandatory, Cenvat has been excluded for the
purpose of valuation of opening stock though
Cenvat portion was considered for valuation of
closing stock of last year. Since clause 12(b) asks
for details of deviation, if any, from section 145A,
should the deviation for valuation of opening stock
be given? Alternatively please clarify whether this
issue is covered in clause 11(d).
Ans: Yes, the excise duty should be included in the
valuation of stock in order to comply with provisions of
section 145A. Once the statutory adjustments are shown
as part of computation of income, no separate
disclosure is necessary under sub-clause 12(a). The
issue is not covered by clause 11(d) since 11(d) requires
reporting of deviation, if any, in the method of
accounting employed in the previous year from
accounting standard prescribed under section 145.
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While giving effect of deviation from section 145A, as per
the Guidance Note excise duty payable on finished goods
has to be covered in the information related to section 43B
i.e. it is allowable as deduction on payment basis. Kindly
elaborate
Ans: The component of excise duty on finished goods forms
part of value of stock in trade. This is because the moment
the manufacture of the goods is complete in all respects and
ready for dispatch the liability of excise duty arises. The
deduction for excise duty is allowed only when the excise
duty on such goods is paid on the finished stocks cleared
and/or dispatched. The information relating to section 43B is
only to see that claim is not made on the basis of advance
payments made without clearance and/ or dispatch of goods.
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Subsequent to the year end but before furnishing of return, excise
duty of an amount which is more than the payable amount, has
been paid. However all the items which formed part of the closing
stock has not been cleared.
Ans: Section 43B is a provision intended to disallow certain
items of expenditure which are otherwise admissible on
account of non-payment within the stipulated date. It cannot
be used to allow an item of expenditure which is not relating
to the year merely on account payment made. Hence, excise
duty paid in excess of amount payable cannot be claimed as
deduction. Reference to Gopikrishna Granites India Ltd., v.
DCIT 251 ITR 337 (AP) and Hindustan Liver Limited v.
V.K. Pandey, JCIT, 251 ITR 209 (Bom) can be relevant in
this regard.
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Clause 12A- Conversion of Capital Asset into Stock in Trade at
fair market value: Section 45(2)
Give the following particulars of the capital asset converted into
stock-in-trade: -
(a) Description of capital asset,
(b) Date of acquisition;
(c) Cost of acquisition;
(d) Amount at which the asset is converted into stock-in-trade
Issues on Clause – 12A
This clause is inserted to keep a track record of transactions
related to conversion of capital asset into stock-in-trade.
Such conversion is treated as transfer u/s 2(47)
U/s 45(2) notional capital gain arise from such transfer and
chargeable to tax in the year in which such stock-in-trade is sold.
No requirement of details of taxability of capital gain or business
income from such deemed transfer.
Follow AS-2 for valuation of stock-in-trade
Follow AS-10 for valuation of fixed assets.
Follow AS-22 for provision of I.Tax as temporary timing
difference.
Sec 47 & 47A also to be kept in mind.
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Cost of capital asset in case of:
Purchase–From invoice, Books etc
Self –constructed–directly related cost
Acquired in exchange–FMV or Net Book value of
asset given up
Acquired by way of inheritance–In this case if no
evidence exist –Auditor should rely upon the report of
the experts such as valuers.
Information under item no. 12A should be necessary not
only in the year of conversion but also in the year of sale
of relevant stock in trade. Since sec. 45(2) provides only
for the computation of capital gain in the year of
conversion but the due date of payment of tax is in the
year of sale of such converted stock-in-trade.
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The legislation has not visualized the situation where
stock in trade is to be converted into capital asset. In
the absence of a specific provision, the formula which
is favorable to assessee should be accepted. (ITA
6374/MUM/2004, ACIT v Bright Star Inv P Ltd)
Clause 13. 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 for 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.
The information is to be given with reference to the entries in the
books of accounts and records made available to the tax auditor.
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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.
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.
d. Any other item of income
Any other items 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.
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e. Capital receipt, if any
The auditor should refer to Cash flow statement for this purpose and
exercise his professional expertise and judgment.
Some examples are :
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 assets.
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.
Clause 13:
Amounts not credited to the Profit & Loss Account:
Nowadays many companies are organizing foreign
tours for their dealers if they achieve targeted sales. In
such situations either the proprietor dealer or the
partner of the dealer firm or the director of the dealer
company may avail of the foreign tour, What are the
duties of the tax auditor in this regard.
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Ans : Clause (iv) of section 28 brings to charge the value of any
perquisite or benefit convertible into money or not arising from
the exercise of business or profession. Such benefit might have not
been credited to the profit and loss account or in the books of
account.
The tax auditor is required to report in regard to items falling
within the scope of section 28 whether or not they are entered into
the books of account. If the books of account or any other
supporting documents or records reflect or indicate enjoyment of
some such benefit, he may make further inquiries. Based on such
inquiries, in exercise of his professional judgment, he may report
about such benefit appropriately. Where circumstances warrant it
may be clarified that the information is not necessarily exhaustive
and is given on the basis of the knowledge he acquired in the
course of audit carried out in accordance with the normally
accepted auditing practices.
In case of an individual assessee certain incomes are
exempt like
a) share of profit from partnership firm – exempt u/s. 10(2A)
b) income of minor children exempt u/s. 10(32) should such
income also be disclosed under clause 13(d)
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Ans : Any income which could be ascertained from the
books of account, records and information made
available to the tax auditor has to be reported.
However, the tax auditor should clearly state that such
incomes are excludible under the relevant provisions
of section 10.
Clause 14.Particulars of depreciation allowable as per the
Income tax Act, 1961 in respect of each asset or block of assets,
as the case may be in the following form:
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
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Issues on Clause -14
It is compulsory for all assessee to claim depreciation or
additional depreciation in calculating taxable income otherwise no
deduction will be allowed & WDV will be treated as reduced –
Explanation 5 to Sec 32 (w.e.f A.Y. 2002-03).
‗Allowable‖implies permissible deduction under provision of Act
and Rules.
―Used‖means actual use and is not kept ready for use.
Assets used partly for Business purpose, deduction u/s 32(1)
restricted to proportionate part.
In clause 14 d(ii) adjustment is contemplated u/s 43A & AS-11 .
U/s 43A deduction on cash basis but AS-11 (revised) deduction
on accrual basis.
No amendment is made in this respect in Schedule VI & in form
3CD.
Depreciation is not allowed on an amount equivalent to
CENVAT credit claimed and allowed.
Depreciation is allowed on ―Actual Cost‖-term defined
u/s 43(1) of I.T. Act.
An assessee can claim depreciation on actual cost even if
he follows Cash method of accounting.
Subsidy received over & above of WDV of block of asset
in the absence of specific provisions not taxable.
The interest relatable to any period after such asset is
first put to use is not a part of actual cost.
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Sub clause (iia) to Sec 32(1) inserted by Finance Act,2002
w.e.f A.Y. 2003-04 to provide additional depreciation on
fulfillment of prescribed conditions.
W.e.f 2006-07 additional depreciation allowed to all the
assessee engaged in the business of manufacturing or
production of any article or thing in respect of New
machinery or Plant installed on or after 31stday of
March,2005.
Depreciation debited to P&L a/c as per requirement of
Schedule VI not reported under clause –14.
In case of dispute between assessee, department &
Auditor regarding classification of assets, rate of
depreciation etc in earlier year a suitable disclosure is
required.
Please clarify the basis upon which depreciation will
be allowed under cash system . Will it be allowed on
full cost or will it be limited to the actual payment
made during the relevant previous year?
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Ans: For the purpose of calculating the depreciation allowable
under the Income-tax Act the basis will be the actual cost as
defined in section 43(1) of the Income-tax Act. Accordingly,
even if an assessee is following cash method of accounting
depreciation has to be allowed on the full actual cost even if
only a portion of it might have been paid in cash during the
relevant previous year. It is because of the fact that when the
asset is used in business, the whole of the asset is used and not a
part proportionate to the cash paid.
(a) In the circumstances where depreciation has not
been claimed in the accounts and is not likely to be
claimed in the return also, should the tax auditor state
the particulars of depreciation under clause 14 or not?
b) The assessee wants to claim less depreciation than
allowable under Income tax Act. It is permissible?
What is the duty of the tax auditor in this regard?
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Ans : That the Finance Act, 2001, with effect from 1st April
2002, has inserted Explanation 5 below section 32 (1) to
provide that the provisions of sub section (1) shall apply
whether or not the assessee has claimed the deduction in
respect of depreciation in computing total income. In other
words, the effect of the Explanation is that the depreciation
would be considered in computing total income irrespective
of the fact whether a claim is made or not. Further, it is not
open to an assessee to claim lesser depreciation than the
prescribed rate.
Where, however, an assessee chooses to claim depreciation at a
lower rate or does not claim or does not intend to claim
depreciation, the tax auditor, as such, does not have to calculate the
depreciation on his own. It would be sufficient for him to state in
the report that the assessee does not intend to claim the
depreciation or has claimed depreciation at a lower rate and give
the necessary facts, if any, relating thereto. There may also be a
situation where the assessee does not want to claim depreciation
but is willing to give all the particulars necessary for calculating
depreciation. The tax auditor in that case can compute the
allowable depreciation and provide the required information under
the clause.
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Under Explanation 10 to section 43(1) any subsidy
received from Government towards an asset should be
reduced from the cost of the asset. What is the position if
in a given case, a subsidy of Rs. 3/- lacs is received
during the year (against a claim made few years ago) in
respect of an asset with a present WDV of Rs. 2/- lacs?
Indicate the treatment to be accorded to the excess
subsidy of Rs. 1/- lac over the WDV.
Ans : The Subsidy received should be reduced from the WDV
so as to reduce the balance in the block to Zero. The
excess, if any, over and above WDV does not appear to be
taxable in absence of a specific provision to that effect.
Section 50 also does not appear to be attracted as there is
no transfer of the asset.
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Clause 15. Amounts admissible under sections
33AB, 33ABA, 35, 35ABB, 35AC, 35CCA, 35CCB, 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
• Section 33AB: Tea / Coffee / Rubber Development Account
• Section 33ABA: Site Restoration Fund
• Section 35: Expenditure on Scientific Research
• Section 35ABB: Expenditure for obtaining license to operate telecom services
• Section 35AC: Expenditure on eligible projects/schemes
• Section 35CCA: Expenditure by way of payments to associations and
institutions for carrying out rural development programmes
• Section 35D: Amortization of certain preliminary expenses
• Section 35E: Deduction for expenditure on prospecting etc. for certain minerals
Clause 16a. 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
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Clause 16b. 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)(va)
‣ 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.
Clause 16:
Bonus, Commission, PF recoveries etc.:
M/s. A Pvt. Ltd pays service charges to its Director
Mr.Z, amounting to Rs. 1 lakh. Mr. Z is holding 50%
of the shares in M/s. A Pvt. Ltd. Please clarify
whether the same has to be reported under this clause?
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Ans: It is not clear whether Mr. Z is an employee of the
company Assuming that he is also an employee of the company,
if it established that the amount of Rs. 1 lakh in sum and
substance constituted dividend, the tax auditor has to report
under sub-clause (a). However, if such service charges are
payable to Mr. z for services rendered to the company and have
no connection with the appropriation of profits in any manner,
there is no reporting requirement.
The assessee applied for a P.F. No. in time but the
same was not allotted within a reasonable time due
to departmental delay. The assessee duly made a
provision for the contribution by the employer in
its profit and loss account and balance sheet. But
the same could not be remitted to the authorities
because of the non allotment of P.F. No. Please
clarify the duty of the tax auditor in this regard.
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Ans: The objective of Sub-clause (b) is to get information in
respect of sums recovered from employees towards
provident fund contributions etc. and the dates on which
such contributions were remitted to the statutory
authorities. This information is necessary to determine the
allowability of the payment of such contributions under the
provisions of section 36(1)(va). In the given issue the
assessee has not remitted the contribution to the statutory
authorities, whatever be the reasons therefore. The tax
auditor has indicate the factual position in this regard.
Please clarify whether the grace period of 5days
should be considered while determining due date for
payment of PF, ESIC contributions for reporting under
section 36(1)(va) read with sections 2(24) (x) and 43 -
B
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Ans: The following extracts from the judgement of the
Income-tax Appellate Tribunal in Hunsur Plywood
Works Ltd., V. Deputy Commission of Income-tax
(1995) 54 ITD 394 will make the position clear.
―Paragraph 38 of the Employees‘ Provident Funds
Scheme, 1952 says that the amounts under
consideration in respect of wages of the employees for
any particular month shall be paid within 15 days of
the close of every month.
Clause (iii) of CPFC's Circular NO.E. 128(1) 60-111 dated 19-3-
1964 as modified by Circular No. E. 11/128 (section 14-B
Amendment)/73 dated 24-10-1973 allows five days of grace
period to the employers for payment of provident fund
contribution, administrative charges and inspection charges. The
said Circular also states that if payment be made within the said
period of grace, no damages as per section 14-B of the
Employees's Provident Funds and Miscellaneous Provisions
Act, 1952 shall be levied. Furthermore, our attention has also
been drawn to CPFC's Circular No. E.128(1 )60-IV dated 29-4-
1967 in clause (iii) of which it has been stated that the Central
Board of Trustees at its meeting on 13-4-1967 agreed that if
payment was made within grace period already allowed by it,
then such payments should not be counted as default even for
the purpose of counting the number of defaults ……(Page 399)
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Thus, we find that from strict judicial angle, the period or days of
grace would seem to be falling within a twilight region. The
period certainly follows the exact due date but at the same time
no action by the other side is possible within the said period
except for registering a protest. Since the present issue is
required to be resolved from practical angle, as discussed by us
above, we are required to examine the consequences of making
of payment of the employees' contribution to the EPF etc., within
five days' period of grace.
We find that if an employer makes payment within such period of
grace, not only is he not liable to pay any damages in accordance
with the Employees' Provident Fund Scheme and the relevant
Act, but by virtue of the Circular dated 29-4-1967 as mentioned
above, he will also not be treated to be in default. Hence, we
ultimately hold that from practical point of view, the five days'
period of grace after 15th of the succeeding months is to be
considered merely as an extension of the early 15 days and all the
consequences of making payment within the said 15 days should
be considered to follow if the payment be made within the grace
period following the said period of 15 days.― (Page 400).
Also refer to CIT v. Salem Cooperative Spinning Mills Ltd.
[2002J 258 ITR 360 (Mad).
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Clause 17. Amounts debited to Profit and loss account, being :-
Clause 17a. Expenditure of Capital nature
‣ Capital expenditure, if any, debited to the profit and loss account
to be disclosed stating the amounts under various heads separately
‣Tax auditor needs to scrutinize records and obtain information and
make necessary inquiries in this behalf
‣ 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, or
• whether it relates to the frame work of the assessee‘s
business etc.
Clause 17b. 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.
‣Note: According to the information and explanation given by the
assessee, no personal expenses have been debited to the profit and
loss account other than those payable under contractual
obligations or in accordance with the generally accepted business
practice.
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Clause 17c. 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.
‣For this purpose the tax auditor should scrutinize the ledger
accounts and make enquiries in this behalf.
Clause 17d. Expenditure incurred at clubs-
(i) As entrance fees and subscriptions
(ii) 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
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Clause 17e.
i. Expenditure by way of penalty or fine for violation of any law
for the time being in force
ii.
iii.
Any other penalty or fine
Expenditure incurred for any purpose which is an offence or
which is prohibited by law
‣ 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.
Note: The assessee has represented that, the assessee has not
incurred:
i. any expenditure by way of penalty or fine for violation of
any law for the time being in force;
ii.
any other penalty or fine; and
iii.
any expenditure for any purpose which is an offence or
which is prohibited by law.
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Clause 17f. Amounts inadmissible under section 40(a)
It basically includes :
‣ Interest, royalty, fees for technical services or any other sum
payable outside India or in India to a non resident or a foreign
company
‣ Interest, commission or brokerage, rent, royalty, fees for
professional or technical services, payments to resident
contractors/subcontractors
‣ Securities transaction tax, Fringe benefit tax, Income tax and
Wealth tax
‣Salaries payable outside India or to a non resident on which tax has
not been deducted at source
‣Tax actually paid by an employer referred to in section 10(10CC)
‣ In case of any interest, commission or brokerage, rent, royalty,
fees for professional services or fees for technical services to a
resident, or amounts payable to a contractor or sub-contractor,
being resident; on which tax has not been deducted, or after
deduction, has not been paid
‣ No disallowance if tax paid before due date for filing return.
There will be no disallowance of any interest, commission or
brokerage, rent, royalty, fees for professional services or fees for
technical services payable to a resident, or amounts payable to a
resident contractor or sub-contractor for carrying out any work if
after deduction of tax during the previous year, it is paid on or
before the due date of filing of return of income specified in
section 139(1). [s. 40(a)(ia) ; w.e.f. 01.04.2010 : FA 2010]
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Clause 17g. Interest, salary, bonus, commission or remuneration
admissible 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.
Firm
Section 40 (b): Uniform limit has been fixed for both professional
firms and non-professional firms in respect of payments of salary,
bonus, commission or remuneration to the working partners: - w.e.f.
01.04.2010
Book Profit
On the first Rs.3,00,000 of the bookprofit
On the balance of the book-profit
Allowable Remuneration
Rs. 1,50,000/- or 90% of the bookprofit,
whichever is more.
60% of book-profit
In case of loss Rs. 1,50,000/-
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40(ba) Payment Of Interest Salary, Bonus, Commission Or
Remuneration Made By AOP/BOI To Its Members
In the case of a AOP/BOI any payment of interest,
salary, bonus commission or remuneration made by
such AOP/BOI to any of its member.
Note:
1. Interest paid to member - Interest received from such member
= Net to be disallowed.
2. If member in individual capacity, then interest paid in
representative capacity be allowed.
3. If member in representative capacity, then interest
paid in individual capacity be allowed.
4. Salary paid in any capacity is to be disallowed.
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Clause 17h.(A). Whether a certificate has been obtained from the
assessee regarding payments relating to any expenditure covered
under section 40A(3) that the payments were made by account payee
cheques drawn on a bank or account payee draft, as the case may be,
[Yes/No]
‣ Confirmation of obtaining a certificate from the assessee regarding
payments relating to any expenditure covered under section 40A(3)
to be given in the above clause
‣ Management Representation obtained from clients could be
regarded as a certificate for this clause
‣ Certificate need not be attached with the Tax Audit Report
Clause 17h. (B) amount inadmissible under section 40A(3), read with
rule 6DD [with break up of inadmissible amounts]
‣ Section 40A(3) provides that where assessee incurs any expenditure
in respect of which payment is made in a sum exceeding Rs.20,000
otherwise than by a account payee cheque / account payee bank draft,
no deduction shall be allowed in respect of such expenditure.
‣ 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 with
reasons.
‣ List should be verified by the tax auditor with the books of account in
order to ascertain whether the conditions for specific exemption granted
in Rule 6DD are satisfied.
‣Details of payments which do not satisfy the above conditions should
be stated under this clause
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Note: The assessee maintains that all payments for expenses
made from bank accounts in excess of Rs. 20,000/- have been
made by account payee cheques or account payee bank drafts.
However, this could not be verified by the examining Chartered
Accountants as the necessary evidence is not in the possession of
the assessee.
40A(3) and 40A(3A) Payments Made Otherwise Than By
Account Payee Cheque Or Account Payee Bank Draft
Section 40A(3) shall be attracted if the following
conditions are fulfilled:
‣ Assessee incurs any expenditure
‣ in respect of which payment or aggregate of
payments made
‣ to a person
‣ in a single day
‣ Of a sum exceeding Rs.20,000/-
‣ Otherwise than by account payee cheque or
account payee demand draft
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Section 40A(3A): Where an allowance has been made in the
assessment for any year in respect of any liability incurred
by the assessee for any expenditure and subsequently
during any previous year (hereinafter referred to as
subsequent year) the assessee makes payment in respect
thereof, otherwise than by an account payee cheque
drawn on a bank or account payee bank draft, the
payment so made shall be deemed to be the profits and
gains of business or profession and accordingly
chargeable to income-tax as income of the subsequent
year if the payment or aggregate of payments made to
a person in a day, exceeds Rs. 20,000/-.
Transportation
Section 40 (3A):
Newly inserted proviso provides that in case of payment made for plying,
hiring or leasing goods carriages,
the limit will be Rs. 35,000/- instead of Rs. 20,000/-,
in respect of disallowance where the payment is made in cash or
otherwise than by way of account payee cheque or DD. - w.e.f. 01.10.2009
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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:-
- Where payment is made toi.
RBI
ii. SBI
iii. Any co-operative bank or land mortgage bank
iv. Any primary agricultural credit society
v. LIC
It may be noted that sub-clauses vi) to xviii) [i.e payment to
IDBI, ICICI, UTI etc] of the said rule have been omitted by
Notification 208/2007, dated June 27, 2007.
Notes:
1. In certain cases as specified in Rule 6DD, payment in
a sum exceeding Rs. 20,000/- may be made otherwise
than by an account payee cheque/DD.
2. Attar Singh Gurmukh Singh (Supreme Court) -
Purchase of stock or raw material constitute
expenditure. Section 40A(3) shall apply on payment
made in this regard.
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3. Vijay Kumar Ajit Kumar - Section 40A(3) shall
also apply in case of advance payment for the
expenditure made otherwise than by account payee
cheque. Disallowance shall be in the year in which
expenditure is incurred.
4. Section 40A(3) attracted for purchases made
otherwise than by account payee cheque by Pucca
Ahartiya and not attracted for purchases made by
a Kachcha Ahartiya.
40A(4) Payments Made By Account Payee Cheque in
Violation of a Contract
‣ Notwithstanding anything contained in any other law
for the time being in force or in any contract,
‣ where any payment in respect of any expenditure has
to be made by an account payee cheque or an account
payee bank draft in order that such expenditure may not
be disallowed as deduction under section 40A(3),
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‣ then such payment may be made by such cheque or
draft, and where the payment is so made,
‣ no person shall be allowed to raise, in any suit or
proceeding a plea on the ground that the payment
was not made in cash or in any other manner.
Where the payment is made by-
i. Letter of credit
ii.
iii.
iv.
Mail or telegraphic transfer
Book adjustment from one bank account to any other account
Bill of exchange
v. Use of electronic clearing system through bank account
vi.
vii.
Credit card
Debit card
It may be noted that sub-clauses v) to vii) as above have been
inserted by Notification no. 208/2007 dated June 27, 2007
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Clause 17i. 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.
40A(7) Employer’s Contribution To Gratuity Fund
No deduction shall be allowed in respect of any
provision made by the assessee for the payment of
gratuity to his employees on their retirement or
termination of employment. However deduction shall
be allowed in respect of (i) payment of a sum as
contribution towards approved gratuity fund or (ii)
Any provision made for the purpose of payment of
gratuity becoming payable during the year.
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Note: No deduction shall be allowed in respect of any
provision made by the assessee for payment of
gratuity to his employees.
Exceptions:
1. Payment as contribution towards approved gratuity
fund.
2. Provisions made for payment of gratuity actually
becoming payable during the previous year.
Note: If the gratuity fund is unapproved, deduction for
gratuity shall not be allowed even if the provision for
gratuity is made as per Actuary.
Note: If a policy is taken from LIC for providing
gratuity to employees then annual premium is allowed
as deduction u/s 37(1).
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Clause 17j. 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
40A(9) Employer’s Contribution To Approved Gratuity
Fund, Recognized Provident Fund Or Approved
Superannuation Fund
No deduction shall be allowed in respect of any sum
paid by the assessee towards setting up or formation of,
or as contribution to, any fund, trust, company,
association of persons, body of individuals, society or
any institution except where such sum is required to be
paid under any law in force or where such sum is paid
for an approved gratuity fund, recognised provident
fund or approved superannuation fund.
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Clause 17k. 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.
Clause 17(l). 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.
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Clause 17 (l): Section 14A
Deduction inadmissible u/s14A in respect of the expenditure incurred in
relation to income which does not form part of the total income( Subsection 1).
The AO, if he is not satisfied with the claim of the assessee, shall determine the
amount of expenditure incurred, in relation to income which does not form part of the
total income in accordance with method prescribed under rule 8D (w.e.f. 24-3-2008),
( Subsection 2).
the expenditure which the AO seeks to disallow under s. 14A should be actually
incurred and so incurred with a view to producing non-taxable income (101 TTJ 369,
ACIT vs Eicher Limited.)
Rule 8D w.e.f. 24-3-2008: Method for determining amount of expenditure in relation
to income not includible in total income.
8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of
a previous year, is not satisfied with
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred in
relation to income which does not form part of the total income under the Act for
such previous year,he shall determine the amount of expenditure in relation to such
income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of
the total income shall be the aggregate of following amounts, namely :
i. the amount of expenditure directly relating to income which does not
form part of total income;
ii. in a case where the assessee has incurred expenditure by way of
interest during the previous year which is not directly attributable to
any particular income or receipt, an amount computed in
accordance with the following formula, namely :
A x B/C
A = amount of expenditure by way o f interest other than the
amount of interest included in clause (i) incurred during the
previous year ;
B = the average of value of investment, income from which
does not or shall not form part of the total income, as
appearing in the balance sheet of the assessee, on the
first day and the last day of the previous year ;
C = the average of total assets as appearing in the balance
sheet of the assessee, on the first day and the last
day of the revious year ;
c
Clause 17 (l): Rule 8D: Determination
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iii.
an amount equal to one-half per cent of the average of the value
of investment, income from which does not or shall not form
part of the total income, as appearing in the balance sheet of
the assessee, on the first day and the last day of the previous
year.
3. For the purposes of this rule, the 'total assets' shall mean, total
assets as appearing in the balance sheet excluding the
increase on account of revaluation of assets but
the decrease on account of revaluation of assets.
including
Clause 17m. 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.
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Clause 17A.
Amount of interest inadmissible under section 23 of the Micro,
Small and Medium Enterprises Development Act, 2006.
‣The auditor should report here the amount of interest paid to the
Micro, Small and Medium Enterprises.
Notification No. 36/2009
This is a new clause inserted by the Central Board of Direct
Taxes through its Notification No. 36/2009 dated 13-4-2009, in
the Form No.3CD in Appendix II of the Income-tax Rules,
1962
The tax auditor is required to state the amount of interest
inadmissible under section 23 of the Micro, Small and Medium
Enterprises Development Act, 2006.
The Micro, Small and Medium Enterprises Development Act,
2006 (MSME Act) is an Act to provide for facilitating the
promotion and development and enhancing the
competitiveness of micro, small and medium enterprises and
for matters connected therewith or incidental thereto.
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Section 23 of the MSME Act
‣ Section 23 of the MSME Act lays down that an interest
payable or paid by the buyer, under or in accordance with
the provisions of this Act, shall not for the purposes
of the computation of income under the Income-tax
Act,1961 be allowed as a deduction.
‣ The inadmissible interest has to be determined on the
basis of the provisions of the MSME Act.
‣ Section 16 of the MSME Act provides for the date from
which and the rate at which the interest is payable.
‣ Accordingly, where a buyer fails to make payment of
the amount to the supplier, as required under section
15, the buyer shall, notwithstanding anything contained
in any agreement between the buyer and the supplier
or any law for the time being in force, be liable to pay
compound interest with monthly rests to the supplier
on that amount from the appointed date or, as the case
may be, from the date immediately following the date
agreed upon, at three times of the bank rate notified by
the Reserve Bank.
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Section 15 of the MSME Act
Section 15 of the MSME Act, requires the buyer to make
payment on or before the date agreed upon in writing, or
where there is no agreement in this behalf, before the
appointed day. It also provides that the period agreed
upon in writing shall not exceed forty five days from the
day of acceptance or the day of deemed acceptance.
Section 22 of the MSME Act
Section 22 of the MSME Act provides that where any buyer is
required to get his annual accounts audited under any law for
the time being in force, such buyer shall furnish the following
additional information in his annual statement of accounts,
namely:-
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i. The principal amount and interest due thereon (to be
shown separately) remaining unpaid to any supplier as at
the end of each accounting year.
ii. The amount of interest paid by the buyer in terms of
Section 16, along with the amount of payment made to
supplier beyond the appointed date during each
accounting year.
iii. The amount of interest due and payable for the delay in making
payment (which have been paid but beyond the appointed day
during the year) but without adding the interest specified under
this Act.
iv. The amount of interest accrued and remaining unpaid at the end
of each accounting year; and
v. The amount of further interest remaining due and payable even
in the succeeding years, until such date when the interest dues as
above are actually paid to the small enterprise, for the purpose of
disallowance as a deductible expenditure under section 23.
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Where the tax auditor is issuing his report in Form
No.3CB, he should verify that the financial statements
audited by him contain the information as prescribed
under section 22 of the MSME Act. If no disclosure is
made by the auditee in the financial statements he should
give an appropriate qualification in Form No.3CB, in
addition to the reporting requirement in clause 17A of
Form No. 3CD.
Clause 18. 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.
2. Legitimate needs of business/profession
3. Benefit derived by assessee
‣ 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
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If necessary, indicate in Form 3CD by way of a note as under :
―The Company does not have a complete list of "relatives" of
directors or a list of "persons" who carry on business or profession
in which a director of the Company or a relative of such director or
such individuals together with the assessee Company has/have a
substantial interest. According to the information with the
Company, the Company has certified that there are no payments
other than disclosed above made to persons specified in Section
40A(2)(b) of the Income tax Act; this has not been verified by the
auditors.‖
Chart of persons specified in Section
40A(2)(b)
Individual Firm Association
of persons
HUF
Company
His
relatives
Its
Partners
Its
Members
Its
Members
Its
Directors
Their
relatives
Their
relatives
Their
relatives
Their
relatives
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Where person having substantial interest in
the business or profession of the assessee is
Individual Firm Associatio
n of
persons
His
relatives
Its
Partners
Its
Members
HUF
Its
Members
Company
Its
Directors
Their
relatives
Their
relatives
Their
relatives
Their
relatives
Note : where one or more the persons falling in any of
the above categories (i.e. individual and his relatives,
firm, its partners and their relatives, etc.) have
substantial interest in the business or profession
carried on by any person – that person is also covered
under section 40A(2)(b)
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Note: Where one or more of the persons falling in any of the above
categories (i.e. individual and his relatives, firm, its partners and their
relatives, etc.) have substantial interest in the business or profession
carried on by any person - that person is also covered under
section 40A(2)(b)
PART III
Director Partner Member of AOP Member of HUF
Companies in
which he is a
Director
All other
Directors of
such
companies
Firm in which he
Is a partner
All other partners
Of such firms
AOP of which he is a
member
All other members of
such HUF
All other members of
such HUF
Their Relatives Their relatives Their relatives Their relatives
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Notes:
1. Relative is defined in section 2(41) as including husband, wife, brother, sister or
any lineal ascendant or descendent of the individual.
2. "Person having a substantial interest" is explained in section 40-A as under:
i. In the case of company - the person concerned is, at any time, during the
previous year the beneficial owner of shares (not being shares entitled to a
fixed rate of dividend whether with or without a right to participate in profits)
carrying not less than 20% of the voting power.
ii.
In other cases - such person is at any time during the previous year,
beneficially entitled to not less than 20% of the profits of such
business or profession.
Clause 19 :- Amounts deemed to be profits and gains
under section 33AB or 33ABA or 33AC
‣ 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
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Clause 20 :- 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.
d.) Subsequent recovery of bad debt, earlier allowed as deduction.
e.) Amount withdrawn from special reserve created under section 36(1)(viii).
Clause 21:- 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
(a) paid during the previous year;
(b) not paid during the previous year;
• Trace the amount of liability which was pre-existed on 1 st April
2009 from statements attached to the Tax audit report for clause
21(i)(A) & 21(i)(B) for the year ended 31 st March, 2009.
• Obtain the closing balance from the trial balance for the year
ended 31.03.09
• E. g. Bonus to employees, Compensated Absences
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(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 under section 139(1);
(b)not paid on or before the aforesaid date
• Trace the closing balances of unpaid liability from the audited trial
balance (current liability).
• Obtain the details of subsequent payment from the client.
• Verified respective ledger accounts to verify the subsequent payments
remained unpaid.
• E.g. Excise duty, Sales Tax / Value Added Tax, Work Contract Tax,
Commission to Managing, Bonus to employees , Leave Encashment, P
F contribution, ESIC contribution, Gratuity - Officers‗, Interest
accrued but not due
In respect of the expenditure covered by clauses (a) to
(f) of section
43B, the particulars may be furnished in the following
form,
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A) Liability pre- existing on first day of previous year
Sr.
No.
Nature
liability
of
Outstan
ding
opening
balance
not
allowed
in any
earlier
previous
year(s)
Amount
paid/set
off
during
the year
against
column
3
Amount
written
back to
the
profit
and loss
account
Amount
remainin
g unpaid
as at the
end of
the year
Whether
passed
through
profit &
loss
account
Remark
s
1 2 3 4 5 (3-4-
5)=6
7 8
B) Liability Incurred during the Previous year
Sr.
No
.
Nature of
liability
Amount
incurred
during the
previous
year but
remaining
outstanding
as on the
last day of
the previous
year)
Amount paid/set
off before the
due date of
filing
return/date upto
which reported
in the tax audit
report,
whichever is
earlier against
column (3)
Amount
unpaid on
the due date
of filing the
return/date
upto which
reported in
the tax
audit report
whichever
is earlier
Whether
passed
through
the profit
& loss
account
Rema
rks
1 2 3 4 5 6 7
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43B certain deductions On Actual Payment Basis
Notwithstanding anything contained in any other
provisions of the Income Tax Act, a deduction
otherwise allowable under the act in respect of –
a. any tax, duty, cess or fee, by whatever name called,
payable under any law for the time being in force, or
b. employer's contribution to provident fund, gratuity
fund or any other fund for the welfare of the
employees, or
c. any bonus or Commission payable to the employees,
or
d. interest payable on any loan or borrowing from any
public financial institution or a state Financial
Corporation or state Industrial Investment
Corporation, or
e. Interest payable on any Loan or ADVANCE from a
scheduled bank, (―Scheduled bank‖ includes a Cooperative
bank).
f. Leave encashment payable to employees.
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shall be allowed as deduction only in the previous year
in which such sum is actually paid by him. This is
irrespective of the previous year in which the liability to
pay such sum was incurred by the assessee according to
the method of accounting employed by him.
Notes:
1. The provisions of section 43B shall not apply in relation
to any sum which is actually paid by the assessee on or
before the due date applicable in his case for furnishing
the return of income under section 139(1) in respect of
the previous year in which liability to pay such sum was
incurred by the assessee and the evidence of such
payment is furnished along with the return of income.
2. CBDT Circular: If under a scheme of the State
Government, payment of sales tax is deferred for
specified number of years, sales tax deferred will be
deemed to have been paid for the purposes of section
43B.
3. Where interest payable under clause (d) or (e) is
converted into a loan or advance or borrowing, then
it shall not be deemed to have been actually paid.
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Clause 22 (a) Amount of Modified Value Added Tax credits availed of or utilized
during the previous year its treatment in the profit and loss account treatment of
outstanding Modified Value Added Tax 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. (Viz. RG-23)
‣Tax auditor should verify that the information furnished under this sub-clause is
compatible with the information under clause 12(b)
‣Reporting in following format
Balance at beginning of the year
Add: CENVAT Credit available during the year
Less: CENVAT Credit utilised during the year
Outstanding at the end of the year
XXX
XXX
(XXX)
XXX
(b) Particulars of income or expenditure of prior period credited or debited to the
profit and loss account.
‣ Accounts audited----Annual Accounts
Accounts not audited----Close scrutiny of ledger to determine period to which
income/expenditure relates.
‣ Both AS 5 and AS(IT)-II notified by Govt under section 145 state that if the
material adjustments arising due to error or ommission in earlier years, then prior
period item.
‣ 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.
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Clause 23. 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 69 D, 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
Hundi---Promissory Note.
Audit Procedures:
‣The Tax auditor to obtain a complete list of borrowings and repayments of
hundi loans otherwise than by account payee cheques
‣Verify the same with the books of account.
‣Verify records in possession of assessee.
‣If records are not available, give appropriate disclaimer to that effect.
‣ Scrutinize cash and petty cash book
Amount borrowed or repaid on hundi.
Where any amount is borrowed on a hundi from, or any amount due
thereon is repaid to, any person otherwise than through an account
payee cheque drawn on a bank, 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, as the case may be :
Provided that, if in any case any amount borrowed on a hundi has
been deemed under the provisions of this section to be the income
of any person, such person shall not be liable to be assessed again in
respect of such amount under the provisions of this section on
repayment of such amount.
Explanation.—For the purposes of this section, the amount repaid
shall include the amount of interest paid on the amount borrowed.]
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Clause 24 (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: If loan or deposit to be accepted together alongwith loans or deposits
already accepted, exceeding Rs. 20,000 to be availed only through account
payee cheque or account payee bank draft.
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 that necessary evidence is not in
possession of assessee.
Other Considerations:
‣ Payments not made through account payee cheques or bank drafts but through
bank transfers like RTGS, NEFT , then tax auditor should give an appropriate
note to that effect.
‣ Sec 269SS applies even when loans are taken free of interest.
‣ Deposit also includes current account, security deposit against contracts.
‣ Scrutinize advances account to verify whether advances are in nature of
deposits.
‣ Sec 269SS shall not apply when loans are accepted by Government, Banking
Company, Govt. Co. or Co. established under Central, State, Provincial Act.
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Section 269SS provides that any loan or deposit shall not
be taken or accepted from any other person otherwise
than by an account payee cheque or account payee bank
draft if,
(a) the amount of such loan or deposit or the
aggregate amount of such loan and deposit ; or
(b) 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 and the amount or the aggregate
amount remaining unpaid ; or
(c) 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 :
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Thus it is clear that no person can accept any loan
or deposit of Rs 20000 or more otherwise than by
way of an account payee cheque or an account payee
draft.
The limit of Rs 20000 will also apply to a case even if
on the date of taking or accepting such loan
or deposit, any loan or deposit taken or accepted
earlier by such person from such depositor is
remaining unpaid and such unpaid amount along with
the loan or deposit to be accepted, exceeds the
aforesaid limit.
This can be explained with an example: If Mr. X has
a credit balance of a loan of Rs 19000 from Mr. Y. Now in
this case Mr. X cannot take loan in excess of Rs 999 more
from Mr. Y except with an account payee cheque
or account payee bank Draft.
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Exemptions from section 269SS: The Following persons
are exempted from the purview of section 269SS:
(a) Government ;
(b) any banking company, post office savings bank or cooperative
bank ;
(c) any corporation established by a Central, State or
Provincial Act ;
(d) any Government company as defined in section 617 of
the Companies Act, 1956
(e) other notified insititutions
(f) where the depositor and the acceptor are both having
agricultural income and neither of them have any taxable
income.
Consequences of contravention of section 269SS:
Section 271D of Income Tax Act 1961 provides that if
a loan or deposit is accepted in contravention of
the provisions of section 269SS then a penalty equivalent
to the amount of such loan or deposit may be levied by
the Joint commissioner.
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Clause 24 (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: Sec 269T is attracted when repayment of loan or deposit is made to
a person
When aggregate amount of loans or deposits held by such person on date of
repayment exceeds Rs. 20000
Even though repayment amount may be less than Rs. 20000
Note:
‣ Loans or deposits may be held singly or jointly with some other person.
‣ Repayment includes interest thereon
‣ Only for company assessee, loans or deposits include loans repayable on
notice and after a particular period and not on demand.
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
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Section 269T
Section 269T of Income Tax Act provides that any branch
of a banking company or a co operative society, firm or
other person shall not repay any loan or deposit
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
(1) The amount of the loan or deposit together with
interest is Rs 20000 or more, or
(2) The aggregate amount of loans or deposits held by
such person, either in his own name or jointly with other
person on the date of such repayment together with
interest, is Rs 20000 or more.
For example if X is having loan of Rs 30000 outstanding to
Y. Then X cannot repay such loan in cash to Y.
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Exemptions from Section 269T:
The Following persons are exempted from the
purview of section 269T:
(a) Government ;
(b) any banking company, post office savings bank or cooperative
bank ;
(c) any corporation established by a Central, State or
Provincial Act ;
(d) any Government company as defined in section 617 of
the Companies Act, 1956
(e) other notified insititutions
Consequenses of contravention of
section 269T:
Section 271E of Income Tax Act 1961 provides that if
a loan or deposit is repaid in contravention of
the provisions of section 269T then a penalty equivalent
to the amount of such loan or deposit repaid may be
levied by the Joint commissioner.
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Clause 24.(c) Whether a certificate has been obtained from the
assessee 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]
The particulars (i) to (iv) at (b) and the Certificate at (c) above need
not be given in the case of a repayment of any loan or deposit taken
or accepted from Government, Government company, banking
company or a corporation established by a Central, State or
Provincial Act.
Clause 25. (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 / revisied orders and trace the amounts of loss /
allowance from the income tax returns and the assessment orders.
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Clause 25 (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
Statute: Notwithstanding anything contained in Chapter, where a change in
shareholding has taken place in a previous year in the case of a company, not
being a company in which the public are substantially interested, no loss incurred
in any year prior to the previous year shall be carried forward and set off against
the income of the previous year unless
(a) on the last day of the previous year the shares of the company carrying not less
than fifty-one per cent of the voting power were beneficially held by persons who
beneficially held shares of the company carrying not less than fifty-one per cent
of the voting power on the last day of the year or years in which the loss was
incurred
Audit Procedures: The Tax Auditor to enquire with the management and review
statutory records of the entity to ascertain whether there is a change in
shareholding of the company and report accordingly
Clause 25(b) - Change in shareholding of the company and carry
forward of the losses u/s 79 of the Act.
Business loss cannot be carried forward and set off in the
previous year in which a change in shareholding takes place
in case of a company in which public are not substantially
interested , if on the last day of the previous year in which
the change in shareholding took place and on the last day of
the previous year in which the loss was incurred, the shares
of the company carrying not less than 51% of the voting
power were not beneficially held by the same persons.
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Clause 26. 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
Tax auditor to scrutinize books of account and other documents
for ascertaining value of deductions under Chapter VIA
Clause 27. (a) Whether the assessee has complied with the provisions of
Chapter XVII-B regarding deduction of tax at source and regarding the
payment thereof to the credit of the Central Government. [Yes/No]
The newly inserted clause 27 is different from the earlier clause.
In the earlier clause the requirement was with reference to the
tax deducted at source but not paid to the credit of the Central
Government in accordance with the provisions of Chapter XVII-
B. The new clause requires reporting on the compliance with the
provisions of Chapter XVII-B regarding deduction of tax at
source and payment thereof to the credit of the Central
Government. Thus, the scope of reporting under the new clause
is much wider.
This reporting requirement is to be read with the specific non
compliances stated under clause (b).
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If the provisions of Chapter XVII-B
have not been complied with, give
the following details, namely:
(i)
(ii)
Tax deductible and not deducted at
all
Shortfall on account of lesser
deduction than required to be
deducted
Amount
…………
…………
(iii) Tax deducted late …………
(iv)
Tax deducted but not paid to the
credit
of the Central Government
…………
Audit Procedures: Tax Auditor to test the controls instilled by the entity for
appropriate deduction of tax a source. Tax auditor also to obtain and verify details
of payment of TDS deducted, for timely payment, with TDS returns
Clause 28(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.
iv.
sales during the previous year;
closing stock;
v. shortage/excess, if any.
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Clause 28(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;
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 28(b) In the case of a manufacturing concern, give
quantitative details of the principal items of raw materials,
finished products and by-products :
B. Finished products/By-products :
i. opening stock;
ii. purchases during the previous year;
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.
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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 of the as to the correctness of the figures
furnished
Issues on Clause – 28
“Principal Items:-Items constitute more than 10% of
the aggregate valueof purchase, consumption or
turnover.
Report only Principal Itemsunder this clause
Clause (a) –Applicable on Trading concern.
Clause (b) –Applicable on Manufacturing concern.
The Information about (vi),(vii) & (viii) of sub clause A of
(b), to the extent of availability of information in the
record.
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Where stock audit has been undertaken, certified
documents would be required both as regards stock as
well as shortages.
Clause 29. 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) total tax paid thereon;
c) dates of payment with amounts
Audit Procedures:
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.
Note: Dividend Distribution Tax to be paid @ 16.61%within 14 days of
declaration/distribution or payment whichever is earlier.
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Issues on Clause - 29
Sec 115-O Tax on distributed profits of Domestic
Companies. The special levy at the prescribed rate, on the
amt of dividend declared, distributed or paid (interim or
other wise) out of current Profits or accumulated Profits.
This tax shall be payable even if no Income tax is payable
by such Company on its total Income.
“Dividend”means dividend under clause (22) of Sec 2
exclusive of sub clause (e) advance or loan out of
accumulated profit or shareholders etc.
The Date of Payment should be verified from the
Challans and Books of A/cs etc.
Tax u/s 115-O should be deposited within 15 days of date
of declaration/ distribution or payment which ever is
earlier.
The tax rate on dividend distributed u/s 115-O is 15%.
The tax auditor need not go into the computation of
distributed profits but to report the amount actually
distributed.
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30. 30.) Whether any cost audit was carried out, if yes, enclose a copy of
the report of such audit [See section 139(9)]
31. Whether any audit was conducted under the Central Excise Act,1944,
if yes, enclose a copy of the report of such audit.
Audit Procedures:
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.
Issues on Clause - 30
Enclose the copy of Cost Audit Report under Sec 233B of
the companies Act 1956 (if conducted such Audit).
The Auditor need not express any opinion if such Audit is
ordered and not conducted.
The Auditor state the fact if such Audit is not completed
by the time of his Audit Report.
Make note of any material observation made in such
Report.
Give information only for that Cost Audit Report which
falls within the relevant Previous Year.
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Issues on Clause - 31
Attached the Audit report of Audit conducted under
Central Excise Act, 1944 (if any).
The auditor should make note of any material
observation made in such report.
If such audit is not completed by the time of his audit
report –mention the fact.
Enclose the copy of such report of Latest Year.
If Excise Audit Report is not enclosed, the return cannot
be considered as defective return under Sec 139(9).
32.) Accounting ratios with calculations as follows :—
a) Gross profit/Turnover;
b) Net profit/Turnover;
c) Stock-in-trade/Turnover;
d) Material consumed/Finished goods produced.
Audit Procedures:
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.
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Issues on Clause -32
Calculate ratios for manufacturing or trading concern in
terms of value only.
Calculate Ratios for the business as a whole and not
product wise.
If Closing stock is Nil, this sub clause (c) is not applicable.
Stock -in –trade include only closing stock of finished
goods not stock of raw material & work –in –progress.
Overall G.P Ratio is enough if gross profit from each
product is different.
Depreciation on Plant & Machinery considered for
valuation of Finished goods [AS-2 (revised)]
Depreciation on P&M should be deduct to arrive at gross
profit.
Exclude extraordinary items for calculation of ratios
unless give material effect [AS 5, AS(IT) II].
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Take the value of Sales, Purchase & Inventories before the
Statutory Adjustment (of Sec 145A).
In case of Share broker
i) Dealing for Commission – Calculate Net Profit Ratio
ii)Doing Business – Calculate Gross Profit Ratio
Case Law
N.C. Budharaja & Co, (1993) 204 ITR 412(SC)
In this Case Hon‘ble Supreme Court decided that
construction of tunnels, bridges, dams etc is only a
Service activity and it cannot amount to manufacturing
activity.
U/s 271B, if a person fails to get his accounts audited as required
under section 44AB or to furnish the report of such audit, then:
The Penalty imposed shall be, lower of
½ % of sales or gross receipts
Rs 1,50,000/-
NO PENALTY IS IMPOSABLE U/S 271B, IF THE
ASSESSEE PROVES THAT THERE WAS A REASONABLE
CAUSE FOR THE FAILURE..
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“Reasonable cause"
Some of the instances where Tribunals/Courts have accepted
as "reasonable cause" are as follows :
a) Resignation of the tax auditor and consequent delay
b) Bona fide interpretation of the term `turnover' based on expert
advice
c) Death or physical inability of the partner in charge of the
accounts
d) Labour problems such as strike, lock out for a long period, etc.
e) Loss of accounts because of fire, theft, etc. beyond the control
of the assessee
f) Non-availability of accounts on account of seizure
g) Natural calamities, commotion, etc.
Penalty u/s 277A
Falsification of book of accounts or documents etc.
A person shall be Punishable with rigorous imprisonment ,
which may extend from 3 months to 3 years and shall be
liable to fine if following conditions are satisfied:
‣ he willfully and with intent to enable any other person
(assessee) to evade any tax or interest or penalty chargeable
and impossible under Income Tax Act
‣ he makes or causes to be made, any entry or statement in
any books or other documents relevant for any proceedings
under the Act which is false.
‣ he knows it to be false or does not believe it to be true.
No such other prosecution shall be launched by any income
tax authority without prior permission of the CIT of
Appropriate authority.
330
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Conclusion
Action on incomplete audit reports
1. Incomplete Information/Non Commitable replies
‣ Report by AO to Commissioner of IT
2. If professional negligence is reflected
‣ Initiation of Disciplinary proceedings
(with the approval of CCIT)
331
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