LUNAWAT & CO. CA. PRAMOD JAIN. Chartered Accountants FCA, FCS, FCMA, LL.B, MIMA, DISA. 13 th October 2014

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1 LUNAWAT & CO. Chartered Accountants 13 th October 2014 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

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

4 INTERNAL AUDITOR Earlier Not if he was an employee of the assessee. If he was working in a professional capacity (not being an employee of assessee) - could have conducted tax audit. Now - Internal auditor of the assessee cannot conduct tax audit if he is internal auditor whether he is an employee of the assessee or not. Effective from

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

6 HISTORY OF TAR GUIDANCE NOTE

7 AS (IT) If accounting on cash basis, what to be done? 2 AS(IT) 1. Disclosure of Accounting Policies True & Fair vs. True and Correct Prudence, Substance over Form & Materiality 2. Prior Period, Extraordinary items & Changes in Accounting Policies

8 POLICY VS. ACCOUNTING Change in Accounting Policy is not change in method of Accounting. Change in method of valuation of stock is change in AP and not change in method of Accounting When can a Accounting policy can be changed? Required by statute Change would result in a more appropriate presentation of FS

9 SUMMARY OF CHANGES Form 3CA & Form 3CB amended Form 3CD also amended No annexures in Form 3CD now Total 41 points as compared to 34 earlier Part A now 8 points earlier 6 Part B now 33 points earlier 28 7 New clauses More than 20 clauses amended / extended Applicable w.e.f even if report is to be filed for earlier AYs

10 FORM 3CA 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 Stamp / Seal of auditor required 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

11 FORM 3CB 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?

12 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.

13 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.

14 SA 700 Tax Auditor s Responsibility 3. My/ Our responsibility is to express an opinion on these financial statements based on my/our audit. I/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.

15 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.

16 SA I/We believe that the audit evidence I/we have obtained is sufficient and appropriate to provide a basis for my/our audit opinion. 6. I/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, I/ 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.

17 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.

18 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

19 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) / (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.

20 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

21 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?

22 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 and income exceeds maximum amount not chargeable to tax

23 APPLICABILITY OF 44AB ON MR. A Mfg. - Turnover 120L; NP - 5L; 80-IC 3 L; TI-1.90L Trading- Turnover 110L; NP -3L; Architect Fee 30 L NP- 5 L; TI-7L Doctor - Trading; Turnover 80L -NP 3L; Fee 27 L NP 5 L TI- 8 L Yes Yes Yes Trading TO 150 L; NP 1.5 L Does not file ITR Yes

24 APPLICABILITY OF 44AB ON MR. A Trading; Turnover 50L; NP 3L; TI-(-)1.5L. Files ITR No Manufacturing; TO 80L; NP -5L; 80-IC-2L; TI-4L No Mfg TO 40 L, NP 1 L; Trading-TO 40 L, NP-1 L; Exports TO 50 L, NP 1 L Trading; TO -60L; Commission - 2L; NP- 3L; TI 4L Yes No

25 APPLICABILITY OF 44AB ON MR. B Tradin g 25 L ; NP- 3 L Manufa cturing 80L ; NP 8L Commi ssion 2 L; NP- 1L Profess ion 21 L ; NP 5 L

26 E-FILING UTILITIES Now different filing utilities on website: Form 3CA-3CD Form 3CB-3CD Common Utility for Form 3CEB Form 29B Form 6B Form 10B Form 10BB Form 64

27 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

28 FORM 3CD NEW CLAUSE - 28 Details of shares received without / inadequate consideration u/s 56(2)(viia). Is it for assesses? Take care of transactions not regarded as trf for this purpose 47 (via), (vic), (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

29 FORM 3CD NEW CLAUSE - 29 Details of consideration received in excess of fair value for issue of shares u/s 56(2)(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

30 FORM 3CD NEW CLAUSES 39 - Details, 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

31 FORM 3CD - AMENDMENTS 10(a) Nature of Business select code 11(b) - Address of each location where books are kept to be given HO / Branch Different books different addresses Address along with state & PIN 11 (c) - Apart from list of books [s. 2(1) (12A)] examined, nature of relevant documents examined also to be given Utility says books examined only

32 FORM 3CD - AMENDMENTS 12 To mention if PL also includes presumptive income under: Chapter XII-G (shipping Business) First Schedule (Insurance Business) 13 (C) detail for change in method of accounting to be given: Particulars Increase in profit Decrease in profit

33 FORM 3CD - AMENDMENTS 14 (b) - Detail for change in method of valuation of closing stock to be given: Particulars Increase in profit Decrease in profit 18 (d)(i) & 27(a) change of words from MODVAT to CENVAT 18 Depreciation schedule can be imported in the new utility CVS file

34 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 noncompliance of AS-2

35 FORM 3CD AMENDMENTS - 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

36 FORM 3CD AMENDMENTS - 19 S. 33AC (reserve shipping business) deleted S. 35 (scientific research) bifurcated into 35(1)(i) revenue expenditure 35(1)(ii) 175% of amount paid to University, etc 35(1)(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%

37 FORM 3CD AMENDMENT 20(B) Contributions received from employees for all funds as referred to in s. 36(1)(va) covered. PF Superannuation Gratuity ESI Other Welfare fund

38 Details to be given for: Nature of fund Sum received from employees Due date for payment Actual amount paid Actual date of payment to authorities FORM 3CD AMENDMENT 20(B)

39 FORM 3CD AMENDMENT 21(A) Amounts debited to PL. Details now in tabular form - Particulars and Amount Capital Expenses Advertisement of all kinds to be given?? Personal Exp. Club entrance fee & subscription not required by English version of Rule. but given in Utility Expenditure incurred at clubs being cost for club services and facilities used to be given

40 FORM 3CD AMENDMENT-21(B) S. 40(a) bifurcated into (i), (ia), (ic), (iia), (iib), (iii), (iv), (v). Other clause?? (ii) - tax 40(a)(i) (can be imported from CVS file) - 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 Also amount of tax deducted (when deducted) also to be given

41 S. 40(a)(ia) - Details of: Payment on which tax not deducted Payment on which tax has been deducted but has not been paid on or before the due date specified in s. 139(1). Apart from date, amount and nature of payment, name & address of payer also to be given Also amount of tax deducted (when deducted) also to be given FORM 3CD AMENDMENT-21(B) Detail of amount deposited out of deducted also to be given

42 S. 40(a)(ic) - FBT S. 40(a)(iia) - WT S. 40(a)(iib) Royalty etc. to SG FORM 3CD AMENDMENT-21(B) 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

43 FORM 3CD AMENDMENT-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

44 FORM 3CD - AMENDMENTS 21(g) Particulars of any liability of contingent nature 24 Deemed profits 32AC included 25 (not in form but in schema) Profit chargeable u/s 41 details required: Name of person Amount of income Section 41(1)(a), (1)(b), (2), (3), (4), (4A), (5) Description of transaction Computation, if any

45 FORM 3CD AMENDMENT - 25 S. 41(1)(a) Cessation of trading liability by assessee S. 41(1)(b) - Cessation of trading liability 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

46 CLAUSE 26 S. 43B Interest converted into loan. Allowed u/s 43B?? Conversion of interest into a loan or borrowing or advance does not amount to actual payment. The converted interest, by whatever name called, in the wake of its conversion into a loan or borrowing or advance, will be eligible for deduction in the computation of income of the previous year in which the converted interest is actually paid.

47 FORM 3CD - AMENDMENTS 30 Loan on Hundi no change in Form, but detail required in Schema 31(c) S. 269 SS/T- certificate no longer required 32 (c) Carry forward losses exact nature of loss to be mentioned year-wise 32(c)- 3 sub clauses added c) Detail of speculation loss incurred - u/s 73 d) Detail of losses in specified business u/s 73A e) Deemed speculation loss under explanation to s. 73

48 CLAUSE 31 - S. 269SS/T Loan received by NEFT / RTGS?? Share application money advance?? No No if adequate documents Sale proceeds collected by selling agent? No Advance received against sale of goods?? Companies Act 2013?? ABC P. Ltd receives cash from A agriculturist? No Yes

49 CLAUSE 31 - S. 269SS/T Security deposit against contracts?? Yes deposit Amount retained by contractee against performance?? No as amount not received ABC P. Ltd repays loan payable on demand in cash? Loan or deposit discharged by accounting entries? No Yes

50 FORM 3CD AMENDMENT - 33 Deductions u/c VIA Chapter III (S. 10A, 10AA) added Detail Section; Amounts admissible as per provision of IT Act and fulfils conditions, if any, specified under relevant provisions of IT Act and Rules or any other guidelines, circular, etc, issued in this behalf.

51 FORM 3CD AMENDMENT - 34 TDS Total revamped. TCS added. Complied status of chapter XVIIB not required to be commented upon 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

52 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

53 TDS EXAMPLE Sectio n (2) Natur e of Payme nt (3) Total amt of payme nt or receip t (4) Total amt on which tax was requir ed to be deduct ed out of 4 (5) Total amt on which tax was ded. / coll. at specifi ed rate out of 5 (6) Amo unt of tax dedu cted out of 6 (7) Amt on which tax was ded. / coll/ at < than specifie d rate out of 7 (8) Amou nt of tax deduct ed or collect ed on 8 (9) Amt of tax ded. or coll. but not deposi ted out of 6 & 8 (10) 194 C Tpt. 15 Cr C Cont. 25 L 15 L 10 L Lacs A Intt. 5 Crs 6 Lacs 5 Lacs 50K 1 Lac I Rent 25 L 20 L 15 L 1.5 L 5 L J FTS 1 L 1 L

54 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??

55 FORM 3CD - AMENDMENTS 34 (c) If liable to pay interest u/s 201(1A) / 206C(7), furnish: TAN Interest payable u/s 201(1A)/206C(7) Amount paid along with date of payment 36 (Old 29) 115-O- 2 more details: amount of reduction in s. 115-O(1A)(i) dividend from subs domestic or 115BBD amount of reduction in s. 115-O(1A)(ii) NPS 10(44)

56 FORM 3CD - AMENDMENTS 37 (Old 30) Cost Audit not to attached report - details, of disqualification or disagreement on any matter / item / value / quantity as may be reported / identified by cost auditor 38 (Old 31) Excise Audit not to attached report - details, of disqualification or disagreement on any matter / item / value / quantity as may be reported / identified by auditor

57 FORM 3CD AMENDMENT - 41 Ratios Previous year information also to be given Turnover also to be given now Now details to be given??? No ratios?? Total turnover of the assessee Gross profit / turnover Net profit / turnover Stock-in-trade / turnover Material consumed / finished goods produced (The details to be furnished for principal items of goods traded or manufactured or services rendered) Only for mfg or trading concerns??

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59 HOW TO DO AN AUDIT Appointment Understanding of Client Understanding the Engagement Authorizations Confirmations Representations Certificates Reports

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