Purpose of Tax Audit - bangaloreicai.org · 8/23/2011 1 issues in tax audit u/s. 44ab and u/s. 44ad and clause to clause analysis of form no 3cd ca naveen khariwal g. b.com,fca 9880683725

8/23/2011

1

ISSUES IN TAX AUDIT U/S. 44AB AND U/S. 44AD

AND CLAUSE TO CLAUSE ANALYSIS OF FORM

NO 3CD

CA NAVEEN KHARIWAL G.

B.COM,FCA

9880683725

Finance Act, 1984

Hon. Finance Minister:

“Tax Audit intended to ensure that the books

of account and other records are properly

maintained and faithfully reflect the true

income of the taxpayer”

8/23/2011

2

Circular No. 387 dt 06-07-1984

A proper audit for tax purposes would ensure:

That books of accounts and other records are

properly maintained

That they faithfully reflect the income of the taxpayer

Claims of deductions are correctly made by him

Circular No. 387 dt 06-07-1984

Such audit would also help in checking fraudulent

practices

Facilitate administration of tax laws by proper presentation

of accounts

Considerable saving of time of the AO in carrying out

routine verifications

Checking correctness of totals and verifying whether

purchase and sales are properly vouched

8/23/2011

3

[Audit of accounts of certain persons carrying on business or

profession.

44AB. Every person,—

(a) carrying on business shall, if his total sales, turnover or gross

receipts, as the case may be, in business exceed or exceeds 6

[sixty lakh rupees] in any previous year; or

(b) carrying on profession shall, if his gross receipts in profession

exceed 8 [fifteen lakh rupees] in any [previous year; or

(c) carrying on the business shall, if the profits and gains from the

business are deemed to be the profits and gains of such person

under [section 44AE ] [or section 44BB or section 44BBB], as

the case may be, and he has claimed his income to be lower than

the profits or gains so deemed to be the profits and gains of his

business, as the case may be, in any [previous year; or]]

(d) carrying on the business shall, if the profits and gains from the

business are deemed to be the profits and gains of such person

under section 44AD and he has claimed such income to be lower

than the profits and gains so deemed to be the profits and gains

of his business and his income exceeds the maximum amount

which is not chargeable to income-tax in any previous year,]

http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=ftn6section44ab.htm&tar=middle

http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=ftn8section44ab.htm&tar=middle

http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section44ae.htm&tar=top




http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section44bb.htm&tar=top




http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section44bbb.htm&tar=top




http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section44ad.htm&tar=top




8/23/2011

4

get his accounts of such previous year audited by an accountant

before the specified date and [furnish by] that date the report of

such audit in the prescribed form duly signed and verified by

such accountant and setting forth such particulars as may be

prescribed :

Provided further that] in a case where such person is required by

or under any other law to get his accounts audited, it shall be

sufficient compliance with the provisions of this section if such

person gets the accounts of such business or profession audited

under such law before the specified date and [furnishes by] that

date the report of the audit as required under such other law and a

further report [by an accountant] in the form prescribed under

this section.

Explanation.—For the purposes of this section,—

(i) ―accountant‖ shall have the same meaning as in the

Explanation below sub-section (2) of section 288;

[(ii) ―specified date‖, in relation to the accounts of the assessee

of the previous year relevant to an assessment year, means the

[30th day of September] of the assessment year.]]

http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section288.htm&tar=top



8/23/2011

5

Liability of Tax Audit

A charitable trust , cooperative society etc., though their

income may be exempt, even if turnover exceed the

threshold limit, they should get their account audited.

If income of an assessee is below the taxable limit, he will

also liable to get his account audited, if the turnover in

business exceed the threshold limit.

Section 44AB not applicable to assessee covered us 44B

and 44BBA.

A non-resident is also required to get his accounts

audited and to furnish report under sec 44AB, but

only pertaining to Indian operations.

An agriculturist is not required to get his accounts

audited u/s 44AB even though the total sales of

agricultural products may exceed Rs 60 lakhs.

8/23/2011

6

Total Sales, Turnover or Gross Receipts

Not defined in Sec. 44AB or any other provision of the

Act.

Can be interpreted as volume of business, total is for all

three expressions.

Sale denotes sale of movable commodity.

Turnover is aggregate amount for which sales effected

or services rendered (as per guidance note of ICAI).

Gross receipt to include all receipts whether in cash or

kind from carrying of business.

Sales, turnover & gross receipts should be determined

as per method of accounting regularly employed.

ISSUE NO. 1 whether the sales by commission agent or by

person on consignment basis forms part of turnover

The position that emerges from ICAI‘s Guidance Note and CBDT‘s Circular No. 452, dated 17.03.1986 is as under:

If the property in the goods or all significant risks and rewards of ownership of goods belongs to the commission agent or consignee immediately before the transfer by him to a third party, then the sales price received / receivable by the commission agent or consignee shall form part of his sales / turnover.

If the property in the goods or all significant risks and rewards of ownership in the goods continue to remain with the principal (consignor) immediately before the transfer by him, (the commission agent or consignee) to a third party, then the sales price received / receivable by the commission agent or consignee shall not form part of the sales / turnover of the commission agent or consignee. The sales price received / receivable by him shall form part of the sales / turnover of the principal (consignor).

8/23/2011

7

ISSUE NO. 2 In case of share brokers

Share brokers, on purchasing securities on behalf of their customers,

do not get them transferred in their names but deliver them to the customers who get them transferred in their names. The same is true in case of sales also. The share broker holds the delivery merely on behalf of his customer. The property in goods does not get transferred to the share brokers. Only brokerage which is being accounted for in the books of account of share brokers should be taken into account for considering the limits for the purpose of section 44AB. However, in case of transactions entered into by share broker on his personal account, the sale value should also be taken into account for considering the limit for the purpose of section 44AB. The case of a sub-broker is same as that of a share broker.

Issue No. 3 - Speculation Transaction 43(5)

It means a transaction, in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

Thus, in a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note.

8/23/2011

8

The contract is settled otherwise and squared up by

paying out the difference which may be positive or

negative.

As such, in such transaction the difference amount is

'turnover'.

In the case of an assessee doing speculative

transactions there can be both positive and negative

differences arising by settlement of various such

contracts during the year.

Each transaction resulting into whether a positive or

negative difference is an independent transaction.

Further, amount paid on account of negative

difference paid is not related to the amount received

on account of positive difference.

In such transactions though the contract notes are issued

for full value of the purchased or sold asset the entries in

the books of account are made only for the differences.

Accordingly, the aggregate of both positive and negative

differences is to be considered as the turnover of such

transactions for determining the liability to audit vide

section 44AB.

8/23/2011

9

Issue No. 4 - Derivatives, futures and options:

Such transactions are completed without the delivery of shares or securities.

These are also squared up by payment of differences.

The contract notes are issued for the full value of the asset purchased or sold but entries in the books of account are made only for the differences.

The transactions may be squared up any time on or before the striking date. The buyer of the option pays the premia.

The turnover in such types of transactions is to be

determined as follows:

(I) The total of favourable and unfavourable differences

shall be taken as turnover.

(II) Premium received on sale of options is also to be

included in turnover.

(III) In respect of any reverse trades entered, the

difference thereon, should also form part of the

turnover.

8/23/2011

10

Issue No. 5 - Delivery based transactions: Where the

transaction for the purchase or sale of any commodity

including stocks and shares is delivery based whether

intended or by default, the total value of the sales is to be

considered as turnover.

Issue No. 6 - Capital Gains Vs. Business

CBDT‘s Instruction No. 1827 dated 31.08.1989 r.w. Circular No. 4/2007, dated 15.06.2007.

Depends on facts and circumstances of each case taking into

consideration nature, frequency and volume of transaction. Landmark Judgments : i. CIT v. P.K.N. and Co. Ltd. (1966) 60 ITR 65 (SC). ii. Saroj Kumar Mazumdar v. CIT (1959) 37 ITR 242 (SC). iii. CIT v. Sutlej Cotton Mills Supply Agency (1975) 100 ITR 706

(SC). iv. CIT (Central), Cal Vs. Associated Industrial Development

Co.(P.) Ltd. [1971] 82 ITR 586 (SC). v. Venkataswami Naidu & Co.(G) v. CIT (1959) 35 ITR 594

(SC).

8/23/2011

11

The Authority for Advance Rulings (AAR) (288 ITR 641), referring to

the decisions of the Supreme Court in Several Cases, has culled out the

following principles:-

(i) ―Where a company purchase and sells shares, it must be shown that

they were held as stock-in-trade and that existence of the power to

purchase and sell shares in the memorandum of association is not

decisive of the nature of transaction;

(ii) The substantial nature of transactions, the manner of maintaining

books of account, the magnitude of purchases and sales and the ratio

between purchases and sales and the holding would furnish a good

guide to determine the nature of transactions;

(iii) Ordinarily the purchase and sale of shares with the motive of

earning a profit, would result in the transaction being in the

nature of trade / adventure in the nature of trade; but where the

object of the investment is shares of a company is to derive

income by way of dividend etc., then the profits accruing by

change in such investment (by sale of shares) will yield capital

gain and not revenue receipt.‖

8/23/2011

12

Board Circular No. 4/2007, dated 15-6-2007

It is possible for tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock in trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.

Issue No. 7 - The following items would not form part of "gross receipts in business” for purposes of section 44AB

In the case of a traveling agent, the amount received from the clients for payment to the airlines, railways etc. where such amounts are received by way of reimbursement of expenses incurred on behalf of the client. If, however, the travel agent is conducting a package tour and charges a consolidated sum for transportation, boarding and lodging and other facilities, then the amount received from the members of group tour should form part of gross receipts

and

In the case of an advertising agent, the amount of advertising charges recovered by him from his clients provided these are by way of reimbursement. But if the advertising agent books the advertisement space in bulk and recovers the charges from different clients, the amount received by him from the clients will not be the same as the charges paid by him and in such a case the amount recovered by him will form part of his gross receipts.

8/23/2011

13

The principle to be applied is that

if the assessee is merely reimbursed for certain expenses incurred, the same will not form part of his gross receipts.

But in the case of charges recovered, which are not by way of reimbursement of the actual expenses incurred, they will form part of his gross receipts.

Issue No. 8 - An assessee own 4 proprietorship businesses. The

aggregate annual turnover of all the concerns exceeds Rs. 60

lakhs but individually each business‘s turnover is below Rs. 60

lakhs. Further, separate books of account are maintained for

each business and profit and loss account and balance sheet are

prepared separately.

(a) will tax audit under section 44AB be applicable ?

(b) If yes, should the particulars of all busineses be reported in

a single Form No. 3CD ? If so, how ?

(c) Should the tax auditor give a consolidated Form No. 3CD in

respect of all the concerns ?

8/23/2011

14

Ans : (a) The requirement of tax audit in the case of an

assessee is to be determined taking into consideration the

‗sales‘, ‗turnover‘ or ‗gross receipts‘ of all the businesses

carried on by him. If the aggregate annual turnover of the

four proprietary concerns exceed Rs. 60 lakhs, section

44AB would be clearly applicable.

(b) In regard to audit report and furnishing of particulars in

Form Nos. 3CA/3CB and 3CD, there are two possibilities,

Firstly, separate tax auditors may be appointed in respect of

individual businesses in which case Form Nos. 3CB and 3CD

have to be submitted separately for each business.

Alternatively, one tax auditor may undertake the audit of all the

businesses. Here also the tax auditor can prepare Form Nos.

3CA/ 3CB and 3CD separately for each business. The need for

separate forms for each business arises particularly where

reliefs are claimed in respect of individual businesses.

8/23/2011

15

(c) However it may be noted that tax audit as such is

conducted in respect of an assessee and hence the question

of consolidating the separate forms into a single form

assumes importance. Further, without consolidating the

separate Form Nos. 3CD into a single form particulars like

deduction permissible under chapter VIA cannot be given.

Hence it is advisable to prepare a consolidated form. The

auditor consolidating the report / form can rely on the work

of the other auditor (AAS -10) (Revised).

Issue No. 9 - (i) The assessee is the proprietor of the following

businesses:

(a) cloth business at Bangalore – Sales Rs. 30 Lakhs.

(b) yarn business at Chennai – sales Rs. 25 lakhs.

(c) hosiery business at Calicut – Sales Rs. 22 lakhs.

Separate sets of books are maintained at each of the above places.

The business are carried on in different names viz., (a) Vinay

Cloth Stores (b) Nagaraj Yarn Merchants and (c) Natesh hosiery

Mart. Should the assessee get his accounts audited under section

44AB in respect of each of the above proprietary concerns ?

8/23/2011

16

(ii) If, in the above case, the hosiery business is carried on by the

assessee‘s wife from the funds gifted by the assessee and the

income of the business is includible in the income of the assessee

under section 64, what will be te position of audit under section

44AB ?

(iii) If the assessee is a partner in (a) M/s. A & Co., (Sales Rs. 45

lakhs) (b) M/s. B & Co., (Sales Rs. 48 lakhs) and (c) M/s. D. &

Co., (Sales Rs. 40 lakhs) and he has 60% share in each of the

above firms, should each of the above firms get its accounts

audited under section 44AB ? Should the asseessee who is a

partner in the above firms get his personal accounts audited under

section 44AB as the aggregate of his share in the turnover of the

three firms exceeds Rs. 60 lakhs.

8/23/2011

17

Ans: (i) Even if the assessee carries on business at different

places in different names and deals in different commodities, it

will be necessary to get the accounts audited if the aggregate

amount of sales of all the businesses exceed Rs. 60 lakhs. In the

given case the total sales of the three businesses amount to Rs.

77 lakhs Therefore, it will be necessary to get the accounts of

all the three concerns belonging to this assessee audited. It may

be noted that the emphasis is on the total sales. Therefore, even

if the assessee carries on one or more businesses the sales of all

the businesses will be taken into consideration.

Ans: (ii) If the business is carried on by the wife of the

assessee, it cannot be said that it is carried on by the assessee

merely because the income from the business is includible in

the income of the assessee under section 64. Therefore, the wife

of the assessee carrying on hosiery business with turnover of

Rs. 22 lakhs will not be required to get the accounts audited

under section 44AB.

8/23/2011

18

Ans: (iii) Each firm is a separate person / assessee for the

purpose of Income-tax Act. Therefore, the figures of sales of

each firm will have to be considered. In the given case, it will

not be necessary for A & Co., B & Co., or C & Co., to get their

accounts audited as the sales of any one of these firms do not

exceed Rs. 60 Lakhs.

Similarly, any partner of these firms will not be required to get

his personal accounts audited if he is not carrying on any

personal business having sales / turnover exceeding Rs. 60

lakhs. The sales / turnover of the firms in which he is a partner

cannot be taken into consideration for this purpose.

Issue No. 10 - (i) A & Co. (Partnership firm) is appointed as

selling agent of a textile mill. The firm canvasses orders for the

mill. The goods are despatched by the mill to the customers

introduced by A & Co. The sales bills are prepared by the mill.

A & Co., recovers the sale proceeds and remits the same to the

mill. The total sales organised by A & Co., during the year

ended 31.03.2011 amounted to Rs. 20 crores. The commission

@ 1% earned by A & co., amounted to Rs. 20 lakhs. Should A

& Co., get their accounts audited under section 44AB ?

8/23/2011

19

(ii) In the above case if A & Co., had purchased cloth for Rs.

55 lakhs and sold cloth worth Rs. 50 lakhs will the provisions

of section 44AB apply ?

Ans : (i) In this case, A & Co. is a selling agent of the textile

mill. From the facts stated in the above issue, it is evident that

the selling agent does not become the owner of the goods. The

ownership continues to be that of the mill and it passes from the

mill to the customer. The goods are despatched directly by the

mill to the customers and sales bills are prepared by the mill.

Therefore, the amount of the sales made by the mill

cannot be taken into consideration for determining the

liability of A & Co., to get its accounts audited under

section 44AB. Since the commission income of A & Co.

is only Rs. 20 lakhs and if there are any sales or other

trading receipts of A & Co., which are less than Rs. 40

lakhs, it will not be required to get its accounts audited

under section 44AB.

8/23/2011

20

(ii) As stated above, because the commission income of

A & Co. is Rs. 20 lakhs and the sales of cloth amount to

Rs. 50 lakhs the total turnover and gross receipts of A &

Co. will exceed Rs. 60 lakhs and it will be necessary for

it to get its accounts audited under section 44AB.

Issue No. 11 - Mr. ‗B‘ has received goods worth Rs. 50 lakhs on

consignment from P & Co. These goods were sold by Mr. ‗B‘ at

Bombay for Rs. 62 lakhs. He has issued his own bills disclosing

therein that the goods belong to P & Co. On completion of sales

he had rendered accounts sales to P & Co. and remitted the sale

proceeds after deducting Rs. 1 lakh being expenses incurred for

sales and Rs. 50,000/- being his commission. For sales-tax

purposes, he is required to record the above sales in his sales

records. Should Mr. ‗B‘ get his accounts audited under section 44

AB ?

8/23/2011

21

Ans : In this case, Mr. B is acting as consignment agent

for P & Co. The sales made by Mr. B at Bombay for Rs.

62 lakhs are made on behalf of P & Co. These sales

cannot be considered as sales of Mr. B. He is only

entitled to his commission of Rs. 50,000/- which will

form part of his gross receipts. Therefore, Mr. B. will not

be required to get his accounts audited under section 44

AB if his total sales and gross receipts including

commission income of Rs. 50,000/- does not exceed Rs.

60 lakhs.

Issue No. 12 - Sankhla industries is engaged in the manufacture of

electrical goods. The total sales / turnover exceeds Rs. 60 lakhs. It

owns the following industrial units.

(i) Enterprise engaged in infrastructure development deduction

available under section 80IA.

(ii) Industrial Unit in a backward are – deduction under section

80IB.

If the assessee gets its accounts audited under section 44AB, is it

necessary to get separate audit reports under section 80IA(7) and

80IB(13) read with 80IA(7)? In case audit is conducted under section

80IA (7) and / or 80IB (13) read with section 80IA(7) which form

should be used, Form No. 3CA or 3CB.

8/23/2011

22

Ans: Yes. It will be necessary to get a separate audit report under

section 80(IA)(7) and 80(IB)(13) for each of the industrial unit.

The finance Act, 2002 has amended these provisions making it

mandatory for all assessees including companies and cooperative

societies to submit a report under these sections. It is to be noted

that audit report under section 80(IA)(7) and 80(IB) (13) is in

respect of an industrial unit covered by the relevant provision

whereas audit under section 44AB is in respect of an assessee

covered by any of the clauses (a), (b) or (c).

It is to be clarified that audit report in such cases will be

in form No. 3CB in case the accounts of the assessee

have not been audited under any other law such as

Companies Act or Cooperative Societies Act etc. Audit

under section 80(IA) or 80(IB) of the Income-tax Act

will not be considered as audit under any other law. The

requirement of section 44AB is a general one covering

the overall position of the accounts of the assessee.

8/23/2011

23

This applies to the accounts of the assessee for the

relevant year covering the results of all the industrial

units situated at different places. Therefore, when the

sales/turnover of all the units put together exceeds Rs.

60lakhs the assessee will have to get the audit conducted

under section 44AB and obtain the audit report in Form

No. 3CB.

Non Resident-Indian Operations:

Issue No. 13- A foreign company has some business

income from India. It has no permanent establishment

in India. Since the income of the foreign company

chargeable under the Income tax Act can not be

precisely determined, the same has been assessed on the

basis provided in Rule 10 of the Income tax Rules,

1962. There are no separate books of account for Indian

business. What are the tax audit report requirements?

Should Form No. 3CD be submitted in respect of such a

foreign company?

8/23/2011

24

Ans: Paragraph 6.3 clarifies that section 44AB does not make any

distinction between a resident and a no-resident. Therefore, a non-

resident assessee is also required to get his accounts audited and to

furnish such report under section 44AB if his turnover exceeds the

prescribed limits. This audit, however, would be confined only to the

Indian operations carried out by the non-resident assessee since he is

not chargeable to Income- tax in India in respect of income accruing or

arising or received outside India. In the given issue, since there are no

separate books of account for the Indian business, the tax auditor has to

necessarily obtain relevant information from the overseas auditor for

the purpose of enabling him to make the audit report and also furnish

the necessary particulars.

So far as audit report is concerned, Form No. 3CB should be used

even if the accounts of the non-resident have been subject to audit

by an auditor qualified to audit the accounts under the relevant

statute of the country. It is also necessary to segregate the data

relating to income chargeable under the Income-tax Act. The tax

auditor has to make appropriate disclosures based on AAS-

10(Revised) ―Using the work of another auditor‖.

8/23/2011

25

Issue No. 14 - Surrender of Stocks:

A survey was conducted during the financial year

2010/11 and the assessee surrendered stocks worth of

Rs. 22 lakhs. During the financial year 2010/11 the

assessee is having a turnover of Rs. 49 lakhs. Should

the value of surrendered stock be included in the

turnover for determining the applicability of section

44AB?

Ans: The surrender of stock worth Rs. 22 lakhs during the survey

does not mean that the turnover of the assessee for the relevant

year exceeded Rs. 60 lakhs. Therefore, the value of surrendered

stock cannot be treated as part of turnover for determining the

applicability of section 44AB. It is also significant to note that

paragraph 5.18 clarifies that section 44AB applies only if the

turnover exceeds the prescribed limit according to the books

maintained by the assessee.

8/23/2011

26

Issue No. 15 - Additional sales found as a result of search

In Brijlal Goyal v. Asstt. CIT [2004] 88 ITD 413 (Delhi),

The Tribunal held as under :

―….. Admittedly, the additional sales found as a result of search, was not

recorded in the books of account regularly kept in the course of

business by the appellant. Merely because the appellant accepted the

additional sales for the purpose of assessment of the relevant year on

the basis of entries in the seized documents, the same would not

constitute accounts of the appellant maintained in the regular course of

business and on that basis alone liability cannot be fastened on the

assessee by holding him to have committed the default.

Issue No. 16 - Sale of car:

Sale of car is not included in sales for the purpose of

tax audit but according to some Supreme Court

judgments under Sales tax Act, the sale of a car is to be

treated as sales and sales tax has to be charged. Then,

why should the same be excluded for tax audit

purposes?

8/23/2011

27

Ans: The sale of car is nothing but a sale of capital asset. The

expression ‗total sales‘, ‗turnover‘ or ‗gross receipts‘ used in

clause (a) of section 44AB should be understood in the context of

the expression ‗in business‘ appearing immediately thereafter in

that very clause. The definition of ‗sales‘ under the Sales-tax Act

of any state is not relevant for determining the applicability of

section 44AB. Paragraphs 5.8(vi) and 5.13 (i) clarify that the sale

proceeds of fixed assets would not from part of turnover gross

receipts since these are not held for resale.

Issue No. 17 - Write back:

As a result of writing back the account of a creditor, the

turnover/gross receipt has exceeded Rs. 60 lakhs.

Will the assessee be liable for tax audit?

8/23/2011

28

Ans: Writing back of the amount payable to a creditor of

which a deduction has been claimed is deemed as

income for the purpose of section 41(1) of the Income-

tax Act, 1961. The amount so written back would not

form part of gross receipt and as such will not be

includible while determining the quantum for

applicability of section 44AB (para 5.13 (xi) of

guidance note on tax audit revised 2005 edition). It is

also neither sales not turnover.

Issue No. 18 - Inclusion of Sales-tax:

16. A, an assessee, provides the following figures:

Sales Rs. 58 lakhs

Vat tax collected Rs. 3 Lakhs

Is A liable for tax audit under section 44AB?

8/23/2011

29

Ans: The words ‗sales‘, ‗turnover‘ and gross receipts‘

are commercial terms and they should be construed in

accordance with the method of accounting regularly

employed by the assessee. If the Vat tax collected is

credited separately to Vat tax account and payments

thereof are debited in the same account, they would

not be included in the turnover. (Para 5.5 and 5.6 of

ICAI‘s guidance note on tax audit revised 2005

edition).

Issue No. 19 - Sales through stalls:

‗AK‘ Pvt. Ltd. is running a departmental store. There are

several stalls. Each stalls belongs to a different person.

According to the arrangement by the stall owners with ‗AK‘

Pvt. Ltd., all sales proceeds are to be collected on the printed

bills of ‗AK‘ Pvt. Ltd. The delivery counter is common for all

stall owners and the same is managed by ‗AK‘ Pvt. Ltd The

premises belongs to ‗AK‘ Pvt. Ltd. who takes out insurance and

also makes security arrangements. The proceeds of all sales

made by various stall owners are collected by ‗AK‘ Pvt, Ltd.

8/23/2011

30

At the end of every week ‗AK‘ Pvt. Ltd. makes up the

sales account of each stall owner and after deducting

charges/commission at the agreed rate remits the

balance amount to each stall owners. The total

turnover on the above basis works out to about Rs. 3

crores. However, the income of ‗AK‘ Pvt. Ltd. from

charges/commission recovered from the stall owners is

Rs. 30 lakhs. Is ‗AK‘ Pvt. Ltd. liable to get its

accounts audited under section 44AB?

Ans: It will not be necessary for ‗AK‘ Pvt Ltd. To get its

accounts audited under section 44AB. The sales in this case

cannot be considered as the sales of ‗AK‘ Pvt. Ltd. These are

sales of the stall owners. ‗AK‖ Pvt Ltd. has only undertaken to

render services like providing space, making security

arrangements, taking out insurance, collection of sale proceeds

on behalf of the stall owners and rendering account to them.

The commission earned for these services does not exceed the

limit of Rs. 60 Lakhs prescribed in section 44AB. Therefore,

the provisions of section 44AB are not attracted in this case.

8/23/2011

31

Issue No. 20 - Leasing

Discuss the following issues:

a) In the case of a company engaged in the business of equipment

leasing will the provisions of section 44AB for tax audit apply

b) In the case of a company engaged in leasing finance, will the

provisions of section 44AB for tax audit apply?

c) In the above cases how will the monetary limit of Rs. 60 lakhs

for turnover or gross receipts be computed?

d) In the case of a company supplying equipment on hire purchase

basis how will the monetary limit of Rs. 60 lakhs be computed

for the purpose of section 44AB?

Ans: (i) In the case of a company engaged in the

business of equipment leasing the provisions of section

44AB for tax audit will apply if its gross receipts from

lease rent exceed Rs. 60 lakhs.

(ii) In the case of a company engaged in the

business of leasing finance, the provisions of section

44AB for tax audit will apply if its gross receipts from

the leasing finance exceed Rs. 60 Lakhs.

8/23/2011

32

(iii) The monetary limit of Rs. 60 lakhs will be computed in the above

cases with reference to lease rent or interest on financing. The value

of the equipment given on lease or the amount advanced under

leasing finance cannot be considered for this purpose.

(iv) When equipment is supplied on hire-purchase basis, the sale is

complete when the person taking the equipment exercises his option

to purchase. Therefore, during the years when hire charges (excluding

instalments of principal amount) are received by the company, the

figure of such charges will from part of its gross receipts. When the

purchaser exercises his option to purchase, the price at which the

equipment is sold to him will form part of total sales or turnover of

that year.

Issue No. 21 - Form No. 3CA/3CB:

a) The accounting year of an assessee has been changed

from calendar year to April to March. Accordingly, the

accounts have been drawn for the period from January,

2010 to March 31,2011 which have already been

audited for tax audit. Which form of audit report

should be used? Form No. 3CA or Form No. 3CB?

Should separate accounts have to be drawn for the

period from 1st April, 2010 to 31st March, 2011?

8/23/2011

33

(b) Rule 6G(a) provides that in the case of a person who

carries on business or profession and who is required by or

under any other law to get his accounts audited the audit

report should be in Form No. 3CA. Under the Companies

Act, all companies are required get their accounts audited.

However the accounting year for the Companies Act can

be different from that of the previous year under the

Income tax Act e.g. under the Companies Act it may be,

say, 30th September. In such cases how can the company

comply with the requirements of Form No. 3CA?

Ans: Issues (a) and (b) are answered together. The previous

year for tax purposes shall always be the financial year as

per section 3 of the Income-tax Act. Therefore the final

accounts along with tax audit report have to be of the

financial year. Accordingly in case the annual accounts

i.e. balance sheet and profit and loss account have not

been audited and certified, it cannot fulfill the

requirement of Form No. 3CA which requires the tax

auditor to enclose the ‗audited‘ profit balance sheet as at

31st March.

8/23/2011

34

Hence, in such cases the tax payer is required to prepare a separate

profit and loss account and balance sheet as at 31st March and get

the same audited and the tax auditor is to give the report in Form

No. 3CB whereby he is required first to certify the true and fair

view of the balance sheet and profit and loss account and furnish

statement of particulars in Form No. 3CD.

Though Rule 6G(1)(a) provides that a person who carries on

business or profession and who is required by or under any other

law to get his accounts audited the tax audit report should be in

Form No. 3CA, the word ―accounts‖ here has to be interpreted in

terms of the requirement of Form No. 3CA.

―Accounts‖ here will mean the accounts i.e. profit and loss

account and the balance sheet and tax audit report. In case

the accounts i.e. profit and loss account and balance sheet

with tax audit report has not been audited under any other

law, the correct form will be Form No. 3CB. [Circular No.

561 dated 22.05.1990 vide page 167 of guidance note on tax

audit revised 2005 edition.]

8/23/2011

35

Issue No. 22 - Revision of Tax Audit Report:

Can a tax auditor revise his tax audit report and Form No.

3CD?

Ans: A tax auditor should exercise extreme care and caution

while discharging his responsibilities. He should ensure that

correct information has been given in Form No. 3CA/3CB

and 3CD. However, if he feels that there is a need for revising

the audit report and / or Form No. 3CD, it is advisable to do

so in a timely manner and he should clearly indicate the

reasons for giving a revised report. Attention is also invited to

paragraph 13. 9 and to the guidance note on revision of Audit

Report which deals with this aspect elaborately.

8/23/2011

36

Issue No. 23 - Relying on the work of statutory

auditor

(i) A tax auditor does not agree with the treatment given

in the audited financial statements in respect of (i)

personal expenses, (ii) capital expenditure, (iii)

valuation of stock-in-trade (iv) method of accounting

or (v) other matters covered in Form No. 3CD.

(ii) If the statutory auditor has not qualified his audit

report on these matters, can the tax auditor qualify his

report in Form No. 3CA and make appropriate

comments in Form No. 3CD?

Ans: (i) In case where statutory audit under any other law has

been conducted by an auditor other than the tax auditor the

requirement of section 44AB read with Rule 6G(1)(a) is to

enclose a report of such audit and the tax auditor is required

to furnish statement of particulars in Form No. 3CD and

certify that the particulars given in the said Form No. 3CD are

true and correct. The tax auditor is not required to comment

upon the audit report given by the statutory auditor. As such

there will be no requirement on the part of tax auditor to

qualify his report in Form No. 3CA.

8/23/2011

37

(ii) The tax auditor, however, has the primary responsibility of

the verification of the particulars prescribed in Form No. 3CD

and he should ensure that the particulars stated are in

conformity with the provisions of the Income-tax Act.

Normally the tax auditor should accept the treatment given to

various items in the financial statements which have been

audited by the statutory auditor. If, however, while conducting

tax audit he is unable to agree with the treatment given to a

particular item in the audited financial statement, he should first

ascertain preferably from the statutory auditor, the reasons for his

giving such a treatment in his statement.

It is possible that statutory auditor while considering the items

on (i) personal expenses, (ii) capital expenditure, (iii) valuation

of stock and trade, (iv) method of accounting or other matter

covered in Form NO.3CD might have dealt with the item from

the angle of generally accepted accounting principle or statutory

provisions covering the entity. The responsibility of furnishing

true and correct particulars in Form NO.3CD is that of the entity.

For this purpose, statutory provision and judicial pronouncement

under tax laws have to be taken into consideration.

8/23/2011

38

The tax auditor should verify and ensure that particulars in

respect of the above items such as personal expenses, capital

expenditure, valuation of stock and trade, method of accounting

etc. are given on the basis of explanations above. However, any

difference between the figures given in the audited financial

statements and figures given in Form No.3CD should be

explained by giving appropriate notes. If, however, there is any

difference in the opinion of the tax auditor and that of the entity

in respect of any information furnished in Form No.3CD, the tax

auditor should state both the view points and also the relevant

information. Attention is invited to paragraph 16.3. of revised

guidance note on tax audit 2005 edition.

Issue No. 24 – Advance received for services are rendered.

These are liabilities and not part of gross receipts until services are

rendered. -

For contrary viewpoint- see Dy. CIT v. Gopal Krishan

Builders.[2004] 91 ITD 124 (Lucknow)(SMC).

The Tribunal held that each and every word used in any statute has

its importance and is used by legislature after a lot of deliberations.

8/23/2011

39

The words used in section 44AB: ―total sales‖, ―turnover‖ or

―gross receipts‘ have been used specifically and the scope of the

words ‗gross receipts‘ is quite wide otherwise legislature would

have stopped after using the words ‗sales‘ or ‗turnover‘,

Further, these advances were having an element of profit. The

amount was to be adjusted towards the cost of flats booked by each

customer and the amounts will have an element of construction

cost as well as profit which might be bigger in proportion when

whole of the cost is realized.

What assessees should do to determine applicability of tax audit

u/s 44AB is as under (in the light of Tribunal‘s decision):

a) In cases of business which do not have ―turnover‘ or ―total sales‖

and ―professions‖

Determine gross receipts – i.e. total amounts received (including

advances) which have profit-making quality about them. If ―gross

receipts‘ exceed Rs. 60 lakhs / Rs. 15 lakhs as the case may be, tax

audit is applicable.

8/23/2011

40

b) In cases of businesses in manufacturing / trading sector-i.e.

businesses which have ―turnover‖ / ‗sales‖ – The following steps are

necessary:

1. Determine ―Sales‘ / Turnover‘ as per the method of accounting

regularly employed by the assessee – (Cash or mercantile system) and

excluding sales tax / duty / other taxes.

2. Determine gross receipts- i.e. total amounts received (including

advances) which have profit – making quality about them (as per

Tribunal‘s decision above).

3. If ―Sales‖ or ―Turnover‖ or ―Gross receipts‖ exceed Rs. 60 Lakhs, tax

audit is applicable.

c) If there is no sales / turnover / work done or completed

during the financial year but only advances have been received

(to be adjusted against value to be provided by way of goods /

services); then if total advances received exceeds Rs. 60 Lakhs /

Rs. 15 Lakhs, as the case may be, tax audit under section 44AB

is applicable.

8/23/2011

41

Special provision for computing profits and gains of business

on presumptive basis.

(1) Notwithstanding anything to the contrary contained in

sections 28 to 43C, in the case of an eligible assessee engaged

in an eligible business, a sum equal to eight per cent of the total

turnover or gross receipts of the assessee in the previous year

on account of such business or, as the case may be, a sum

higher than the aforesaid sum claimed to have been earned by

the eligible assessee, shall be deemed to be the profits and

gains of such business chargeable to tax under the head ―Profits

and gains of business or profession‖.

(2) Any deduction allowable under the provisions of sections 30

to 38 shall, for the purposes of sub-section (1), be deemed to

have been already given full effect to and no further deduction

under those sections shall be allowed :

Provided that where the eligible assessee is a firm, the salary

and interest paid to its partners shall be deducted from the

income computed under sub-section (1) subject to the

conditions and limits specified in clause (b) of section 40.




http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section43c.htm&tar=top









8/23/2011

42

(3) The written down value of any asset of an eligible business

shall be deemed to have been calculated as if the eligible

assessee had claimed and had been actually allowed the

deduction in respect of the depreciation for each of the relevant

assessment years.

(4) The provisions of Chapter XVII-C shall not apply to an

eligible assessee in so far as they relate to the eligible business.

(5) Notwithstanding anything contained in the foregoing

provisions of this section, an eligible assessee who claims that

his profits and gains from the eligible business are lower than

the profits and gains specified in sub-section (1) and whose

total income exceeds the maximum amount which is not

chargeable to income-tax, shall be required to keep and

maintain such books of account and other documents as

required under sub-section (2) of section 44AA and get them

audited and furnish a report of such audit as required under

section 44AB.

http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section44aa.htm&tar=top




http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section44ab.htm&tar=top




8/23/2011

43

Explanation.—For the purposes of this section,—

(a) ―eligible assessee‖ means,—

(i) an individual, Hindu undivided family or a partnership firm, who is a

resident, but not a limited liability partnership firm as defined under clause (n)

of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6

of 2009) and

(ii) who has not claimed deduction under any of the sections 10A, 10AA,

10B, 10BA or deduction under any provisions of Chapter VIA under the

heading ―C. - Deductions in respect of certain incomes‖ in the relevant

assessment year;

(b) ―eligible business‖ means,—

(i) any business except the business of plying, hiring or leasing goods

carriages referred to in section 44AE; and

(ii) whose total turnover or gross receipts in the previous year does not

exceed an amount of [sixty lakh rupees].]

Critical analysis of section 44AD

http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section10a.htm&tar=top






http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section10b.htm&tar=top


http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:/WebSites/DITTaxmann/Act2010/DirectTaxLaws/ITACT/HTMLFiles/2011&DFile=section10ba.htm&tar=top






8/23/2011

44

Till the 31st March,2010, the Chapter Profit & gains of

Small business on Presumptive Basis was having majorly 3

sections for Indian entities.

> Section 44AD civil construction

> Section 44AE Transporters

> Section 44AF Retail Traders

From 01.04.2010 the honorable finance minister Mr.

Pranab Mukherjee has amended the first section i.e.

44AD along with 5 sub sections to facilitate the business

operations of small taxpayers

Earlier this section was extended to civil constructions

only but now this section has been extended to all small

businesses.

8/23/2011

45

The new section 44AD is as follows: 44AD

(1)

Notwithstanding anything to the contrary contained

in sections 28 to 43C, in the case of an eligible

assessee engaged in an eligible business, a sum equal

to eight per cent of the total turnover or gross

receipts of the assessee in the previous year on

account of such business or, as the case may be, a

sum higher than the aforesaid sum claimed to have

been earned by the eligible assessee, shall be deemed

to be the profits and gains of such

business chargeable to tax under the head “Profits

and gains of business or profession”.

For better understanding of sub section 1 of newly

inserted section 44AD, we must know the meaning of

following:

> Eligible Assessee

> Eligible Business

> Total Turnover/Gross receipts

> Significance of Word Gross Receipts

> Claimed to have been earned






8/23/2011

46

1. Who is an Eligible Assessee?

(explanation to Section 44AD)

(a) ―eligible assessee‖ means:-

(1) an individual

(2) Hindu undivided family

(3) or a partnership firm

who is a resident.

but not a limited liability partnership firm as

defined under clause (n) of sub-section (1) of section 2

of the Limited Liability Partnership Act, 2008 (6 of 2009);

and


(ii) who has not claimed deduction under any of the sections

10A, 10AA, 10B, 10BA or deduction under any provisions of

Chapter VIA under the heading ―C. - Deductions in respect

of certain incomes‖ in the relevant assessment year;






8/23/2011

47

Who all are the aseessees not covered under Section 44AD?

> Individual who is not resident

> HUF who is not Resident

> Association of Person

> Firm having non resident Status.

> A local Authority

> A co-operative Society

> Limited Liability Partnership both Indian as well as Foreign

> Companies both Domestic and Foreign company

> Every Artificial Juridical Person

> Individual/HUF/Firms claiming deduction under chapter III of the Act i.e Section 10A,10AA,10B,10BA relating to units located in FREE Trade Zone, Hardware & Software Technology Park etc.

> Individual/HUF/Firms claiming deduction under Chapter VIA Part-C (deductions in respect of certain Incomes) i.e Section 80H to 80TT.

2. What is eligible Business ?


(b)eligible business means,

(i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of[sixty lakh rupees]. Meaning of the above section: Eligible Business covers any business except Transport Business (Transportation Business has special treatment under section 44AE).



8/23/2011

48

This provision is straightforward and includes all the business whether it is: . > Manufacturing > Trading > Wholesale > Retail > Job Work > Service business > Speculative/ Non speculative. The only criteria is that, the turnover of eligible Business should not exceed Rs. Sixty lakhs in the previous Year.

What is not included in the Business?

.

The profession is not included in the business because:

There is specific reference to the word Business in

Section 44AD, which does not include profession, and

There is specific Turnover limit of Rs. 15 Lakhs for

Profession under section 44AB, which means that

profession is totally separate from Business.

8/23/2011

49

How to calculate limit of 60 lakhs? The Total Turnover and Gross receipts should be less than 60 lacs in the previous Year. It includes all the eligible businesses carried on by a eligible assessee during the previous year and the 60 lakhs will be for all of them cumulatively. Few Examples: 1. Manish, a resident individual, is carrying on three eligible businesses, the turnover of which is as under : > Business A (Manufacturing) Rs. 25 Lac

> Business B (Trading) Rs. 15 Lac

> Business C (Service) Rs. 25 Lac

Whether section 44AD is applicable on him?

The Answer is NO because turnover of eligible business

exceed Rs. 60 Lakhs.

8/23/2011

50

2. Manish, a resident individual, is carrying on two businesses, the turnover of which is as under : > Business A (Eligible Business) Rs. 55 Lacs

> Profession Rs. 10 Lacs > Business B (Transport u/s 44AE) Rs. 6 Lacs Section 44AD and 44AE both are applicable, as profession is not included under section 44AD and section 44AD and 44AE are independent of each other. Who bears the onus of proof to prove the turnover? The onus of proof is on the assessee. It is his duty to prove the turnover. If the assessee is maintaining the books of accounts, then it will be easy for him to prove the same, but if he is not maintaining the books of accounts, then it will be very difficult for him to prove, because there is no specific provision for the same.

What documents you should provide to the AO to prove

the turnover?

- copies of invoices issued during the PY

- copies of cash memo

- copies of Purchase bill

- Bank statement

- Inventory details, if any maintained

- Average G.P rate applicable to Particular business

- Returns filed under sales tax/vat/excise/service Tax laws.

8/23/2011

51

What is the meaning of Notwithstanding

Anything to contrary contained in section 28 to

43C

Section 44AD(1) starts with wording Notwithstanding Anything to contrary contained in

section 28 to 43C it means section 28 to 43C of Income Tax Act, 1961 is not applicable on

eligible assessee carrying on small business.

The some of the benefits & losses of this wording is enumerated as under by way of examples

:

Manish has paid Rs. 28000/- for purchase of goods in cash. No disallowance can be made

under section 40A(3) for the same.

Ashish has paid Rs. 42000/- to transporter for freight in cash. No disallowance can be made

under Section 40A (3).

Vipin has contributed certain sum to national Laboratory which qualifies for deduction under

section 35(2AA), if he chooses section 44AD , he will not eligible for benefit of this section.

Vicky has recovered certain bad debts written off in earlier years of Rs. 35000/-. It may not be

added in specified amount declared

What is the meaning of Claimed to have

been earned?

By the introduction of these words in section 44AD(1), the legislature shows its intention to accept specified income as returned income even if higher sum is earned by eligible assessee unless it is claimed by assessee in his Income Tax Return. Example Manish is carrying on small business . The Turnover is Rs. 50 lakhs. The profit as per his books or calculation is Rs. 8 Lakhs. However, he opts to return the income under section 44AD @ 8% i.e Rs. 4 Lakhs. The proceeds of business are deposited in a bank account.

8/23/2011

52

Can the AO assess the difference

amount as undisclosed income?

Section 44AD(2)

(2) Any deduction allowable under the provisions of sections

30 to 38

shall, for the purposes of sub-section (1), be deemed to have been

already given full effect to and no further deduction under those

sections shall be allowed

.

Provided that where the eligible assessee is a firm, the salary

and interest paid to its partners shall be deducted from the

income computed under sub-section (1) subject to the

conditions and limits specified in clause (b) of section 40





8/23/2011

53

Computation of Taxable Profit u/s 44AD in case of

Partnership Firm

Profit from Business

Particulars Amount

44 AD ( Say the turnover is Rs. 50 lacs) then the

income would be 8%

4,00,000

Less:

Interest allowable u/s 40(b) 1,20,000

Remuneration to partners allowable 1,80,000

Total Income of the Firm U/s. 44AD

1,00,000

Section 44AD (3)

The written down value of any asset of an eligible

business shall be deemed to have been calculated as

if the eligible assessee had claimed and had been

actually allowed the deduction in respect of the

depreciation for each of the relevant assessment

years.

8/23/2011

54

Few Examples

Manish a resident individual having a machinery

of Rs. 2,00,000/- as on 31-03-2011 eligible for depreciation

under section 32 @ 15%.In A.Y 2011-12, he opts for Section

44AD. In the Assessment Year 2012-13, his turnover is Rs. 70

lakh, so he calculated his profit as per normal provisions of

the Act. In A.Y 2013-14, he again opts for Section 44AD, In

this Assessment year he sold the Assets for Rs. 1,50,000/-.

Calculation of WDV:

Particulars

Amount

WDV as on 31-03-2011 2,00,000

Less: Depreciation @

15%

30,000

WDV as on 31-03-2012 1,70,000

Less: Depreciation @

15%

25,500

WDV as on 31-03-2013 1,44,500

Less : Sale Price 150,000

WDV as on 31-03-2014 Nil

8/23/2011

55

Calculation of Capital Gains

Particulars

Amount

Sale Consideration 1,50,000

Less WDV as on 31-03-2013 1,44,500

Short Term capital gain U/s 50

5,500

Whether the Assessee can carry forward unabsorbed

depreciation?

As per the subsection (3) of section 44AD, the Act clearly

states that the depreciation is deemed to have been

allowed u/s. 32 and the same has been deemed to have

been set off against the profit. Hence the same cannot be

allowed to be allowed to be carried forward.

8/23/2011

56

Section 44AD(4) The provisions of Chapter XVII-C shall not apply to an eligible

assessee in so far as they relate to the eligible business.

Chapter XVII-C deals with provisions relating to Advance Payment of Tax. On plain reading of this subsection, we conclude that eligible assessees are exempt from payment of Advance Tax. But the second part of Provision creates a blunder so far it relates to eligible business, which creates lot of doubt. The following example will better clear your understanding :

Profit under section 44ADRs. = 4.00 lacs

(Say Turnover is Rs. 50 lakhs)

Interest Income = Rs.5.00 Lacs

Total Income = Rs.9.00 lacs In this situation, whether the assessee is exempted from provisions of advance tax in all or whether the assessee is liable to Pay advance Tax on interest income of Rs.5.00 lac. From the understanding of Law, it is clear that the assessee have to pay advance tax on interest income of Rs.5.00 lac. But how this tax calculation is to be made is no where defined in legislature?

SECTION 44AD(5)

This sub-section has created lots of doubts and debates in the mind of all the CAs and Tax consultants. This Sub-section is very much important for all the very small businessmen. Please give attention and read it care fully. . Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under


8/23/2011

57

section 44AB The assessee is bound to get the books of accounts audited, if the following two conditions are satisfied:- 1. His profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) i.e. his net profit is lower than 8% of turnover. and 2. Whose total income exceeds the maximum amount which is not chargeable to income-tax.

Here see both the conditions are simultaneous and the assessee required to get his accounts audit only and only if his profits from the business u/s 44AD are lower than 8% of this turnover and further his total income is more than maximum amount which is not liable to tax.

The minimum amount which is not liable to tax for Assessment Year : 2011 -12 is Rs. 1.60 Lakh and the turnover of the eligible business is Rs. 38 Lakhs and the Net profit is Rs. 1.52 lacs which comes to only 4% hence the first condition for the compulsory audit is there but since the income is only Rs.1.52 Lakhs hence the second condition of section 44AD(5) is not complete, hence the audit is not mandatory.

If whatever mentioned above is the intention of law then in most of the cases where the income of the assessee is below taxable limit, they are not required to get their books of accounts audited, even if the rate of profit is below 8%


8/23/2011

58

Exception to Tax Audit: Once a person gets covered under any one of the four categories, Tax audit

becomes mandatory. But there are two exceptions to tax audit. The first proviso to Section 44AB, exempts business covered under Section 44B and 44BBA from the purview of tax audit. But the second proviso is something more interesting. The second proviso says that if the accounts of a person are to be audited under any other law, it would be sufficient if the accounts are audited under that law before the 30th of September. The accounts need not once again be audited by an Accountant but the report in form 3CA and 3CD needs to be obtained from an Accountant.

The effects of this section arouse much fascination. Since Companies are required to be audited under the Companies Act, 1956, they need not be audited once again under Section 44AB. It is sufficient if the audit reports in the prescribed forms are obtained. This is even more fascinating in the Case of Co-operative Societies. Co-ops are required to be audited under the Co-operative Societies Act, but the auditor of a co-op need not be a CA. Even then a co-op need not be once again audited under Section 44AB.

Case Studies u/s. 44AD:-

NATURE OF

BUSINESS

STATUS GROSS

TURNOVER/

RECEIPTS

NET

PROFIT

WHETHER LIABLE TO AUDIT

U/S. 44AB

CIVIL

CONSTRUCTION

INDIVIDUAL RS. 50 LAKHS Rs. 410000/- No Since Net profit is more

than 8% of Turnover.

CIVIL

CONSTRUCTION

INDIVIDUAL Rs. 50 lakhs Rs. 85000/- No since his total amount does

not exceed the maximum

amount not chargeable to tax

CIVIL

CONSTRUCTION

PARTNERSHIP

FIRM

Rs. 50 lakhs Rs. 85000/- Yes since his Net Profit is

below deemed income

prescribed u/s. 44AD

BUILDING

MATERIAL

SUPPLIER

PARTNERSHIP

FIRM

Rs.70 lakhs Rs. 580000/- Yes since his turnover is

exceeding Rs. 60 lakhs not

eligible u/s. 44AD

8/23/2011

59

AN INDIVIDUAL HAVING FOLLOWING 3 PROPRIETORY BUSINESS :-

CIVIL

CONSTRUCTION

RS. 30/- LAKHS Rs.250000/- No. since Net Profit is

more than 8% of Gross

Turnover

BUILDING

MATERIAL

SUPPLIER

RS. 70/- LAKHS Rs. 600000/- Yes because Turnover is

exceeding Rs. 60 lacs

STONE CRUSHER Rs. 15/- Lakhs Rs. 100000/- Yes because Net Profit is

less than 8% of Turnover

Thus assessee is required to get accounts audited in respect of Building Material

supplier business & Stone Crusher Business

AN INDIVIDUAL HAVING FOLLOWING 3 PROPRIETORY BUSINESS :-

CIVIL

CONSTRUCTION

RS. 30/-

LAKHS

Rs.250000/- No. since Net Profit is


Turnover

BUILDING

MATERIAL

SUPPLIER

RS. 20/-

LAKHS

Rs. 180000/- No. since Net Profit is


Turnover

STONE CRUSHER Rs. 35/- Lakhs Rs. 300000/- No. since Net Profit is


Turnover

Even though aggregate turnover of all the business exceeds Rs. 60/- lakhs, Assessee is

not liable to audit u/s. 44AB in respect of any of the business.

8/23/2011

60

ISSUE - 1

Sanjay, a resident individual, carrying on five businesses the

turnover of which are as under:

a) Manufacturing Rs 30/- lakhs

b) Service Rs 15/- lakhs

c) Wholesale trading Rs 10/- lakhs

d) Retail trading Rs 5/- lakhs

e) Interest from money lending Rs 5/- lakhs

ISSUE - 2

Deepak & Co, a resident firm having two businesses, the

turnover of which is as under:

a) Trading Rs 40/- lakhs

b) Transportation business Rs 30/- lakhs

.

8/23/2011

61

ISSUE - 3

Sachin, a resident individual has given the following details:

a) Professional gross receipts Rs 30/- lakhs

b) Manufacturing business turnover Rs 35/- lakhs

ISSUE – 4

XYZ, a resident HUF carrying on trading activities. Total

turnover of the business is Rs 40/- lakhs. Profit as per books is

Rs 6.5 lakhs. However, it wants to file the return of income

under section 44AD and claim profit at 8% i.e. 3.2 lakhs. Can

it do so?

8/23/2011

62

ISSUE – 5

Srinidhi a resident individual covered under section 44AD, for

three consecutive assessment year 2011-12 to 2013-14, WDV

of furniture as on 31-03-2010 is Rs 50,000/-. He sells the

furniture for Rs 42,000/- on 01-01-2013.

Compute WDV of furniture for assessment year 2013-14?

ISSUE – 6

Mamta an individual resident, assessed under section 44AD

has made the following payments (previous assessment year

assessed under section 44AB):

8/23/2011

63

Case 1:

Cash payment of Rs 32,000/- for purchases

Single cash payment of Rs 51,000/- for repair expenses

(contract without TDS)

Payment of interest of Rs 18,000/- without TDS.

Case 2:

The following disallowances were made in the previous

assessment year:

Cash payment exceeding Rs 20,000/- for purchases

Interest expenditure of Rs 25,000/- for non-remittance of TDS

with in due date. TDS amount being paid in the next year.

8/23/2011

64

ISSUE NO - 7

Sapna is a resident individual assessed under section 44AD

recovered bad debts written-off in earlier years Rs

23,000/-.

ISSUE NO - 8

Mitesh is a resident individual submits the following details:

Net profit from trading business

(TO Rs 40/- lakhs) 1,80,000.00

Other income 10,000.00

80C deductions to be allowed 35,000.00

Compute his total income, whether section 44AD and section

44AB would be applicable?

8/23/2011

65

ISSUE NO - 9

In case of an assessee being an individual or HUF liable to

audit under section 44AB because of section 44AD, would

TDS provisions apply to him in the next year?

ISSUE NO – 10

Would audit under section 44AB for the purpose of section

44AD be counted in the limit of tax audits for tax auditors?

8/23/2011

66

ISSUE NO – 11

Speculation:

The following is the profit & loss account of Mr Ashish, a

resident individual dealing in shares. Whether section 44AD

would apply?

Profit & Loss Account

To Loss on sale of

shares

20,00,000.00 By Profit on sale of

shares

65,00,000.00

To Net profit 45,00,000.00

65,00,000.00 65,00,000.00

8/23/2011

67

In case of a person who is doing speculation business in

shares with no intention of taking or giving delivery but

merely earning or losing through squaring up of

transactions, what will constitute the turnover / gross

receipts of the business?

ISSUE NO – 12.

Nimita & Co, a resident firm, submits the following details for

the previous year 2010-11:

Total turnover : 20,00,000.00

Loss from trading business (as per P & L A/c): 1,50,000.00

Salary and interest to partners,

debited to P & L A/c: 1,70,000.00

& 1,15,000.00 respectively

Is section 44AD applicable?

8/23/2011

68

ISSUE NO – 13.

Sneha an individual resident, carrying on trading activity

submits the following:

Compute total income.

Turnover : 40,00,000.00

Net profit as per normal

provision books : 2,00,000.00

B/f depreciation allowance: 2,00,000.00

B/f business loss AY 08-09: 1,50,000.00

Net profit as per normal provisions is 5%. Assessee opts

for section 44AD and offers Rs 3,20,000.00 i.e., 8% of Rs

40 lakhs as his profit from business.

Computation of income from business?

8/23/2011

69

ISSUE NO. - 14

Mr Prem, an individual resident, submits the following details?

Compute tax liability for assessment year 2011-12?

Income from business to be assessed

under section 44AD 4,00,000.00

Income from other sources 10,00,000.00

Deduction under section 80C 1,00,000.00

Advance tax paid Nil

Presumptive taxation – Plying,

hiring or leasing goods carriage

Section 44AE: In case of the business of plying, hiring or leasing

goods carriages, higher income is to be deemed: - w.e.f.

01.04.2011 (FY 2010-11)

Type of vehicle Estimated income per vehicle

Heavy goods vehicles Rs. 5,000/- per month or part of the

month. (Earlier Rs. 3,500/-)

Other than heavy goods

vehicles

Rs. 4,500/- per month or part of the

month. (Earlier Rs. 3,150/-)

8/23/2011

70

FORM NO. 3CD

[See rule 6G(2)]

Statement of particulars required to be furnished under

section 44AB of the Income-tax Act, 1961

Amendment

Central Law Board of Direct Tax has amended tax audit

form no. 3CD vide notification dated 10thAugust, 2006

and 13thApril 2009

8/23/2011

71

PART A

Clause (1 to 6)

1. Name of the assessee

2. Address

3. Permanent Account Number

4. Status

5. Previous year ended

6. Assessment year

Issues on Clause(1 to 6)

1) If assessee is proprietor give his/her name along with all

Proprietary Firm‘s name.

2) As per income tax record, if any change in address must be

given.

3) If PAN has been applied and allotment is pending mentioned

not yet allotted.The copy of application of applied PAN must be

kept by the Auditor.

4) ‗Status‘ means as per sec. 2 (31) of Income Tax Act & not

‗residential status‘ [Sec 2(31) – ―Person‖ includes an Individual,

HUF, Firm etc.

5) As per sec. 3 of Income Tax Act, previous year should end on

31st March.

6) Assessment year according to the relevant Previous Year

8/23/2011

72

PART B

Clause 7 to 32

Clause 7a. If firm or association of persons, indicate names of

partners/members and their profit sharing ratio

Clause 7b. If there is any change in the partners or members or

in their profit sharing ratio since the last date of the preceding

year, the particulars of such change

8/23/2011

73

ISSUES ON Clause 7:

Ans: (i) What is the date with reference to which the

information in subclause (a) is to be given? Is it on the first

day of the previous year or last day thereof?

Paragraph 18.1, inter alia, clarifies that the details of partners

or members during the entire previous year will have to be

furnished. Hence, the names of partners of the firm or

members of the association of persons and their profit

sharing ratios during the entire previous year will have to be

stated and not merely on the first day of the previous year or

last day thereof.

(ii) Should the dates on which the change referred to in sub-clause

(b) occurred, be mentioned?

Paragraph 18.2 clarifies that if there is any change in the partners

of the firm or members of the association of persons or their profit

or loss sharing ratio, the particulars of such change must be stated.

The word "particulars" is significant and it includes the relevant

dates also. The date on which there is a change in the membership

of partner(s) of a firm or member(s) of an association of persons

or a change in the profit sharing ratios (including changes, if any,

in the terms of remuneration, interest) is extremely significant data

for the purpose of calculating interest, remuneration etc.

8/23/2011

74

Further, once there is a change in the partners/members or their

profit sharing ratio, it will obviously be reflected either in a fresh

partnership deed or a supplementary partnership deed. Hence, it is

necessary to mention the dates on which such changes occurred.

Even in a case where there is a change in the salary to partners it is

necessary to mention the dates on which such changes have

occurred, as change in salary to partners is as significant as

changes in the profit sharing ratios among the partners.

(iii) Keeping in view the requirements of section 184, is it

necessary to confirm the particulars of change with the records of

Registrar of Firm ?

Ans: Paragraph 18.3 gives guidance about the supplementary

documents which the tax auditor may verify in order to satisfy

himself about the genuineness of change in the partners or change

in the profit sharing ratios. Sub point (ii) of the above paragraph

points out that the tax auditor may verify whether notice of

change, if required, has been given to the registrar of firms. Thus

the verification of records of the registrar of firms is discretionary

and has to be done in accordance with the professional judgement

of the tax auditor.

8/23/2011

75

(iv) When a partner in a representative capacity, say, karta of HUF,

retires from a firm and is admitted to that firm in his individual

capacity, is it a change in the constitution of the firm as envisaged

by this clause ?

Ans: It is a change in the constitution of the firm as envisaged by

this clause.

Clause 8a. Nature of business or profession (if more than one business or profession is carried on during the previous year, nature of every business or profession)

For this, reference can be made to the director‘s report and / or abstract under Part IV of Schedule VI.

Clause 8b. If there is any change in the nature of business or profession, particulars of such change

Some examples of change in nature:

1. from manufacturer to trader or vice versa

2. change in principal line of business In case of amalgamation / demerger, if similar line of activity, it would not amount to change in the nature.

The tax auditor should make proper enquiries, review the minutes of meeting (if made available), director‘s report, etc.

../PART 4 SCHEDULE 6.pdf













8/23/2011

76

Issues on Clause 8

Permanent discontinuanceof a particular product

line of business need to be reported not temporary

suspension.

―Nature of business or Profession‖given must be same as

Annexure -I.

Effect on Carry or forward of losses :-from A.Y. 2000-01

losses will be carried forward, even if the business or

profession is discontinued (Sec 72(1)(i))

Clause 9

(a)Whether books of account are prescribed under

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

(b) Books of account maintained. (In case books of

account are maintained in a computer system, mention

the books of account generated by such computer

system)

(c) List of books of account examined.

8/23/2011

77

Sec 44AA

Specified Profession

Non Specified Profession or

Business

Exceeds

Does not

Exceeds

Limit Rs 1,50,000 Receipts

Limit Total income Rs 1,20,000 or

Total Sale Receipts Rs 10,00,000

Exceeds

Does not

Exceeds

Prescribes

Books Rule 6F

Any books

Any books

No books are

mandatory

Note: Any books means the books so as to enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.

8/23/2011

78

Cont.

Prescribed Books:

Cash book

Journal (if the accounts are kept on mercantile bases)

Ledger

Serial numbered carbon copies of the bills and receipts issued

Original purchase bill/payment vouchers.

If person carrying on medical profession in addition to above books a daily case

register in form no. 3C. and stock register

[RULE 6F (2) &(3) ]

Prescribed books of account are to be kept at the place of profession or principal

place of profession if carried at more than one place[s.rule(4)] and for a period of 6

years from the end of the relevant assessment year. [ rule 6F(5)]

Specified Profession

Legal, medical, engineering, accountancy, architectural

profession, technical consultancy, interior decoration or

other notified profession.

vide notification : No. SO 17(E), dated 12-1-1977.,

notified professions are the profession of authorised

representative and the profession of a film artist.

8/23/2011

79

Sec 2(12A) Books or Books of account includes:-

Ledgers

Day-Books

Cash books

Account books

Others

Whether kept in the written form or as print-outs of data

stored in a floppy, disc, tape or any other form of electro-

magnetic data storage device.

If case of books of accounts generated by the Computer

system; the proper print out are mandatory.

ISSUES ON Clause 9:

Books of Account:

In case where stock records are not properly maintained

by the assessee due to big volume of operations e.g.

particularly in case of retail trade how should the tax

auditor report on such imperfect records maintained by

the assesse.

8/23/2011

80

Ans : Paragraph 20.6 advises the assessees engaged in trading/

manufacturing activities to maintain quantitative details

principal items of stores, raw material and finished goods.

Inventories normally constitute a significant portion of the total

assets particularly in the case of manufacturing and trading

entities as well as some service rendering entities. The Auditing

Practices Committee has issued a Guidance Note on Audit of

(b) Inventories.

Under the paragraph entitled "examination of records" it has

been observed in the above Guidance Note that the auditor may

come across cases where the entity does not maintain detailed

stock records" other than basic records relating to purchase and

sales. In such situations, the auditor would have to suitably

extend the extent of application of the audit procedures in

regard to the inventories.

8/23/2011

81

While giving the particulars in Form NO.3CD the concept of

materiality has to be kept in mind. If the value of inventories

constitutes a very significant portion of the total assets and even

then the assessee does not maintain proper stock records, the

auditor will have to exercise his professional judgement

whether the absence of such records would affect his reporting

requirements.

Clause 10. Whether the profit and loss account includes any

profits and gains assessable on presumptive basis, if yes,

indicate the amount and the relevant sections (Sec 44AD,

44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other

relevant section)

8/23/2011

82

SL. NO. Section Business Covered

1 44ADCivil construction business

2 44AE Transport business

3 44BShipping business of a non-resident

4 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.

5 44BBA Operation of aircraft by non-resident.

6 Any other relevant section

This refers to the sections not listed above under

which income may be assessable on presumption

basis like section 44D and sec 115A(1)(b) and will

include any other section that may be enacted in

future for presumptive taxation.

Clause 11a. Method of accounting employed in the previous year

Assessee can follow either cash or mercantile system of accounting, hybrid system is not permitted.

However, assessee can adopt cash system for one business and mercantile for other business. But the assessee has to consistently follow the method of accounting.

As per Section 209 of the Companies Act 1956, every Company is required to keep books of account under accrual basis. The tax auditor should refer the notes to the accounts.

8/23/2011

83

Clause 11b. Whether there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year

The change in the accounting policy may not be a change in accounting method. Hence, it need not be reported here.

The method of accounting can be changed provided changed method is regular method and the assessee has not merely abandoned or changed it for a casual period to suit his own purposes.

Clause 11c. If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss

The concept of materiality is the basic governing factor. If it is not possible to quantify effect, disclosure of such fact should be stated. Reference can be made to the notes to the accounts.

Clause 11d. 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 there on the profit or loss

U/s 145(2)- Accounting Standard to be followed by all assessee

following mercantile system of accounting .

The Central Government has notified two Accounting Standards [CBDT

C.No. 9949 dated July25,1996]

(A) Accounting Standard – I

Relating to ― Disclosure of Accounting Policies‖.

B) Accounting Standard – II

Relating to Disclosure of ―Prior Period and Extraordinary Items

and changes in Accounting Policies‖.

8/23/2011

84

Reporting of treatment of Excise Duty, VAT etc

Clause 12

12(a) Method of valuation of closing stock employed in the previous year

(b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss.

Clause 21: Residuary note State whether sales tax, customs duty, excise duty or any other

indirect tax, levy, cess, impost etc. is passed through the profit and loss account.

Clause 22(a): 22. (a) Amount of Modified Value Added Tax credits availed of

or utilised 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 12a. Method of valuation of closing stock employed

in the previous year

The tax auditor should refer the method of valuation in

significant accounting policies in the notes to the accounts.

The word the ―Closing Stock‖ includes all items of inventory.

8/23/2011

85

Clause 12b. Details of deviation, if any, from the method of valuation

prescribed under section 145A, and the effect thereof on the profit

or loss

Section 145A has come into force from A.Y 1999-2000. It is not

necessary to change the method of valuation of purchase / sale and

inventory regularly employed in books of account.

The adjustments provided under the section can be made while

computing the income for the return. The adjustments will affect

opening stock, purchases, sales and closing stock. The adjustments

are as follows:

any tax, duty, cess or fee actually paid or incurred on inputs, sales,

inventory should be added, if not already added (to gross up)

Issues on Clause 12(a) :

Valuation of Closing Stock:

Where an assessee is following cash system of

accounting, should he account for the closing stock or

alternatively, can the entire purchases be claimed as

an expense?

8/23/2011

86

Ans: Even if the assessee is following cash system of

accounting, he should account for the closing stock as per the

principles laid down in Accounting standard – 2 (Revised)

valuation of inventories. The trading account has to be

prepared and the opening stock, purchases and closing stock

have to be kept in mind while making valuation of closing

stock.

In this connection, a reference may be made to the decision

of the Supreme Court in CIT v. A. Krishnaswami Mudaliar

(53 ITR 122, 132), wherein it was held ―But whatever may

be the system, whether it is cash or mercantile,…, in a

trading venture it would be impossible accurately to assess

the true profits without taking into account the value of the

stock in trade at the beginning and at the end of the year‘.

In clause 3(i) of the old Form No. 3CD, reference

was to ―opening and closing stock-in-trade‖. In sub

clause (a) of clause 12 of revised Form No. 3CD, the

reference is to closing stock . What is the significance

of this change?

8/23/2011

87

Ans: The significance of this change is explained in paragraph 23.3.

of guidance note on tax audit revised 2005 edition. In clause 3(i)

of the old Form No. 3CD reference was to ―opening and closing

stock-in-trade‘. In sub-clause (a) of clause 12 of revised Form No.

3CD, the reference is to ―closing stock‖. The expression ―stock-in-

trade‖ means finished goods and raw materials. Since sub-

clause(b) refers to section 145A where the term ― inventories‖ is

used, the term ―closing stock‖ will include all items of inventories.

AS-2 defines the term ―inventories‖ to include finished goods, raw

material maintenance supplies, consumables and loose tools.

Therefore, method of valuation of items of closing inventories will

have to be given under sub-clause (a).

Issues on Clause – 12(b)

Please clarify whether adjustment of Cenvat against

excise duty payable is considered as ―paid‖ for the

purposes of section 43B?

8/23/2011

88

Ans : Yes, adjustment of Cenvat against excise duty

payable is considered as ―actually paid‖ for the

purpose of allowance under section 43B. It is a

constructive payment. Reference can also be made to

the Hon‘ble Supreme Court decision in standard

Triumph Motor Company Limited v CIT 201 ITR 391.

Section 145A is supposed to be tax neutral This

argument does not hold good in a case where excise

duty is payable by a manufacturer in a financial year

on account of his sales exceeding the basic exemption

limit, but in the next year the turnover is within the

basic exemption limit and the unit is not liable to pay

the excise duty. In such a situation, how can the credit

of excise duty on closing stock be claimed?

8/23/2011

89

Ans: In the first year debit of excise duty adjustment of excise

duty to the closing stock would offset each other and as such

there would be no impact on the profit as per accounts.

However, the debit on account of excise duty would be

disallowed under section 43B. In the next year the opening

stock would be closing stock of the first year, duly adjusted

with excise duty. The earlier year‘s excise duty debit would be

credited to profit and loss account of the next year. However,

this credit would not be taxable in view of disallowance of the

amount in the first year under section 43B.

It is also significant to note that paragraph 13 of AS 4 –

Contingencies and events occurring after the balance sheet date

provides that assets and liabilities should be adjusted for events

occurring after the balance sheet date that provide additional

evidence to assist the estimation of amounts relating to

conditions existing at the balance sheet date.

8/23/2011

90

Liability on closing stock of finished goods are

provided The goods are yet in the godown. There is a

fire and goods are destroyed. Is the assessee required

to include the amount of excise duty in the valuation

of stock for the purpose of section 145A?

Ans: Excise is a duty on manufacture of goods and the

liability for duty arise as soon as such goods are

manufactured. The duty payable on such goods will

have to be included for the purpose of valuation of

closing stock. If such goods are lost or destroyed in

storage, remission of duty can be given by the

commissioner on application. However, once the goods

are cleared from the factory and subsequently they are

destroyed there is no provision for granting refund of

duty.

8/23/2011

91

During the year after announcement of AS-2 as

mandatory, Cenvat has been excluded for the

purpose of valuation of opening stock though

Cenvat portion was considered for valuation of

closing stock of last year. Since clause 12(b) asks

for details of deviation, if any, from section 145A,

should the deviation for valuation of opening stock

be given? Alternatively please clarify whether this

issue is covered in clause 11(d).

Ans: Yes, the excise duty should be included in the

valuation of stock in order to comply with provisions of

section 145A. Once the statutory adjustments are shown

as part of computation of income, no separate

disclosure is necessary under sub-clause 12(a). The

issue is not covered by clause 11(d) since 11(d) requires

reporting of deviation, if any, in the method of

accounting employed in the previous year from

accounting standard prescribed under section 145.

8/23/2011

92

While giving effect of deviation from section 145A, as per

the Guidance Note excise duty payable on finished goods

has to be covered in the information related to section 43B

i.e. it is allowable as deduction on payment basis. Kindly

elaborate

Ans: The component of excise duty on finished goods forms

part of value of stock in trade. This is because the moment

the manufacture of the goods is complete in all respects and

ready for dispatch the liability of excise duty arises. The

deduction for excise duty is allowed only when the excise

duty on such goods is paid on the finished stocks cleared

and/or dispatched. The information relating to section 43B is

only to see that claim is not made on the basis of advance

payments made without clearance and/ or dispatch of goods.

8/23/2011

93

Subsequent to the year end but before furnishing of return, excise

duty of an amount which is more than the payable amount, has

been paid. However all the items which formed part of the closing

stock has not been cleared.

Ans: Section 43B is a provision intended to disallow certain

items of expenditure which are otherwise admissible on

account of non-payment within the stipulated date. It cannot

be used to allow an item of expenditure which is not relating

to the year merely on account payment made. Hence, excise

duty paid in excess of amount payable cannot be claimed as

deduction. Reference to Gopikrishna Granites India Ltd., v.

DCIT 251 ITR 337 (AP) and Hindustan Liver Limited v.

V.K. Pandey, JCIT, 251 ITR 209 (Bom) can be relevant in

this regard.

8/23/2011

94

Give the following particulars of the capital asset converted into stock-in-trade: -

(a) Description of capital asset,

(b) Date of acquisition;

(c) Cost of acquisition;

(d) Amount at which the asset is converted into stock-in-trade

Clause 12A- Conversion of Capital Asset into Stock in Trade at

fair market value: Section 45(2)

Issues on Clause – 12A

This clause is inserted to keep a track record of transactions

related to conversion of capital asset into stock-in-trade.

Such conversion is treated as transfer u/s 2(47)

U/s 45(2) notional capital gain arise from such transfer and

chargeable to tax in the year in which such stock-in-trade is sold.

No requirement of details of taxability of capital gain or business

income from such deemed transfer.

Follow AS-2 for valuation of stock-in-trade

Follow AS-10 for valuation of fixed assets.

Follow AS-22 for provision of I.Tax as temporary timing

difference.

Sec 47 & 47A also to be kept in mind.

8/23/2011

95

Cost of capital asset in case of:

Purchase–From invoice, Books etc

Self –constructed–directly related cost

Acquired in exchange–FMV or Net Book value of

asset given up

Acquired by way of inheritance–In this case if no

evidence exist –Auditor should rely upon the report of

the experts such as valuers.

Information under item no. 12A should be necessary not

only in the year of conversion but also in the year of sale

of relevant stock in trade. Since sec. 45(2) provides only

for the computation of capital gain in the year of

conversion but the due date of payment of tax is in the

year of sale of such converted stock-in-trade.

8/23/2011

96

The legislation has not visualized the situation where

stock in trade is to be converted into capital asset. In

the absence of a specific provision, the formula which

is favorable to assessee should be accepted. (ITA

6374/MUM/2004, ACIT v Bright Star Inv P Ltd)

Clause 13. Amounts not credited to the profit and loss account,

being:

a. the items falling within the scope of section 28

Section 28 prescribes certain items to be treated as income for e.g. sum received under Keyman insurance policy including the sum allocated by way of bonus on such policy, etc.

Under this clause various amounts falling within the scope of section 28 which are not credited to the profit and loss account are to be stated.

The information is to be given with reference to the entries in the

books of accounts and records made available to the tax auditor.

8/23/2011

97

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 the authorities concerned

The tax auditor has to examine all relevant correspondence,

records and evidence in order to determine whether any

claim has been admitted as due within the relevant previous

year.

If cash system is followed, even if it is admitted within the

previous year, but not actually received during the previous

year, it need not be reported here.

c. Escalations claims accepted during the previous year

Escalation claims would normally arise pursuant to a contract. Only those claims, to which the other party has signified unconditional acceptance need to be reported here.

d. Any other item of income

Any other items which tax auditor considers as income based on

verification of records, but not credited to Profit and loss account

to be reported under this clause.

In giving details under sub clauses (c ) and (d), due regard should

be given to AS – 9 Revenue Recognition.

8/23/2011

98

e. Capital receipt, if any

The auditor should refer to Cash flow statement for this purpose and exercise his professional expertise and judgment.

Some examples are :

1. Capital subsidy received in the form of government grants which are in the nature of promoters‘ contribution.

2. Government grants in relation to a specific fixed asset where such grant has been shown as a deduction from gross value of fixed assets.

3. Compensation for surrendering certain rights.

4. Profit on sale of fixed assets / investments to the extent not credited to the profit and loss account.

Clause 13:

Amounts not credited to the Profit & Loss Account:

Nowadays many companies are organizing foreign

tours for their dealers if they achieve targeted sales. In

such situations either the proprietor dealer or the

partner of the dealer firm or the director of the dealer

company may avail of the foreign tour, What are the

duties of the tax auditor in this regard.

8/23/2011

99

Ans : Clause (iv) of section 28 brings to charge the value of any

perquisite or benefit convertible into money or not arising from

the exercise of business or profession. Such benefit might have not

been credited to the profit and loss account or in the books of

account.

The tax auditor is required to report in regard to items falling

within the scope of section 28 whether or not they are entered into

the books of account. If the books of account or any other

supporting documents or records reflect or indicate enjoyment of

some such benefit, he may make further inquiries. Based on such

inquiries, in exercise of his professional judgment, he may report

about such benefit appropriately. Where circumstances warrant it

may be clarified that the information is not necessarily exhaustive

and is given on the basis of the knowledge he acquired in the

course of audit carried out in accordance with the normally

accepted auditing practices.

In case of an individual assessee certain incomes are

exempt like

a) share of profit from partnership firm – exempt u/s. 10(2A)

b) income of minor children exempt u/s. 10(32) should such

income also be disclosed under clause 13(d)

8/23/2011

100

Ans : Any income which could be ascertained from the

books of account, records and information made

available to the tax auditor has to be reported.

However, the tax auditor should clearly state that such

incomes are excludible under the relevant provisions

of section 10.

Clause 14.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 the WDV as the case may be.

d) Additions/deductions during the year with dates; in case of any addition of an asset, date put to use; including adjustments on account of Modvat, change in rate of exchange of currency, subsidy or grant or reimbursement, by whatever name called.

e) Depreciation allowable

f) Written down value at the end of the year

8/23/2011

101

Issues on Clause -14

It is compulsory for all assessee to claim depreciation or

additional depreciation in calculating taxable income otherwise no

deduction will be allowed & WDV will be treated as reduced –

Explanation 5 to Sec 32 (w.e.f A.Y. 2002-03).

‗Allowable‖implies permissible deduction under provision of Act

and Rules.

―Used‖means actual use and is not kept ready for use.

Assets used partly for Business purpose, deduction u/s 32(1)

restricted to proportionate part.

In clause 14 d(ii) adjustment is contemplated u/s 43A & AS-11 .

U/s 43A deduction on cash basis but AS-11 (revised) deduction

on accrual basis.

No amendment is made in this respect in Schedule VI & in form

3CD.

Depreciation is not allowed on an amount equivalent to

CENVAT credit claimed and allowed.

Depreciation is allowed on ―Actual Cost‖-term defined

u/s 43(1) of I.T. Act.

An assessee can claim depreciation on actual cost even if

he follows Cash method of accounting.

Subsidy received over & above of WDV of block of asset

in the absence of specific provisions not taxable.

The interest relatable to any period after such asset is

first put to use is not a part of actual cost.

8/23/2011

102

Sub clause (iia) to Sec 32(1) inserted by Finance Act,2002

w.e.f A.Y. 2003-04 to provide additional depreciation on

fulfillment of prescribed conditions.

W.e.f 2006-07 additional depreciation allowed to all the

assessee engaged in the business of manufacturing or

production of any article or thing in respect of New

machinery or Plant installed on or after 31stday of

March,2005.

Depreciation debited to P&L a/c as per requirement of

Schedule VI not reported under clause –14.

In case of dispute between assessee, department &

Auditor regarding classification of assets, rate of

depreciation etc in earlier year a suitable disclosure is

required.

Please clarify the basis upon which depreciation will

be allowed under cash system . Will it be allowed on

full cost or will it be limited to the actual payment

made during the relevant previous year?

8/23/2011

103

Ans: For the purpose of calculating the depreciation allowable

under the Income-tax Act the basis will be the actual cost as

defined in section 43(1) of the Income-tax Act. Accordingly,

even if an assessee is following cash method of accounting

depreciation has to be allowed on the full actual cost even if

only a portion of it might have been paid in cash during the

relevant previous year. It is because of the fact that when the

asset is used in business, the whole of the asset is used and not a

part proportionate to the cash paid.

(a) In the circumstances where depreciation has not

been claimed in the accounts and is not likely to be

claimed in the return also, should the tax auditor state

the particulars of depreciation under clause 14 or not?

b) The assessee wants to claim less depreciation than

allowable under Income tax Act. It is permissible?

What is the duty of the tax auditor in this regard?

8/23/2011

104

Ans : That the Finance Act, 2001, with effect from 1st April

2002, has inserted Explanation 5 below section 32 (1) to

provide that the provisions of sub section (1) shall apply

whether or not the assessee has claimed the deduction in

respect of depreciation in computing total income. In other

words, the effect of the Explanation is that the depreciation

would be considered in computing total income irrespective

of the fact whether a claim is made or not. Further, it is not

open to an assessee to claim lesser depreciation than the

prescribed rate.

Where, however, an assessee chooses to claim depreciation at a

lower rate or does not claim or does not intend to claim

depreciation, the tax auditor, as such, does not have to calculate the

depreciation on his own. It would be sufficient for him to state in

the report that the assessee does not intend to claim the

depreciation or has claimed depreciation at a lower rate and give

the necessary facts, if any, relating thereto. There may also be a

situation where the assessee does not want to claim depreciation

but is willing to give all the particulars necessary for calculating

depreciation. The tax auditor in that case can compute the

allowable depreciation and provide the required information under

the clause.

8/23/2011

105

Under Explanation 10 to section 43(1) any subsidy

received from Government towards an asset should be

reduced from the cost of the asset. What is the position if

in a given case, a subsidy of Rs. 3/- lacs is received

during the year (against a claim made few years ago) in

respect of an asset with a present WDV of Rs. 2/- lacs?

Indicate the treatment to be accorded to the excess

subsidy of Rs. 1/- lac over the WDV.

Ans : The Subsidy received should be reduced from the WDV

so as to reduce the balance in the block to Zero. The

excess, if any, over and above WDV does not appear to be

taxable in absence of a specific provision to that effect.

Section 50 also does not appear to be attracted as there is

no transfer of the asset.

8/23/2011

106

Clause 15. Amounts admissible under sections 33AB, 33ABA, 35, 35ABB, 35AC, 35CCA, 35CCB, 35D, 35DD, 35DDA, 35E

a. debited to the profit and loss account (showing the amount debited and deduction allowable under each section separately;

b. not debited to the profit and loss account

Section 33AB: Tea / Coffee / Rubber Development Account

Section 33ABA: Site Restoration Fund

Section 35: Expenditure on Scientific Research

Section 35ABB: Expenditure for obtaining license to operate telecom services

Section 35AC: Expenditure on eligible projects/schemes

Section 35CCA: Expenditure by way of payments to associations and institutions for carrying out rural development programmes

Section 35D: Amortization of certain preliminary expenses

Section 35E: Deduction for expenditure on prospecting etc. for certain minerals

Clause 16a. 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

If any such sum is paid, this would not be normally allowed as

deduction

The requirement is only in respect of disclosure, the tax auditor is

not expected to express an opinion about the allowability or

otherwise

The tax auditor should verify the contract with the employees so as

to ascertain the nature of payments

8/23/2011

107

Clause 16b. Any sum received from employees 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 under section 36(1)(va)

Deduction of such sums received from the employees is allowed, if it is

credited by assessee to the account of employees on or before the due date

as per the applicable law.

Otherwise, the same is treated as his income under Section 2(24)(x)

Tax auditor should get a list of various contributions recovered from the

employees and verify the actual payments from the evidence available.

Clause 16:

Bonus, Commission, PF recoveries etc.:

M/s. A Pvt. Ltd pays service charges to its Director

Mr.Z, amounting to Rs. 1 lakh. Mr. Z is holding 50%

of the shares in M/s. A Pvt. Ltd. Please clarify

whether the same has to be reported under this clause?

8/23/2011

108

Ans: It is not clear whether Mr. Z is an employee of the

company Assuming that he is also an employee of the company,

if it established that the amount of Rs. 1 lakh in sum and

substance constituted dividend, the tax auditor has to report

under sub-clause (a). However, if such service charges are

payable to Mr. z for services rendered to the company and have

no connection with the appropriation of profits in any manner,

there is no reporting requirement.

The assessee applied for a P.F. No. in time but the

same was not allotted within a reasonable time due

to departmental delay. The assessee duly made a

provision for the contribution by the employer in

its profit and loss account and balance sheet. But

the same could not be remitted to the authorities

because of the non allotment of P.F. No. Please

clarify the duty of the tax auditor in this regard.

8/23/2011

109

Ans: The objective of Sub-clause (b) is to get information in

respect of sums recovered from employees towards

provident fund contributions etc. and the dates on which

such contributions were remitted to the statutory

authorities. This information is necessary to determine the

allowability of the payment of such contributions under the

provisions of section 36(1)(va). In the given issue the

assessee has not remitted the contribution to the statutory

authorities, whatever be the reasons therefore. The tax

auditor has indicate the factual position in this regard.

Please clarify whether the grace period of 5days

should be considered while determining due date for

payment of PF, ESIC contributions for reporting under

section 36(1)(va) read with sections 2(24) (x) and 43 -

B

8/23/2011

110

Ans: The following extracts from the judgement of the

Income-tax Appellate Tribunal in Hunsur Plywood

Works Ltd., V. Deputy Commission of Income-tax

(1995) 54 ITD 394 will make the position clear.

―Paragraph 38 of the Employees‘ Provident Funds

Scheme, 1952 says that the amounts under

consideration in respect of wages of the employees for

any particular month shall be paid within 15 days of

the close of every month.

Clause (iii) of CPFC's Circular NO.E. 128(1) 60-111 dated 19-3-

1964 as modified by Circular No. E. 11/128 (section 14-B

Amendment)/73 dated 24-10-1973 allows five days of grace

period to the employers for payment of provident fund

contribution, administrative charges and inspection charges. The

said Circular also states that if payment be made within the said

period of grace, no damages as per section 14-B of the

Employees's Provident Funds and Miscellaneous Provisions

Act, 1952 shall be levied. Furthermore, our attention has also

been drawn to CPFC's Circular No. E.128(1 )60-IV dated 29-4-

1967 in clause (iii) of which it has been stated that the Central

Board of Trustees at its meeting on 13-4-1967 agreed that if

payment was made within grace period already allowed by it,

then such payments should not be counted as default even for

the purpose of counting the number of defaults ……(Page 399)

8/23/2011

111

Thus, we find that from strict judicial angle, the period or days of

grace would seem to be falling within a twilight region. The

period certainly follows the exact due date but at the same time

no action by the other side is possible within the said period

except for registering a protest. Since the present issue is

required to be resolved from practical angle, as discussed by us

above, we are required to examine the consequences of making

of payment of the employees' contribution to the EPF etc., within

five days' period of grace.

We find that if an employer makes payment within such period of

grace, not only is he not liable to pay any damages in accordance

with the Employees' Provident Fund Scheme and the relevant

Act, but by virtue of the Circular dated 29-4-1967 as mentioned

above, he will also not be treated to be in default. Hence, we

ultimately hold that from practical point of view, the five days'

period of grace after 15th of the succeeding months is to be

considered merely as an extension of the early 15 days and all the

consequences of making payment within the said 15 days should

be considered to follow if the payment be made within the grace

period following the said period of 15 days.― (Page 400).

Also refer to CIT v. Salem Cooperative Spinning Mills Ltd.

[2002J 258 ITR 360 (Mad).

8/23/2011

112

Clause 17. Amounts debited to Profit and loss account, being :-

Clause 17a. Expenditure of Capital nature

Capital expenditure, if any, debited to the profit and loss account to be disclosed stating the amounts under various heads separately

Tax auditor needs to scrutinize records and obtain information and make necessary inquiries in this behalf

General tests should be applied to determine whether a particular expenditure is of a capital nature i.e.

• where it brings into existence an asset or

• advantage of enduring benefit, or

• whether it relates to the frame work of the assessee‘s business etc.

Clause 17b. Expenditure of personal nature

Tax auditor needs to scrutinize the ledger to verify whether any

expenses of personal nature have been incurred by the assessee.

Section 227(1A) requires the auditor to inquire whether personal

expenses have been charged to the revenue account.

Note: According to the information and explanation given by the

assessee, no personal expenses have been debited to the profit and

loss account other than those payable under contractual

obligations or in accordance with the generally accepted business

practice.

8/23/2011

113

Clause 17c. Expenditure on advertisement in any souvenir,

brochure, tract, pamphlet, or the like, published by a political party

If there is any such expenditure debited to the profit and loss

account, the same will be disallowed under section 37(2B) and has

to be reported under the above clause.

For this purpose the tax auditor should scrutinize the ledger

accounts and make enquiries in this behalf.

Clause 17d. Expenditure incurred at clubs-

(i) As entrance fees and subscriptions

(ii) As cost for club services and facilities used

The expenditure may be incurred for directors, employees,

partner, proprietors.

The fact that whether they are of personal nature or incurred

in the course of business should be ascertained. If they are of

personal nature, they should be shown under clause 17b.

The tax auditor should make a close scrutiny of the ledger in

such cases

8/23/2011

114

Clause 17e.

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

ii. Any other penalty or fine

iii. Expenditure incurred for any purpose which is an offence or which is prohibited by law

Tax auditor should obtain in writing the details of all payments made by way of penalty or fine from the assessee and how such amounts have been dealt in the books of accounts

The tax auditor is not required to express any opinion as to allow ability or otherwise of amount.

It does not cover payment for contractual breach.

Note: The assessee has represented that, the assessee has not incurred:

i. any expenditure by way of penalty or fine for violation of any law for the time being in force;

ii. any other penalty or fine; and

iii. any expenditure for any purpose which is an offence or which is prohibited by law.

8/23/2011

115

Clause 17f. Amounts inadmissible under section 40(a)

It basically includes :

Interest, royalty, fees for technical services or any other sum payable outside India or in India to a non resident or a foreign company

Interest, commission or brokerage, rent, royalty, fees for professional or technical services, payments to resident contractors/subcontractors

Securities transaction tax, Fringe benefit tax, Income tax and

Wealth tax

Salaries payable outside India or to a non resident on which tax has not been deducted at source

Tax actually paid by an employer referred to in section 10(10CC)

In case of any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services to a resident, or amounts payable to a contractor or sub-contractor, being resident; on which tax has not been deducted, or after deduction, has not been paid

No disallowance if tax paid before due date for filing return. There will be no disallowance of any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a resident contractor or sub-contractor for carrying out any work if after deduction of tax during the previous year, it is paid on or before the due date of filing of return of income specified in section 139(1). [s. 40(a)(ia) ; w.e.f. 01.04.2010 : FA 2010]

8/23/2011

116

Clause 17g. Interest, salary, bonus, commission or remuneration

admissible under section 40(b)/40(ba) and computation thereof

Tax auditor is required to state the inadmissible amount under

this clause after applying the conditions for allowance or

disallowance and accordingly determine the prima facie

inadmissibility of the deduction and also quantify the same

Conditions for admissibility:

a. Remuneration to working partner

b. Remuneration/interest is authorized by partnership deed

c. The interest should not exceed 12% p.a. and the remuneration

should not exceed the maximum permissible limits.

d. The same should not pertain to a period prior to the date of

partnership deed.

Firm

Section 40 (b): Uniform limit has been fixed for both professional firms and non-professional firms in respect of payments of salary, bonus, commission or remuneration to the working partners: - w.e.f. 01.04.2010

Book Profit Allowable Remuneration

On the first Rs.3,00,000 of the book-

profit

Rs. 1,50,000/- or 90% of the book-

profit, whichever is more.

On the balance of the book-profit 60% of book-profit

In case of loss Rs. 1,50,000/-

8/23/2011

117

40(ba) Payment Of Interest Salary, Bonus, Commission Or

Remuneration Made By AOP/BOI To Its Members

In the case of a AOP/BOI any payment of interest,

salary, bonus commission or remuneration made by

such AOP/BOI to any of its member.

Note:

1. Interest paid to member - Interest received from such member

= Net to be disallowed.

2. If member in individual capacity, then interest paid in

representative capacity be allowed.

3. If member in representative capacity, then interest

paid in individual capacity be allowed.

4. Salary paid in any capacity is to be disallowed.

8/23/2011

118

Clause 17h.(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 draft, as the case may be,

[Yes/No]

Confirmation of obtaining a certificate from the assessee regarding

payments relating to any expenditure covered under section 40A(3)

to be given in the above clause

Management Representation obtained from clients could be

regarded as a certificate for this clause

Certificate need not be attached with the Tax Audit Report

Clause 17h. (B) amount inadmissible under section 40A(3), read with rule 6DD [with break up of inadmissible amounts]

Section 40A(3) provides that where assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs.20,000 otherwise than by a account payee cheque / account payee bank draft, no deduction shall be allowed in respect of such expenditure.

Tax auditor should obtain a list of all payments exceeding Rs. 20,000 made by the assessee during the previous year which should also include the list of payments exempted in terms of Rule 6DD with reasons.

List should be verified by the tax auditor with the books of account in order to ascertain whether the conditions for specific exemption granted in Rule 6DD are satisfied.

Details of payments which do not satisfy the above conditions should be stated under this clause

8/23/2011

119

Note: The assessee maintains that all payments for expenses

made from bank accounts in excess of Rs. 20,000/- have been

made by account payee cheques or account payee bank drafts.

However, this could not be verified by the examining Chartered

Accountants as the necessary evidence is not in the possession of

the assessee.

40A(3) and 40A(3A) Payments Made Otherwise Than By

Account Payee Cheque Or Account Payee Bank Draft

Section 40A(3) shall be attracted if the following

conditions are fulfilled:

Assessee incurs any expenditure

in respect of which payment or aggregate of

payments made

to a person

in a single day

Of a sum exceeding Rs.20,000/-

Otherwise than by account payee cheque or

account payee demand draft

8/23/2011

120

Section 40A(3A): Where an allowance has been made in the

assessment for any year in respect of any liability incurred

by the assessee for any expenditure and subsequently

during any previous year (hereinafter referred to as

subsequent year) the assessee makes payment in respect

thereof, otherwise than by an account payee cheque

drawn on a bank or account payee bank draft, the

payment so made shall be deemed to be the profits and

gains of business or profession and accordingly

chargeable to income-tax as income of the subsequent

year if the payment or aggregate of payments made to

a person in a day, exceeds Rs. 20,000/-.

Transportation Section 40 (3A):

Newly inserted proviso provides that in case of payment made for plying, hiring or leasing goods carriages,

the limit will be Rs. 35,000/- instead of Rs. 20,000/-,

in respect of disallowance where the payment is made in cash or otherwise than by way of account payee cheque or DD. - w.e.f. 01.10.2009

8/23/2011

121

Rule 6DD – Disallowance of cash payments

As per Rule 6DD as amended by Rules 2007 ‗no disallowance shall be made even if payment is made in excess of Rs. 20,000, in the cases and circumstances specified hereunder, namely:-

- Where payment is made to-

i. RBI

ii. SBI

iii. Any co-operative bank or land mortgage bank

iv. Any primary agricultural credit society

v. LIC

It may be noted that sub-clauses vi) to xviii) [i.e payment to IDBI, ICICI, UTI etc] of the said rule have been omitted by Notification 208/2007, dated June 27, 2007.

Notes:

1. In certain cases as specified in Rule 6DD, payment in

a sum exceeding Rs. 20,000/- may be made otherwise

than by an account payee cheque/DD.

2. Attar Singh Gurmukh Singh (Supreme Court) -

Purchase of stock or raw material constitute

expenditure. Section 40A(3) shall apply on payment

made in this regard.

8/23/2011

122

3. Vijay Kumar Ajit Kumar - Section 40A(3) shall

also apply in case of advance payment for the

expenditure made otherwise than by account payee

cheque. Disallowance shall be in the year in which

expenditure is incurred.

4. Section 40A(3) attracted for purchases made

otherwise than by account payee cheque by Pucca

Ahartiya and not attracted for purchases made by

a Kachcha Ahartiya.

40A(4) Payments Made By Account Payee Cheque in

Violation of a Contract

Notwithstanding anything contained in any other law

for the time being in force or in any contract,

where any payment in respect of any expenditure has

to be made by an account payee cheque or an account

payee bank draft in order that such expenditure may not

be disallowed as deduction under section 40A(3),

8/23/2011

123

then such payment may be made by such cheque or

draft, and where the payment is so made,

no person shall be allowed to raise, in any suit or

proceeding a plea on the ground that the payment

was not made in cash or in any other manner.

Where the payment is made by-

i. Letter of credit

ii. Mail or telegraphic transfer

iii. Book adjustment from one bank account to any other account

iv. Bill of exchange

v. Use of electronic clearing system through bank account

vi. Credit card

vii. Debit card

It may be noted that sub-clauses v) to vii) as above have been

inserted by Notification no. 208/2007 dated June 27, 2007

8/23/2011

124

Clause 17i. Provision for payment of gratuity not allowable under

section 40A(7)

As per section 40A(7), deduction of any provision is allowable

only if provision is made for contribution to any approved gratuity

fund or the provision relates to the amount of gratuity which has

become payable during the previous year.

The tax auditor should call for the order of Commissioner of I.T

granting approval for gratuity fund, verify the date from which it is

effective and also verify whether the provision has been made as

provided in the trust deed.

40A(7) Employer’s Contribution To Gratuity Fund

No deduction shall be allowed in respect of any

provision made by the assessee for the payment of

gratuity to his employees on their retirement or

termination of employment. However deduction shall

be allowed in respect of (i) payment of a sum as

contribution towards approved gratuity fund or (ii)

Any provision made for the purpose of payment of

gratuity becoming payable during the year.

8/23/2011

125

Note: No deduction shall be allowed in respect of any

provision made by the assessee for payment of

gratuity to his employees.

Exceptions:

1. Payment as contribution towards approved gratuity

fund.

2. Provisions made for payment of gratuity actually

becoming payable during the previous year.

Note: If the gratuity fund is unapproved, deduction for

gratuity shall not be allowed even if the provision for

gratuity is made as per Actuary.

Note: If a policy is taken from LIC for providing

gratuity to employees then annual premium is allowed

as deduction u/s 37(1).

8/23/2011

126

Clause 17j. Any sum paid by the assessee as an employer not allowable under section 40A(9)

Under section 40 A(9), any payments made by an employer towards the setting up or formation of or as contribution to any fund, trust, company, or other institutions (other than contributions to recognised provident fund or approved superannuation fund or approved gratuity fund )is not allowable.

Tax auditor should furnish the details of payments which are not allowable under this section

40A(9) Employer’s Contribution To Approved Gratuity

Fund, Recognized Provident Fund Or Approved

Superannuation Fund

No deduction shall be allowed in respect of any sum

paid by the assessee towards setting up or formation of,

or as contribution to, any fund, trust, company,

association of persons, body of individuals, society or

any institution except where such sum is required to be

paid under any law in force or where such sum is paid

for an approved gratuity fund, recognised provident

fund or approved superannuation fund.

8/23/2011

127

Clause 17k. Particulars of any liability of a contingent

nature

Detailed scrutiny of account heads like outstanding liabilities, provision etc to be made to ascertain any such particulars of contingent nature debited to profit and loss account.

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.:-

Section 14A provides that no deduction shall be made in respect of expenditure incurred by assessee in relation to income which is exempt from tax.

The tax auditor has to verify the details furnished by the assessee and should satisfy himself that the inadmissible amounts have been worked out correctly.

Where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act and does not furnish the necessary particulars for the purpose of ascertaining the inadmissible expenditure under section 14A, the tax auditor has to make a proper disclaimer / qualification.

8/23/2011

128

Deduction inadmissible u/s14A in respect of the expenditure incurred in relation to income which does not form part of the total income( Subsection 1).

The AO, if he is not satisfied with the claim of the assessee, shall determine the amount of expenditure incurred, in relation to income which does not form part of the total income in accordance with method prescribed under rule 8D (w.e.f. 24-3-2008), ( Subsection 2).

the expenditure which the AO seeks to disallow under s. 14A should be actually

incurred and so incurred with a view to producing non-taxable income (101 TTJ 369, ACIT vs Eicher Limited.)

Rule 8D w.e.f. 24-3-2008: Method for determining amount of expenditure in relation

to income not includible in total income. 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of

a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in

relation to income which does not form part of the total income under the Act for such previous year,he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

Clause 17 (l): Section 14A

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :

i. the amount of expenditure directly relating to income which does not form part of total income;

ii. in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :

A x B/C A = amount of expenditure by way o f interest other than the

amount of interest included in clause (i) incurred during the previous year ;

B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ;

C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the revious year ;

Clause 17 (l): Rule 8D: Determination

c

8/23/2011

129

iii. an amount equal to one-half per cent of the average of the value

of investment, income from which does not or shall not form

part of the total income, as appearing in the balance sheet of

the assessee, on the first day and the last day of the previous

year.

3. For the purposes of this rule, the 'total assets' shall mean, total

assets as appearing in the balance sheet excluding the

increase on account of revaluation of assets but including

the decrease on account of revaluation of assets.

Clause 17m. Amount inadmissible under the proviso to section 36(1)(iii)

Section 36(1)(iii) provides that interest on borrowed capital would be deductible only if :

a) The assessee has borrowed money.

b) It is used for the purpose of business and profession.

c) Interest is paid/payable on such money.

The proviso to the above section requires that capital borrowed for acquisition of asset for extension of existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as a deduction.

Tax auditor has to thus report the amount inadmissible under the above proviso.

8/23/2011

130

Clause 17A.

Amount of interest inadmissible under section 23 of the Micro,

Small and Medium Enterprises Development Act, 2006.

The auditor should report here the amount of interest paid to the

Micro, Small and Medium Enterprises.

Notification No. 36/2009

This is a new clause inserted by the Central Board of Direct

Taxes through its Notification No. 36/2009 dated 13-4-2009, in

the Form No.3CD in Appendix II of the Income-tax Rules,

1962

The tax auditor is required to state the amount of interest

inadmissible under section 23 of the Micro, Small and Medium

Enterprises Development Act, 2006.

The Micro, Small and Medium Enterprises Development Act,

2006 (MSME Act) is an Act to provide for facilitating the

promotion and development and enhancing the

competitiveness of micro, small and medium enterprises and

for matters connected therewith or incidental thereto.

8/23/2011

131

Section 23 of the MSME Act

Section 23 of the MSME Act lays down that an interest

payable or paid by the buyer, under or in accordance with

the provisions of this Act, shall not for the purposes

of the computation of income under the Income-tax

Act,1961 be allowed as a deduction.

The inadmissible interest has to be determined on the

basis of the provisions of the MSME Act.

Section 16 of the MSME Act provides for the date from

which and the rate at which the interest is payable.

Accordingly, where a buyer fails to make payment of

the amount to the supplier, as required under section

15, the buyer shall, notwithstanding anything contained

in any agreement between the buyer and the supplier

or any law for the time being in force, be liable to pay

compound interest with monthly rests to the supplier

on that amount from the appointed date or, as the case

may be, from the date immediately following the date

agreed upon, at three times of the bank rate notified by

the Reserve Bank.

8/23/2011

132


Section 15 of the MSME Act, requires the buyer to make

payment on or before the date agreed upon in writing, or

where there is no agreement in this behalf, before the

appointed day. It also provides that the period agreed

upon in writing shall not exceed forty five days from the

day of acceptance or the day of deemed acceptance.


Section 22 of the MSME Act provides that where any buyer is

required to get his annual accounts audited under any law for

the time being in force, such buyer shall furnish the following

additional information in his annual statement of accounts,

namely:-

8/23/2011

133

i. The principal amount and interest due thereon (to be

shown separately) remaining unpaid to any supplier as at

the end of each accounting year.

ii. The amount of interest paid by the buyer in terms of

Section 16, along with the amount of payment made to

supplier beyond the appointed date during each

accounting year.

iii. The amount of interest due and payable for the delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act.

iv. The amount of interest accrued and remaining unpaid at the end of each accounting year; and

v. The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23.

8/23/2011

134

Where the tax auditor is issuing his report in Form

No.3CB, he should verify that the financial statements

audited by him contain the information as prescribed

under section 22 of the MSME Act. If no disclosure is

made by the auditee in the financial statements he should

give an appropriate qualification in Form No.3CB, in

addition to the reporting requirement in clause 17A of

Form No. 3CD.

Clause 18. Particulars of payments made to persons specified under section 40A(2)(b)

Section 40A(2) provides that expenditure for which payment has

been or is to be made to specified persons may be disallowed (excess portion) if in opinion of A.O, such expenditure is excessive or unreasonable having regard to,

1. Fair Market value.

2. Legitimate needs of business/profession

3. Benefit derived by assessee Tax auditor should obtain a full list of specified persons as

contemplated in this section and obtain details of expenditure/payments made to specified persons

Tax auditor should scrutinize all items of payments to above persons

8/23/2011

135

If necessary, indicate in Form 3CD by way of a note as under :

―The Company does not have a complete list of "relatives" of

directors or a list of "persons" who carry on business or profession

in which a director of the Company or a relative of such director or

such individuals together with the assessee Company has/have a

substantial interest. According to the information with the

Company, the Company has certified that there are no payments

other than disclosed above made to persons specified in Section

40A(2)(b) of the Income tax Act; this has not been verified by the

auditors.‖

Chart of persons specified in Section

40A(2)(b)

Individual Firm Association

of persons

HUF

Company

His

relatives

Its

Partners

Its

Members

Its

Members

Its

Directors

Their

relatives

Their

relatives

Their

relatives

Their

relatives

8/23/2011

136

Where person having substantial interest in

the business or profession of the assessee is

Individual Firm Associatio

n of

persons

HUF

Company

His

relatives

Its

Partners

Its

Members

Its

Members

Its

Directors

Their

relatives

Their

relatives

Their

relatives

Their

relatives

Note : where one or more the persons falling in any of

the above categories (i.e. individual and his relatives,

firm, its partners and their relatives, etc.) have

substantial interest in the business or profession

carried on by any person – that person is also covered

under section 40A(2)(b)

8/23/2011

137

Note: Where one or more of the persons falling in any of the above

categories (i.e. individual and his relatives, firm, its partners and their relatives, etc.) have substantial interest in the business or profession

carried on by any person - that person is also covered under section 40A(2)(b)

Director Partner Member of AOP Member of HUF

Companies in

which he is a

Director

Firm in which he

Is a partner

AOP of which he is a

member

All other

Directors of

such

companies

All other partners

Of such firms

All other members of

such HUF

All other members of

such HUF

Their Relatives Their relatives Their relatives Their relatives

PART III

8/23/2011

138

Notes:

1. Relative is defined in section 2(41) as including husband, wife, brother, sister or any lineal ascendant or descendent of the individual.

2. "Person having a substantial interest" is explained in section 40-A as under:

i. In the case of company - the person concerned is, at any time, during the previous year the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than 20% of the voting power.

ii. In other cases - such person is at any time during the previous year, beneficially entitled to not less than 20% of the profits of such business or profession.

Clause 19 :- Amounts deemed to be profits and gains under section 33AB or 33ABA or 33AC

Sections 33AB and 33ABA lay down the circumstances under which amount withdrawn from deposits covered thereby for purposes other than specified purposes, is to be deemed income chargeable as profits and gains. Tax auditor is required to report such amounts

8/23/2011

139

Clause 20 :- Any amount of profit chargeable to tax under section 41 and computation thereof

Section 41 mainly includes

a.) Recovery of any loss, expenditure or trading liability, earlier allowed as deduction.

b.) In case of undertaking engaged in generation/ distribution of power, if building, machinery, plant or furniture is sold/discarded/demolished or destroyed.

c.) When an asset used for scientific research is sold.

d.) Subsequent recovery of bad debt, earlier allowed as deduction.

e.) Amount withdrawn from special reserve created under section 36(1)(viii).

Clause 21:- In respect of any sum referred to in clause (a), (b), (c), (d), (e) or (f) of section 43B, the liability for which;

(A)pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was

(a) paid during the previous year;

(b) not paid during the previous year;

Trace the amount of liability which was pre-existed on 1st April

2009 from statements attached to the Tax audit report for clause

21(i)(A) & 21(i)(B) for the year ended 31st March, 2009.

Obtain the closing balance from the trial balance for the year

ended 31.03.09

E. g. Bonus to employees, Compensated Absences

8/23/2011

140

(B) was incurred in the previous year and was

a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1);

(b)not paid on or before the aforesaid date

Trace the closing balances of unpaid liability from the audited trial

balance (current liability).

Obtain the details of subsequent payment from the client.

Verified respective ledger accounts to verify the subsequent payments

remained unpaid.

E.g. Excise duty, Sales Tax / Value Added Tax, Work Contract Tax,

Commission to Managing, Bonus to employees , Leave Encashment, P

F contribution, ESIC contribution, Gratuity - Officers‗, Interest

accrued but not due

In respect of the expenditure covered by clauses (a) to

(f) of section

43B, the particulars may be furnished in the following

form,

8/23/2011

141

A) Liability pre- existing on first day of previous year

Sr.

No.

Nature of

liability

Outstan

ding

opening

balance

not

allowed

in any

earlier

previous

year(s)

Amount

paid/set

off

during

the year

against

column

3

Amount

written

back to

the

profit

and loss

account

Amount

remainin

g unpaid

as at the

end of

the year

Whether

passed

through

profit &

loss

account

Remark

s

1 2 3 4 5 (3-4-

5)=6

7 8

B) Liability Incurred during the Previous year

Sr.

No

.

Nature of

liability

Amount

incurred

during the

previous

year but

remaining

outstanding

as on the

last day of

the previous

year)

Amount paid/set

off before the

due date of

filing

return/date upto

which reported

in the tax audit

report,

whichever is

earlier against

column (3)

Amount

unpaid on

the due date

of filing the

return/date

upto which

reported in

the tax

audit report

whichever

is earlier

Whether

passed

through

the profit

& loss

account

Rema

rks

1 2 3 4 5 6 7

8/23/2011

142

43B certain deductions On Actual Payment Basis

Notwithstanding anything contained in any other

provisions of the Income Tax Act, a deduction

otherwise allowable under the act in respect of –

a. any tax, duty, cess or fee, by whatever name called,

payable under any law for the time being in force, or

b. employer's contribution to provident fund, gratuity

fund or any other fund for the welfare of the

employees, or

c. any bonus or Commission payable to the employees,

or

d. interest payable on any loan or borrowing from any

public financial institution or a state Financial

Corporation or state Industrial Investment

Corporation, or

e. Interest payable on any Loan or ADVANCE from a

scheduled bank, (―Scheduled bank‖ includes a Co-

operative bank).

f. Leave encashment payable to employees.

8/23/2011

143

shall be allowed as deduction only in the previous year

in which such sum is actually paid by him. This is

irrespective of the previous year in which the liability to

pay such sum was incurred by the assessee according to

the method of accounting employed by him.

Notes:

1. The provisions of section 43B shall not apply in relation

to any sum which is actually paid by the assessee on or

before the due date applicable in his case for furnishing

the return of income under section 139(1) in respect of

the previous year in which liability to pay such sum was

incurred by the assessee and the evidence of such

payment is furnished along with the return of income.

2. CBDT Circular: If under a scheme of the State

Government, payment of sales tax is deferred for

specified number of years, sales tax deferred will be

deemed to have been paid for the purposes of section

43B.

3. Where interest payable under clause (d) or (e) is

converted into a loan or advance or borrowing, then

it shall not be deemed to have been actually paid.

8/23/2011

144

Clause 22 (a) Amount of Modified Value Added Tax credits availed of or utilized during the previous year its treatment in the profit and loss account treatment of outstanding Modified Value Added Tax credits in the accounts.

Tax auditor should verify that there is a proper reconciliation between balance of CENVAT credit in the accounts and relevant excise records. (Viz. RG-23)

Tax auditor should verify that the information furnished under this sub-clause is compatible with the information under clause 12(b)

Reporting in following format

Balance at beginning of the year XXX

Add: CENVAT Credit available during the year XXX

Less: CENVAT Credit utilised during the year (XXX)

Outstanding at the end of the year XXX

(b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.

Accounts audited----Annual Accounts

Accounts not audited----Close scrutiny of ledger to determine period to which income/expenditure relates.

Both AS 5 and AS(IT)-II notified by Govt under section 145 state that if the material adjustments arising due to error or ommission in earlier years, then prior period item.

There is difference between expenditure of any earlier year debited to the profit and loss account and the expenditure relating to any earlier year, which has crystallised during the relevant previous year

Material adjustments necessitated by circumstances which though related to previous periods but determined in the current period, will not be considered as prior period items.

8/23/2011

145

Clause 23. Details of any amount borrowed on hundi or any amount due

thereon (including interest on the amount borrowed) repaid, otherwise than

through an account payee cheque [Section 69D]:-

Statute: As per Sec 69 D, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year in which the amount was borrowed or repaid

Hundi---Promissory Note.

Audit Procedures:

The Tax auditor to obtain a complete list of borrowings and repayments of hundi loans otherwise than by account payee cheques

Verify the same with the books of account.

Verify records in possession of assessee.

If records are not available, give appropriate disclaimer to that effect.

Scrutinize cash and petty cash book

Amount borrowed or repaid on hundi.

Where any amount is borrowed on a hundi from, or any amount due

thereon is repaid to, any person otherwise than through an account

payee cheque drawn on a bank, the amount so borrowed or repaid

shall be deemed to be the income of the person borrowing or

repaying the amount aforesaid for the previous year in which the

amount was borrowed or repaid, as the case may be :

Provided that, if in any case any amount borrowed on a hundi has

been deemed under the provisions of this section to be the income

of any person, such person shall not be liable to be assessed again in

respect of such amount under the provisions of this section on

repayment of such amount.

Explanation.—For the purposes of this section, the amount repaid

shall include the amount of interest paid on the amount borrowed.]

8/23/2011

146

Clause 24 (a) * Particulars of each loan or deposit in an amount exceeding the limit specified in section 269SS taken or accepted during the previous year :—

i. name, address and permanent account number (if available with the assessee) of the lender or depositor;

ii. amount of loan or deposit taken or accepted;

iii. whether the loan or deposit was squared up during the previous year;

iv. maximum amount outstanding in the account at any time during the previous year;

v. whether the loan or deposit was taken or accepted otherwise than by an account payee cheque or an account payee bank draft.

Statute: If loan or deposit to be accepted together alongwith loans or deposits

already accepted, exceeding Rs. 20,000 to be availed only through account

payee cheque or account payee bank draft.

Audit Procedures: The Tax auditor to obtain details of all loans or deposits taken

and verify the same with records maintained by the assessee. Where records are

not available auditor to give a disclaimer that necessary evidence is not in

possession of assessee.

Other Considerations:

Payments not made through account payee cheques or bank drafts but through

bank transfers like RTGS, NEFT , then tax auditor should give an appropriate

note to that effect.

Sec 269SS applies even when loans are taken free of interest.

Deposit also includes current account, security deposit against contracts.

Scrutinize advances account to verify whether advances are in nature of

deposits.

Sec 269SS shall not apply when loans are accepted by Government, Banking

Company, Govt. Co. or Co. established under Central, State, Provincial Act.

8/23/2011

147

Section 269SS provides that any loan or deposit shall not

be taken or accepted from any other person otherwise

than by an account payee cheque or account payee bank

draft if,

(a) the amount of such loan or deposit or the

aggregate amount of such loan and deposit ; or

(b) on the date of taking or accepting such loan

or deposit, any loan or deposit taken or accepted

earlier by such person from the depositor is

remaining unpaid and the amount or the aggregate

amount remaining unpaid ; or

(c) the amount or the aggregate amount referred to

in clause (a) together with the amount or the

aggregate amount referred to in clause (b), is twenty

thousand rupees or more :

8/23/2011

148

Thus it is clear that no person can accept any loan

or deposit of Rs 20000 or more otherwise than by

way of an account payee cheque or an account payee

draft.

The limit of Rs 20000 will also apply to a case even if

on the date of taking or accepting such loan

or deposit, any loan or deposit taken or accepted

earlier by such person from such depositor is

remaining unpaid and such unpaid amount along with

the loan or deposit to be accepted, exceeds the

aforesaid limit.

This can be explained with an example: If Mr. X has

a credit balance of a loan of Rs 19000 from Mr. Y. Now in

this case Mr. X cannot take loan in excess of Rs 999 more

from Mr. Y except with an account payee cheque

or account payee bank Draft.

8/23/2011

149

Exemptions from section 269SS: The Following persons are exempted from the purview of section 269SS:

(a) Government ; (b) any banking company, post office savings bank or co-operative bank ; (c) any corporation established by a Central, State or Provincial Act ; (d) any Government company as defined in section 617 of the Companies Act, 1956 (e) other notified insititutions (f) where the depositor and the acceptor are both having agricultural income and neither of them have any taxable

income.

Consequences of contravention of section 269SS:

Section 271D of Income Tax Act 1961 provides that if

a loan or deposit is accepted in contravention of

the provisions of section 269SS then a penalty equivalent

to the amount of such loan or deposit may be levied by

the Joint commissioner.

8/23/2011

150

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 :—

(i) name, address and permanent account number (if available with the assessee) of the payee;

(ii) amount of repayment;

(iii) maximum amount outstanding in the account at any time during the previous year;

(iv) whether the repayment was made otherwise than by account payee cheque or account payee bank draft.

Statute: Sec 269T is attracted when repayment of loan or deposit is made to a person

When aggregate amount of loans or deposits held by such person on date of repayment exceeds Rs. 20000

Even though repayment amount may be less than Rs. 20000

Note:

Loans or deposits may be held singly or jointly with some other person.

Repayment includes interest thereon

Only for company assessee, loans or deposits include loans repayable on notice and after a particular period and not on demand.

Audit Procedures: The Tax auditor to obtain details of all loans or deposits repaid and verify the same with records maintained by the assessee. Where records are not available auditor to give a disclaimer

8/23/2011

151

Section 269T

Section 269T of Income Tax Act provides that any branch

of a banking company or a co operative society, firm or

other person shall not repay any loan or deposit

otherwise than by an account payee cheque

or account payee bank draft drawn in the name of

the person, who has made the loan or deposit, if

(1) The amount of the loan or deposit together with

interest is Rs 20000 or more, or

(2) The aggregate amount of loans or deposits held by

such person, either in his own name or jointly with other

person on the date of such repayment together with

interest, is Rs 20000 or more.

For example if X is having loan of Rs 30000 outstanding to

Y. Then X cannot repay such loan in cash to Y.

8/23/2011

152

(a) Government ;

(b) any banking company, post office savings bank or co-operative bank ;

(c) any corporation established by a Central, State or Provincial Act ;

(d) any Government company as defined in section 617 of the Companies Act, 1956

(e) other notified insititutions

Exemptions from Section 269T:

The Following persons are exempted from the

purview of section 269T:

Consequenses of contravention of

section 269T:

Section 271E of Income Tax Act 1961 provides that if

a loan or deposit is repaid in contravention of

the provisions of section 269T then a penalty equivalent

to the amount of such loan or deposit repaid may be

levied by the Joint commissioner.

8/23/2011

153

Clause 24.(c) Whether a certificate has been obtained from the

assessee regarding taking or accepting loan or deposit, or repayment

of the same through an account payee cheque or an account payee

bank draft. [Yes/No]

The particulars (i) to (iv) at (b) and the Certificate at (c) above need

not be given in the case of a repayment of any loan or deposit taken

or accepted from Government, Government company, banking

company or a corporation established by a Central, State or

Provincial Act.

Clause 25. (a) Details of brought forward loss or depreciation

allowance, in the following manner, to the extent available :

Audit Procedures: The Tax auditor to study the assessment records

i.e. income tax returns filed, assessment orders, appellate orders and

rectification / revisied orders and trace the amounts of loss /

allowance from the income tax returns and the assessment orders.

8/23/2011

154

Clause 25 (b) whether a change in shareholding 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

Statute: Notwithstanding anything contained in Chapter, where a change in

shareholding has taken place in a previous year in the case of a company, not

being a company in which the public are substantially interested, no loss incurred

in any year prior to the previous year shall be carried forward and set off against

the income of the previous year unless

(a) on the last day of the previous year the shares of the company carrying not less

than fifty-one per cent of the voting power were beneficially held by persons who

beneficially held shares of the company carrying not less than fifty-one per cent

of the voting power on the last day of the year or years in which the loss was

incurred

Audit Procedures: The Tax Auditor to enquire with the management and review

statutory records of the entity to ascertain whether there is a change in

shareholding of the company and report accordingly

Clause 25(b) - Change in shareholding of the company and carry

forward of the losses u/s 79 of the Act.

Business loss cannot be carried forward and set off in the previous year in which a change in shareholding takes place in case of a company in which public are not substantially interested , if on the last day of the previous year in which the change in shareholding took place and on the last day of the previous year in which the loss was incurred, the shares of the company carrying not less than 51% of the voting power were not beneficially held by the same persons.

8/23/2011

155

Clause 26. Section-wise details of deductions, if any, admissible under Chapter VIA.

Audit Procedures: Tax Auditor to perform corroborative inquiry with the entity to ascertain if there are any Deductions

i. In respect of certain Payments

ii. In respect of certain Incomes

iii. Others

Tax auditor to scrutinize books of account and other documents for ascertaining value of deductions under Chapter VIA

Clause 27. (a) 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/No]

The newly inserted clause 27 is different from the earlier clause. In the earlier clause the requirement was with reference to the tax deducted at source but not paid to the credit of the Central Government in accordance with the provisions of Chapter XVII-B. The new clause requires reporting on the compliance with the provisions of Chapter XVII-B regarding deduction of tax at source and payment thereof to the credit of the Central Government. Thus, the scope of reporting under the new clause is much wider.

This reporting requirement is to be read with the specific non compliances stated under clause (b).

8/23/2011

156

Amount

(i)

Tax deductible and not deducted at

all

…………

(ii)

Shortfall on account of lesser

deduction than required to be

deducted

…………

(iii)

Tax deducted late

…………

(iv)

Tax deducted but not paid to the

credit

of the Central Government

…………

If the provisions of Chapter XVII-B have not been complied with, give the following details, namely:

Audit Procedures: Tax Auditor to test the controls instilled by the entity for

appropriate deduction of tax a source. Tax auditor also to obtain and verify details

of payment of TDS deducted, for timely payment, with TDS returns

Clause 28(a) In the case of a trading concern, give quantitative details of principal items of goods traded:

i. opening stock;

ii. purchases during the previous year;

iii. sales during the previous year;

iv. closing stock;

v. shortage/excess, if any.

8/23/2011

157

Clause 28(b) In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products :

A. Raw materials : i. opening stock;


iii. consumption during the previous year;

iv. sales during the previous year;

v. closing stock;

vi. yield of finished products;

vii. percentage of yield;

viii. shortage/excess, if any.

Clause 28(b) In the case of a manufacturing concern, give quantitative details of the principal items of raw materials, finished products and by-products :

B. Finished products/By-products :

i. opening stock;


iii. quantity manufactured during the previous year;

iv. sales during the previous year;

v. closing stock;

vi. shortage/excess, if any.

*Information may be given to the extent available.

8/23/2011

158

Audit Procedures:

Tax Auditor to obtain certificates from the assessee in respect of

principal items of goods traded, manufactured ( raw materials,

finished goods and by-products).

Auditor to verify the figures reported on a sample basis, in order

to satisfy himself of the as to the correctness of the figures

furnished

Issues on Clause – 28

“Principal Items:-Items constitute more than 10% of

the aggregate valueof purchase, consumption or

turnover.

Report only Principal Itemsunder this clause

Clause (a) –Applicable on Trading concern.

Clause (b) –Applicable on Manufacturing concern.

The Information about (vi),(vii) & (viii) of sub clause A of

(b), to the extent of availability of information in the

record.

8/23/2011

159

Where stock audit has been undertaken, certified

documents would be required both as regards stock as

well as shortages.

Clause 29. In the case of a domestic company, details of tax on distributed profits under section 115-O in the following form :—

a) total amount of distributed profits;

b) total tax paid thereon;

c) dates of payment with amounts

Audit Procedures:

Tax Auditor to verify the statutory records / minutes to ascertain the amount of profits distributed. Auditor to verify the tax paid thereon and the date of payment, on the basis of duly received challan and books of account.

Note: Dividend Distribution Tax to be paid @ 16.61%within 14 days of declaration/distribution or payment whichever is earlier.

8/23/2011

160

Issues on Clause - 29

Sec 115-O Tax on distributed profits of Domestic

Companies. The special levy at the prescribed rate, on the

amt of dividend declared, distributed or paid (interim or

other wise) out of current Profits or accumulated Profits.

This tax shall be payable even if no Income tax is payable

by such Company on its total Income.

“Dividend”means dividend under clause (22) of Sec 2

exclusive of sub clause (e) advance or loan out of

accumulated profit or shareholders etc.

The Date of Payment should be verified from the

Challans and Books of A/cs etc.

Tax u/s 115-O should be deposited within 15 days of date

of declaration/ distribution or payment which ever is

earlier.

The tax rate on dividend distributed u/s 115-O is 15%.

The tax auditor need not go into the computation of

distributed profits but to report the amount actually

distributed.

8/23/2011

161

30. 30.) Whether any cost audit was carried out, if yes, enclose a copy of the report of such audit [See section 139(9)]

31. Whether any audit was conducted under the Central Excise Act,1944, if yes, enclose a copy of the report of such audit.

Audit Procedures:

The tax auditor to ascertain from the management whether an audit was carried out and if yes enclose a copy of the report of such audit.

Where an audit may have been ordered and is not completed by the time the tax auditor gives his report, he has to state the same in his report.


Enclose the copy of Cost Audit Report under Sec 233B of

the companies Act 1956 (if conducted such Audit).

The Auditor need not express any opinion if such Audit is

ordered and not conducted.

The Auditor state the fact if such Audit is not completed

by the time of his Audit Report.

Make note of any material observation made in such

Report.

Give information only for that Cost Audit Report which

falls within the relevant Previous Year.

8/23/2011

162


Attached the Audit report of Audit conducted under

Central Excise Act, 1944 (if any).

The auditor should make note of any material

observation made in such report.

If such audit is not completed by the time of his audit

report –mention the fact.

Enclose the copy of such report of Latest Year.

If Excise Audit Report is not enclosed, the return cannot

be considered as defective return under Sec 139(9).

32.) Accounting ratios with calculations as follows :—

a) Gross profit/Turnover;

b) Net profit/Turnover;

c) Stock-in-trade/Turnover;

d) Material consumed/Finished goods produced.

Audit Procedures:

The Tax auditor to verify the ratios. The tax auditor should assign meaning to the terms used in the above ratios having due regard to the generally accepted accounting principles. Ratios mentioned in this clause are to be calculated in terms of value only.

8/23/2011

163

Issues on Clause -32

Calculate ratios for manufacturing or trading concern in

terms of value only.

Calculate Ratios for the business as a whole and not

product wise.

If Closing stock is Nil, this sub clause (c) is not applicable.

Stock -in –trade include only closing stock of finished

goods not stock of raw material & work –in –progress.

Overall G.P Ratio is enough if gross profit from each

product is different.

Depreciation on Plant & Machinery considered for

valuation of Finished goods [AS-2 (revised)]

Depreciation on P&M should be deduct to arrive at gross

profit.

Exclude extraordinary items for calculation of ratios

unless give material effect [AS 5, AS(IT) II].

8/23/2011

164

Take the value of Sales, Purchase & Inventories before the

Statutory Adjustment (of Sec 145A).

In case of Share broker

i) Dealing for Commission – Calculate Net Profit Ratio

ii)Doing Business – Calculate Gross Profit Ratio

Case Law

N.C. Budharaja & Co, (1993) 204 ITR 412(SC)

In this Case Hon‘ble Supreme Court decided that

construction of tunnels, bridges, dams etc is only a

Service activity and it cannot amount to manufacturing

activity.

U/s 271B, if a person fails to get his accounts audited as required

under section 44AB or to furnish the report of such audit, then: The Penalty imposed shall be, lower of ½ % of sales or gross receipts Rs 1,50,000/- NO PENALTY IS IMPOSABLE U/S 271B, IF THE

ASSESSEE PROVES THAT THERE WAS A REASONABLE CAUSE FOR THE FAILURE..

8/23/2011

165

Some of the instances where Tribunals/Courts have accepted as "reasonable cause" are as follows :

a) Resignation of the tax auditor and consequent delay

b) Bona fide interpretation of the term `turnover' based on expert

advice

c) Death or physical inability of the partner in charge of the accounts

d) Labour problems such as strike, lock out for a long period, etc. e) Loss of accounts because of fire, theft, etc. beyond the control

of the assessee

f) Non-availability of accounts on account of seizure

g) Natural calamities, commotion, etc.

“Reasonable cause"

Penalty u/s 277A

Falsification of book of accounts or documents etc.

A person shall be Punishable with rigorous imprisonment , which may extend from 3 months to 3 years and shall be liable to fine if following conditions are satisfied:

he willfully and with intent to enable any other person (assessee) to evade any tax or interest or penalty chargeable and impossible under Income Tax Act

he makes or causes to be made, any entry or statement in any books or other documents relevant for any proceedings under the Act which is false.

he knows it to be false or does not believe it to be true.

No such other prosecution shall be launched by any income tax authority without prior permission of the CIT of Appropriate authority.

330

8/23/2011

166

Conclusion

Action on incomplete audit reports

1. Incomplete Information/Non Commitable replies

Report by AO to Commissioner of IT

2. If professional negligence is reflected

Initiation of Disciplinary proceedings

(with the approval of CCIT)

331

Documents

Purpose of Tax Audit - bangaloreicai.org · 8/23/2011 1 issues in tax audit u/s. 44ab and u/s. 44ad and clause to clause analysis of form no 3cd ca naveen khariwal g. b.com,fca 9880683725