NELLORE CHARTERED ACCOUNTANT

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1 Nellore Branch (SIRC) of The Institute of Chartered Accountants of India NELLORE CHARTERED ACCOUNTANT N E W S L E T T E R Editor CA. V.M.V. Subbarao Cell : vmvsr@rediffmail.com Editorial Committee CA. Chinni Sravan Kumar CA. K. Rajesh CA. B. Durga Prasad CA. P. Ramesh Kumar Reddy Managing Committee CA. K. Kiran Kumar Chairman CA. P.V. Rama Raghava Rao Vice Chairman CA. R. Yugandhar Reddy Secretary CA. A. Sankaranarayana Treasurer CA. J.V. Chalapathi Rao SICASA - Chairman CA. A. Pundarikaksham Member CA. B. Sekkizhar Ex-Officio & Regional Council Member Chairmans Communique The motto of the ICAI is Ya Aeshu Suptaeshu Jagruti. The motto literally means a person who is awake in those that sleep. It is a quotation from the Upanishads (Kathopanishad). It was given to the ICAI at the time of its formation in 1949 by Sri Aurobindo as a part of its emblem. It is well known that a doctor treats the diseases but few people know that a CA looks after the health of the society. Friends, the success of a newsletter depends on its contents. The contents might be your views, your innovative ideas, your analysis, your imaginations or anything else. Do not stop the ideas from germinating. Cultivate them and pen them down to blossom as contents of this newsletter. This newsletter is yours and feel free to have your say. As for as programmes are concerned we have celebrated CA day in grand manner & also conducted a Study Circle meeting on Union Budget On behalf of Nellore branch of ICAI we felicitated Central Cabinet Minister Sri M. Venkaiah Naidu garu at VPR convention centre, Nellore on 19th July, On 30th July, 2014 Annual General Meeting conducted. We thank all the members for participating in AGM & for giving valuable suggestions for future of our Nellore branch. On that day we have also conducted Study Circle Meeting on Revised Tax audit reports. On we are going to conduct full day seminar on Direct & Indirect Taxes for which CA. P. Rajendra Kumar, Past central Council Member & CA. Satya Kumar, KPMG Chennai coming as faculties. Please attend for the programme. Best wishes for coming tax audit period. With Warm Regards, CA. K. KIRAN KUMAR CHAIRMAN 1

2 Annual General Meeting of Nellore Branch On Best Wishes : Date Name Occassion Mobile No Sriram Satesh Marriage Day M. Nageswara Rao Marriage Day A. Chaitanya Birthday M. Venkateswarlu Birthday D. Penchala Reddy Marriage Day M. Nanda Gopal Birthday

3 Felicitation to Sri. Venkaiah Naidu, Central Cabinet Minister On at VPR Convention Centre - Nellore 11

4 Direct Taxes 24 Key Changes in New / Revised Tax Audit Report Form 3CD CBDT has vide Notification no. 33/2014 dated revised the format of Tax Audit Report to be furnished under section 44AB of the Income tax Act with effect from We have compiled below the key amendments made to the old Form 3CD:- 1. Particulars of registration under excise duty, service tax, sales tax, and customs duty etc Revised Form 3CD requires Auditors to report registration number or any other identification in respect of all other types of tax liabilities which Assessee is liable to pay. Although Tax Auditor have to report only the Registration details of taxes payable under other statues but he has to check under what other statues Assessee is liable to pay taxes and has to report accordingly. Auditor may also obtain such list from his client. (Clause 4) 2. Relevant clause of section 44AB under which the tax audit has been conducted Now Auditor has to report under which clause of Tax Audit the Audit is been conducted. Now Auditor has to report if the Audit is of Business or Profession or under Presumptive taxation scheme. (Clause 8) 3. Location(s) (address(s)) of keeping books of accounts to be given - Revised Audit Report prescribes the requirement to report address of place where books of accounts Audited by the Tax Auditor are kept by the Assessee. If the books of accounts are not kept at one location, Auditor has to furnish the addresses of all such locations along with details of books of accounts maintained at each location. (Clause 11(b)) 4. Particulars of sale of Land/Building less than Stamp value to be given Now Auditor has to report where any land or building or both is transferred during the previous year for a consideration less than value adopted or assessed or assessable by any authority of a State Government referred to in section 43CA or 50C. (Clause 17) 5. Reporting of Deduction allowable under Section 32AC, Section 35AD, Section 35CCC, Section 35D: Deductions allowable under sections 32AC, 35AD, 35CCC and 35DDD are also required to be reported in revised Form No. 3CD. (Clause -19) 6. Detailed information to be given on amount debited to P & L a/c of Capital Expenses, Personal Expenses, and Advertisement. (Clause 21(a)) 7. Amounts inadmissible under section 40(a) Revised report restricted the reporting only to sub-clause (i) and (ia). Sub-Clause (i) deals with allowability of payment made to non-resident of such sums on which TDS is deductible, while sub-clause (ia) deals with payment to resident dedcutees. It further requires Auditor to report the name and address of the payee in respect of whom default has been committed. (Clause 21(b)) 8. Additional Reporting of disallowance U/s. 40A(3A) - Earlier Auditor had to report only the cash payment for expenses incurred during the year in excess of prescribed limit but now the CBDT has casted additional responsibility on auditor to report the cash payment made during the year in respect of expenses incurred in earlier years exceeding the prescribed limit U/s. 40A(3A). Now auditor has to verify all the cash payments in excess of prescribed limits to report under section 40A(3) and 40A(3A). In addition to this auditor also needs to report Cash payment under section 269T if the same relates to any loan or deposit exceeding the limit prescribed under section 269T. Clause has further removed the reporting requirement of certificate if any been obtained by the Auditor from the Assessee U/s. 40A(3).(Clause 21(d)). 3

5 9. Reporting of Deemed income under Section 32AC: Section 32AC of the Act provides for investment allowance of 15% for investment in plant and machinery. New form provides for reporting of deemed income which results from sale or transfer of new asset, (if asset was acquired and installed by the assessee for the purpose of claiming deductions under Section 32AC) within a period of five years from the date of its installation. in Old form (Clause 24) 10. Word Modvat been replaced by the word Cenvat. (Clause 27(a)). 11. Reporting of shares acquired without consideration or inadequate consideration- Now Tax Auditor has to report Whether during the previous year the assessee has received any property, being share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia). It is not clear how a Tax Auditor can determine the Value of shares of a company of which he is not the auditor. This clause applies only to Firms and Companies in which Public are not substantially interested. (Clause 28) 12. Reporting of Issue of share at Premium- Whether during the previous year the assessee received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib), if yes, please furnish the details of the same. Clause applies to Companies in which Public are not substantially interested. (Clause 29). 13. Non reporting of Certificate Under section 269SS and 269T Now Auditor not required to report whether or not he has obtained any certificate from Assessee Under section 269SS and 269T of the Income Tax Act,1961. (Clause 31) 14. Reporting of Deduction Claimed U/s. 10A and 10AA In addition to deduction claimed under chapter VIA New form 3CD requires auditor to report deduction claimed under section 10A and 10AA. (Clause -33) 15. Additional Reporting of Losses in speculation business (Section 73) and of carry forward and set-off of losses by specified business (Section 73(A) Auditor has to furnish the following details. (1) details of speculation loss referred to in section 73 during the previous year (2) details of loss referred to in section 73A in respect of any specified business (3) Auditor has to state whether the company is deemed to be carrying on a speculation business as referred in explanation to section 73 and details of speculation loss from such business. (Clause 36(c ), 32(d) and 32(e) 16. Section wise details of TDS/TCS deducted/collected and paid- In addition to details of TDS/TCS auditor has to disclose amount short deducted, TAN of the Assessee, Amount on which TDS /TCS deducted or collected, amount paid and also details of amount of TDS/TCS not paid by the Assessee. Earlier reporting was only of TDS but now its been extended to TCS also. (Clause 34(a)). 17. Auditor has to give details of Late filing of TDS/TCS return In old 3cd from Auditor was not required to report any late filing of TDS or TCS return. (Clause 34(b)) 18. Auditor has to give details of Interest Payable u/s 201(1A) and 206C(7) In old 3cd from Auditor was not required to report detail of Interest payable for delay in payment of TDS/TCS (Clause 34(c)) 19. Separate reporting of tax on distributed profits under section 115-O(1A)(i) of Dividend received by domestic 4

6 company from its subsidiary and under section 115-O(1A)(ii) of The amount of dividend paid to any person for or on behalf of the New Pension System Trust referred to in Section 10(44).. (Clause 36) 20. Reporting on Cost audit Old Form No. 3CD required reporting of cost audit only when statutory cost audit was carried out U/s. 233A of the Companies Act, 1956 but Revised Form No. 3CD specifies reporting requirement even when cost audit has been carried out voluntarily. The requirement of attachment of copy of cost audit report along with Form has been substituted with reporting of qualifications in cost audit report(clause 37). 21. Reporting on Audit under Central Excise Act - Revised 3CD report do not require the auditor to attach the copy of excise audit report with Tax Audit report and requires him to report on qualifications in cost audit report (clause 38). 22. Audit under Service tax to be reported - Report on Audit conducted under section 72A Auditor has to report Whether any audit was conducted under section 72A of the Finance Act andf has to give details, if any, of disqualification or disagreement on any matter/item/value/quantity as may be reported/identified by the auditor. (Clause 39) 23. Ratio Analysis of Two years - Up to last year Auditor was to disclose Ratio of current year only but now auditor needs to disclose ratio of preceding financial year also. In addition to this auditor has also to report total turnover for the previous year as well as for preceding financial year. (Clause 40) 24. Details of Demand and Refund- Auditor has to furnish 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 along with details of relevant proceedings. (Clause 41) SERVICE TAX No Service Tax Audit by Department or CAG An important judgment of the Hon ble Delhi High Court in the case of Travelite (India) Vs. Union of India & Ors. [W.P. (C) 3774/2013, C.M. No. 7065/2013] on the following issue: Issue: Whether Rule 5A(2) of the Service Tax Rules, 1994 is ultra vires the provisions of the Finance Act, 1994 ( the Finance Act )? Whether CBEC Instruction No: F.No.137/26/2007-CX.4 dated January 1, 2008 regarding Audit by Department is contrary to the Finance Act? Facts & background: In the instant case, Travelite (India) ( the Petitioner ) is a registered service tax assessee. The Petitioner received a letter from the Commissioner of Service tax dated November 7, 2012 ( the Letter ) which sought its records for the years to for scrutiny by an audit party under Rule 5A(2) of the Service Tax Rules, 1994 ( the Service Tax Rules ). The Petitioner being aggrieved by the Letter filed a writ petition before the Hon ble High Court of Delhi challenging the validity of Rule 5A(2) of the Service Tax Rules brought into force vide Notification No. 45/2007-ST dated December 28, 2007 as well as the CBEC Instruction F. No. 137/26/2007-CX.4 dated January 1, 2008 ( the Instruction ). Contentions of the Petitioner : 5

7 The Petitioner contended that an assessing officer can call for records in respect of any period during which the Department seeks to intensively scrutinize receipts, etc., i.e. under a Special Audit under Section 72A of the Finance Act. It was further argued by the Petitioner that the Finance Act does not contain any substantive power to call for records for scrutiny as is permissible under Rule 5A(2) of the Service Tax Rules or for the purpose of scrutiny by any authority outside of those created under the Finance Act, such as the Comptroller and Auditor General s office. Furthermore, the Petitioner submitted that the Rule 5A(2) of the Service Tax Rules is not within the rule making power conferred under Section 94 of the Finance Act and is squarely inconsistent with Section 72A of the Finance Act. Moreover, the handing over of records to an audit party cannot be governed by a non-statutory instrument like the Service Tax Audit Manual. The Petitioner also challenged the Instruction issued by CBEC. Rule 5A(2) of the Service Tax Rules: It requires the assessee to provide records to an audit party, which reads as under: Rule 5A. Access to a registered premises. (1) An officer authorised by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue. (2) Every assessee shall, on demand, make available to the officer authorised under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be,- (i) the records as mentioned in sub-rule (2) of rule 5; (ii) trial balance or its equivalent; and (iii) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961 (43 of 1961), for the scrutiny of the officer or audit party, as the case may be. Further, the Instruction issued by CBEC in this regard provides as under: 1. A new Rule 5A has also been incorporated in the said Rules to prescribe that an officer authorised by the Commissioner shall have access to any premises registered under the Service Tax Rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue and that the assessee shall provide, on demand, the specified records including trial balance or the equivalent. It may be noted that this rule does not envisage issue of any notification by a Commissioner for such authorisation of officers. The requirement of authorisation could be fulfilled by issue of an office order. 2. In this regard, it is clarified that records/documents required to be maintained under various laws such as the Income Tax Act, Companies Law the CENVAT Credit Rules, 2004, VAT and other State legislation would be acceptable, and the amendment made in the rule does not cast any additional responsibility on taxpayers in terms of maintenance of records. 3. The list of records, as required to be provided under said sub-rule (2) should be submitted once only. Once filed, further intimation would be required to be given only in case there is any change in the list (i.e. addition, deletion, modification in the types of records maintained) that had been furnished by the assessee. 4. A copy of the list furnished by the assessee would be sent by the jurisdictional superintendent to the audit section. 6

8 5. The audit team or any other officer authorised by the Commissioner to visit the registered premises of an assessee shall give prior intimation to the assessee along with the list of documents that he requires for the purposes of scrutiny, verification or audit. 6. That taxpayer shall provide the records as required by the authorized officer within a period of fifteen days from the date of request. In case, the taxpayer is unable to produce any of the records called for within the stipulated time, he shall intimate the same along with reasons, for non-production of records, and the officer may also further time for production of such records keeping in view the overall facts into account. 7. These amendments have been made in the service tax rules to enable the duly authorised offices to carry out audit or scrutiny as may be necessary to safeguard the interest of revenue. However, it may be ensured that only such records are demanded which are necessary for conducting such audit scrutiny or verification. Power of Audit under the Finance Act: The only provision in Chapter V of the Finance Act on scrutiny and audit of records of the assessee is under Section 72A of the Finance Act, which reads as under: 72A. (1) If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as such person ),- (i) has failed to declare or determine the value of a taxable service correctly; or (ii) has availed and utilised credit of duty or tax paid- (a) which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or (b) by means of fraud, collusion, or any wilful misstatement or suppression of facts; or (iii) has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner... Only in the specified circumstances as mentioned under Section 72A of the Finance Act, supra, the Commissioner may direct such person to get his accounts audited by a Chartered accountant or Cost accountant nominated by him, to the extent and for the period as may be specified by him. Contentions of the Department: Held: The Revenue argued that Rule 5A of the Service Tax Rules was made pursuant to the power conferred under Section 94 of the Finance Act and not pursuant to Section 72A of the Finance Act. Further, the Revenue also contended that the Rule is also justified by invoking the provisions of Service Tax Audit Manual as the basis for ordering an audit. Rule 5A(2) of the Service tax Rules is ultra vires the provisions of the Finance Act: The Hon ble Delhi High Court held that Rules only give effect to statute s provisions and intent and cannot be used to create substantive rights, obligations or liabilities that are not within the contemplation of the statute. Further, the only audit within the Statute is as mentioned under Section 72A of the Finance Act, i.e. a Special Audit, when only certain circumstances are fulfilled. The Parliament thus had a clear intention to provide for only a special audit. Accordingly, Rule 5A(2) of the Service Tax Rules cannot provide for a general audit of the 7

9 assessee and is ultra vires the rule making power conferred under Section 94(1) of the Finance Act. Further, the Hon ble Delhi High Court also held that the Service Tax Audit Manual is merely an instrument of instructions for the service tax authorities and do not have any statutory force. Therefore, Rule 5A(2) of the Service Tax Rules cannot be justified on the basis of the Service Tax Audit Manual. The Instruction regarding Audit by Department is contrary to the Statue: Further, it was held that the Instruction is also ultra vires the Finance Act since executive instructions without statutory force cannot override the law. Consequently, any notice, circular, guideline etc., contrary to statutory laws cannot be enforced since the parent statute in this regard, the Finance Act itself does not authorise a general audit of the type envisioned by the impugned Rule 5A(2) of the Service Tax Rules, and furthermore only stipulates that a Special Audit can be undertaken if the circumstances outlined in Section 72A of the Finance Act are fulfilled. The Hon ble High Delhi Court finds that the Instruction is not only an attempt to widen the scope of the law impermissibly but also is patently contrary to the Statute. The Instruction, to the extent it provides clarifications on Rule 5A(2) of the Service Tax Rules, pertaining to Service Tax audit, is quashed. Important to Note: It will not be out of place to mention that recently, the Hon ble Allahabad High Court in the case of ACL Education Centre Pvt. Ltd. & Ors. Vs. Union of India [2014-TIOL-120-HC-ALL-ST] has held that the Audit under service tax is to be conducted by Chartered Accountants/ Cost Accountants only and not by officers of the Department. Further the Hon ble Calcutta High Court in the case of SKP Securities Ltd. Vs. DD (RA-IDT) & Ors. [2013-TIOL-38- HC-KOL-ST] has held that no audit of private assessee can be undertaken by CAG. COMPANIES ACT, 2013 MCA notifies Slum Area Development as an eligible CSR activity under Schedule VII of the Companies Act, 2013 COMPANIES ACT, AMENDMENT IN SCHEDULE VII NOTIFICATION NO. GSR 568(E)[F.NO.1/18/2013-CL-V], DATED In exercise of the powers conferred by sub-section (1) of section 467 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following further amendments in Schedule VII of the said Act, namely: 1. In Schedule VII, after item (x), the following item and entry shall be inserted, namely: (xi) slum area development. Explanation. For the purposes of this item, the term slum area shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force. 2. This notification shall come into force on the date of its publication in the Official Gazette. 8

10 CENTRAL EXCISE End of Stay Petitions Finance (No.2) Bill, 2014 has received the assent of the President s on 6th. This brings to an end the practice of stay petitions. The present budget has now enforced mandatory deposit of 7.5% and 10%. Accordingly, the upper limit for disposal of appeals at CESTAT is 3 years. Simultaneously, all provisions regarding Stay have been deleted. As per section 35F, an appellant becomes entitled to contest further, at CESTAT, ONLY IF he pays the deposits. The present time-frame of 180 days days, max 365 days is now deleted. After 3 years, there will be no hardship for the appellant, because the deposit mechanism is not in relation to Stay, but as eligibility for appeal. Text of the amendments follows hereafter. Amendment of Section 35C Clause 96 of the Finance Act, 2014 In the Central Excise Act, in section 35C, in sub-section (2A), the first, second and third proviso shall be omitted. SECTION 35C Orders of Appellate Tribunal (1) The Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or annulling the decision or order appealed against or may refer the case back to the authority which passed such decision or order with such directions as the Appellate Tribunal may think fit, for a fresh adjudication or decision, as the case may be, after taking additional evidence, if necessary. (1A) The Appellate Tribunal may, if sufficient cause is shown, at any stage of hearing of an appeal, grant time, from time to time, to the parties or any of them and adjourn the hearing of the appeal for reasons to be recorded in writing : Provided that no such adjournment shall be granted more than three times to a party during hearing of the appeal.. (2) The Appellate Tribunal may, at any time within six months from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (1) and shall make such amendments if the mistake is brought to its notice by the Commissioner of Central Excise or the other party to the appeal: Provided that an amendment which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the other party, shall not be made under this sub-section, unless the Appellate Tribunal has given notice to him of its intention to do so and has allowed him a reasonable opportunity of being heard. (2A) The Appellate Tribunal shall, where it is possible to do so, hear and decide every appeal within a period of three years from the date on which such appeal is filed: DELETED DELETED Provided that where an order of stay is made in any proceeding relating to an appeal filed under sub-section (1) of section 35B, the Appellate Tribunal shall dispose of the appeal within a period of one hundred and eighty days from the date of such order: Provided further that if such appeal is not disposed of within the period specified in the first proviso, the stay order shall, on the expiry of that period, stand vacated: 9

11 DELETED Provided also that where such appeal is not disposed of within the period specified in the first proviso, the Appellate Tribunal may, on an application made in this behalf by a party and on being satisfied that the delay in disposing of the appeal is not attributable to such party, extend the period of stay to such further period, as it thinks fit, not exceeding one hundred and eighty-five days, and in case the appeal is not so disposed of within the total period of three hundred and sixty-five days from the date of order referred to in the first proviso, the stay order shall, on the expiry of the said period, stand vacated. (3)... (4)... Clause 98 of the Finance Act, 2014 In the Central Excise Act, for section 35F, the following section shall be substituted, namely: - Deposit of certain percentage of duty demanded or penalty imposed before filing appeal. 35F. The Tribunal or the Commissioner (Appeals), as the case may be, shall not entertain any appeal, - Commissioner Appeals Stage (i) under sub-section (1) of section 35, unless the appellant has deposited seven and a half per cent of the duty demanded or penalty imposed or both, in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise; First Appeal to CESTAT (ii) against the decision or order referred to in clause (a) of sub-section (1) of section 35B, unless the appellant has deposited seven and a half per cent of the duty demanded or penalty imposed or both, in pursuance of the decision or order appealed against; Second Appeal to CESTAT (iii) against the decision or order referred to in clause (b) of sub-section (1) of section 35B, unless the appellant has deposited ten per cent of the duty demanded or penalty imposed or both, in pursuance of the decision or order appealed against: Provided that the amount required to be deposited under this section shall not exceed rupees ten crores: Author: Existing Stay Petitions unaffected Provided further that the provisions of this section shall not apply to the stay applications and appeals pending before any appellate authority prior to the commencement of the Finance (No.2) Act, Explanation... Therefore, in the future, all OIOs and OIA (from Commissioner Appeals) are expected to carry a standard clause: Pay 7.5%/10% (one of these will be struck off) of the amount of Duty/Penalty (one or none of these may be struck off) along with other instructions such file appeal within 60/90 days, etc. The appellant will be entitled to refund of the deposit on successful outcome of the appeal. However, there are OIOs and OIAs passed before 6th and in respect of which appeals have not been filed, yet. These will require specific intervention by the CBEC through a trade circular. (Author: Smitesh Desai) 10

12 Nellore Branch ICAI Bhawan, NH-5, Near Toll Plaza, Venkatachalam, NELLORE (A.P.) Tel: (0861) , Website: For Advertisments & Information CA. V.M.V. Subba Rao Cell : vmvsr@rediffmail.com BOOK-POST 12