Shri Mahaviray Namah. J. B. NAGAR CPE Study Circle of WIRC

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1 Shri Mahaviray Namah J. B. NAGAR CPE Study Circle of WIRC TAX AUDIT: Practical issues

2 Reference Material GUIDANCE NOTE PUBLISHED BY THE ICAI ISSUES ON TAX AUDIT PUBLISHED BY THE ICAI STANDARDS ON AUDITING PRESCRIBED BY ICAI ACCOUNTING STANDARDS PRESCRIBED BY ICAI ACCOUNTING STANDARDS NOTIFIED U/S. 145 OF I.T. ACT GUIDANCE NOTE ON TAX AUDIT u/s. 44AB ( Resources)

3 What is the Objective of Tax audit? Circular No. 387 dated 6 th July 1984 ensure that the books of a/c & other records properly maintained faithfully reflect the income of the tax payer claims for deduction are correctly made checking fraudulent practices proper presentation of the accounts before the tax authorities A. O. attending to more important investigational aspects of a case

4 Who is liable for tax audit u/s. 44AB? Enhanced limits of Turnover or Professional receipts (60/15) Limits under DTC (100/25) Can a person having less than prescribed turnover be liable for tax audit u/s. 44AB? Amended S. 44AD Eligible assessees Who does not claim deduction u/s. 10A, 10AA, 10B, 10BA or 80H to 80RRB. Eligible business Prescribed % of Profit No liability for advance tax Whoiscovered? Whoisnotcovered? Distinction between Business or Profession Similarly S. 44AE

5 WhocanbeappointedasTaxAuditor? Communication with previous auditor, whether necessary? How many Tax Audits a Chartered Accountant can undertake? How can a Company remove Tax Auditor?

6 Is it mandatory to submit to tax audit report to AO after e-filling return of income? Annexure less return and Rule 12(2) Filling up particulars of tax audit in the e-return Consequence of failure to carry out tax audit in time (S. 271B) Penalty amount increased from 1,00,000 to 1,50,000 Reasonable cause Sec. 273B Can penalty u/s. 271B be imposed when books of account not maintained? Is ICAI Guidance Note binding? What about `Issues on Tax audit? Should the tax auditor obtain signature of assessee on Form 3CD?

7 Canataxauditreportberevised? GN i. revision of accounts of a company after its adoption in annual general meeting. ii. change of law e.g., retrospective amendment. iii. change in interpretation, e.g., CBDT Circular, judgements, etc. Must mention said report is revised with reference of earlier report. Extensiveusesof N.A. intaxauditreportbyauditors,whetherproper? a) Thereisnochangeinthenatureofbusiness b) There has been no deviation in method of accounting c) There is no such payment d) Should good tax audit reports be published?

8 WhatisTurnover? GNonTaxAuditPara5.1topara5.16. IssuesonTaxAuditanswertoissuesNo.6to33 1 st checkisitbusinessorprofession Profession: Only gross receipts Business: Sales, turnover or gross receipt all to be considered. How to distinguish Profession with Business? CoachingclassesrunbyaCAvisavisbynonqualifiedbusinessman.ISOTAissue29 Turnover/ Gross Receipt GN5.11(a)Daytrader/speculator:sumtotalofdifferences,+veor ve. GN5.11(b)SecurityDeri.Transactions: +veor ve. +premiumonsaleofoptions. GN 5.11(c) Commodity Deri. Transactions: Settlement without delivery +ve or ve GN 5.13(vi) Clearing& forwarding agent: Exclude reimbursement custom duty etc Not Turnover: Purchases, WIP, Sale of fixed assets, write back of Crs. A/cs.

9 Sales tax, excise duty charged on sales ISOTA issue 11: In accordance with method of accounting regularly employed Section 145A provides sale of goods includes any tax, duty, cess or fees. ThisappliestoCENVAT,VATbutdoesnotapplytoservicetax.

10 Use of Form 3CA & 3 CB Form no. 3CA tax auditor to enclose copy of the audit report Where no statutory report form no. 3CB. Contents of 3CD Part A (clause 1 to 6), Part B (Clause 7 to 32), Annexure I (PartA& PartB) Form will be treated incomplete if Annexure I is not filled up. Clause 4: Status in case of a LLP? S. 2 (23)

11 Clause 7: Change in partners profit sharing ratio Change in partner s remuneration or Interest rate on Capital Minorbecomingmajor&optingtoshareinlosses Clause 8(a): Nature of business or profession Itisimportanttospecifyexhaustivelistofnatureofbusiness. Why? Clause 9: Books of Account Isitnecessarytohavehardcopyofprintouts? Section 2[12A) Books includes data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device. Whether stock records are books of account? Tax auditor s responsibility where proper stock records not maintained. Clause 11: Method of Accounting Change in method of accounting visa vischange in accounting policy(gn 22.7)

12 What if previous year accounts are not audited? Scope of Section 145A. Gross Method vs. Net Method. ICAI s GUIDANCE NOTE ON TAX AUDIT u/s. 44AB dated Clause 12: Valuation of closing stock In cash system of accounting, whether closing stock will come? Clause 12A : Capital assets converted in to stock in trade Definition of Capital Assets u/s. 2 (14) and of transfer u/s. 2 (47)(iv). Clause 13: Amounts not credited to Profit & loss A/c. What if not accounted for in accounts? Clause 13 (d): Amount not credited to Profit & Loss A/c. : Any other item of income Clause 13(e): Whether amount of capital gains or capital receipt be mentioned? Should money received on share application be reported in 13(e)

13 Clause 14: Particulars of Depreciation CENVAT and Vat credit availed be deducted from cost Can depreciation be claimed in following situation? ACompanyholdsanassetinthenameofadirector. Afirmholding assetinthenameofapartner. Cash system of accounting: Unpaid Fixed Assets Ifanassesseewantstoclaimnoorlowerdepreciationonanasset Explanation 3 to Section 32(1) by Finance (No.2) Act, 2009 block of assets is substituted with the word assets.

14 Clause 16: Bonus, Commission, PF recoveries etc. Employers contribution to PF U/s. S.43B Vs. Employees contribution to PF S. 36(1)(va) rws S. 2(24)(x) Clause17:General&alsoonpenalty&fineetc. Penalty: Infraction of law or arising out of contractual obligation Interest on sales-tax arrears Compensatory Lachmandas Mathurdas 254 ITR 799(SC) Penalty to Mun. Corpn. for unauthorized construction (plan not approved) RadhaBallabhSilk Mills v. DCIT 12 SOT 423 (Mum) Paid to Mun. Corpn. for deficiency in open space CIT vs. Lokenath& Co 147 ITR 624 (Del)

15 Amounts inadmissible under Section 40A (3) read with rule 6DD: Aggregate of payments made in a day in > Rs. 20,000 Payment made for plying, hiring or leasing goods carriages > Rs. 35,000 Payment to sundry creditors > prescribed in a day business income for that year Income determined by applying net profit rate. PurshottamlalTamrakar184 CTR (MP) 349. Clause 17 (a) Capital expenditure 3 tests to be applied Test of enduring benefit, Ownership test, Functional test. In case of software Clause 17 (f) (amount inadmissible u/s 40(a)) Section 40 a (i) to be paid within time prescribed u/s. 200(1) Section 40 a (ia) to be paid before filing of return or due date

16 Clause 17 (l): Amount of deduction inadmissible in terms of section 14A Rule 8D: Expenditure in relation to exempt income shall be aggregate of Section 14A is highly controversial. If auditor in agreement with assessee -report amount with suitable disclosure Otherwise give qualified opinion, adverse or disclaimer of opinion. Clause 17A: Amount of interest inadmissible u/s. 23 of the MICRO, Small and Medium Enterprises Development Act, 2009 Amount to be reported whether sum debited to Profit and Loss Account or not. Clause 20: Amounts chargeable u/s. 41? Only if deduction allowed in earlier year. Mere time barring liability without write back Waiver of principal amount of loan by bank

17 Clause 21: Payments covered u/s. 43B Furnishing of bank guarantee for unpaid liability Udaipur Distillery 186 CTR (Raj) 1 Excess deposit in account current with excise department UnutilisedMODVAT credit (GlaxoSmithklineChandigarh, Special Bench). Clause 24(b): Loan and Deposit Repaid If firm pays LIP on behalf of family members from whom loans taken. 269T. Clause 27:Tax deducted at source There are lots of debatable issues, appropriate comments shall be made. CBDT Circular No.4 of 2008 TDS on service tax on rent u/s. 194I CBDT clarification to Bombay Chamber TDS on service tax on professional fees NewSection 206AA mandatory PAN.

18 GENERAL ISSUES Assessee vis a vis Auditors duty Information to be complied & authenticated by assessee Auditors duty to check the details Conflicting views with assessee the auditor may state both views Conflicting judicial precedents, auditor should state the judgment relied upon Working papers No one will believe you did something on an audit if there is nothing in your workingpapersfiletoshowforit. They are aid in Planning and Performance of audits Supervision and Review of audit work Provide evidence of audit performed / support auditor s opinion.

19 Documentation for Tax Audit: SA -210: Appointment letter defining scope of audit SA - 580: Management representation letter SA -310: Notes on the nature of business SA -500: Sample Purchase & Sales bills Proof of assets purchased & Revenue exp. Capitalized Trial balance Financial statements duly signed b the assessee SA -505: Bank loan statement, Bank balance confirmation Major sundry debtors and creditors balance confirmation, SA 520: analytical ratio analysis SA -550: List of related parties and transaction

20 AS -1 Notes on accounts and disclosure of accounting policies AS -2 Valuation of inventories with quantitative inflow and outflow statement AS 5 Extraordinary Items nature & disclosure AS 6: Depreciation calculation statement AS 29: Estimation of liabilities including contingent liabilities 3CD check list, documentations, 3CD specific certificates, statutory compliances etc. Abatement? BEWARE A person other than tax payer who willfully makes or causes to tax payer to make any false entry in the books of accounts or any statement to evade any tax liability would be made liable to imprisonment range from 3 months to 3 years with fine.(abatement u/s. 277A)

21 To sum up, one must keep in mind: Concept of Prudence, Substance over form, Materiality & Matching Concept.

J. B. NAGAR CPE Study Circle of WIRC TAX AUDIT: Practical issues By Vinod Kumar Jain, FCA

Shri Mahaviray Namah J. B. NAGAR CPE Study Circle of WIRC TAX AUDIT: Practical issues By Vinod Kumar Jain, FCA Reference Material GUIDANCE NOTE PUBLISHED BY THE ICAI ISSUES ON TAX AUDIT PUBLISHED BY THE