Tax Audits. Tax Audit Reports U/s. 44AB; Form 3CA, 3CB and Form 3CD. August 2011

Tax Audits Tax Audit Reports U/s. 44AB; Form 3CA, 3CB and Form 3CD August 2011

Slide 2 Objectives Participants will be able to understand: Nature and need for tax audits. Form 3CD,clauses and Annexure. Changes for the current Assessment year. Scope of work and Issues involved in tax audit

Slide 3 Tax audit Nature and Need. Tax Audits are required to be performed ONLY by a Chartered Accountant u/s 44AB of Income tax act. Tax Audits include the issuance of Tax Audit Report in Form 3CA or Form 3CB. Form 3CA is used when the accounts of the business or profession of a person have been audited under any other law Summary: Statutory closure Tax Audit report 31 March, 20XX FORM 3CA Other than 31 March, 20XX FORM 3CB

Tax audit Nature and Need. (contd ) 2011 Deloitte Haskins & Sells Slide 4 The tax audit report shall include a statement of particulars in Form 3CD The tax audit period shall be ALWAYS for the year April to next March (e.g. April 2010 to March 2011 ). The year for which audit is performed shall be called as the Previous Year & the next year shall be called as the Assessment Year (e.g. For the year ending Mar 11, 2010-11 is the Previous year, 2011-12 is the Assessment year)

Slide 5 Tax audit Nature and Need. (contd ) Nature Criteria Tax Audit required? Business Revenue > 60 lacs Yes Profession Receipts > 15 lacs Yes Special application to deemed profits and gains deemed U/s. 44AD, 44AE, 44BB or 44BBB

Slide 6 Due date Filing returns! Due date of filing of return of income for an assessee who is required to file a report on international transactions is 30th November. However, in case of other assessees is 30th September. Tax Audit to be completed by 30th September Date of signing of tax audit report to be mentioned in the return.

Slide 7 Form 3CD & their clauses Form 3CD has 32 clauses These slides contain the following: The description of the clause Work to be performed Points to be considered

General Clause 1 & 2 - Name and Address of Assessee Check in Partnership deed, Memorandum of Association, Recent signed accounts etc Clause 3 - Permanent Account Number PAN Card, PAN Allotment Letter. Ensure the name in the PAN card and form 3CD are same 2011 Deloitte Haskins & Sells Slide 8

General (contd ) Clause 4 - Status Ensure the status indicated in Form 3CD, based on the particulars as indicated in the immediately preceding previous year s Form 3CD / Income Tax Return. For Domestic Company - Sec 2(22A) of IT Act, 1961 For a Company in which public are substantially interested- Sec 2(18) of IT Act, 1961 2011 Deloitte Haskins & Sells Slide 9

General (contd ) Clause 5 Previous Year Indicate the previous year for the assessee Clause 6 Assessment Year Indicate the year in which income of the previous year is assessed 2011 Deloitte Haskins & Sells Slide 10

Firm / AOP Clause 7 In case of firm or AOP Indicate the names of the partners/ members and their profit sharing ratios Indicate the change in the partners or members and the change in the profit sharing ratio since that last of the preceeding year, particulars of such change 2011 Deloitte Haskins & Sells Slide 11

Nature of business Clause 8 Nature of business Indicate the nature of business or profession (if more than one business carried on during the year, nature of the business) If there is any change in the nature of business or profession, the particulars of such change 2011 Deloitte Haskins & Sells Slide 12

Slide 13 Books of Account Clause 9(a) Whether books of account are prescribed under section 44AA read with Rule 6F, if yes, list of books so prescribed. Clause 9(b) Books of account maintained. Books generated by Computer System Books maintained manually on the Computer Clause 9(c) List of books of account examined.

Slide 14 Books of Account (contd ) Points to consider Section 44AA requires compulsory maintenance of books of account and other documents by assessees. Rule 6F prescribes the specified books of account to include a cash book, journal, ledger, carbon copies of bills, receipts, etc. Work to be performed Verify the books, records and documents maintained to check the compliance with requirements of Section 44AA of the Income-tax Act and make a note of any deviation In the case of computerised books, make a listing of all books / main reports generated through the system.

Slide 15 Profits on presumptive basis Clause 10 Whether the profit and loss account includes any profits and gains assessable on presumptive basis, if yes, indicate the amount and relevant sections (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other relevant section

Method of Accounting Employed Clause 11(a) Method of accounting employed in the previous year. Clause 11(b) Whether there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year. 2011 Deloitte Haskins & Sells Slide 16

Method of Accounting Employed (contd..) Clause 11(c) If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss. Clause 11(d) Details of deviation, if any in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit and loss 2011 Deloitte Haskins & Sells Slide 17

Method of Accounting Employed (contd..) 2011 Deloitte Haskins & Sells Slide 18 Obtain a list of items of expense and income which are accounted for on a cash basis. Scrutinise the statement of miscellaneous income / expenses in the audit file for this purpose. Items accounted on cash basis to be reported in the form if the assessee is following mercantile system of accounting. Note here that as per section 145 an assessee can follow cash or mercantile system of accounting, but hybrid system of accounting is not allowed. If there is any change in the method of accounting, indicate the details of deviation, if any, in the method of accounting employed in the previous year from the Accounting Standards prescribed under Section 145 and the effect, if any, on the profit and loss account.

Valuation of Inventories Clause 12(a) Method of valuation of closing stock employed in the previous year. Refer the Annual report. Clause 12(b) Indicate the details of deviation, if any, from the method of valuation prescribed under section 145A and the effect thereof on the profit and loss account 2011 Deloitte Haskins & Sells Slide 19

Conversion of capital asset Clause 12A Conversion of capital asset into stockin-trade Description of the capital asset; Date of the acquisition; Cost of acquisition; Amount at which the asset is converted into stockin-trade 2011 Deloitte Haskins & Sells Slide 20

Conversion of capital asset Clause 12A Conversion of capital asset into stockin-trade Description of the capital asset; Date of the acquisition; Cost of acquisition; Amount at which the asset is converted into stockin-trade 2011 Deloitte Haskins & Sells Slide 21

Slide 22 Amounts not credited to profit & loss account Clause 13(a) Items falling within the scope of section 28 Clause 13(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 authorities concerned

Amounts not credited to profit & loss account (contd ) Clause 13(c) Escalation claims accepted during the previous year Clause 13(d) Any other item of income Clause 13(e) Capital receipt if any 2011 Deloitte Haskins & Sells Slide 23

Depreciation Particulars of depreciation allowable as per the Income-tax Act, 1961: Clause 14(a) Description of asset/block of assets. Clause 14(b) Rate of depreciation. Clause 14(c) Actual cost or written down value, as the case may be. 2011 Deloitte Haskins & Sells Slide 24

Slide 25 Depreciation (contd ) Clause 14(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) Modified Value added Tax credit claimed and allowed (ii) Change in rate of exchange of currency, (iii) Subsidy or grant or reimbursement, by whatever name called. Clause 14(e) Depreciation allowable. Clause 14(f) Written down value at the end of the year.

Slide 26 Depreciation (contd ) Work to be done Obtain from the client a depreciation schedule Ensure that the fixed assets are correctly classified as per IT Act & read with New Appendix - I to the Rules Verify the opening written down value from the previous year return Ensure that the rate of depreciation for assets which have been put to use for less than 180 days is equal to 50% of the rate otherwise applicable. Ensure that MODVAT has been excluded from the cost of the asset Verify the claim of additional depreciation claimed by the assessee ( section 32(1)(iia)

Slide 27 Depreciation (contd ) Reconciliation of additions to Fixed Assets: Consider additions as per IT depreciation schedule Aggregate additions over 180 days and less than 180 days Compare with additions as per audited financial statement Explain reasons for differences if any Reconciliation of deletions to Fixed Assets: Consider deletions as per audited financial statement Compute : Gross book value of assets sold Accumulated depreciation of assets sold (+ or -) profit or loss on sale of assets = Sale proceeds of assets sold

Slide 28 Amendment to AS 11 and treatment in tax Revision to AS 11 AS 11 has been revised and the amendment is applicable for all financial years beginning after 6 th Dec 2006.Applicable for AY 2008-09 [FY beginning 1 st April 2007] All foreign exchange fluctuation (forex) gains/ losses whether realised or unrealized to be charged of to profit & loss account Tax implications As per the Income Tax Act, any forex gain or loss with respect to capital asset purchased from country outside India to be considered as capital expenditure Realised gain or loss to be capitalized in the year of realisation Unrealized gain or loss to be deferred for capitalization in the year of actual payment

Slide 29 Treatment of forex for tax purposes Forex gain or losses on capex ( purchased from country outside India) Forex Realized? No Yes Capitalized for tax depreciation Deferred for capitalization Year of payment Yes Capitalized for tax depreciation Difference between the exchange rates Reversal of def tax asset / liability b/f u/s 43A

Slide 30 Depreciation (contd ) Particulars Amount Amount Additions made as per books 100 Add: Foreign Exchange Loss (realized) debited to P/L Account 20 20 120 Less: Foreign Exchange Gains (realized) credited to P/L Account Total additions as per Tax Depreciation Schedule 5 (5) 115

Slide 31 Amounts admissible Clause 15 Amounts admissible under section 33AB, 33ABA, 33AC, 35, 35ABB, 35AC, 35CCA, 35CCB, 35D and 35E Debited to the profit & loss account (showing the amount debited and deduction allowable under each section separately) Not debited to profit & loss account

Slide 32 Bonus or Commission etc. Clause 16(a) Any sum paid to an employee as bonus or commission for services rendered, where such sum otherwise payable to him as profits or dividends. Section 36(1)(ii) Clause 16(b) Any sum received from employee towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x) and due date for payment and the actual date of payment to the concerned authorities- Section 36(1)(va)

Slide 33 Work to be done Bonus/Commission PF Bonus or Commission etc.(contd ) Enquire about such payments to key management personnel Ensure payment to PF within 15 th (due date) of the subsequent month Point to be considered Employee contributions when not paid in time will be deemed as income.

Slide 34 Amount debited to P&L Account Amounts debited to the profit and loss account, being: Clause 17(a) Expenditure of capital nature Clause 17(b) Expenditure of personal nature (Section 37 of IT Act,1961 and Section 227 (1A) of Companies Act,1956) Clause 17(c) Expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. ( section 37(2B))

Slide 35 Amount debited to P&L Account (contd ) Clause 17(d) Expenditure incurred at clubs as entrance fees and subscription as cost for club services and facilities used Clause 17(e) Expenditure by way of penalty or fine for violation of any law for time being in force, any other penalty or fine, expenditure incurred for any purpose which is an offense or which is prohibited by law Clause 17(f) Section 40(a)(i) Payments made to Non-residents or outside India; Section 40(a)(ia) Payments of any interest, commission, brokerage, rent, royalties, fees for professional or technical services, contractors payment made to Residents; etc.

Slide 36 Amount debited to P&L Account (contd ) Clause 17(g) Interest, salary, bonus, commission or remuneration inadmissible under section 40(b) / 40(ba) and computation thereof Clause 17(h)(A) whether a certificate has been obtained from the assessee regarding payments relating to any expenditure covered under section 40A(3) that the payments were made by account payee cheques drawn on a bank or account payee bank draft, as the case may be - Yes/No Clause 17(h)(B) amount inadmissible under section 40A(3), read with rule 6DD [with break-up of inadmissible amounts]

Slide 37 Amount debited to P&L Account (contd ) Clause 17(i) Provision for payment of unapproved gratuity fund not allowable under section 40A(7) Clause 17(j) Any sum paid by the assessee as an employer not allowable under section 40A(9) Clause 17(k) Particulars of any liability of a contingent nature.

Slide 38 Amount debited to P&L Account (contd ) Clause 17(l) 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; Amendment :Insertion of Rule 8D vide Notification No. 45 dated 24th March 2011 prescribes method for determining amount of expenditure in relation to income not includible in total income Clause 17 (m): Amount inadmissible under the proviso to section 36(1)(iii)

Slide 39 Work to be done Browse general ledger Accounts for: Amount debited to P&L Account (contd ) Repairs & Maintenance (Enquire about material amounts CAPEX may be charged off) Staff Welfare (Other than contractual obligations Use judgment) Advertisement/Promotional expenses Enquire about such items with the client. Entertainment Enquire and report Miscellaneous Expenses / Interest account/rates & taxes verify delays in statutory remittances and enquire on interest on delays if any.

Slide 40 Amount debited to P&L Account (contd ) Interest, royalty, fees for technical services or other sum chargeable under the act paid to a Non resident, without deducting TDS Any interest, commission, brokerage, fees for professional services and fees for technical services payable to a resident and contractors or subcontractors on which TDS is not deducted Any sum paid on account of wealth tax needs to be removed since this expense is disallowed

Slide 41 Amount debited to P&L Account (contd ) 40A(7) Gratuity not funded/ Gratuity funded 43B. For 40 A(7) provision for gratuity shall be disallowed. Browse Provision for gratuity A/c, for actual cash outflow, report the provision component. 40A(9) Enquire about such payments/ Scrutinize Staff welfare/general Expenses/Donations.

Amount debited to P&L Account (contd ) Section14 Determine various classifications of income. Verify whether all incomes are subject to tax. Verify the existence of Tax exempt income. Ensure whether the Mgmt. has identified expenditure relatable to the above. Determine the basis of allocation & report. 36(1)(iii), verify the purpose of Loans if any, Verify the Loan agreements/arrangements. Check for Interest Payment disclosure in Financials Ensure the Loan taken for capital purposes, have been added to the cost of the asset till date of put to use. 2011 Deloitte Haskins & Sells Slide 42

MSMED - Interest Clause 17A Amount of interest inadmissible under section 23 of the MSMED Act, 2006 2011 Deloitte Haskins & Sells Slide 43

Particulars Of All Payments Made To Persons Specified In Section 40A(2)(b) Clause 18 Particulars of payments made to persons specified under section 40A(2)(b) Work to be done Peruse the Financials for Related Party Disclosures. Report transactions with assesses holding more than 20% or more Equity Capital Report payments such sitting fees, remunerations to Directors 2011 Deloitte Haskins & Sells Slide 44

Amounts deemed to be profits and gains Clause 19 Amount deemed to be profits and gains under section 33AB or 33ABA or 33AC Clause 20 Any amount of profit chargeable to tax under section 41 and computation thereof 2011 Deloitte Haskins & Sells Slide 45

Payments covered under 43B of the Act Clause 21 In respect of any sum refereed to in clause (a), (c), (d) or (e) of section 43B Pre-existing on the first day of the previous year but was not allowed in the assessment of any preceding previous year needs to be reported separately Amount incurred during the current previous year needs reported separately 2011 Deloitte Haskins & Sells Slide 46

Slide 47 Modified Value Added Tax Clause 22(a) Amount of Modified Value Added Tax credits availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of outstanding Modified Value Added Tax credits in the accounts. Clause 22(b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.

Slide 48 Modified Value Added Tax (contd ) Work to be done Verify opening balances with previous year s 3CD Review the Excise Accounts in general ledger & Excise Registers / Reconciliation. Review the total debits /total Credits in RG 23A/23C i.e. cenvat register for Excise Credits & Utilisation Verify Computations to arrive at Closing Balances. For Prior Period items verify Signed Financials /Notes/workpapers for indication of such items debited in Profit & Loss account

Slide 49 Acceptance and repayment of loans and deposits Clause 24(a) Particulars of each loan or deposit in an amount exceeding the limit specified in section 269 SS taken or accepted during the previous year Clause 24(b) Particulars of each repayment of loan or deposit in an amount exceeding the limit specified in section 269T made during the previous year

Slide 50 Details of brought forward loss or depreciation allowance Clause 25 Details of brought forward loss or depreciation allowance to be given the manner prescribed in the form Any change in the share holding of the company has 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 of the IT Act

Slide 51 Deductions admissible under Chapter VIA Clause 26 Section wise details of deductions, if any, admissible under chapter VIA

Slide 52 Taxes deducted at source Clause 27 Whether the assessee has complied with the provisions of Chapter XVII-B regarding deduction of tax at source and regarding the payment thereof to the credit of the Central Government ( Yes or no)

Slide 53 Taxes deducted at source(contd ) Clause 27 Work to be done Ensure whether the assessee has complied with the provisions of Chapter XVII-B regarding deduction of tax at source and regarding the payment thereof to the credit of the Central Government Obtain a Statement of payments on month wise basis for all items Check whether tax deduction is done for all the payments Check whether the remittance of tax is done before the due date

Slide 54 Taxes deducted at source (contd ) If no deduction has been made or remittance is beyond the date disclosure to be made Get the details separately for each head indicating the following: Tax required to be deducted but not deducted Tax required to be deducted but short deducted Tax deducted but not paid within financial year / due date for year end accruals Cross verify the disclosure under this column with disclosure under section 40(a)(i) and (ia) Verify the Statement with entries in the relevant ledger accounts, Bank Books, original TDS challans for payment and Return filed with the Government. Date of receipt by the Receiving Banker and not the cheque date should be considered as date of payment. Ensure the time limits prescribed under Rule 30 of the Income-tax rules have been complied.

Slide 55 Taxes deducted at source (contd ) 194C - Contract 194I Rent 194J Professional / Technical fees Increase in threshold limit from Rs. 20,000 to Rs. 30,000 with effect from July 1, 2010 Increase in the threshold limit for aggregate payments from Rs 50, 000 to Rs 75,000 with effect from July 1, 2010 Increase in the threshold limit for aggregate payments from Rs 1,20, 000 to Rs 1,80,000 with effect from July 1, 2010 Increase in the threshold limit for payment from Rs 20, 000 to Rs 30,000 with effect from July 1, 2010

Slide 56 Quantitative details Clause 28 & work to be performed In the case of a trading concern, give quantitative details of principal items of goods traded tracing to the audited financial statements: opening stock purchases during the previous year sales during the previous year closing stock shortage/excess, if any

Quantitative details (contd ) In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by- products tracing to the audited financial statements: opening stock; purchases during the previous year; consumption during the previous year; sales during the previous year closing stock; yield of finished products: percentage of yield: shortage/excess 2011 Deloitte Haskins & Sells Slide 57

Slide 58 Corporate Dividend Tax Clause 29 & work to be performed In the case of a domestic company, verify the details of tax on distributed profits under section 115-O in the following manner: total amount of distributed profits total tax paid thereon dates of payment with amounts

Slide 59 Cost Audit Clause 30 & work to be performed Ensure whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)]. Obtain a representation from the client mentioning whether cost audit under Section 233B of the Companies Act, 1956 for the year under audit was prescribed. Obtain a copy of the cost audit report. If cost audit is not complete by the time of the tax audit, this should be stated in Form 3CD.

Slide 60 Excise Audit Clause 31 & work to be performed Ensure whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit. Obtain a representation from the client mentioning whether excise audit was carried out for the year under audit. Obtain a copy of the excise audit report if excise audit was conducted. If excise audit is not complete by the time of the tax audit, this should be stated in Form 3CD.

Slide 61 Accounting Ratios Clause 32 & work to be performed Obtain the audited trial balance or the audited profit and loss account and compute the following ratios: Gross profit / Turnover Net profit / Turnover Stock-in-trade / Turnover Material consumed/ Finished goods produced

Slide 62 Annexures to Form 3CD General The annexures to Form 3CD must be filled up failing which the Form will be considered as incomplete for the purposes of filing. The annexures also have to be signed by the auditor.

Annexure I Annexure 1 has two parts Part A & Part B Part A needs to specify factors such as the name of the assessee, PAN number, status as also the relevant code pertaining to the main area of the business or professional activity Part B needs to provide some parameters of the business activity. To name a few - Reserves and Surplus/Profit and Loss Account, Secured loans, Unsecured loans, Current liabilities and provisions, Total of Balance Sheet, Gross turnover/gross receipts, Gross profit, Commission received etc. These parameters can be filled from the latest financial statements i.e. balance sheet and the Profit & Loss Account 2011 Deloitte Haskins & Sells Slide 63

Slide 64 Annexure II This annexure contains a table in which details of the value of fringe benefits in terms of section 115WC read with section 115WB for the assessment year. However, the same is not applicable from AY 2010-11

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