HOW TO CONDUCT TAX AUDIT Friday, 7 August, 2015 · HOW TO CONDUCT TAX AUDIT Friday, 7 th August, 2015 PRESENTEDBY: CA. (ADV.) NIMESH K. CHOTHANI B.COM,FCA,CS, LL.B.,DISA. INTRODUCTION

HOW TO CONDUCT TAX AUDITHOW TO CONDUCT TAX AUDITHOW TO CONDUCT TAX AUDITHOW TO CONDUCT TAX AUDIT

Friday, 7th August, 2015

PRESENTED BY:CA. (ADV.) NIMESH K. CHOTHANIB.COM,FCA,CS, LL.B.,DISA

INTRODUCTION

� Introduced w.e.f. 01.04.1985, AY 1985-86

� Purpose

� Proper maintenance of Books of Account & other

records

� Facilitate the administration of tax laws.

BNC & Associates, Chartered Accountants2

� Facilitate the administration of tax laws.

� Discourage tax avoidance and tax evasion &

� Prevent fraudulent tax practices

TAX AUDIT UNDER SECTION 44AB

Different Tax Payers

A Person Carrying on Profession

A Person Carrying on Business A Person covered U/sec.

44AD,44AE,44BB or 44BBB


If his Gross Receipts exceed `25 Lakhs in any

Previous Year.If his total Sales Turnover or Gross Receipts, as the case may be in business exceed or exceeds 1

Crore rupees in any Previous Year

44AD,44AE,44BB or 44BBB

If such person claims that the profits and gains from the business is lower than the compute under above

sections irrespective of his turnover.

TURNOVER FOR SECTION 44AB� Whether Turnover includes only sales or it also includes purchases

� Turnover of Consignment Agents

� Clearing & Forwarding Agents

� Discounts

� Trade Discount


� Cash Discount

� Festival Discount

� Turnover Discount

� Goods Returned

� Out of current year sales

� Out of earlier year sales

TURNOVER FOR SECTION 44AB� Scrap & By Products

� Taxes whether to be included – Excise /VAT etc.

� Gross Receipts –Whether Receipt in kind included?

� Turnover of Proprietor Firm

� Share of Profit in Partnership Firm


� Share of Profit in Partnership Firm

� Speculative Transactions

� Futures & Options

TAX AUDIT REPORT U/S 44AB� Form 3CA & 3CB

� Form 3CD

� Annexure – I

� Annexure - II (Not Applicable since discontinuation of Fringe Benefit Tax


Benefit Tax

THE PROVISIONS OF SEC. 44AB ARE

APPLICABLE TO

� Every person carrying on a business if his total sales, turnover or grossreceipts, in business exceed Rs. One Crore;

� Every person carrying on profession shall if his gross receipts inprofession exceed Rs.25 lakhs;


� Every person who claims that his income is lower than the amountdeemed to be profits or gains of such person under section 44AE orsection 44BB or section 44BBB;

� Every person who claims that his income is lower than the amountdeemed to profits and gains of such person under section 44AD andhis income exceeds the maximum amount not chargeable to tax.

EVERY PERSON TO WHOM THE PROVISIONS

OF S. 44AB APPLY IS OBLIGED TO

� get his accounts audited by an accountant before the specifieddate; and

� a furnish by that date the report of such audit in the prescribedform duly signed and verified by such accountant and setting forthsuch particulars as may be prescribed


� Since A.Y. 2013-14, tax audit report is required to be filedelectronically

� The report of the audit is to be in Form 3CA/3CB and theparticulars required to be furnished are prescribed in Form No.3CD

� FromAY 2014-15, Form No. 3CD is revised.

OBJECTIVE� The Speech of the Finance Minister while presenting the UnionBudget for 1984-85 and the Memorandum explaining theprovisions of the Finance Bill, 1984 state the objective ofintroduction ofTaxAudit as under -


� "Compulsory audit is intended to ensure proper maintenance ofbooks of account and other records, in order to reflect the trueincome of the tax payer and to facilitate the administration of taxlaws by a proper presentation of the accounts before the taxauthorities. This would also save time of the AO considerably incarrying out the verification."

Why Only Chartered Accountants Are

Eligible To Conduct Tax Audit U/S. 44AB

� Following observations of SC. in T. D. Venkata Rao v. UOI (237 ITR315)(SC) are worth noting-

� Chartered Accountants, by reason of their training have special aptitude in the matter of


� Chartered Accountants, by reason of their training have special aptitude in the matter ofaudits. It is reasonable that they, who form a class by themselves, should be required to auditthe accounts of businesses whose turnover exceeds Rs.40 lakhs and professionals whose grossreceipts exceeds Rs. 10 lakhs in any given year. There is no material on record and indeed inour view, there cannot be that an income-tax practitioner has the same expertise as charteredaccountants in the matter of accounts. For the same reason the challenge under article 19 mustfail, and it must be pointed out that these income-tax practitioners are still entitled to beauthorized representatives of the assessee.

RULE 6GRule 6G(1) provides that the report of audit of accounts of aperson required to be furnished uls 44AB shall be in FormNo.-

� 3CA: In case of a person who carries on Business orProfession and whose accounts of the business are auditedunder any other law


under any other law

� 3CB: In case of person who carries on Business orprofession but who is not required by or under any other lawto get his accounts audited.

As per Rule 6G(2), particulars which are required to be

furnished uls 44AB shall be in Form 3CD

DUE DATES FOR TAX AUDIT UNDER

44AB

� As per provision of section 139 (1) every assessee who isrequired to gets his accounts audited in terms of Section44AB, he has to gets his accounts audited by a charteredaccountant before the "specified date" (i.e. 30thSeptember) and furnish by that date the report of such


September) and furnish by that date the report of suchaudit.

� Note: If Transfer pricing audit than the due date forsubmission of both forms i.e. Form 3CD and Form3CEB will be 30th November.

ELIGIBILITYThe Explanation u/s. 288 (2) is substituted to provide that theexpression “accountant” means a chartered accountant as defined inclause (b) of Sec. 2 (1) of the Chartered Accountants Act, 1949 whoholds a valid certificate of practice u/s. 6 (1) of that Act. Further itis provided that the accountant shall not include the followingpersons (except for the purposes of representing an assessee u/s.


persons (except for the purposes of representing an assessee u/s.2(1)):-

In case of an assessee, being a company, the person who is noteligible for appointment as an auditor of the said company inaccordance with the provisions of Sec. 141 (3) of the CompaniesAct, 2013.

ELIGIBILITYIn any other case,� (i) the assessee himself or in case of the assessee, being a firm orassociation of persons or Hindu undivided family, any partner of thefirm, or member of the association or the family;

� (ii) in case of the assessee, being a trust or institution, any personsreferred to in clauses (a),(b), (c) and (cc) of sub-section (3) of section13;


13;� (iii) in case of a person other than persons referred to in sub-clause (i)and (ii), the person who is competent to verify the u/s. 139 inaccordance with the provisions of the section 140; (iv) any relative of anyof the persons referred to in sub-clauses (i),(ii) and (iii); (v) an officer oremployee of the assessee;

� (vi) an individual who is a partner, or who is in the employment, of anofficer or employee of the assessee;

ELIGIBILITY� (vii) an individual who, or his relative or partner is holding anysecurity of or interest in the assessee.� It is also provided that the relative may hold security or interest in theassessee of the face value not exceeding one hundred thousandrupees;

� an individual who, or his relative or partner is indebted to theassessee. It is also provided that the relative may be indebted to the


assessee. It is also provided that the relative may be indebted to theassessee for an amount not exceeding one hundred thousand rupees;

� an individual who, or his relative or partner has given a guarantee orprovided any security in connection with the indebtedness of anythird person to the assessee.

� It is also provided that the relative may give guarantee or provide anysecurity in connection with the indebtedness of any third person tothe assessee for an amount not exceeding one hundred thousandrupees;

ELIGIBILITY� (viii) a person who, whether directly or indirectly, hasbusiness relationship with the assessee of such nature as maybe prescribed;

� (ix) a person who has been convicted by a court of an offenceinvolving fraud and a period of ten years has not elapsed from


involving fraud and a period of ten years has not elapsed fromthe date of such conviction.

� Sec 288 (4) is now amended to provide that a person who hasbeen convicted by a court of an offence involving fraud shallnot be qualified to represent an assessee u/s. 288(1)for aperiod of ten years from the date of conviction.

APPOINTMENT & REMOVALAppointment:

� He is appointed by Assessee for Financial year wise.

� The tax auditor should obtained the letter of appointment for conducting the audit as mentioned in sec. 44AB.

Removal:


Removal:

� There is no specific procedure for removal of a tax auditor appointed under sec. 44AB.

� Note: Audit done under presumption scheme is not covered under the aforementioned limit of 60 Audits.

TAX AUDIT PROCEDURES� Primary responsibility of assessee to prepare relevant

information

� Tax Auditor to verify compliance� Tax Auditor to-

� Use professional skill & expertise


Use professional skill & expertise� Apply Generally Accepted Auditing Procedures as applicable for other audits

� Apply techniques of reasonable test audit checks & compliance tests depending upon internal controls of assessee

� Follow principles of ‘Materiality’, ‘Prudence’ & ‘Substance Over Form’

TAX AUDIT PROCEDURES� Refer to following publications issued by ICAI-

� Standards onAudit (SAs)

� Guidance Notes (GNs) on Audit Reports & Certificates forSpecial Purposes

� GN on Tax Audit , Supplementary GN on Tax Audit, GN on


� GN on Tax Audit , Supplementary GN on Tax Audit, GN onsection 145A consideringVAT & GN on section 14A

� Issues onTaxAudit

� SA 700 - Auditor’s report on financial statements

� Statement on qualifications in Auditor’s report

PENALTY FOR FAILURE TO GET

ACCOUNTS AUDITED

� If the assessee fails to get his accounts audited u/s44AB in respect of any previous year or yearsrelevant to an assessment year,

� A flat penalty u/s 271B shall be attracted which isequal to:


equal to:

½% of the total Sales, turnover or gross receipts orSum of ` 1,50,000 (Whichever is less)

� Sec 273B provides that no penalty shall be imposed forany failure referred to in Sec 271B if assessee provesthat there was reasonable cause for such failure.

PENALTY U/S 277 A� Falsification of books of accounts or documents etc: The Finance(No.2) Act, 2004 has inserted section 277 A w.e.f1-10-2004.Accordingly any" person shall be punishable with rigorousimprisonment, which may extend form 3 months to 2 years andshall be liable to fine if the following conditions are satisfied.� He willfully and with intent to .enable any other person(assessee) to


� He willfully and with intent to .enable any other person(assessee) toevade any tax or interest or penalty chargeable and imposable underthe IncomeTaxAct.

� He makes or causes to be made, any entry or statement in any booksor other documents relevant for any proceeding under the Act whichis false.

� He knows it to be false or dose not believe it to be true.

Contents of working papersWorking papers should state-

� Client’s name.

� Type of engagement.

� Nature of clients business.

Degree of reliance on internal control.


� Degree of reliance on internal control.

� Sources of information.

� Conclusion reached.

� Supervision and review of work perd\formed by assistant.

Classification working papersWorking paper files may be classifies as-

(a) Permanent audit files.

(b) Current audit files.

(a) Permanent Audit Files- generally include-

� Memorandum and Articles of Association of the company.


Memorandum and Articles of Association of the company.

� Bye-Laws or regulations in case of society or co-operative society.

� Record of study and evaluation of internal control

� Copies of audited financial statements of previous years

� Record of communication with the retiring auditor.

� Notes regarding significant accounting policies.

� Important observations of earlier years

Classification working papers(b) Current file- Include the following-� Correspondence relating to acceptance of annualappointments.

� Minutes of meetings of board of directors or executivecommittee.


� Audit programme.� Evidence of work performed by assistant and reviewed byseniors.

� Communication with client regarding audit matter.� Letter of representation and confirmation from clients.� Conclusion reached about significant aspects of audit.

FORM FORM FORM FORM 3CD3CD3CD3CD

PART PART PART PART A A A A

�Clause (1 to 8)1. Name of the assessee2. Address3. Permanent Account Number4. Whether the assessee is liable to pay tax like excise duty, service

tax, sales tax, customs duty etc. If yes please furnish the


tax, sales tax, customs duty etc. If yes please furnish theregistration number or any other identification number allottedfor the same.

5. Status6. Previous year ended7. Assessment year8. Indicate the relevant clause of section 44AB under which the

audit has been conducted.

DocumentationDocumentationDocumentationDocumentation� These documents are part of permanent audit files

� For Companies : Certificate of Incorporation, MOA, AOA � For Partnership Firm / LL.P. : Partnership Deed in case of LL.P. and Partnership Firm,

� For Proprietary Concern: Shop & Establishment Certificate or VAT Registration Certificate or Service Tax, Excise Certificate

� In any other Concern: MOA, AOA, Trust Deed or any other


� In any other Concern: MOA, AOA, Trust Deed or any other supporting documents

� For Address: Rent Agreement, Shop & Establishment Certificate or VAT Registration Certificate or Service Tax, Excise Certificate

� Certified Copy of PAN Card� For Applicability of Indirect Taxes : Nature of Business, List of Central, State and Local Tax Laws applicable to the Business. Expert opinion if any.

PART BPART BPART BPART B

CLAUSE 9CLAUSE 9CLAUSE 9CLAUSE 9

9. (a) If firm or Association of Persons, indicate names ofpartners/members and their profit sharing ratios.

(b) If there is any change in the partners or members or intheir profit sharing ratio since the last date of the precedingyear, the particulars of such change.


year, the particulars of such change.

Check the updated Partnership Deed and verify whetherthere is any change in the Partnership Deed during the yearwith respect to previous one available in Permanent File.

CLAUSE 10(a) Nature of business or profession.

(b) If there is any material change in the nature of business or profession, the particulars of such change.

� To give broad nature of each business/ Profession

� To give principal line of each business/profession


� To give principal line of each business/profession� Main sector to be given with sub-sector

� Ex. Manufacturing- Aromatic chemicals

� E-filing portal requires details as: Sector, Sub-sector, code

� Mentioned of any material change like:

� New business started or Some business discontinued

� Any Practice, activities that constitute > 10% are given

BUSINESS VS. PROFESSION� Section 2(13) : “Business includes any trade, commerce ormanufacture or any adventure or concern in the nature oftrade, commerce or manufacture”

� Section 2(36) : “Profession includes vocation”� CIT Vs. Manmohan Das (1966) 59 ITR 699 (SC) : Professioninvolves;


involves;� Intellectual skill or� Manual skill controlled by intellectual skill� Different than an operation which is substantially theproduction or sale or arrangement for production or sale ofcommodities

NOTIFIED PROFESSIONS� Followings have been notified to be profession

� Accountancy� Architectural� Company Secretary� EngineeringFilm Artists/Actors, Cameraman, Director, Singer,


� Film Artists/Actors, Cameraman, Director, Singer,� Story-writer etc.� Interior Decoration� Legal� Medical� Technical Consultancy

HELD TO BE BUSINESS� Followings have been held to be Business by decision ofcourts :� Advertising agent

� Clearing, forwarding and shipping agents [ see CIT Vs. JeevanlalLallubhai & Co. 206-ITR- 548(Bom.)]


Lallubhai & Co. 206-ITR- 548(Bom.)]

� Couriers

� InsuranceAgent

� Stock and share broking and dealing in shares and securities [see CITVs. Lallubhai Nagardas & Sons 204-ITR-93 (Bom.)

� Travel agent

CLAUSE 1111. (a) Whether books of account are prescribed under section

44AA, if yes, list of books so prescribed.

(b) List of Books of account maintained and the address atwhich the books of accounts are kept.

(In case books of account are maintained in a computer


(In case books of account are maintained in a computersystem, mention the books of account generated by suchcomputer system.)

(c) List of books of account and nature of relevantdocuments examined.

CLAUSE – 11 – BOOKS OF ACCOUNTS

� Clause requires the address at which the books of accountsare kept

� If books are maintained at more than one location addressesof each location and list of books maintained there is to begiven


given

� Issue : Multiple location accounting software like SAP, ERPetc. – How to report?

� Non-maintenance of stock register –What to report

ANALYSIS OF CLAUSE 11

Sec 44AA

Specified ProfessionLegal, Medical, Engineering, accountancy,

technical consultancy

Non Specified Profession or Business Income Exceed Rs.1.20 lacs or Turnover Rs.10 Lacs in preceding one of the

3 years


Limit Rs 1,50,000 Receipts

Exceeds

Prescribes Books Rule 6F Cash Book, Journal, Ledger Additional for Medical-Daily cash register and Inventory

Does not Exceeds

Books to substantiate the business transactions

ExceedsDoes not Exceeds

No books are mandatory

Documentation of Books of Account

� Management Representation Letter

� Books of Account verified by theAuditTeam

� Place where the Books of Account are maintain and verifiedby the AuditTeam

� List of Other Documents examined by the AuditTeam.


� List of Other Documents examined by the AuditTeam.

CLAUSE 12Whether the profit and loss account includes any profits andgains assessable on presumptive basis, if yes, indicate theamount and the relevant sections(44AD, 44AE, 44AF, 44B,44BB, 44BBA, 44BBB,Chapter XII-G, First Schedule or anyother relevant section).


other relevant section).

Examine the nature of business and if it includes specified in theabove section whether it included in Profit and Loss Accountsubject to audit.

RELEVANT SECTIONS OF CLAUSE 12S.No. Section Business Covered

1 44AD Special Provision for Comp P&L of business on presumptive basis

2 44AE Plying, hiring or leasing goods carriages.

3 44AF Retail trade- upto 2010-11 ( then sec 44 AD applicable)

4 44B Shipping business in case of non-residents.

5 44BB Providing service or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils

6 44BBA Operation of aircraft in case of non-residents


6 44BBA Operation of aircraft in case of non-residents

7 44BBB Civil construction etc. in certain turnkey power project offoreign companies.

8 Chapter XII-G Provisions Relating to Income of Shipping Companies

9 First Schedule Insurance Business

10 Any other relevant section

This refers to the sections not listed above presumption basis and will include any other section that may be enacted in future.

CLAUSE 13a) Method of accounting employed in the previous year

b) Whether there has been any change in the method ofaccounting employed vis-à-vis the method employed in theimmediately preceding previous year.

c) If answer to (b) above is in the affirmative, give details of


c) If answer to (b) above is in the affirmative, give details ofsuch change, and the effect thereof on the profit or loss.

d) Details of deviation, if any, in the method of accountingemployed in the previous year from accounting standardsprescribed under section 145 and the effect thereof on theprofit or loss.

CLAUSE – 13 – METHOD OF

ACCOUNTING ETC.

� Change in method of accounting is to be reported� What if the earlier year’s accounts were not under audit –How would CA certify that there is no change in the methodof accounting.

� Details of deviation in method employed from accountingstandards prescribed u/s. 145 & its effect on profit / loss is


standards prescribed u/s. 145 & its effect on profit / loss isto be reported� TwoAccounting Standards prescribed till now� Others have not yet been in operation.� Section 145 amended– Now it is Income Disclosure andComputation Standards

CLAUSE 14a) Method of valuation of closing stock employed in the

previous year.

b) Details of deviation, if any, from the method of valuationprescribed under section 145A, and the effect thereof onthe profit or loss.


the profit or loss.

Documentation:

Current year closing stock valuation sheet (Certified by theManagement) and manner of valuation of Closing Stock

Observation of the audit team regarding change in valuationmethod with compare to previous year.

CLAUSE – 14 – VALUATION OF

INVENTORY – SECTION 145A

� Method of valuation is to be certified - Effect of deviation fromSection 145A is to be reported –Increase / Decrease etc.

� What if closing inventory is valued at market price – Whethertaxes to be included for valuation ?


� Modvat Credit on Closing stock of Raw Material –Whether to be included when assessee follows Net Method

� CIT Vs. Indo Nippon Chemical Co. Ltd. (2000) 245ITR 384 (Bom) approved in 261 ITR 275 (SC)

� CIT Vs. Shri Ram Honda Power Equipment Ltd. (2013) 352 ITR481(SC)

CLAUSE 15� Give the following particulars of the 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


� Amount at which the asset is converted into stock-in-trade

Documentation:

Details of capital assets converted into stock-in-trade and evidencefor conversion viz. Board resolution in case of company.Documentary proof regarding date of acquisition, cost ofacquisition, if purchase date before 1-4-1981 then valuation reportas of that date.

CLAUSE – 15 – CONVERSION OF CURRENT

ASSET INTO STOCK IN TRADE

� Firm requires to mention the cost of acquisition of CapitalAsset

� Section 55(2)(b)� FMV as on 1-4-1981

� Cost of previous owner – section 49


� Cost of previous owner – section 49

� FMV at the time of distribution of Current Assets by limitedcompany

� Consolidation of shares or split up etc.

CLAUSE 16� Amounts not credited to the profit and loss account, being:

� the items falling within the scope of section 28;

� the Proforma credits, drawbacks, refund of duty of customs orexcise or service tax, or refunds of sales tax, where suchcredits, drawbacks or refunds are admitted as due by the


credits, drawbacks or refunds are admitted as due by theauthorities concerned.

� escalation claims accepted during the previous year;

� any other item of income;

� capital receipt, if any.

CLAUSE – 16 – AMOUNTS NOT

CREDITED TO PROFIT & LOSS A/C.

� Company / Firm eligible to Free Vacation due to achievingtarget sales – utilised by Director / Partner – Section 28

� Escalation claims accepted – what if Cash system is followed?

� Whether LIC Maturity etc. to be reported as Capital


� Whether LIC Maturity etc. to be reported as CapitalReceipts

� Exempt incomes credited directly to capital account ofproprietor

CLAUSE – 16 – AMOUNTS NOT

CREDITED TO PROFIT & LOSS A/C.� Details relating to the Performa credits, drawbacks, refund of duty of customs or excise or service tax, or refunds of sales tax, where such credits, drawbacks or refunds are applied during the year and pending as on the balance sheet date.

� Details of escalation claims made during the previous year and pending as of the balance sheet date;


pending as of the balance sheet date;

� any other item of income/ receipt directly credited to Capital Account or Reserve Account;

� capital receipt directly credited to Capital Account or Reserve Account.

� Reason for the such amount not required to be credit to Profit and Loss Account.

CLAUSE 17� Where any land or building or both is transferred during the previous year for a consideration less than value adopted or assessable by any authority of a State Government referred to in section 43CA or 50C,please furnish:


Details of Property

Consideration received or accrued

Value adopted or assessed or assessable

CLAUSE 17 – SECTION 43CA OR 50C

� How to report in case of Percentage completion method?

� Reference to valuation officer

� Also extends to section 50C – Scope of section 44AB extended to capital gain transactions.

� Documentation


� Documentation� Stamp Duty valuation as per the Agreement registered with the Registration Authority

� If Document is not registered, the stamp duty assessable value certified by the expert or management (Reasonable test check required)

Clause1818. 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, in the following form :

a. Description of asset/ block of assets.

b. Rate of depreciation.

c. Actual cost or written down value, as the case may be.

d. Additions/Deductions during the year with dates; in case of any addition of an asset, date of put to use, including adjustment on account of:


(i) Central Value Added Tax credit 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

CLAUSE – 18 – DEPRECIATION� Mistakes in classification in prior years

� Is it mandatory to claim depreciation – Is it mandatory toclaim at rates prescribed. – Lesser rate whether permissible

� Car Registered in Partner’s name – Reflected in Firm’sBalance Sheet –What about Depreciation


Balance Sheet –What about Depreciation

� Documentation:

� Proof of assets purchased & revenue expenditure capitalized SA-500, A.S 10, AS-11 & A.S 16, Sec 36(1)(iii) & 43A of I.T Act

� Depreciation calculation statement according to Section 32 Income Tax Act.

Clause 19� Amounts admissible under sections :

32AC, 33AB, 33ABA, 35(1)(i), 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(1)(iv), 35(2AA), 35(2AB), 35ABB, 35AC, 35AD, 35CCA, 35CCB, 35CCC, 35CCD, 35D, 35DD, 35DDA, 35E.


Section Amount debited to Profit and loss A/c

Amountadmissible as per the provisions of the Act and also fulfills the conditions if any specified under the relevant provisions of the Act or rules or any other guidelines,etc issued in this behalf

Brief Summary of Relevant Section of

ClauseS No. Section Details

1 32AC Investment in New Plant and Machinery exceeding Rs 100Crore

2 33AB Tea Development

3 33ABA Site Restoration Fund

4 33AC Reserve for Shipping. (N.A. w.e.f. 1-4-2002)

5 35 Expenditure on Scientific Research


5 35 Expenditure on Scientific Research

6 35ABB Expenditure on license to operate telecommunication services.

7 35AC Eligible Projects/Schemes

8 35AD Deduction in respect of expenditure on Specified Business

Brief Summary of Relevant Section of

Clause (Cont…)

S No. Section Details

9 35CCA Rural development program

10 35CCB Conservation of Natural resources

11 35CCC Expenditure on Agricultural Extension Project

12 35CCD Expenditure on Skill Development Project


12 35CCD Expenditure on Skill Development Project

13 35D Amortization of Preliminary Expenses

14 35DD Amortization of Expenditure in case of amalgamationor demerger

15 35DDA Amortization of expenditure incurred under VRS.

16 35E Expenditure on prospecting certain minerals

CLAUSE 2020. 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. [Section36(1)(ii)].

Details of Contribution received from employees for various funds to section36(1 )(va):


S.No Nature of Fund

Sum received from employees

Due Datefor payment

Theactual amountpaid

The actual date of payment to the concerned authorities

CLAUSE – 20 – SECTION 36(1)(VA)� Section 2(24)(x) – Employees’ contribution is Income

� Section 36(1)(va) – Deduction allowable if paid within Due date under relevant law

� Due Date is which date - Difficulties on Late Payment

� Days of Grace under the relevant Law ?

� Decisions

� ITO Vs. LKP Securities Ltd. 36 CCH 93 (Mum.) - Employee’s contribution is not


� ITO Vs. LKP Securities Ltd. 36 CCH 93 (Mum.) - Employee’s contribution is not covered by section 43B - Due date as per the relevant law – Days of Grace allowed

� CIT Vs. Sabari Enterprises 298 ITR 141 (Kar)

� CIT Vs. Vijay Shree Ltd. – Cal HC- ITA No. 245/2011 – itatonline.org

� CIT Vs. Mark Auto Industries Ltd. 358 ITR 43 (P & H)

� CIT Vs. Hindustan Organics Chemicals Ltd. (Bom HC) – ITA No. 399 of 2012 dated 22-6-2014 – itatonline.org

CLAUSE 21 (a)

21. (a) Amounts debited to the profit and loss account, being:

� Expenditure of capital nature;� Expenditure of personal nature;� Expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party;


pamphlet or the like, published by a political party;� Expenditure incurred at clubs being cost for club services and facilities used;

� Expenditure by way of penalty or fine for violation of any law for the time being in force;

� Expenditure by way of any other penalty or fine;� Expenditure incurred for any purpose which is an offence or which is prohibited by law;

CLAUSE 21(b)21. (b) Amounts inadmissible under section

40(a):-�As payments to non-resident referred to in sub clause(i)� Details of payment on which tax is not deducted:


� Details of payment on which tax is not deducted:� Date of Payment� Amount of Payment� Nature of Payment� Name and address of the payee

CLAUSE 21(b)

� Details of payment on which tax has been deducted but has not been paid during the previous year or in the subsequent year before the expiry of time prescribed under section 200(1)


200(1)� Date of Payment� Amount of Payment� Nature of Payment� Name and address of the payee� Amount of tax deducted

CLAUSE 21(b)

� As payment referred to in sub clause(ia);(Resident)

�Details of Payment on which tax is not deducted:


deducted:� Date of Payment

� Amount of Payment

� Nature of Payment

� Name and address of the payee

CLAUSE 21(b)

�Details of payment on which tax has been deducted but has not been paid on or before the due date specified in sub-section(1) of section 139.


139.� Date of Payment

� Amount of Payment

� Nature of Payment

� Name and address of the payer

� Amount of tax deducted

� Amount out of (v) deposited, if any

CLAUSE 21 CONT…� Under sub-clause(ic)[wherever applicable]-FBT� Under sub clause(iia)-Wealth Tax Paid� Under sub-clause(iib)-Royalty to State Govt. undertaking by State Govt.

� Under sub-clause(iii)-Salary Paid outside India or to a non-resident.


resident.� Date of Payment� Amount of Payment� Name and address of the payee

� Under sub-clause(iv)-Payment from the fund� Under sub-clause(v)-Any Tax Paid by employer.

CLAUSE 21 (c)21. (c) Amounts debited to profit and loss account being, interest,

salary, bonus, commission or remuneration inadmissible undersection 40(b)/40(ba) and computation thereof

� It is required to check whether interest, salary, bonus,commission or remuneration is provided as per PartnershipDeed?


Deed?

� It is required to check whether interest, salary, bonus,commission or remuneration is provided as per Income TaxAct, 1961?

� If not, then provide computation thereof and need to defineinadmissible amount under section 40(b) / 40(ba)

CLAUSE 21 (d)� (d)Disallowance/deemed income under section 40A(3):

� On the basis of the examination of books of account and otherrelevant documents/evidence, whether the payment referred to insection 40A(3A) read with rule 6DD were made by account payeecheque drawn on a bank or account payee bank draft if not, pleasefurnish the details of amount deemed to be the profits and gains of


furnish the details of amount deemed to be the profits and gains ofbusiness or profession under section 40A(3A):

S.No Date of payment

Nature of Payment

Amount Name and PAN of the payee(if available)

CLAUSE 21 (e) to (i)e) Provision for payment of gratuity not allowable under

section 40A(7);

f) Any sum paid by the assessee as an employer not allowable under section 40A(9);

g) Particulars of any liability of a contingent nature.


g) Particulars of any liability of a contingent nature.

h) Amount of deduction inadmissible in terms of section 14A in respect of expenditure incurred in relation to income which does not form part of the total income

i) Amount inadmissible under the proviso to section 36(1)(iii).

CLAUSE 22

� Amount of interest inadmissible under section 23 of the Micro,Small and Medium Enterprises DevelopmentAct, 2006.

� If no provision is made for interest, there could be nodisallowance. However it may affect the true and fair view of


disallowance. However it may affect the true and fair view ofaccounts, in this case, a suitable qualification may be required.

� It should be verified whether the assessee maintains separaterecords for the purpose of identification of creditors as theMicro, Small and Medium Enterprises under the said act.

Thank YouThank You
