LUNAWAT & CO. Chartered Accountants 24 th September 2016, Ambala CA. PRAMOD JAIN FCA, FCS, FCMA, LL.B, MIMA, DISA

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1 CRITICAL ISSUES LUNAWAT & CO. Chartered Accountants 24 th September 2016, Ambala CA. PRAMOD JAIN FCA, FCS, FCMA, LL.B, MIMA, DISA

2 WHAT IS TAX AUDIT?? S. 10 (23C) (iv), (v), (vi) or (via), Section 10A, Section 12A(1)(b), Section 44AB Section 80-IA, Section 80-IB, Section 80-IC, Section 80-ID, Section 80JJAA, Section 80LA, Section 92E Section 115JB Section 115JC

3 LEGISLATION FOR AY S. 44AB Business Business exceeds Rs. Rs. 1 Crore Profession Profession exceeds Rs. Rs. 25 L Business Business u/s 44AD; deemed profit < 8% and TI >ANCT Business Business u/s 44AE / 44BB / 44BBB; income is < deemed profits Rule 6G Prescribing Prescribing the Forms for Report u/s 44AB Form 3CA Report in case of a person who is required to get his A/cs A/cs audited under any law Form 3CB Report Report in any other case Form 3CD Particulars Particulars as required u/f 3CA or 3CB S. 271B Penalty Penalty ½% maximum Rs. Rs L

4 TAR CEILING ICAI clarified in 2011 that audit prescribed under any statute (like DVAT, 2004), not covered 44AD / 44AE audit not covered in limit

5 APPLICABILITY OF 44AD /44AB FOR AY Mfg. - Turnover 120L; NP -5L; 80-IA 3 L; TI-2.40L AD - No AB - Yes Trading- Turnover 110L; NP -3L; Architect Fee 30 L; NP- 5 L; TI-7L AD - No AB - Yes Doctor Trading Turnover 80L - NP 3L; Fee 27 L NP 5 L; TI- 8 L AD - No AB - Yes Trading Turnover 150 L; NP 1.5 L Does not file ITR AD - No AB - Yes

6 APPLICABILITY OF 44AD /44AB FOR AY Trading; Turnover 50L; NP 3L; TI- (-)1.5L. Files ITR Manufacturing; Turnover 80L; NP - 9L; 80IC - 4L; TI-4L AD - No AB - No AD - No AB - No Mfg TO 40 L, NP 1 L; Trading-TO TO 40 L, NP-1 L; Exports TO 50 L, NP 1 L AD - No AB - Yes Trading; Turnover -60L; Commission - 2L; NP- 3L; TI 4L AD No AB - No

7 APPLICABILITY OF 44AD / 44AB FOR AY Manufact uring 80L ; NP 8L Commissi on 2 L; NP- 1L Trading 25 L ; NP- 3 L Professio n 21 L ; NP 5 L

8 SECTION 44AB CHANGES AY AB limit for profession increased to 50Lacs Audit of professionals below Rs. 50 Lacs if receipt below 50 Lacs and s. 44ADA benefit not taken If benefit u/s 44AD not claimed in 1 year then cannot claim in next 5 years. In such case to maintain books if income exceeds maximum amount not chargeable to tax s. 44AD(4) Provision for assesses covered u/s 44AD(4)

9 APPLICABILITY-44AD /44AB FOR AY AY T Rs. 120 Lacs. P 10 L, TI 9 L Y/N AY T Rs. 120 Lacs. P 8 L, TI 6 L AY T Rs. 70 Lacs. P 10 L, TI 9 L N/Y N/Y AY T Rs. 60 Lacs. P 10 L, TI 2 L N/N

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11 WHO CAN CONDUCT AUDIT W.e.f.. 1 st June 2015 Accountant as defined in Explanation below S. 288 (2) A Chartered Accountant as defined in section 2 (1) (b) of the Chartered Accountants Act, 1949 who holds a valid certificate of practice u/s 6 (1) of that Act CA in practice (can represent)

12 QUALIFICATION - CA T.D. Venkata Rao v. Union of India [1999] 237 ITR 315 (SC): Chartered Accountants, by reason of their training have special aptitude in the matter of audits. It is reasonable that they, who form a class by themselves, should be required to audit the accounts of businesses. There is no material on record and indeed in our view, there cannot be that an income- tax practitioner has the same expertise as chartered accountants in the matter of accounts. and it must be pointed out that these income-tax practitioners are still entitled to be authorised representatives of assessees.

13 DISQUALIFICATION - COMPANIES

14 DISQUALIFICATION OTHERS Assessee himself In case of a firm - any partner of the firm In case of AOP - member of the association In case of HUF - member of the family Person referred to in section 13(3)(a),(b),(c), (cc); Relative of any of above persons Other than above, person who is competent to verify return u/s 139/140; Officer or employee of assessee;

15 RELATIVE INCOME TAX AUDITOR Spouse of the individual; Brother or sister of the individual; Brother or sister of the spouse of the individual; Any lineal ascendant or descendant of the individual; Any lineal ascendant or descendant of the spouse of the individual; Spouse of a person referred above Any lineal descendant of a brother or sister of either the individual or of spouse of individual

16 DISQUALIFICATIONS - OTHERS Who is a partner, or who is in employment, of an officer or employee of assessee; Who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction An individual who, or his relative or partner Is holding any security of or interest in assessee Relative face value - Rs. 1 L Is indebted to the assessee. Relative Rs. l L Has given a guarantee /provided security. Relative 1 L

17 A person or a firm who, whether directly or indirectly, has business relationship with assessee. i.e., any transaction entered into for commercial purpose except: In nature of professional services permitted In the ordinary course of business of co. at ALP like sale of products or services DISQUALIFICATIONS TAX AUDITOR To auditor, as customer, in the ordinary course of business, by companies engaged in business of telecommunications, airlines, hospitals, hotels & such other similar businesses

18 ??? Can a CA in practice who is giving accounting services to a company conduct tax audit of that company? Can an internal auditor of a company issue Form 15CB certificate for that company? Can a CA in practice who is giving accounting services to a company issue certificate in Form 29B for MAT calculation?

19 Audit Reports Companies Act CARO Other Acts NonNonCARO Form 3CA Tax Audit LLP Form 3CB Society

20 FORM 3CA Total 3Paras Reporting period for PL amended from 31 st March to period wise. Examination of books by auditor included before giving opinion Opinion now to be given subject to observations / qualifications, no annexures Para 3 Name of signatory to be given. FRN?? To be signed by person eligible as per s. 44AB (earlier CA, auditor as per Companies Act, other person entitled to audit

21 FORM 3CB Total 5 Paras Same as Form 3CA except examination of books Opinion subject to observations / qualifications to be given: Financial Statements 3(a) Form 3CD 5 SA 700?

22 SA 700 Assessee s Responsibility for the Financial Statements and the Statement of Particulars in Form 3CD 1. The assessee is responsible for the preparation of the aforesaid financial statements that give a true and fair view of the financial position and financial performance (if applicable) in accordance with the applicable Accounting Standards issued by the Institute of Chartered Accountants of India. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

23 SA The assessee is also responsible for the preparation of the statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961 annexed herewith in Form No. 3CD read with Rule 6G(1)(b) of Income Tax Rules, 1962 that give true and correct particulars as per the provisions of the Income-tax Act, 1961 read with Rules, Notifications, circulars etc that are to be included in the Statement.

24 SA 700 Tax Auditor s Responsibility 3. Our responsibility is to express an opinion on these financial statements based on our audit. We have conducted this audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

25 SA An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements,, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purposes of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

26 SA 700 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 5. We We are also responsible for verifying the statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961 annexed herewith in Form No. 3CD read with Rule 6G (1) (b) of Income- tax Rules, We have conducted my/our verification of the statement in accordance with Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961, issued by the Institute of Chartered Accountants of India. 6. We

27 QUALIFICATIONS IN REPORT -1 Proper books of account, to enable reporting in form 3CD, have not been maintained by the assessee. All the information and explanations which to the best of my/our knowledge and belief were necessary for the purpose of my/our audit has been provided by the assessee. Documents necessary to verify the reportable transaction were not made available. Proper stock records are not maintained by the assessee.

28 QUALIFICATIONS IN REPORT - 2 Valuation of closing stock is not possible. Yield/percentage of wastage is not ascertainable. Records necessary to verify personal nature of expenses not maintained by the assessee TDS returns could not be verified by with the books of account. Records produced for verification of payments through account payee cheque were not sufficient Amount of expense related to exempted income u/s 14A of Income tax Act, 1961 could not be ascertained

29 QUALIFICATIONS IN REPORT - 3 Creditors under Micro, Small and Medium Enterprises Development Act, 2006 are not ascertainable Prior period expenses are not ascertainable from books of account Fair market value of shares u/s 56(2) (viia viia) / (viib viib) is not ascertainable. Reports of audits carried by Excise/Service tax Department were not made available GP ratio is not ascertainable from the financial statements prepared by the assessee.

30 QUALIFICATIONS IN REPORT - 4 Information regarding demand raised or refund issued during the previous year under any tax laws other than Income-tax act, 1961 and Wealth tax Act, 1957 were not made available Others Mandatory that observations in 3CD on which opinion cannot be given be reported in Form 3CA / Form 3CB

31 OVERVIEW FORM 3CD OVERVIEW Part A New 3CD 5 New Part B 9-41 Amendme nts

32 FORM 3CD OVERVIEW Purpose was to facilitate determination of income from business or profession Now Capital Gain 50C and other sources also covered 56 (shares) Read and understand all clauses and relevant sections Obtain Form 3CD duly authenticated by assessee New 143(1) Tax Audit Report adjustment

33 FORM 3CD NEW CLAUSE - 4 Indirect Tax Registration Nos to be given if liable to pay i.e., Central Excise Duty, Central Customs Duty, Service Tax, Sales Tax /VAT State Wise, State Excise Duty State Wise Others Indirect tax. Is it indirect tax audit?

34 FORM 3CD NEW CLAUSE - 8 Relevant clause u/s 44AB under which audit is done to be given a) Business exceeds Rs. 1 Cr. b) Profession exceeds Rs. 25 Lacs c) Lower deemed profits u/s 1) 44AE, 2) 44BB, 3) 44BBB d) Lower deemed profits u/s 44AD & income exceeds maximum amt not chargeable to tax

35 FORM 3CD CLAUSE - 11 Whether books prescribed u/s 44AA? If yes, list of books prescribed. List of books maintained &address at which maintained List of books of a/cs & nature of relevant documents examined. S. 2(12A) - books or books of a/c includes ledgers, day- books, cash books, account-books & other books, whether kept in written form or..electronic. Relevant documents - directly related to transactions reflected in books of a/cs like invoice, bank statements, vouchers, dr. note, cr. note, inventory register, agreements /contracts or any other document on basis of which preliminary entries are passed in books of a/cs

36 FORM 3CD CLAUSE - 13 Method of accounting employed in previous year Change in method of accounting applied If, yes, effect thereof on profit / loss Deviation in method of accounting from accounting standards prescribed u/s 145 and effect thereof on P/L Change in method of valuation of inventories to be reported? Change in accounting policy to be reported? ICDS?

37 FORM 3CD CLAUSE - 14 Method of valuation of closing stock S. N Particulars + in profit - in profit 1 Increase in cost of opening stock on inclusion of excise duty 20 on which CENVAT credit is available/availed 2 Increase in purchase cost of RM on inclusion of excise duty on which CEN VAT credit is available/availed Increase in sales of FG on inclusion of excise duty Excise duty paid - sale of FG as result of its inclusion in sales Increase in closing stock of RM on inclusion of excise duty 40-6 Increase in closing stock of FG on inclusion of excise duty 60-7 Increase in excise duty on closing stock of FG as a result of - 60 its inclusion in closing stock of FG 8 Accounting of CENVT credit availed and utilised on RM consumed in payment of excise duty on FG accounted on basis of RM consumed Total

38 FORM 3CD NEW CLAUSE - 15 Conversion of capital asset into stock in trade Accounting of inventories in books? At Carrying cost FMV If other than carrying cost then qualification regarding non- compliance of AS-2

39 FORM 3CD NEW CLAUSE - 17 Land or building or both transferred at less that the circle rate u/s 43CA or 50C. Detail to be given: Detail of property with complete address Consideration received or accrued Value adopted or assessed / assessable Builders!!!

40 FORM 3CD CLAUSE - 18 Depreciation allowable Additional Dep. Actual Cost or WDV Car 1 st Insurance Interest upto asset put to use S. 35 capital assets not to be included Additions/deductions during year with dates ; in case of any addition of an asset, date put to use; including adjustments on a/c of CENVAT / VAT credits claimed & allowed - reconcile Change in rate of exchange of currency AS 11/43A Subsidy / grant / reimbursement, etc

41 FORM 3CD CLAUSE - 19 Amounts admissible. Details: Amounts debited to PL Amounts admissible under IT provisions and also fulfils conditions S. 32AC (investment in new Plant & Mach) added S. 35AD(specified business) added S. 35CCC (agricultural extension project) added S. 35CCD (skill development project) added

42 FORM 3CD CLAUSE - 19 S. 35 (scientific research) bifurcated into 35(1)(i) revenue expenditure 35(1)(ii) 175% of amount paid to University, etc 35(1)(iia iia) 125% of amount paid to company 35(1)(iii) 125% of amount paid for research in social science or statistical research.. 35(1)(iv) Capital expenditure 35(2AA) 200% of sum paid to National Laboratory. 35(2AB) Company in bio technology or Mfg..200%

43 FORM 3CD CLAUSE 21(A) Furnish the details of amounts debited to the profit and loss account, being in the nature of Capital, personal, advertisement expenditure club fee, etc: Loss on sale of Assets Fee for increase in authorised Capital Loss on sale of investments

44 FORM 3CD CLAUSE 21(B) S. 40(a) bifurcated into (i), (ia ia), (ic ic), (iia iia), (iib iib), (iii), (iv), (v). 40(a)(i) - details: Payment on which tax not deducted Payment on which tax has been deducted but has not been paid during P.Y. or in subsequent year before the expiry of time prescribed u/s 200(1) Apart from date, amount and nature of payment, name & address of payee, PAN if available also to be given Amount of tax deducted (when deducted) also to be given Full amount disallowable 139(1)?? 15CA /15CB reliance Amounts inadmissible u/s 40(ia ia) 30% - all payments covered now

45 FORM 3CD CLAUSE 21(B) S. 40(a)(ic ic) - FBT S. 40(a)(iia iia) - WT S. 40(a)(iib iib) Royalty etc. to SG S. 40(a)(iii) Salaries paid outside India or to Non- residents if tax not paid on it or not deducted u/c XVIIB details to be given S. 40(a)(iv) Payment to PF or other fund unless assessee has made effective arrangement for TDS if chargeable under head salaries

46 FORM 3CD CLAUSE 21(B) S. 40(a)(v) Tax paid by employer u/s 10(10CC) Disallowance u/s 40A(3) No certificate required now. However to be obtained and mention in 3CD & 3CB Detail to be given: Date of payment Nature of payment Amount Name of Payee PAN (if available) 40A(3A) also covered same details

47 FORM 3CD CLAUSE 25 Profit chargeable u/s 41 details required: Name of person; Amount of income; relevant sub-section section Description of transaction; Computation, if any S. 41(1)(a) Cessation of trading liability by assessee S. 41(1)(b) - Cessation of trading liab. by successor assessee S. 41(2) Balancing Charge S. 41(3) Asset used u/s 35 sold to extent of deduction claimed S. 41(4) Recovery of bad debts S. 41(4A) Amount withdrawn from special reserve u/s 36(1)(viii) S. 41 (5) After closure of business if income u/ss 1,3,4, 4A, then can be set off against loss

48 FORM 3CD CLAUSE 26 S. 43B. Amounts covered: CST, VAT, Excise, ServiceTax, Customs, Propertytax etc Sum payable as an employer by way of contribution to any PF or superannuation fund or gratuity fund etc Bonus or commission payable by assessee to its employees for services rendered, where such sum would not have been payable to him as profits... Interest on any loan from PFI, a state financial corporation or a state inds. investment corp., Banks. Sum payable by the assessee as an employer in lieu of any leave at the credit of his employee. Interest converted into loan. Allowed u/s 43B??

49 FORM 3CD CLAUSE 27(A) CENVAT Credit reconcile with registers and books CENVAT Amount Treatment in Profit & Loss /Accounts Opening balance CENVAT Availed CENVAT utilized Closing/outstanding Balance

50 RELATED PARTY Accounting Standards Companies Act Income Tax AS 18 S. 2(76) 40A(2)(b) S. 184 S. 188

51 FORM 3CD NEW CLAUSE - 28 Details of shares received without / inadequate consideration u/s 56(2)(viia viia). Is it for all assesses? Take care of transactions not regarded as transfer for this purpose 47 (via), (vic vic), (vicb vicb), (vid) & (vii) Not stated in Form, required in Utility Name of the person from whom shares are received PAN, if available Name of company whose shares are received CIN No. of Shares Amount of consideration paid FMV of shares If without consideration, it may not be accounted in books. Reporting to be made. Reporting only difference exceeds Rs. 50K

52 FORM 3CD NEW CLAUSE - 29 Details of consideration received in excess of fair value for issue of shares u/s 56(2)(viib viib) only for companies Details not given in Form, but in Utility: Name of the person from whom consideration received for issue of shares PAN, if available No. of Shares received Amount of consideration received FMV of shares Would anything be reported under this? Use SA 620 Using the work of an Auditor s Expert

53 CLAUSE 31 - S. 269SS/T Advance against immovable property in cash for Rs /- covered? Reportable in Form 3CD? Loan received by NEFT / RTGS?? Share application money advance?? Sale proceeds collected by selling agent? Yes, No No No if adequate documents Advance received against sale of goods?? Companies Act 2013?? No No

54 CLAUSE 31 - S. 269SS/T ABC P. Ltd receives cash from Mr. A an agriculturist? Security deposit received against contracts? Amount retained by contractee against performance?? Yes Yes deposit No as amount not received ABC P. Ltd repays loan payable on demand in cash? Loan in name of Mr A transferred in name of Mr B by accounting entry? No Yes

55 FORM 3CD AMENDMENT - 34 TDS Total revamped. TCS added. Reconcile it with: TDS Returns Financial Statements Clause 21(b) 40(a) / 40(ia ia) 34(a) if required to deduct or collect tax as per provisions of Chapter XVIIB or XVIIBB furnish: 1. TAN 2. Section 3. Nature of payment or receipt

56 FORM 3CD AMENDMENT Total amount of payment or receipt specified in 3 5. Total amount on which tax was required to be deducted / collected under 4 6. Total amount on which tax was deducted / collected at specified rate out of 5 7. Amount of tax deducted or collected out of 6 8. Amount on which tax was deducted / collected at less than specified rate out of 7 9. Amount of tax deducted or collected on Amount of tax deducted or collected but not deposited out of 6 & 8

57 TDS EXAMPLE Section (2) Nature of Paymen t (3) Total amt of paymen t or receipt (4) Total amt on which tax was required to be deducte d out of 4 (5) Total amt on which tax was ded.. / coll. at specifie d rate out of 5 (6) Amou nt of tax deduct ed out of 6 (7) Amt on which tax was ded. / coll/ at < than specified rate out of 7 (8) Amount of tax deducte d or collecte d on 8 (9) Amt of tax ded. or coll. but not deposit ed out of 6 & 8 (10) 194 C Tpt. 194 C Cont. 15 Cr L 15 L 10 L Lacs A Intt. 5 Crs 6 Lacs 5 Lacs 50K 1 Lac I 194J Rent FTS 25 L 20 L 15 L 1.5 L 5 L L 1 L

58 FORM 3CD AMENDMENT (b) If TDS / TCS Statement not furnished within prescribed time, furnish: TAN Type of Form Due date of furnishing Date of furnishing, if furnished Whether the TDS / TCS Statement contains information about all transactions which are required to be reported Transporters??? yes / no??

59 FORM 3CD AMENDMENT (c) Whether the assessee is liable to pay u/s 201(1A) or section 206C(7), if yes, please furnish :- Amount of Amount paid Date of TAN Interest Payable out of Col. (2) Payment (1) (2) (3) (4) NA. Check TRACES

60 FORM 3CD CLAUSE 40 Ratios: Total Turnover of the assessee GP / Turnover NP / Turnover Stock-in in-trade / Turnover Material Consumed / Finished Goods produced To be given for all assessees??? Only Manufacturing & Trading Ratios in value only To be given for business as whole Calculation of the ratios are also to be stated

61 FORM 3CD CLAUSE 40 NP before / after tax? Before Stock-in in-trade includes what items? Only finished goods Material consumed would, include RM consumed, stores, spare parts and loose tools Relevant previous year figures are to be taken from last previous year audit report. In case the preceding PY is not subject to audit, nothing should be mentioned in relevant column

62 FORM 3CD NEW CLAUSES 39 - Details etails, if any, of disqualification or disagreement on any matter / item / value / quantity as may be reported / identified by the auditor in audit under s. 72A service tax 41 - Details of demand raised / refund issued under any tax laws other than IT & WT with relevant proceedings

63 REVIEW Statutory audit report qualification, notes to accounts, adverse remarks and disclaimers in report Qualifications in cost audit report Audit u/s 72A of service tax Demand raised or refund issued in any law. Online compliance websites for dues, compliances, etc

64 DISCLAIMERS It is not possible to verify whether the taking or accepting of loan or deposit or repayment of the same have been made otherwise than by account payee cheque or bank draft as necessary evidence is not in the possession of the assessee. We have verified the compliance with the provisions of Chapter XVII-B and XVII-BB regarding deduction / collection of tax at source and regarding the payment thereof to the credit of the Central Government in accordance with the Auditing Standards generally accepted in India which include test checks and the concept of materiality.

65 AUDIT PROCEDURE Appointment Engagement Letter Understanding of Client Understanding the Engagement Authorizations Confirmations Management Representations Certificates Reports Billing /Collection

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68 CA. Pramod Jain CA. Pramod Jain, Lunawat & Co