PRESUMPTIVE TAXATION U/S 44AD, 44ADA & 44AE SOME PRACTICAL ISSUES

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1 PRESUMPTIVE TAXATION U/S 44AD, 44ADA & 44AE SOME PRACTICAL ISSUES CA V. Karthikeyan Presumptive taxation for Business Effect of Demonetisation on Section 44 AD : As per Press release by CBDT dt presumptive rate of income was reduced from 8 % to 6% on gross receipts received through Banking Channel / Digital mode. For Cash receipts received presumptive rate of tax u/s 44AD continues to be 8%. Complete sales to be realized whether in cash or bank before due date for filing specified u/s 139(1). Failed to realize, Assessee cannot offer profits u/s 44AD. 1

2 Presumptive taxation for Business Section 44 AD : Threshold Limit increased from Rs. 1Crore to Rs.2 Crores. In case of a firm, remuneration and interest payable to partners should be allowed before declaring profits u/s 44AD. i.e. Deemed profits are after providing such remuneration and interest to partners subject to limits specified u/s 40B. When a Assessee declares his profits u/s 44AD in P.Y. he has to continue to declare his profits u/s 44AD for next 5 consecutive AYs, if not he will not be eligible to claim 44AD for a period of 5 consecutive AYs from the P.Y. in which he didn t offer business income u/s 44AD. Presumptive taxation for Professionals Section 44 ADA : Assessee is not required to maintain books of accounts u/s 44 AA and get the accounts audited u/s 44AB when he offers profits or gains from such profession more than 50% of total gross receipts offered. Here Total Gross receipts should not Exceeds Rs.50 Lakhs. Also Deductions u/s 30 to 38 were deemed to have been allowed. 2

3 ITR 4 (Sugam) With respect to New Provision Sec. 44 ADA, there is new column to declare the gross receipts for Profession. In new return, with respect to Sec. 44AD, reducing presumptive Income rate, they bifurcated the Gross Turnover column under Sec. 44AD into Receipts through Cheque, Draft and Bank ECS Receipts in Cash to offer presumptive 6% 8% respectively. In case of firm, remuneration and interest to partners will be allowed before the estimation of presumptive income in case of 44AD and 44ADA. In case of 44AE, presumptive income will be after allowance of remuneration and interest to partners. Practical Issues in Presumptive Taxation A Partnership Firm is involving in manufacturing of leather and it is offering income u/s 44 AD each year. Now, it converts its business to LLP. Whether it can continue to offer income u/s 44AD? The Presumptive Taxation scheme of Section 44ADA which can be adopt only by Individual, HUF and Partnership Firm (Not LLP). So, it cannot offer presumptive income u/s 44 AD since it converts into LLP. 3

4 Practical Issues in Presumptive Taxation An Individual who is offering income u/s 44AD each year. He became Non resident in the Previous year. Whether he can continue to offer presumptive income u/s 44AD? The Presumptive Income u/s 44AD will be applicable only to the resident individual. Non Resident cannot avail the benefit u/s 44AD Practical Issues in Presumptive Taxation An Individual who is offering income u/s 44AD each year. He became Non resident in the Previous year. Whether he can continue to offer presumptive income u/s 44AD? The Presumptive Income u/s 44AD will be applicable only to the resident individual. Non Resident cannot avail the benefit u/s 44AD. 4

5 Practical Issues in Presumptive Taxation A Person doing brokerage business who have received brokerage for Rs. 1,00,00,000 and declaring 5% of Rs. 5,00,000. Should his books of Accounts be audit u/s 44AB since he is offering income less than 8%? Audit u/s 44AB is applicable if he is declaring income lower than the rate specified u/s 44AD. But, section 44AD is not applicable to Agency, Commission and Brokerage. Hence, he can declare income less than 8%. Practical Issues in Presumptive Taxation An Individual who is doing financial consultancy business and the service receiver while he is paying service charge, he is deducting TDS u/s 194 J. Whether he can offer income u/s 44ADA? Sec. 44ADA will be applicable only to the Notified Professions. It is a inclusive definition, it doesn t cover financial consultancy business, hence he can t offer income u/s 44ADA. Notifications No. SO-18[E] dated , No. SO 2675 dt and S.O. 385[E] dt

6 Practical Issues in Presumptive Taxation An Eligible Assessee who is engaged in the business of plying of goods carriages and he owns 12 trucks but he kept 2 trucks idle and operates only 10 trucks for plying of goods carriages. Whether he can offer income u/s 44AE? Section 44AE clearly states that it will be apply only to assessee who does not own more than 10 goods vehicles at ant time during the year. Hence in the present case even though assessee has kept idle 2 trucks but he owns 12 trucks during the whole period. He can not opt Section 44 AE. Practical Issues in Presumptive Taxation A Partnership Firm is engaged in business of plying, hiring or leasing of goods carriage and owns 8 trucks during AY The Firm has opted 44AE for computing presumptive business income. Whether firm can provide remuneration to its partners as allowed u/s 40(b). 6

7 As firm owns 8 truck during AY Income u/s 44AE for AY will be computed as follows : = Rs.7,500 * 12 Months * 8 Trucks = Rs.7,20,000/- Since as per Sec 44 AE, Partners remuneration and Partners Interest can be reduced from the presumptive income computed. Max Partners remuneration = Rs.5,22,000/- [As limits specified u/s 40(b)] Hence, Taxable business income of Firm is as follows = Rs.7,20,000 Rs.5,22,000 = Rs.1,98,000/- Practical Issues in Presumptive Taxation An Individual who is doing the contracting business. He has total turnover of Rs. 70 Lakhs and he has earned profit or Rs. 12 Lakhs as per his Profit & Loss A/c. Whether he can declare income of Rs. 5.6 Lakhs (8% of Rs. 70 lakhs) as presumptive Income u/s 44AD? He has to offer income at 8% of his turnover or higher income he earned as his presumptive income u/s 44AD. 7

8 CHANGES IN 44AD The Major Changes in presumptive Income u/s 44AD compared to AY is that 1) we can offer presumptive income of 6% for receipts through Bank A/c & 8% for receipts through cash. 2) The Interest and remuneration payable to partners u/s 40(b) even though normally deductible but will not be deductible before arriving presumptive income. The Comparative difference in presumptive Income with AY in case of receipt of Rs. 50 Lakhs in Cash and Rs. 50 Lakhs in Bank is Turnover Cash 50,00,000 50,00,000 Bank* 50,00,000 50,00,000 Profit u/s 44AD 8,00,000 8% 4,00,000 6% 3,00,000 Less : Remuneration 1,00,000 Not Allowed 7,00,000 7,00,000 The Amount should be received before or due date u/s 139(1). 44AD column in ITR 4 captures as CHANGES IN 44AD Whether a person opting the presumptive taxation scheme who is liable to pay advance tax in each installment and whether he will be liable to the interest u/s 234 C? The Person who opts for Presumptive taxation will be liable to pay only march month advance tax installment of 100% on or before 15 th March, otherwise he will liable to pay interest u/s 1%. 8

9 PRESUMPTIVE INCOME IN CASE OF FIRMS Illustration : A Firm has turnover of Rs.1,00,00,000 in AY and AY Compute Presumptive profit to be offered u/s 44AD for AY and AY , Also provide maximum remuneration to partners subject to section 40(b). Particulars AY AY Turnover 1Crore 1Crore Presumptive exps 92 Lakhs Lakhs Remuneration Lakhs Min.Profit u/s 44AD 8 Lakhs 8Lakhs Remuneration 5.70 Lakhs Not Allowable Profit in ITR Lakhs 8 Lakhs 30.90% Rs.71,070 Rs. 2,47,200 If the firm wants to pay same tax for which it is entitled to deduct the salary, it should maintain books as per 44 AA and an audit u/s 44 AB since in the new regime the presumptive profit will be less than 8%. 9

10 PRACTICAL SCENERIO IN PRESUMPTIVE TAXATION Illustration : A Assessee had a turnover of Rs.1Crore in AY Which were realized in following ways : Cash component - Rs.25 Lakhs. A/c payee Cheque or ECS : a) Upto Rs.70 Lakhs b) Upto Rs.3 Lakhs. c) Upto Rs.2 Lakhs The circumstances for computing profits u/s 44AD. Solution : Under 44 AD, there are two rate to calculate presumptive income, i.e 8% and 6%. In order, to apply 6% on Sales turnover following are conditions specified : a) Sales should be realized through bank b) Such bank receipts should be on or before due date u/s 139(1) Hence in case the assessee can offer 6% only on Rs.73 Lakhs, and balance Rs.27 Lakhs should be 8%. Profit u/s 44AD = Rs.6,54,000 (6% Rs.73Lakhs + 8% 27Lakhs ) 10

11 SCENERIO APPLICAILITY OF TAX AUDIT U/s 44AB A Assessee(Individual or HUF) had a turnover of Rs.1 Crore in AY , but he computed a business income of Rs.2 Lakhs. Assessee has no other source of Income. Whether Assessee is liable for Tax Audit. What is if Assessee has Loss in business? Also state whether Assessee is liable for Tax Audit, if Assessee is a Firm. Since Assessee wants to offer income lower than limits specified in section 44AD, Tax audit is applicable u/s 44AB. But in this case as assessee has no other source of income and his income computed does not exceed the basic exemption limit, No Tax Audit is applicable. If Assessee has loss from such business, No Tax audit u/s 44 AB is required. If Assessee is a Firm, there is no basic exemption limit hence,tax Audit u/s 44AB is applicable. 11

12 OWN SALES & CONSIGNMENT SALES An Eligible Assessee is engaged in trading business of goods both in his own name and also as a consignee for another person. The Total Sales amount to Rs.1.40 Crores, Turnover Details are as follows : Own Business Turnover = Rs.80 Lakhs Consignment Sales Turnover = Rs.60 Lakhs Whether Assessee can opt for Persumptive income computation or not? For computing Turnover for 44AD, the turnover of sale of goods on his own name should alone to be considered i.e Rs.80 Lakhs. Here, the commission received on Consignment sales is liable for Tax Audit only when such commission exceeds the limit of Rs.2 Crores. Consignment Commission can be offered at any rate (Even below 8%), provisions of Sec.44AD will not govern the commission income. 12

13 AGENCY NATURE OF BUSINESS An Eligible Assessee is involved in the business of Fuel Filling Station dealership under a PSU s Trade name. His total Sale Turnover during AY is Rs. 3 Crores. On which is entiled for a margin of 10%. What amount to be offered as business income by the assessee for AY Since, Assessee is acting as an agent to such PSU, such sales represent to that of PSU itself and not the Assessee. (Clarified by CBDT Circular no.452 Dt ) The Assessee business income is the dealer s 10% on sales made, i.e Rs.30 Lakhs. Since section 44AD provisions not govern the agency nature of business income. Assessee can offered agency income at any rate. Tax Audit u/s sec 44AB is applicable only when such income exceeds Rs.2 Crores. 13

14 Commission Business An Eligible Assessee is engaged in Re-insurance business on which he will receive a commission for the sum re-insured. Such sum reinsured during AY was Rs.2 Crores. He is entitled for a commission of Rs.20 Lakhs. What will be the Turnover of such assessee for AY Also state treatment u/s 44AD. Assessee s business Turnover is Rs.20 Lakhs and not Rs. 2 Crores. Also as per section 44AD, Commission business is specifically excluded from nature of business. Hence he may offer income at any rate on such Commission income. Tax audit u/s 44AB is applicable only when such commission income exceeds Rs.2 Crores. 14

15 Turnover in Derivatives Contract An Assessee got the notice from income tax department that he had bought and sold Rs. 170 Crores worth of shares & securities under derivative contract and they have asked sources of funds. They have further asked why it should not be audited u/s 44AB? As per guidance note issued by ICAI on Tax Audit under section 44AB, If the transactions which are completed without the delivery of shares or securities and also squared up by payment of differences then the turnover will be determined as total of favourable and unfavourable differences only. Income under Derivative contract Business Income or Capital Gain? The Person who is doing derivative transactions who have bought Rs. 174 crores and sold Rs. 175 Crores worth of shares and securities. Whether it should be offered as Business Income or Capital Gains? Which will be the beneficial? Circular No. 6/2016 states that the assessee can either show the differences in the derivative contract as Business income or Capital Gains as he wishes. But once the assessee takes stand in the particular assessment year to treat the income under capital Gains shall remain applicable in subsequent Assessment Years. 15

16 Business Income vs Capital Gains If Offered under Business Income Turnover is (175 Cr 174 Cr) = 1 Crore Less : Expenses = 92 Lakhs If Offered under Capital Gains Profit u/s 44 AD = 8 Lakhs Tax on 30% = 2.4 Lakhs Short Term CG (175 Cr 174 Cr) = 1 Crore Less : Expense on Transfer = 2 Lakhs Taxable STCG = 98 Lakhs Tax on 15% = Lakhs Tax liability when Assessee is a Firm and AOP A Firm who is engaged in the business of trading of leather products. Upto AY , its profit were offered u/s 44AD and eligible for the partner remuneration is deducted from such profits. The Partners have no income other than business income. Since from AY , the remuneration to partner is not allowed as deduction from profits computed u/s 44AD. What will be the tax treatment if it is treated as 1. Firm 2. AOP? 16

17 Tax Treatment for Firm and AOP Firm Firm AOP AY AY AY Turnover Profit u/s 9% % Partner s Remuneration allowed Not allowed Not Business Income Tax Liability WHAT IS FORM 3CD Form 3CD is a form to be submitted along with Audit Report required to be certified by Auditors. Form 3CD is a Form in accordance with Rule 6G(2) and Section 44AB of the Indian Income Tax Act, Form 3CD contains 41 Clauses. It is required to be attached with Forms 3CA or 3CB, as applicable. 17

18 Contd Whether Form 3CA or 3CB the observation or Qualifications relating to 3CD can be tabulated. The Form 3CD is basically prepared by the assessee and the auditor is only certifying the particulars and any observations to be given in 3CA or 3CB. Form 3CD has to be signed both by Auditor and the assesee TO WHOM DOES FORM 3CD APPLY SECTION 44AB specifies compulsory audit for A person carrying on Business if the total sales, turnover or gross receipt for the PY exceeds 1 crore (2 Crore From AY ) A person carrying on profession if the gross receipts for the PY exceeds 25 lakhs ( 50 lakhs from AY 17-18)A If a person claims that the profits & gains from the business or profession are lower than those computed u/s 44AE, 44BB or 44BBB u/s 44AD(1), [44ADA, 44AD(4) w.e.f AY 17-18] if the income exceeds the maximum amount not chargeable to tax. 18

19 SECTION 44AE, 44BB,44BBB 44AE : The presumptive taxation scheme of 8% under these provisions can be opted for by an assessee who is engaged in the business of plying, hiring or leasing goods carriages and does not own more than ten goods vehicles at any time during the previous year. 44BB : The presumptive taxation scheme of 10% under these provisions can be opted by an assessee being a non-resident, engaged in the business of providing services or facilities in connection with / supplying plant and machinery on hire in the prospecting for, or extraction or production of, mineral oils. 44BBB : The presumptive taxation scheme of 10% under these provisions can be opted by an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf If the assessee claims that the income is lower than that computed u/s 44AE, 44BB, 44BBB he is required to maintain books of accounts u/s 44AA and get them audited u/s 44AB SECTION 44AD(1), 44AD(4),44ADA Section 44AD (1) : The presumptive taxation scheme of 8% under these provisions can be opted for by an resident eligible assessee [ Individual, HUF, Firm but not LLP or Company ] who is engaged in any business (except u/s 44AE), whose turnover or gross receipts from such business do not exceed 1 Crore [ 2 Crores from AY ] Section 44AD (4) : From AY if an eligible assessee opts for presumptive basis of 8% for any PY u/s 44AD and in any of the 5 consecutive subsequent AY s declares income at lower than 8%, then he shall not be eligible to claim benefit u/s 44AD for 5 subsequent AY s ( subsequent from the AY of lower declaration ) Section 44ADA : From AY a resident assessee engaged in profession referred to in sec 44AA(1) ( i.e, legal, medical, engineering or architectural profession or profession of accountancy or technical consultancy or interior decoration etc ) whose gross receipts do not exceed 50 lakhs can opt for an estimated basis of 50 % of the total gross receipts If the assessee claims that the income is lower than that computed u/s 44AD(1), 44AD(4),44ADA and if the income exceeds the maximum amount not chargeable to tax then he is required to maintain books of accounts u/s 44AA and get them audited u/s 44AB 19

20 AMENDEMENT In the case of a firm up to AY the normal deduction in respect of salary and interest to partners u/s 40(b) shall be allowed to be deducted from the Presumptive income of 8% u/s 44AD. This deduction shall not be available from AY QUICK QUESTION Example : If an eligible assessee has a turnover of 40 Lakhs but his income (i.e profit ) is 2 Lakhs. Does he come under the purview of Tax Audit? The turnover being 40 lakhs, the presumptive income will be (8% of 40 lakhs) 3.2 lakhs. Here the assessee wants to claim an amount lower than 8%. Since the income (2 lakhs) does not exceed the maximum amount not chargeable to tax he will not come under the purview of Tax Audit. 20

21 CAN AN ASSESSEE DECLARE A HIGHER INCOME THAN 8%? The assessee is allowed to voluntarily declare a higher income in his returns. Why is the Threshold limit for Section 44AB one crore while that of 44AD two Crores from AY 17-18? The press release dated regarding the threshold limit states that threshold for non-audit of accounts for eligible assessees opting for presumptive taxation scheme is 2 Crore. Since the limit for non-audit has been increased to 2 Crore it is deemed that audit u/s 44AB is to be done only if the Receipts exceed 2 Crore Practical Problems An assessee in trading business shows the P&L result as a loss. His accounts are not proper and doing a tax audit will only hamper his income. How to proceed? The turnover can be split into Consignment Sales 50,00,000 Direct Sales 20,00,000 Total 70,00,000 Commission on consignment sales can be shown as difference between Sales & Purchases relating to Consignment. As per CBDT Circular 452 dt these sales will not be taken for 44AB turnover 10% income (above 8% ) can be shown on Direct sales which will be Rs 2 lakhs (20,00,000*10% ) Loss can be arrived on consignmet sales commission. Eligible business u/s 44AD does not include commission business. Commission business is not profession as per the definition of eligible business. 21

22 Practical Issues U/s 44AD The income to be offered is 8% of turnover or the actual income whichever is higher. Even though maintenance of books is not necessary, it is advisable to have books to explain the transactions. In a particular case, even though the income is offered u/s 44AD, notice was issued to ensure whether the turnover was reflected in the bank statements. The assessee had shown only few lakh transactions in bank. The turnover was Rs 80 lakhs & the income offered was Rs 10 lakhs. In order to prove this, books were written, P&L and BS were given with debtors & creditors. The officer having been satisfied that the actuals as per P&L is matching with return accepted the results and completed the assessment Action on incomplete audit reports The CBDT has issued instructions to the field officers to report any professional negligence on the part of the Chartered Accountants in preparing the tax audit report to the ICAI in terms of section 288, as the ICAI is entitled to institute proceedings against its member Chartered Accountants who submit faulty tax audit reports PIB Press Release, New Delhi, dated

23 WHAT IS THE DUE DATE FOR 3CA, 3CB & 3CD The due date for filing of tax audit report is September 30 th and if the assessees are having international or specified domestic transactions it is November 30 th. CLAUSES Clauses 1 to 8 1. Name 2. Address 3. PAN 4. Registration number or any other identification number for indirect taxes like excise duty, service tax, sales tax, customs duty, etc if any 5. Status 6. Period of the report 7. Assessment year 8. The relevant clause of section 44AB under which the audit has been conducted 23

24 9. If Firm/AOP/LLP Name of the partners/members CLAUSES 9 TO 11 Profit sharing ratios at the end of the year Change in partners/members/profit sharing ratios (all since the preceding previous year ) 10. Nature of every business or profession and change if any Temporary Suspension of business or business reorganization involving similar line of activities does not result in change and hence may not be reported 11. List of Books of accounts If prescribed u/s 44AA (in case of specified professional u/s 44AA(1) whose gross receipts exceed Rs 1.5 lahks in each of the 3 prior PY s or during the current PY in which the profession is commenced ) If maintained along with address(es) (in case books are maintained in a computer system books generated) nature of relevant documents examined CLAUSES 12, If the P & L a/c includes any profits and gains assessable on presumptive basis the amount the section 13. The method of accounting Cash or Mercantile ( hybrid method is not acceptable, different methods for different businesses is allowed ) Change if any along with details and effect on P&L( or ) Deviation, if any from accounting standards prescribed under section 145 and the effect on P & L If the assessee opts for Cash system the Accounting standards do not apply 24

25 APPLICABILITY OF ICDS NOTIFIED U/S 145(2) OF THE IT ACT, 1961 The Central Govt has earlier vide Notification No. SO 892 (E) dated 31st March, 2015 notified 10 ICDS applicable from AY However due to revisions of clarifications on ICDS it has been decided that ICDS will be applicable from AY vide., press release dated Closing Stock CLAUSE 14,15 Method of Valuation [ lower of Cost (FIFO or WA Cost ) or NRV ] Deviation from the method prescribed u/s 145A, and the effect on P&L The method of valuation u/s 145A includes the cess, duty, taxes paid but AS-2 excludes the same. Hence the necessary adjustments should be made while computing Income from Business or Profession. Further such adjustment will not result in any increase in Gross Profit or Taxable Income. 15. Particulars of Capital asset converted into stock in trade Description of capital asset Date of acquisition Cost of acquisition Amount at which the asset is converted into stock-in-trade (in consonance with AS 2) 25

26 CLAUSE 16 Amounts not credited to the profit and loss account, being, - (a) the items falling within the scope of section 28; Section 28 envisages all the receipts which are to be taxable under the head Profits and Gains of Business or Profession These items may be fully omitted from the books or may be credited to the books but not the P&L The tax auditor should ensure that there are no items falling within section 28 which have not been credited to P&L a/c (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 but which have not been refunded to the assessee during the PY Contd (c) escalation claims accepted during the previous year Normally such claims arise in Construction contracts. If the claim is as per the agreement and accepted though not credited to P&L then it is to be checked if income is to be recognized in the P&L (d) any other item of income; This clause considers all the residuary sections other than Section 28 (Eg: 2(24)(x) Employee s contribution to PF) (e) capital receipt, if any. The capital receipts weather taxable or not will be reported here. 26

27 CLAUSE 17 Reporting under this clause applies only when any land or building or both is transferred during the previous year Consideration is less than value adopted or assessed or assessable by any authority of a State Government (Stamp valuation authority) referred to in section 43CA or 50C land or building form part of Business or profession or the personal transaction is passed through the business books Section 43CA applies for business assets (stock in trade other than capital asset) and Section 50C for capital assets (depreciable as well as non-depreciable ) CLAUSE 18 Under Clause 18 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, have to be mentioned in the following form : (a) Description of asset/block of assets ( Tangible as well as intangible) (b) Rate of depreciation. (c) Actual cost of written down value, as the case may be. (d) Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of (i) Central Value Added Tax credits claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March, 1994, (ii) change in rate of exchange of currency, and (iii) subsidy or grant or reimbursement, by whatever name called. (e) Depreciation allowable. (f) Written down value at the end of the year. In case of any deletion in the second half, the form will consider it as relating to first half only. 27

28 CLAUSE 19 Amount Admissible u/s 32AC, 33AB, 33ABA and 35 etc Clause 19 applies to all the assessees who claim deductions under the relevant sections mentioned The details of amounts debited to the P&L and amount admissible as deduction are to be stated The amounts are generally debited to the P&L. However deductions under certain sections are based on capital expenditures which are not debited to the P&L a/c but shown as fixed assets/ Deposits Sections : 32AC Allowance for Investment in new plant & Machinery, 33AB Tea, Coffee and Rubber Development account, 33ABA Site Restoration Fund etc. CLAUSE 20 Clause 20 is applicable to all assessees and is required to report on the following (a) Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend. [Section 36(1)(ii) disallows such payments in the hands of the employer assessee] Payment of Bonus to employees under the Payment of Bonus Act, 1965 are deductible expense and are not covered u/s 36(1)(ii) (b) Details of contributions received from employees towards PF, ESIC, Superannuation Fund or any other fund referred to in 2(24)(x) and its relevant due date and actual date of deposit with the concerned authorities as referred to in section 36(1)(va) In the Case of Commissioner of Income Tax vs. Gujarat State Road Transport Corporation, Tax Appeal No. 637 of 2013, Date of Order : , Gujarat High Court it has been decided that a payment made otherwise than in cash is acceptable i.e, through cheque, provided the sum has been realised within fifteen days from the date of the cheque 28

29 CLAUSE 21 The details of amounts debited to the profit and loss account : a) Being in the nature of capital expenditure (37(1)), personal expenditure (37(1)), advertisement expenditure in pamphlets etc of a political party (37(2B)), entrance fee and subscription for clubs, club services and facilities used, penalty or fine for violation of any law, expenses for the purposes which is offensive or prohibited by law 37(2B) does not apply to expenditure on advertisement in newspapers or magazines published by political parties. Contd.. b) Amounts inadmissible u/s 40(a) Section 40(a) deals with expenditure where TDS is either not deducted or has been deducted but not paid before the due date. It also deals with taxes such as wealth tax/fringe benefit tax/income tax etc which are not allowed as deductions. 29

30 The clause deals with the following relating to TDS deducted or after deduction has not been paid before the due date 40(a)(i) Interest/royalty/fees for technical services or any other sum chargeable to tax payable outside or in India to a non-resident, not being a company or to a foreign company on which tax is deductible under Chapter XVII-B 40(a)(ia) Any Interest/commission/brokerage/rent/ royalty/fees for professional services or fees for technical services payable to a resident or amounts payable to a contractor or a sub contractor for carrying out any work on which TDS is deductible. W.e.f from AY the disallowance is restricted to 30% and applies to any sum payable to a resident on which TDS is deductible thus including salaries. These disallowances shall be allowed in the year in which TDS payment is made W.e.f. AY section 40a(ib) provides for disallowance of equalization levy paid or payable to a non-resident for a specified service for which such levy applies but had not been deducted or had been deducted but not paid before the due date. Clarification-Instruction No. 2/2014, dated In the light of decisions of the Supreme Court in the case of of GE India Technology (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 156 (SC) and Transmission Corporation of AP Ltd. and another v. CIT [1999] 105 Taxman 742/239 ITR 587 (SC)and the decision of the Madras High Court in CIT v. Chennai Metropolitan Water tax Cases Appeals Nos of 2005, [2011] 14 Taxmann.com 73/202 Taxman 454/[2012] 348 ITR 530 (Mad.), the field officers had sought clarification as to whether the tax is to be deducted under section 195(1) on the whole sum being remitted to a non-resident or only the portion representing the sum chargeable to tax, particularly if no application has been made under sub-section (2) of section 195 of the Act to determine the sum. The CBDT examined the matter in detail and directed that where the assessee fails to deduct tax under section 195 of the Act, the Assessing Officer shall determine the appropriate proportion of the sum chargeable to tax and ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201 of the Act. It has been further clarified that such appropriate proportion of the sum will depend on the facts and circumstances of each case taking into account nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion. 30

31 Practical Isuue Unaware of the residential status of the deductee, the TDS has been deducted at 1% instead of 30%.It was further noted that the deductee had no other source of income other than LTCG. How to proceed about it? A communication can be made to the AO stating the above situation. The AO with regards to Instruction No. 2/2014, dated may instruct to deduct such appropriate proportion ( 20.3 % in the present case ). 40(a)(ic) Fringe Benefit Tax 40(a)(iia) wealth tax 40(a)(iib) royalty, license fee, service fee etc levied exclusively on or which is appropriated directly or indirectly from a state Govt. undertaking by the state Govt 40(a)(iii) Salary payable outside India or to a non-resident if the tax has not been paid or deducted under chapter XVII-B 40(a)(iv) any payment to PF or other fund unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head salaries for the employee 40(a)(v) any tax paid by the employer for perquisites u/s 10(10CC) 31

32 Contd.. c)interest, salary, bonus, commission or remuneration inadmissible u/s 40(b) made by a firm (including LLP but not foreign LLP) to its partners and u/s 40(ba) by an AOP/BOI to its members d)(i) expenditure exceeding Rs 20,000 covered under section 40A(3) read with rule 6DD if not made by account payee cheque drawn on a bank or account payee bank draft. (ii) Reporting of disallowance u/s 40A(3A) is a new requirement under the revised format applicable to assessees following mercantile basis of accounting. This section applies where an unpaid expenditure has been deducted in the relavent PY but has been subsequently paid by a mode other than by account payee cheque drawn on a bank or account payee bank draft. The amount already allowed earlier now becomes taxable as deemed income. Contd.. e)provision for payment of gratuity not allowable under section 40A(7) an assessee following mercantile basis of accounting is required to make provision for Gratuity as per the requirements of AS-15. If the assessee has not provided for the same or made contribution to the approved Gratuity fund, then the tax auditor needs to qualify his Report. f)any sum paid by the assessee as an employer not allowable under section 40A(9) Payment by an employer towards setting up or formation of or contribution to any fund, trust, company, AOP, BOI, Society are disallowed g)particulars of any liability of a contingent nature. 32

33 Contd.. h)amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurred in relation to income which does not form part of the total income(i.e, exempt income) U/s 14A(2), if the AO is not satisfied with the correctness of the claim or the claim made by the assessee that no expenditure has been incurred in relation to exempt income, he shall determine the inadmissible amount as per Rule 8D. i) amount inadmissible under the proviso to section 36(1)(iii) interest paid for acquisition of an asset for extension of existing business or profession is not allowed as deduction. AMENDMENT As per NOTIFICATION NO. SO 1949(E) [F.NO /7/2016-TPL], DATED the following changes have been made to Rule 8D (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; and (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 B/ C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of value of investment, C = the average of total assets (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. (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; and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee. 33

34 CLAUSE 22 Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006 the interest on delayed payment to Micro and Small Enterprises is not allowed as deductible expenditure. CLAUSE 23 Particulars of payments made to persons specified under section 40A(2)(b) Section 40A(2)(b) defines related parties Under this clause the auditor only has to report all the payments to related parties which are debited to P&L a/c unlike the ITR Form where the disallowances have to be mentioned. If the AO is of the opinion that these transactions are not at Fair Market Value, he may disallow the same 34

35 CLAUSE 24 Amounts deemed to be profits and gains under section 32AC or 33AB or 33ABA or 33AC These sections are also covered under clause 19 If the conditions specified under the respective sections are not satisfied then the assessee is liable to be taxed for deemed Profits arising there from. Eg : Withdrawal of deposits made under the respective sections CLAUSE 25 Any amount of profit chargeable to tax under section 41 and computation thereof Section 41 covers certain situation where the assessee has earlier claimed the benefit of the deduction or allowance but subsequently recovers the same thus becoming taxable Taxability arises in the following 5 different situations Section 41(1) Reversal/writing back of trading liability Section 41(2) Sale of assets of undertaking engaged in generation and distribution of power Section 41(3) Sale of assets used in scientific research Section 41(4) Recovery of Bad debts allowed earlier Section 41(4A) Withdrawal from Special Reserve 35

36 CLAUSE 26 Taxes/Duties and other sums covered u/s 43B Under this clause reporting is required for two categories a. Items in respect of which liability was existing on the first day of the previous year, and which were paid/not paid during the previous year; b. Items in respect o which the liability was incured during the previous year, which was paid on or before the due date of furnishing return or not paid on or before the aforesaid date Section 43B deals with a) Tax, Duty, Cess or Fee under any law b) Contribution by an employer to PF or Super annuation fund or gratuity fund or any other fund for the welfare of the employees c) Bonus or commission payable to employees provided the amount is not paid as profit and dividend d) Interest on any loan or borrowing from any public financial institution or a state financial corporation etc e) Interest on any loan or advance from a scheduled bank f) Leave encashment payable by the employer g) Any sum payable to the Indian Railways for the use of railway assets (w.e.f AY 16-17) CLAUSE 27 a) Amount of Central 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 Central Value Added Tax credits in the accounts. b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account Prior period items result from error or omission in earlier periods. Prior period items crystallized during the current year are not an element of error and hence are not prior period items. 36

37 CLAUSE 28 Acquisition of Shares covered u/s 56(2)(viia) The shares transferred during the previous year should be of unlisted closely held public company/private company Transferee (recipient company) should be unlisted closely held public company/private company or Firm (includes LLP) Transferor can be any person/persons Consideration of transfer should be inadequate in comparision with FMV computed under Rule 11UA or there should be no consideration. If these conditions are satisfied the reporting requirement under Clause 28 arises CLAUSE 29 Consideration for Issues of Shares covered u/s 56(2)(viib) The assessee (share issuing company) is a company in which public are no substantially interested Fresh shares are issued (not transferred). Shares may be Equity or Preference Shares are issued at premium (above the face value) Consideration (including premium) received is more than FMV Shares are issued to resident only (Consideration has been received from resident) Consideration is received during the relavent PY If these conditions are satisfied the reporting requirement under Clause 29 arises. The Auditor can Under Clauses 28 &29 rely on Valuation Report. 37

38 CLAUSE 30 Amount borrowed or Repaid on Hundi Includes interest on the amount repaid If paid otherwise than through an account payee cheque. [Section 69D] The limit of Rs as in section 269SS is not applicable here. Thus all borrowings have to be reported Thus in the case of Hundi borrowings exceeding Rs 20,000 reporting will be required not only under Clause 30 but also Clause 31 CLAUSE 31 Acceptance/Repayment of Loan/Deposit u/s 269SS and 269TT The sub-clause (a) of the clause 31 deals with acceptance of loans/deposits exceeding Rs u/s 269SS while Sub-clause (b) deals with repayment exceeding Rs u/s 269T Reporting is required for all the loans/deposits, repayment/acceptances exceeding Rs 20,000 weather through account payee cheque/bank draft or otherwise Use of electronic clearing system through bank account has been inserted w.e.f from April 2015 Unlike 269SS section 269T is applicable to Banks also. However banks can credit the loan amount directly to savings/current account of the person. Also the limit of Rs applies to each branch of the bank while in all other cases it applies to assesee as a whole W.e.f from specified advances in relation to transfer of Immovable properties also come under the purview of these sections Under sub-clause ( c) the taking or accepting loan or deposit, or repayment of the same were made by account payee cheque drawn on a bank or account payee bank draft based on the examination of books of account and other relevant documents has to be reported up on by the auditor 38

39 CLAUSE 32 Sub-clause (a) requires details of brought forward loss or depreciation allowance. Only b/f loss details are required but not carry forward. This clause enables the AO to determine the b/f losses available to the assessee for set-off which can then be correlated with the return of Income filed Sub-clause (b) requires the reporting of change in shareholding of the company 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. Section 79 applies to closely-held Public/Private companies in which the public are not substantially interested. Sub-clause (c) requires the reporting of amount of any speculation loss referred to in section 73 incurred during the previous year by the assessee. Section 73 requires that speculation losses/allowances on account of depreciation/capital expenditure on scientific research can be set off only against such losses/allowances for four succeeding AY s Sub-clause (d) requires the reporting of amount of any loss referred to in section 73A in respect of any specified business as specified u/s 35AD during the previous year Sub-clause (e) requires the reporting of amount In case of a company deemed to be carrying on a speculation business as referred in explanation to section 73. Where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business section 73 is attracted. CLAUSE 33 Clause 33 requires Section-wise details of deductions, if any, admissible under Chapter VIA or Chapter III (Section 10A, Section 10AA) The details to be provided are the section & amounts admissible as per the provision of the Income-tax Act, 1961 The revised Guidance note requires reporting only when these items appear in the books of accounts (Eg : Personal books & business books maintained separately by sole proprietor ) 39

40 CLAUSE 34 Compliance with TDS & TCS Provisions Sub-clause (a) applies when the assessee is required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB It is to be noted that reporting is required even if the assessee is not in default The reporting is applicable to accruals/provisions also. Contd. Sub-clause (b) requires reporting of information regarding Filing of TDS/TCS returns The reporting under this sub-clause is to be given only when the assessee has either belatedly filed or not filed any or all the TDS/TCS returns The TDS returns have been prescribed under rule 31A which deals with payments to residents and Rule 37A which deals with payments to nonresidents 40

41 Contd. Sub-clause (c) deals with short deduction/non-deduction of TDS or noncollection/short collection of TCS thus attracting interest under section 201(1A) or section 206C(7). In case the TDS is not paid by the deductor but is since paid by the deductee while filing his return of income, the TDS not paid cannot be recovered from the Deductor [Hindustan Coca Cola v CIT (2007) 293 ITR 226. As a result, the liability of the deductor to pay interest on TDS will also cease on the payment of tax by the Deductee. The assessee can obtain a Form 26A from the chartered accountant of the deductee for the same. Quick Question A person has sold a Land for Rs 70,00,000 for which Rs 70,000 ( 1% ) tax had to be deducted. Since the deductee had a Long term capital loss on sale of land considering the indexed cost of acquisition it was felt that no tax was required to be deducted but she has filed her return. The deductor has received a TDS intimation for non-filing of 26QB.How to go about it? Here the TDS is not paid by the deductor.as per the intimation the deductor will be liable to pay by way of fee, a sum of Rs. 200 for every day during which such failure continues u/s 234E of the Act. But since the tax has been paid by the deductee while filing her return of income, hence the TDS not paid cannot be recovered from the Deductor. The deductor can obtain a Form 26A from the chartered accountant of the deductee for the same to avoid the late fee. 41

42 CLAUSE 35 Quantitative Details for Trading/Manufacturing Concerns The following details are required to be reported in the case of goods traded (Trading concern)/raw Materials, Finished products and by-products(manufacturing Concern) as applicable (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 36 Tax on Distributed Profits (Tax on Dividend ) In the case of a domestic company, the following details of tax on distributed profits under section 115-O are required to be reported (a) total amount of distributed profits; (b) amount of reduction as referred to in section 115-O (1A)(i); (c ) amount of reduction as referred to in section 115-O (1A)(ii); (d) total tax paid thereon; (e) dates of payment of DDT with amounts. In case of Final Dividend DDT is required to be paid within 14 days of declaration, distribution or payment, whichever falls earlier In case of Interim Dividend, DDT needs to be paid within 14 days of Distribution/payment. In case of Deemed Dividend u/s 2(22)(e), DDT is payable upon payment/distribution of such dividend Effective Rate of DDT % The DDT is not allowed as a deductible Expenditure in the hands of the Domestic Company 42

43 CLAUSE Clause 37 requires reporting of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the cost auditor where any Cost Audit was carried out. Clause 38 requires reporting of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the auditor in any audit conducted under the Central Excise Act, Clause 39 requires reporting of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the auditor in an audit conducted under section 72A of the Finance Act, 1994 in relation to valuation of taxable services These clauses do not require the Tax Auditor to give his opinion on the findings in the Cost Audit report If any of these disqualifications have a bearing on Tax Audit, the same may be reported in the main audit report in Form 3CA/3CB It is no longer required to attach the Cost/Excise report along with the 3CD as was required earlier CLAUSE 40 Accounting Ratios and Business Parameters The details of the following Ratios are required to be reported for the previous year and the preceding previous year 1. Total turnover of the assessee 2. Gross Profit/Turnover 3. Net Profit/Turnover 4. Stock in trade/turnover 5. Material consumed/finished goods produced If the previous year was not audited or was audited by another auditor, then the information may br given after giving suitable note stating the fact in the Tax Audit Report While reporting different ratios consistency between the numerator and the denominator should be maintained 43

44 CLAUSE 41 Clause 41 requires reporting of the details of demand raised or refund issued during the previous year under any tax laws other than Income-tax Act, 1961 and Wealth tax Act, 1957 The details of such demands/refunds issued during the previous year need to be reported irrespective of the fact that the demand/refund relates to earlier periods Draft 3CD Tax Audit Checklist 44

45 FORM 3CD It is the responsibility of the Tax Auditor to ensure proper compliance of the provisions of Income Tax Act and report on the same. Form 3CD is an efficient tool which effectively helps the auditor and should hence be used as extensively as possible. THANK YOU 45