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Introduction :
Tax Audit refers to the audit carried out under the provisions of section 44AB of the Income Tax Act, 1961.
Originally introduced by The Finance Act, 1984, in the Income-tax Act, 1961 w.e.f. 1 April 1985 through Section 44AB.
Even if income is below taxable limit, tax audit needs to be carried out if turnover exceeds prescribed limit.
Applicable to both Residents and Non-Residents.
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 40 lakhs.
3
Basic Elements of Sec. 44AB
Every person- a) carrying on business shall, if his total sales, turnover or
gross receipts in business exceeds forty lakh rupees in any previous year ; or
b) carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year; or
c) carrying on the business shall, if his profits and gains from business are deemed to be profits and gains under *[section 44AD or 44AE or 44AF] [or Sec. 44BB or Sec. 44BBB] and who has claimed his income to be lower than the deemed profits and gains of this section,
* Words “Sec. 44AD shall be substituted for the words” Sec. 44AD or Sec. 44AF by the Finance (No. 2) Act 2009 w.e.f. 01.04.2011 The following clause (d) shall be inserted after clause (c) of section 44AB by Finance (No. 2) Act 2009 w.e.f. from 01.04.2011 ;
d) Carrying on business shall, if the profits and gains from the business are deemed to be profits & gains u/s 44AD, and he has claimed such income to be lower than profits & gains of his business and his income exceeds maximum amount which is not chargeable to income-tax in any previous year.
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 & setting forth such particulars as may be prescribed……
Salient Features:-
Not applicable to Company and LLP. Limit of turnover business wise. Option of presumptive scheme-business wise. Audit for that business only which does not opt for
presumptive norms and total income exceeds taxable limit.
Applicability of TDS provisions.
Object Of Tax Audit:-
To assist the Assessing Officer in computing the total income of the assessee.
Involves expression of opinion on the truth and correctness of certain factual details by assessee to the Income Tax Dept. To enable proper assessment of tax by the Department.
To ensure that income-tax assessments are made simpler and faster since the basic data required for assessments are provided with the return of income, by filing Forms 3CA, 3CB and 3CD of the tax audit report.
Increases self compliance by the tax payer and educates them.
Applicability of Sec. 44AB:-
Person carrying on business:- Sales,turnover, gross receipts exceeds Rs. 40 lacs in previous year. Deemed profit U/s 44AD, 44AE, 44AF, 44BB & 44BBB and claims it to be lower. Not applicable if covered by Sec. 44B and 44BBA.
Person carrying on Profession:-- Gross receipts in profession exceeds Rs. 10 lacs.
Position from AY-2011-2012:-
(Changes made by Finance (No.2) Act 2009 U/s 44AD):-
44AD now applicable to all “eligible assessees” engaged in any “eligible business”.
Eligible assessee – Individual, HUF or General Firm.
Eligible business – any business except buying /leasing or hiring goods carriage referred to in Sec. 44AE and turnover from eligible business does not exceed Rs. 40 lacs.
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 Type of vehicle Estimated income per vehicle Estimated income per vehicle
Heavy goods vehicles Heavy goods vehicles Rs. 5,000/- per month or part of the Rs. 5,000/- per month or part of the month. (month. (Earlier Rs. 3,500/-Earlier Rs. 3,500/-) )
Other than heavy goods Other than heavy goods vehicles vehicles
Rs. 4,500/- per month or part of the Rs. 4,500/- per month or part of the month. (month. (Earlier Rs. 3,150/-Earlier Rs. 3,150/-) )
Total Sales, Turnover or Gross ReceiptsNot 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. Transaction in shares is turnover or not will depend
whether shares held as stock in trade or capital assets. Types of transaction in shares/derivatives :
-Speculative transactions.
-Derivative, F&O
-Delivery based transaction.
As per “Guidance Note on Terms Used in Financial Statements”
“Sales Turnover” has been defined as under :-
“The aggregate amount for which sales are effected or services rendered by an enterprise. The term `gross turnover’ and `net turnover’ (or `gross sales’ and `net sales’) are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”.
As per the Guide to Company Audit issued by the Institute while discussing “sales”, states as follows.
• “sales”
“Total turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sales for each class separately.
Note(i) The term `turnover' would mean the total sales after deducting there from goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any. Adjustments which do not relate to turnover should not be made e.g. writing off bad debts, royalty etc. Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account.”
The “Statement on the Amendments to Schedule VI to the Companies Act, 1956” issued by the Institute, while discussing the disclosure requirements relating to ‘turnover’ states as follows
• “As regards the value of turnover, a question which may arise is with reference to various extra and ancillary charges.
• The invoices may involve various extra and ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc.
• It is suggested that ordinarily the value of turnover should be disclosed exclusive of such ancillary and extra charges, except in those cases where because of the accounting system followed by the company, separate demarcation of such charges is not possible from the accounts or where the company’s billing procedure involves a composite charge inclusive of various services rather than a separate charge for each service.
• In the case of invoices containing composite charges, it would not ordinarily be proper to attempt a demarcation of ancillary charges on a proportionate or estimated basis.
For example, if a company makes a composite charge to its customer, inclusive of freight and despatch, the charge so made should accordingly be treated as part of the turnover for purpose of this section.
It would not be proper to reduce the value of the turnover with reference to the approximate value of the service relating to freight and despatch.
On the other hand, if the company makes a separate charge for freight and despatch and for other similar services, it would be quite proper to ignore such charges when computing the value of the turnover to be disclosed in the Profit and Loss Account.
In other words, the disclosure may well be determined by reference to the company’s invoicing and accounting policy and may thereby vary from company to company.
For reasons of consistency as far as possible, a company should adhere to the same basic policy from year to year and if there is any change in the policy the effect of that change may need to be disclosed if it is material, so that a comparison of the turnover figures from year to year does not become misleading.”
The Statement on the Companies (Auditors' Report) Order, 2003 issued by the Institute in April 2004, while discussing
the term ‘turnover’ states as follows
• The term, “turnover”, has not been defined by the Order. Part II of Schedule VI to the Act, however, defines the term “turnover” as the aggregate amount for which sales are effected by the company.
• It may be noted that the “sales effected” would include sale of goods as well as services rendered by the company. In an agency relationship, turnover is the amount of commission earned by the agent and not the aggregate amount for which sales are effected or services are rendered.
• The term “turnover” is a commercial term and it should be construed in accordance with the method of accounting regularly employed by the company.
• “The term ‘turnover’ for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise.
• If sales tax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover.
• Trade discount can be deducted from sales but not the commission allowed to third parties.
• If however, the Excise duty and/or sales tax recovered are credited separately to Excise Duty or Sales Tax Account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover.
• However, sales of scrap shown separately under the heading ‘miscellaneous income’ will have to be included in turnover”.
Applying the above generally accepted accounting principles, a fewtypical cases may be considered :
i. Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can be deducted from the turnover.
ii. Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a financing charge and is not related to turnover. The same should not be deducted from the figure of turnover.
iii. Turnover discount is normally allowed to a customer if the sales made to him exceed a particular quantity. This being dependent on the turnover, as per trade practice, it is in the nature of trade discount and should be deducted from the figure of turnover even if the same is allowed at periodical intervals by separate credit notes.
iv. Special rebate allowed to a customer can be deducted from the sales if it is in the nature of trade discount. If it is in the nature of commission on sales, the same cannot be deducted from the figure of turnover.
v. Price of goods returned should be deducted from the figure of turnover even if the returns are from the sales made in the earlier year/s.
vi. Sale proceeds of fixed assets would not form part of turnover since these are not held for resale.
vii. Sale proceeds of property held as investment property will not form part of turnover.
viii. Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part of turnover. However if the shares, securities, debentures etc., are held as stock-in-trade, the sale proceeds thereof will form part of turnover.
whether the sales by commission agent or by person on consignment basis forms part of turnover
In such cases, it will be necessary to find out, whether the property in the goods or all significant risks, reward of ownership of goods belongs to the commission agent or the consignee immediately before the transfer by him to third person.
If the property in the goods or all significant risks and rewards of ownership of goods continue to belong to the principal, the relevant sale price shall not form part of the sales/turnover of the commission agent and/or the consignee as the case may be.
If, however, the property in the goods, significant risks and reward of owner -ship belongs to the commission agent and/or the consignee, as the case may be, the sale price received/receivable by him shall form part of his sales /turnover.
In this context, it would be useful to refer to the CBDT Circular No.452 dated 17th March, 1986, where the Board has clarified the question of applicability of section 44AB in the cases of Commission Agents, Arhatias, etc.
In case of share brokersShare 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.
Speculation Transaction 43(5) (a)
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.
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.
(b) 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.
(c) 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.
Capital Gains Vs. Business
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. Venkataswami Naidu & Co.(G) v. CIT (1959) 35 ITR 594
(SC).
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.
"gross receipts"The term "gross receipts" is also not defined in the Act.
It will include all receipts whether in cash or in kind arising from carrying on of the business which will normally be assessable as business income under the Act.
In other words, the following items of income and/or receipts would be covered by the term "gross receipts in business"
i) Profits on sale of a licence granted under the Imports (Control) Order, 1955 made under the Imports and Exports (Control) Act, 1947;
ii) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
iii. Any duty of customs or excise re-paid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1995;
iv. The aggregate of gross income by way of interest received by the money lender;
v. Commission, brokerage, service and other incidental charges received in the business of chit funds;
vi. Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, travelling etc.) and if the same is credited to a separate account in the books, only the net surplus on this account should be added to the turnover for the purposes of Section 44AB;
vii. The net exchange rate difference on export sales during the year on the basis of the guiding principle explained in (vi) above will have to be added.
viii. Hire charges of cold storage;
IX Liquidated damages;
X. Insurance claims - except for fixed assets;
XI. Sale proceeds of scrap, wastage etc. unless treated as part of sale or turnover, whether or not credited to miscellaneous income account;
XII. Gross receipts including lease rent in the business of operating lease;
XIII. Finance income to reimburse and reward the lessor for his investment and services;
XIV. Hire charges and instalments received in the course of hire purchase;
XV. Advance received and forfeited from customers.
The following items would not form part of "gross receipts in business" for purposes of section 44AB
i. Sale proceeds of fixed assets
ii. Sale proceeds of assets held as investments
iii. Rental income unless the same is assessable as business income
iv. Dividends on shares except in the case of an assessee dealing in shares
v. Income by way of interest unless assessable as business income
vi. Reimbursement of customs duty and other charges collected by a clearing agent
vii. In the case of a recruiting agent, the advertisement charges received by him by way of reimbursement of expenses incurred by him
viii. 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
ix. 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.
x. Share of Profit of a partner of a firm in the total income of the firm excluded from his total income under section 10(2A) of the Income tax Act
xi. Write back of amounts payable to a creditors and /or provisions for expenses or taxes no longer required.
In reference to the above Items would not form part of "gross receipts in business"
for purposes of section 44AB
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.
Who can be appointed as Tax Auditor?:-
A Chartered Accountant or a firm of Chartered Accountants in full time practice.
A CA/firm appointed as Tax Consultants.
Statutory Auditor.
Internal Auditor cannot be Tax Auditor- (decided in 281st meeting of Council in October 2008, w.e.f 12.12.2008.)
Due date for Audit:
Obligation on the aforesaid persons to obtain before the "specified date"a report of the audit Report to be in the prescribed form duly signed and verified by the “accountant”.
“specified date" relevant to the assessment year,means 30th of September of the A.Y.
Audit Planning
Obtain Appointment letter
Issue engagement letter
Obtain representation letter
Obtain certificates as required in clause of 3CD
FORMS OF TAX AUDIT
42
Different Persons Audit Form No.
Statement Particulars
In case of Person who carries on Business or profession and who is required by or under any law to get its account audited.
3CA 3CD
In case of a person who carries on Business or Profession and not being a person referred above
3CB 3CD
Meaning of Business
• S 2(13): Business includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
• The word business is one of wide import and it means activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earn income. The expression business does not necessarily mean trade or manufacture only- Barendra Prasad Roy v ITO [1981]129 ITR 295 (SC).
Meaning of Profession
Section 2 (36):Profession to include vocation.
Profession is a word of wide import and includes vocation which is only a way of living.-CIT v. Ram Kripal Tripathi [1980]125 ITR 408 (All).
Whether a particular activity can be classified as business or profession will depend on the facts and circumstances of each case. The expression profession involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities.- CIT vs. Manmohan Das (Deceased) [1966] 59 ITR 699 (SC).
Books of account and other documents to be kept and maintained under section 44AA(3) by persons carrying
on certain professions. Rule 6F. (1) Every person carrying on legal, medical,
engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and maintain the books of account and other documents specified in sub-rule (2)
[Provided that nothing in this sub-rule shall apply in relation to any previous year in the case of any person if his total gross receipts in the profession do not exceed one lakh fifty thousand rupees in any one of the three years immediately preceding the previous year, or, where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount.]
(2) The books of account and other documents referred to in sub-rule (1) shall be the following, namely:—
(i) a cash book; (ii) a journal, if the accounts are maintained according
to the mercantile system of accounting; (iii) a ledger; (iv) carbon copies of bills, whether machine numbered
or otherwise serially numbered, wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him: Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees;]
v) original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed fifty rupees, payment vouchers prepared and signed by the person: [Provided that the requirements as to the preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.]
Explanation : In this rule,— (a) “authorised representative” means a person who represents any
other person, on payment of any fee or remuneration before any Tribunal or authority constituted or appointed by or under any law for the time being in force, but does not include an employee of the person so represented or a person carrying on legal profession or a person carrying on the profession of accountancy;
b) “cash book” means a record of all cash receipts and payments, kept and maintained from day-to-day and giving the cash balance in hand at the end of each day or at the end of a specified period not exceeding a
[month];
c) “film artist” means any person engaged in his professional capacity in the production of a cinematograph film whether produced by him or by any other person, as—
(i) an actor; (ii) a cameraman; (iii) a director, including an assistant director; (iv) a music director, including an assistant music director; (v) an art director, including an assistant art director; (vi) a dance director, including an assistant dance director; (vii) an editor; (viii) a singer; (ix) a lyricist; (x) a story writer; (xi) a screen-play writer; (xii) a dialogue writer; and (xiii) a dress designer.
(3) A person carrying on medical profession shall, in addition to the books of account and other documents specified in sub-rule (2), keep and maintain the following, namely :—
(i) a daily case register in Form No. 3C; (ii) an inventory [under broad heads,] as on the first and the last day of the previous
year, of the stock of drugs, medicines and other consumable accessories used for the purpose of his profession.
(4) The books of account and other documents specified in sub-rule (2) and sub-rule (3) [other than those relating to a previous year which has come to an end] shall be kept and maintained by the person at the place where he is carrying on the profession or, where the profession is carried on in more places than one, at the principal place of his profession:
Provided that where the person keeps and maintains separate books of account in respect of each place where the profession is carried on, such books of account and other documents may be kept and maintained at the respective places at which the profession is carried on.
(5) The books of account and other documents specified in sub-rule (2) and sub-rule (3) shall be kept and maintained for a period of [six] years from the end of the relevant assessment year:
Provided that where the assessment in relation to any assessment year has been reopened under section 147 of the Act within the period specified in section 149 of the Act, all the books of account and other documents which were kept and maintained at the time of reopening of the assessment shall continue to be so kept and maintained till the assessment so reopened has been completed.]
• [(6) Notwithstanding anything contained in sub-rules (1) to (3), it shall not be necessary for any person carrying on any of the professions specified in sub-rule (1) to keep and maintain the books of account and other documents specified in sub-rule (2) or sub-rule (3) in relation to any previous year commencing before the [first day of March, 1983].]
SOME OF THE ACTIVITIES CONSIDERED AS BUSINESS
• Advertising Agent.• Clearing, Forwarding and Shipping agents –CIT V.
Jeevanlal Lallubhai & Co, [1994] 206 ITR 548 (Bom).• Couriers.• Insurance agent.• Nursing Home. 135 ITR 146, 90 ITD 235• Stock and share broking and dealing in shares and
securities-CIT v. Lallubhai Nagardas & Sons [1993} 204 ITR 93 (Bom).
• Travel agent.
Audit Report : Form No. 3CA
First part:
Refers to the fact that the statutory audit of the assessee was conducted by a chartered accountant or any other auditor in pursuance of the provisions of the relevant Act, and the copy of the audit report along with the
– audited profit and loss account ;
– audited balance sheet and
– the documents declared by the relevant Act to be part of or annexed to the profit and loss account and balance sheet, are annexed to the report.
In case the statutory auditor is carrying out the audit under section 44AB, the fact that he has carried out the statutory audit under the relevant Act should be stated.
Audit Report : Form No. 3CA
Second part:
statement of particulars required to be furnished under section 44AB is annexed with the particulars in Form No. 3CD.
Third part:
To express further that, in his opinion and to the best of his information and according to the explanations given to him, the particulars given in the said Form No.3CD and the annexure thereto true and correct.
Fourth part:
Item No. 4 of the notes to Form No. 3CA requires that the person, who signs this audit report, shall indicate reference of his membership no. authority under which he is entitled to sign this report.
Contents of Form 3CD:-
PART A - General particulars - Clause 1 to 6.
PART B - Disclosure of particulars - Clauses 7 to 32.
ANNEXURE 1 - Financial Parameters - Part A and Part B.
Form No. 3CD
PART A
Clause 1 to 6
Clause 1. Name of the assessee • should be as per the Certificate of Incorporation / Partnership deed, as the case may be.
Clause 2. Address • should be of registered office. However, if the administrative / corporate office is different from the registered office, the address of the same can also be given.
Clause 3. Permanent Account Number• as per the PAN card or letter received from the Income tax
authorities.• if PAN has been applied for but not allotted, the fact should be stated.
Clause 4. Status
Status refers to the different class of assessees included in the definition of ‘person’ under section 2(31) namely :
individual, hindu undivided family, company, firm, an association of persons or a body of individuals, a local authority, or artificial juridical person Status should be as per the return of income tax. residential status is
not required.
Clause 5. Previous year ended
It is 31st March (relevant financial year).
Clause 6. Assessment year
If the financial year is 31st March 2010, the assessment year is 2010-2011.
PART B
Clause 7 to 32
Clause 7a. If firm or association of persons, indicate names of partners/members and their profit sharing ratio
should be as per the Partnership deed / Constitution deed. profit sharing ratio also includes loss sharing ratio, because loss is nothing but negative profits.
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
The tax auditor should verify the certified copy of the latest / amended partnership deed.
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 versa2. 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.
Clause 9a. Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed
The books of accounts prescribed in Rule 6F are: i. a cash book,ii. a journal, if accounts are mercantile system of accounting is
followed,iii. a ledger,iv. carbon copies of bills issued by the assessee, andv. original bills and receipts issued to the assessee.
The tax auditor is required to mention list of books so prescribed. This applies to specified profession (like legal, medical, engineering).
Clause 9b. 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)
The tax auditor is required to obtain list of books both financial/non financial records from the assessee. The general list is as follows:
1. Cash/Bank Book2. Petty Cash book3. Journal register4. Purchase/Sales Register5. Debtors/Creditors Ledger6. General Ledger7. Inventory Records8. Fixed Asset Register9. Excise records
- Not an exhaustive list. Use of excel worksheets is not computer generated record
Note: Printouts listing individual transactions, maintained and generated in a computer system, are taken out as and when required.
Clause 9c. List of books of account examined
The statutory auditor puts tick marks/ identification at the time of finalization of accounts on all those records mentioned in clause 9b above. Hence, normally the same list as per clause 9b can be referred here.
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)
This relates to civil construction, business of plying, hiring
or leasing goods carriages, retail business, shipping business,
business of exploration of mineral oils, operation of aircraft
by non-resident, foreign companies engaged in civil
construction.
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.
Normally mercantile system of accounting is followed with certain exceptions e.g. export incentives (duty drawback), interest (e.g. on MSEB deposit) which may be accounted for on cash basis. Tax auditor has to also keep in mind the materiality for certain transactions.
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
Only 2 accounting standards have been prescribed under the Income Tax Act:
AS-I “Disclosure of Accounting Policies”
AS-II “Disclosure of prior period and extra ordinary items and changes in Accounting Policies”
The tax auditor has to report details of deviation in method of accounting in the previous year from accounting standards and effect thereof on profit or loss.
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 noteState 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.
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)
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
Example :Inventories are stated exclusive of Central Value Added Tax
(CENVAT) / State Value Added Tax (VAT). The assessee follows the exclusive method in respect of accounting of CENVAT/VAT credits. However, there is no effect on the profit for the year as supported by the illustration given in “Guidance Note on Tax Audit under section 44AB of the Income-tax Act” issued by the Institute of Chartered Accountants of India.
Sales are exclusive of sales tax/state value added tax and octroi (where separately recovered), which has not been debited to the profit and loss account. However there is no effect thereof on the profit for the year.
METHOD OF ACCOUNTING IN CERTAIN CASES
SEC.145A(VALUATION OF PURCHASE,SALES AND INVENTORY)
The valuation of purchase and sales of goods and inventory for the purpose of determining the income chargeable under the
head “Profits and gains of business or Profession” shall be
a) in accordance with the method of accounting regularly employed by the assessee; and
b) further adjusted to include the amount of any tax, duty, cess or fee, by whatever name called, actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.
• Any payment of tax, duty etc., shall include even payments in respect of which any right (such as CENVAT) may arise as a consequence to such payment.
• Sec.145A appears to have been introduced in order to ensure that the sale of goods and purchase of goods are grossed up by including the excise duty, tax, cess, etc., and similar "grossing up to be done in the inventory valuation ignoring the CENVAT credit that may be available towards such duty paid.
• Assessees normally could follow two methods of treatment with reference to tax, duty etc., in the preparation of accounts / statements. One is inclusive method where the figures are grossed up and another is exclusive method where the figures are shown at net of CENVAT credit.
• Few judicial pronouncements (held at the Tribunal level ) upheld the following of exclusive method and held that Assessing Officer is not justified in making any adjustment to such method consistently followed. In those cases, the excise duty liability was claimed as deduction on payment basis under the provisions of section 43B of the Act. The insertion of section 145A is aimed at negativing such judicial Pronouncements and also to require assessees to follow only the inclusive method.
Particulars Amount
i) Opening stock of raw material Nil
ii) Purchase price of raw material including CENVAT credit 200000
ill) CENVAT credit available 20,000
iv) Gross excise duty payable 30,000
v) Manufacturing expenses 10,000
vi) Sale price of finished goods 2,50,000
vii) Closing stock of raw material 10% of the purchases
According to the law makers, the profit gets reduced if the exclusive method is followed as demonstrated by
the following illustration with assumed data:
PROFIT & LOSS ACCOUNT - INCLUSIVE METHOD
Rs. Rs.
Raw Material purchased 200,000 Sales 2,50,000
Manufacturing expenses 10,000 Closing stock of raw materials 20,000
Excise Duty(30,000-20,000) 10,000
Profit 50,000
2,70,000 2,70,000
PROFIT & LOSS ACCOUNT - EXCLUSIVE METHOD
Rs. Rs.
Raw Material purchased 180,000 Sales 2,50,000
Manufacturing expenses 10,000Closing stock of raw materials
18,000
Excise Duty 30,000
Profit 48,000
2,68,000 2,68,000
• The introduction of section 145A is aimed at requiring assessee to follow the inclusive method whereby more profit is shown.
• But, it needs to be appreciated that if closing stock is shown at a higher figure in one year, it will be carried forward and shown as the opening stock in the next year and to that extent the profit increased in one year will be off set by the profit reduced in the next year.
• Thus, the effect of making the adjustment required under section 145A will be the advancing of a portion of the profits of one year to the preceding year.
• In a case where the closing stock is progressively on the increase, the effect of such advancing will gradually increase resulting in revenue collection to the government at an earlier point of time.
• In the above working, in the inclusive method, the
closing stock is shown at Rs.20,000/- and the excise duty claim of Rs.30,000/- is reduced by the entire Rs.20,000/- being CENVAT credit available. If an assessee avails CENVAT credit only to the extent of consumption of raw material the net result will be the same.
• Since the excise duty of Rs. 2,000/- attributable to closing stock is included in the closing stock value, a sum of Rs. 18,000/- attributable to raw material consumed should be reduced from Rs. 30,000/- and thereby enable the assessee to avail a deduction of Rs. 18,000/- towards the excise duty for this year
Rs. Rs.
Raw Material purchased 2,00,000 Sales 2,50,000
Manufacturing expenses 10000 Closing stock of Raw materials 20,000
Excise Duty (30,000 - 18,000) 12,000
Profit48,000
2,70,000 2,70,000
This is the approach suggested in the Guidance Note on Tax Audit under section 44AB by the Institute of Chartered
Accountants of India and if this approach is adopted, Sec.145A becomes tax neutral as per the computation shown below:
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
• The particulars to be stated are required to be furnished with reference to the previous year in which the conversion has taken place.
• The taxability of capital gains or business income arising from such deemed transfer is not required to be reported.
• 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 12A- Conversion of Capital Asset into Stock in Trade at fair market value: Section 45(2)
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.
Clause 13. Amounts not credited to the profit and loss account, being:
a. the items falling within the scope of section 28
Example:Sales tax/state value added tax and octroi (where separately recovered) aggregating Rs.10,00,000/- collected on sales, which in accordance with the accounting policy consistently adopted by the assessee, is considered as a liability and not a part of revenue. This treatment has no effect on the profit for the year.
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.
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 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
Tax Auditor needs to examine:
Classification of block of assets
Working of actual cost and the WDV
Date of acquisition and date put to use
Applicable rate of depreciation
Date and sale value in case of deduction
Adjustments required on account of CENVAT, exchange difference and subsidies/grants.
Exchange difference to be adjusted to the carrying cost of the fixed asset as per Section 43A i.e. on payment basis.
If there is any dispute with regard to the classification of an asset in a particular block or the rate of depreciation applied, the tax auditor must give his working with suitable reasons.
The adjustments on account of exchange difference, CENVAT to be verified by the auditor.
Subsidy or grant received from the Government against the particular asset / assets to be reduced from the actual cost of the asset.
Section 32(1)(iia) outlines the conditions prescribed for claiming additional depreciation in respect of new machinery or plant which has been acquired and installed by the assessee engaged in the manufacture or production of any article or a thing:
Plant & Machinery, before its installation, should not be used either within or outside India by any other person.
The same should not be installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house.
Not eligible on any office appliances or road transport vehicles.
If the whole of the actual cost is allowed as a deduction in computing income chargeable under the head, profits and gains of business or profession, than no additional depreciation.
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
Income From Manufacture Of Tea, Coffee And Rubber
33AB Tea Development Account, Coffee Development Account And Rubber Development Account
Eligible Assessees :
All assessees engaged in the business of growing and manufacturing tea, coffee or rubber in India.
Quantum of Deduction:
The deduction shall be lower of the following:
a. Amount deposited in NABARD or Deposit Account
b. 40% of “ P/G/B/P of such business before deduction under section 33AB”
Notes:
1. Deduction to be allowed before setting off the
brought forward losses.
2. Tea development allowance must be in relation to
the income of business of growing and
manufacturing tea, rather than in relation to taxable
portion of business of growing and manufacturing
tea. After allowing the tea development allowance,
the 40% of balance income is taxable. (Same will
apply for coffee and rubber also
Conditions:
1. Assessee must deposit any amount in:
(i) an account with NABARD (under an
scheme approved Tea Board or the Coffee Board
or the Rubber Board); or
(ii) a deposit account in under the scheme
framed by Tea Board or the Coffee Board or the
Rubber Board with previous approval of the Central
Government.
2. Amount must be deposited before the expiry of 6
months from end of the previous year or before the
due date of furnishing return of income, whichever
is earlier.
Withdrawal of amount from NABARD Deposit
Account: Any amount can be withdrawn from
NABARD/ Deposit Account for the purposes
specified in the scheme of Tea Board or the Coffee
Board or the Rubber Board, as the case may be, or in
the following circumstances:
a. closure of business - Taxable*
b. death of an assessee - Not taxable
c. partition of HUF - Not Taxable
d. dissolution of firm - Taxable*
e. Liquidation of company - Not Taxable
* Taxable under the head P/G/B/P in the year of
withdrawal.
Misutilisation of amount from NABARD / Deposit
Account: If any amount deposited with NABARD/
Deposit Account is utilised for the purchase of following
assets, then the whole of such amount so utilised shall
be deemed to be the income of the previous year in
which such utilisation takes place:
a) any machinery or plant to be installed in any office
premises or residential accommodation, including any
accommodation in the nature of a guest house.
b) any office appliances (not being computers)
c) any machinery or plant, the whole of the actual cost of
which is allowed as a deduction (whether by way of
depreciation or otherwise) in computing the income
chargeable under the head "Profits and Gains of
business or profession" of anyone previous year;
Notes:
1. Where amount in the NABARD/ Deposit Account is
utilised as per the scheme for the purposes of any
expenditure, such expenditure, shall not be allowed as
a deduction in computing P/G/B/P.
2. If the amount is withdrawn for the purposes of scheme
and is fully/partly not utilised in the previous year in
which it is withdrawn, then the amount not utilised
shall be deemed to be the income under P/G/B/P of
that previous year - Utilisation should be in the same
previous-year in which withdrawn.
3. Where any asset acquired in accordance with the
scheme is sold or otherwise transferred in any
previous year by the assessee to any person at any
time before the expiry of 8 years from the end of the
previous year in which it was acquired, such part of
the cost of the asset as is relatable to the deduction
under section 33AB shall be deemed to be the P
/G/B/P of the previous year in which asset is
sold/transferred.
Rule 7A Income From The Manufacture of Rubber
Income derived from the sale of rubber obtained from
rubber plants grown by the seller in India shall be
computed as if it were income derived from business,
and 35% of such income shall be liable to tax.
Rule 7B Income From The Manufacture of Coffee
1. Income derived from the sale of coffee grown and cured by the seller in India shall be computed as if it were income derived from the business, and 255% of such income shall be deemed to be income liable to tax.
2. Income derived from the sale of coffee grown, cured roasted and grounded by the seller in India, with or without mixing chicory or other flavouring ingredients, shall be computed as if it were income derived from business, and 405 of such income shall be deemed to be income liable to tax.
Rule 8 Income From Manufacture of Tea
1. Income derived from the sale of tea grown and
manufactured by the seller in India shall be computed
as if it were income derived from business, and 40%
of such income shall be deemed to be income liable
to tax.
2. In computing such income, an allowance shall be
made in respect of the cost of planting bushes in
replacement of bushes that have died or become
permanently useless in an area already planted.
Section 33ABASITE RESTORATION FUND.
(1) where an assessee is carrying on business consisting of the prospecting for, or extraction or production of, petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement with such assessee for such business, has before the end of the previous year
(a) Deposited with the State Bank of India any amount or amounts in an account (hereinafter in this section referred to as the special account) maintained by the assessee with that Bank in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Government of India in the Ministry of Petroleum and Natural Gas; or
(b) Deposited any amount in an account (hereafter in this section referred to as the Site Restoration Account) opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Ministry referred to in clause (a) (hereafter in this section referred to as the deposit scheme), the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of - (i) A sum equal to the amount or the aggregate of the amounts so deposited; or
(ii) A sum equal to twenty per cent of the profits of such business (computed under the head "Profit and gains of business or profession" before making any deduction under this section), whichever is less :
Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner or, as the case may be, any member of such firm, association of persons or body of individuals :
Provided further that where any deduction, in respect of any amount deposited in the special account, or in the Site Restoration Account, has been allowed under this sub-section in any previous year, no deduction shall be allowed in respect of such amount in any other previous year :
Provided also that any amount credited in the special account or Site Restoration Account by way of interest shall be demed to be deposit.
(2) The deduction under sub-section (1) shall not be admissible unless the accounts of such business of the assessee for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant :
Provided that in a case where the assessee is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this sub-section if such assessee get the accounts of such business audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed under the sub-section.
(3) Any amount standing to the credit of the assessee in the special account or the Site Restoration Account shall not be allowed to be withdrawn except for the purposes specified in the scheme or, as the case may be, in the deposit scheme.
(4) Notwithstanding anything contained in sub-section (3), not deduction under sub-section (1) shall be allowed in respect of any amount utilised for the purchase of –
(a) Any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest-house;
(b) Any office appliances (not being computers);
(c) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year;
(d) Any new machinery or plant to be installed in an industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.
(5) Where any amount standing to the credit of the assessee in the special account or in the Site Restoration Account is withdrawn or closure of the account during any previous year by the assessee, the amount so withdrawn from the account, as reduced by the amount, if any, payable to the Central Government by way of profit or production share as provided in the agreement referred to in section 42, shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year.
Explanation : Where any amount is withdrawn on closure of the account in a previous year in which the business carried on by the assessee is not longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.
(6) Where any amount standing to the credit of the assessee in the special account or in the Site Restoration Account is utilised by the assessee for the purposes of any expenditure in connection with such business in accordance with the scheme or the deposit scheme, such expenditure shall not be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
(7) Where any amount, standing to the credit of the assessee in the special account or in the Site Restoration Account, which is released during any previous year by the State Bank of India or which is withdrawn by the assessee from the Site Restoration Account for being utilised by the assessee for the purposes of such business in accordance with the scheme or the deposit scheme is not so utilised, wither wholly or in part, within that previous year, the whole of such amount or, as the case may be, part thereof which is not so utilised shall be deemed to be profits and gains of business and accordingly chargeable to income-tax as the income of that previous year :
(8) Where any asset acquired in accordance with the scheme or the deposit scheme is sold or otherwise transferred in any previous year by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired, such part of the cost of such asset as is relatable to the deduction allowed under sub-section (1) shall be deemed to be the profits and gains of business or profession of the previous year in which the asset is sold or otherwise transferred and shall accordingly be chargeable to income-tax as the income of that previous year :
Provided that nothing in this sub-section shall apply - (i) Where the asset is sold or otherwise transferred by the assessee to Government, a local authority, a corporation established by or under a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); or
(ii) Where the sale or transfer of the asset is made in connection with the succession of a firm by a company in the business or profession carried on by the firm as a result of which the firm sells or otherwise transfers to the company any asset and the scheme or the deposit scheme continues to apply to the company in the manner applicable to the firm.
Explanation : The provisions of clause (ii) of the proviso shall apply only where - (i) All the properties of the firm relating to the business of profession immediately before the succession become the properties of the company;
(ii) All the liability of the firm relating to the business or profession immediately before the succession become the liabilities of the company; and
(iii) all the shareholders of the company were partners of the firm immediately before the succession.
(9) The Central Government may, if it considers necessary or expedient so to do, by notification in the Official Gazette, direct that the deduction allowable under this section shall not be allowed after such date as may be specified therein.
Explanation : For the purposes of this section –
(a) "State Bank of India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955);
(b) The expression "amount standing to the credit of the assessee in the special account or the Site Restoration Account" includes interest accrued to such accounts
Expenditure on scientific researchSECTION 35
In respect of expenditure on scientific research, the following deductions shall be allowed.Section 35(1)(i): Revenue Expenditure Incurred Before Commencement of Business
Expenditure incurred on salary (excluding perquisite) and on purchase of material used in scientific research within the 3 years immediately' preceding the year of commencement of business shall be allowed as a deduction in the year of commencement provided such expenditure is certified by the prescribed authority
Revenue Expenditure Incurred After Commencement of Business 100% of revenue expenditure laid out or expended on scientific. research related to the business carried on by the assessee
b) Section 35(1)(ii): an amount equal to 125% of any sum paid a scientific research association which has as its object the undertaking of scientific research or to a university, college other institution to be used for scientific research providedsuch association/ university/ college /institution is approved by Central Government under section 35(1)(ii).
Section 35(1)(iia): an amount equal to 125% of any sum paid to a company to be used by it for scientific research:
Provided that such company- a) is registered in India, b) has as its main object the scientific research and
development, c) is for the purposes of this clause, for the time being
approved by the prescribed authority in the prescribed manner, and
d) fulfils such other conditions as may be prescribed
d) Section 35(1)(iii): an amount equal to 125% of any sum paid to a university, college, or other approved institution to be used for research in social science or statistical research provided such university/ college /institutions is approved by Central Government under section 35(1)(iii).
Note: The deduction for the sum paid under section 35(1)(ii)/ 35(1)(iii) shall not be denied if the approval of research institute has been withdrawn subsequent to the making of payment by the assessee.
e) Section 35(1)(iv): 100% deduction of capital
expenditure (excluding land) on scientific research
related to business carried on by the assessee.
Capital expenditure incurred on scientific research
within 3 years immediately preceding the
commencement of business shall be allowed as
deduction in the year in which business is
commenced.
Note 1. No depreciation shall be allowed in respect of assets for which deduction has been claimed under section 35.
Note 2. It is not' necessary that the assessee should carry out the scientific research himself. If scientific research is carried out by some other person for the business of the assessee, payment made to such other person will be treated as expenditure on scientific research [CIBA of India Limited (SC)]
Note 3. The set off and carry forward of unabsorbed scientific research capital expenditure is in the same manner as that of depreciation.
Note 4. If land and building is purchased through a composite agreement, then the cost of the land and building shall be bifurcated on the basis of their FMV. Cost of the land is not allowable as deduction and cost of building shall be allowed as deduction under section 35(1)(iv).
Scientific Research Asset ceases to be used for Scientific Research
Sold without using for the Sold after using for the purpose of business Purpose of business
a) Section 41(3) shall apply: (a) Explanation 1 to section 43(1) Least of (i) Sale price, and Shall apply Actual cost shall (ii) Deduction allowed be taken as NIL
under section35(1)(iv) shall be taxable as P/G/B/P
b) As per supreme Court in Artex (b) Section 43(6) and section 50Manufacturing Company, Shall apply to the sale of asset,Capital shall arise if sales Price for the purpose of computation
Exceeds the cost of the asset of capital gains.
Higher Deduction on Payment Made to Approved Specified Persons For Scientific Research 35(2AA)
Deduction - 125% of sum paid to a National
Laboratory, University, IIT or specified person
approved by prescribed authority with a specific
direction that it shall be used for scientific research
under an approved programme.
Note: Deduction shall not be denied if the approval
granted to National laboratory, etc. is withdrawn after
payment has been made by the assessee.
Higher Deduction to Companies Which Are Engaged In Business of Manufacture or Production of Specified Articles
For Conducting in House Scientific Research 35(2AB)
Deduction - 150% of the expenditure (excluding cost of land or building) on scientific research on an approved in-house research & development facility - Revenue as well as Capital Expenditure
Eligible Assessee:
Companies engaged. in the business of manufacture or production of any other article or thing other than those specified in Eleventh Schedule.
NOTES : Research and development facility should be
approved by prescribed authority. Deduction allowed only if company has
entered into an agreement with prescribed authority for co-operation in such research & development facility and for audit of accounts maintained for such facility.
150% deduction shall also be allowed for expenditure incurred on clinical drug trails & obtaining approvals from regulatory authority and for filing an application for a patent under the
Patent Act in case of a company doing scientific research
in drugs and pharmaceuticals.
Cost of land is not allowed as deduction.
Cost of building shall be allowed under section 35(l)(iv)
@ i 100%.
Revenue and capital expenditures allowable under
section 35(2AB) @ 150%.
No deduction shall be allowed to a company approved
under clause (C) of clause (iia) of section 35(1) in respect
of expenditure referred to in section 35(2AB)
Expenditure For Obtaining License toOperate Telecommunication 35ABB Services
I. Deduction is available from
(i) the previous year in which business is commenced, in case the licence fees has actually been paid before the date of commencement of business, or
(ii) the previous year in which licence fees is actually paid, in case licence fees is paid after the commencement of business.
TO THE PREVIOUS YEAR IN WHICH THE LICENCE EXPIRES
II. Deduction under section 35ABB shall be as under in case of I(i) above: = Licence fee actually paid before the commencement of business Previous Year in which business commences to Previous Year
in which licence expires. Deduction under section 35ABB shall be as under in case of I (ii) above: = licence fee actually paid after the commencement of business Previous Year in which licence fees is actually paid to the Previous Year in which licence expires
III. Whole licence is transferred and sale price is less than unamortised licence fees
Deduction under section 35ABB in the year of transfer will as under: Unamortized license fees Less: Sale price
IV. Part license transferred and the sale price is less than unamortized license fees Deduction under section 35ABB shall be allowed as under for the period beginning with the previous year in which licence is transferred to the previous year in which the licence expires, (i.e., the Residual Period)
Una mortised licence fees - Sale price The Residual Period
Part licence/ whole of licence is transferred and sale exceeds price the unamortized licence fees Least of the following is taxable as PGBP in the year of sale: (a) Sale price - unamortized licence fees (b) Deduction allowed till date under section 35ABB
Note: No further deduction under section 35ABB shall be available in the year of transfer or subsequent previous years.
Note: Capital Gains shall arise if the sale price of the licence is than more the cost of the licence. No capital gains shall arise if sale price, of the licence is less than the cost of licence.
Section 35ACEXPENDITURE ON ELIGIBLE PROJECTS OR SCHEMES.(1) Where an assessee incurs any expenditure by way of payment
of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme, the assessee shall, subject to the provisions of this section, be allowed a deduction of the amount of such expenditure incurred during the previous year : Provided that a company may, for claiming the deduction under this sub-section, incur expenditure either by way of payment of any sum as aforesaid or directly on the eligible project or scheme.
(2) The deduction under sub-section (1) shall not be allowed unless the assessee furnishes along with his return of income a certificate 554aa -
(a) Where the payment is to a public sector company or a local authority or an association or institution referred to in sub-section (1), from such public sector company or local authority or, as the case may be, association or institution;
(b) In any other case, from an accountant, as defined in the Explanation below sub-section (2) of section 288, in such form, manner and containing such particulars (including particulars relating to the progress in the work relating to the eligible project or scheme during the previous year) as may be prescribed.
(3) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year.
(4) Where an association or institution is approved by the National Committee under sub-section (1), and subsequently that Committee is satisfied that the project or the scheme is not being carried on in accordance with all or any of the conditions subject to which approval was granted, it may, at any time, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned association or institution, withdraw the approval.
(5) Where any project or scheme has been notified as an eligible project or scheme under clause (b) of the Explanation and subsequently the National Committee is satisfied that the project or the scheme is not being carried out in accordance with all or any of the conditions subject to which such project or scheme was notified, such notification may be withdrawn in the same manner in which it was issued :Provided that a reasonable opportunity of showing cause against the proposed withdrawal shall be given by the National Committee to the concerned association, institution, public sector company or the local authority, as the case may be.
Explanation : For the purposes of this section, - (a) "National Committee" means the Committee
constituted by the 554b Central Government, from amongst persons of eminence in public life, in accordance with the rules made under this Act;
(b) "Eligible project or scheme" means such project or scheme for promoting the social and economic welfare of, or the uplift of, the public as the Central Government may, by notification in the Official Gazette, specify in this behalf on the recommendations of the National Committee
Section 35CCAEXPENDITURE BY WAY OF PAYMENT TO ASSOCIATIONS AND INSTITUTIONS FOR CARRYING OUT RURAL DEVELOPMENT PROGRAMMES.
(1)Where an assessee incurs any expenditure by way of payment of any sum - (a) To an association or institution, which has as its object the undertaking of any programme of rural development, to be used for carrying out any programme of rural development approved by the prescribed authority 560 ; or(b) To an association or institution, which has as its object the training of persons for implementing programmes of rural development;
(c) To a rural development fund set up and notified 563 by the Central Government in this behalf;
(d) To the National Urban Poverty Eradication Fund set up and notified by the Central Government in this behalf, the assessee shall, subject to the provisions of sub-section (2) be allowed a deduction of the amount of such expenditure incurred during the previous year.
(2) The deduction under clause (a) of sub-section (1) shall not be allowed in respect of expenditure by way of payment of any sum to any association or institution referred to in the said clause unless the assessee furnishes a certificate from such association or institution to the effect that -
(a) The programme of rural development had been approved by the prescribed authority before the 1st day of March, 1983; and
(b) Where such payment is made after the 28th day of February, 1983, such programme involves work by way of construction of any building or other structure (whether for use as a dispensary, school, training or welfare centre, workshop or for any other purpose) or the laying of any road or the construction or boring of a well or tube-well or the installation of any plant or machinery, and such work has commenced before the 1st day of March, 1983.
SECTION 35D Amortisation of Certain Preliminary Expenses
1. Where a resident assessee incurs any expenditure on specified purpose –
i. before commencement of his business, or
ii. after commencement of his business, in connection with extension of his undertaking or in connection with setting up a new unit,
he shall be entitled to a deduction of the expenditure so incurred over a period of time.
2. The deduction shall be an amount equal to 1/5th of such expenditure for each of the five successive previous years beginning with the previous year in which business commences, or, as the case may be, the previous year in which extension of the undertaking is completed or new undertaking commences production or operation.
3. Expenditure on specified purposes eligible for amortisation under section 35D includes expenditure on:
Preparation of feasibility report and project report
Market & other survey
Engineering services
Legal charges for drafting agreement
Legal charges of drafting and printing of Articles and
Memorandum of Association.
Legal fees for registering the Company
Expenses on public issue of shares and debentures
4. Where the aggregate amount of expenditure exceeds 5% of –
a) "Cost of project" (in case of non-corporate assessee)
b) In the case of an Indian Company, "Capital employed in the business of the company" or the "Cost of project" at the option of the company
the excess shall be ignored for the purpose of computing deduction allowable under section 35D.
35DD Amortisation of Amalgamation or Demerger Expenses
Where an Indian Company, incurs any expenditure for the purposes of
amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to l/5th of such expenditure
for 5 years beginning with the previous year in which
amalgamation or demerger takes place.
35DDA Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme
Where an assessee incurs any expenditure by way of payment of any
sum to an employee in connection with his voluntary retirement,
in accordance with any scheme of voluntary retirement,
l/5th of the amount so paid shall be allowed as deduction for 5 years.
The deduction shall be allowed from the previous year in which actual payment is made.
The deduction shall be allowed even if the amount is paid to employee after voluntary retirement.
v
Deduction Under Section 35AD
35AD This Section has been introduced by Finance Act, 2009 to provide investment
linked incentive to the following specified business:
i. Setting up and operating a cold chain facility. Commence its operations on or after 1.4.2009.
ii. Setting up and operating a warehousing facility for storage of agricultural produce. Commence its operations on or after 1.4.2009.
iii. Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution including storage facilities being an integral part of such network. Commence its operations on or after 1.4.2007.
The deduction shall be as under: i. Any capital expenditure incurred before
commencement of business allowed fully in the year in which business is commenced provided capitalized in books.
ii. Any capital expenditure incurred after the commencement of business fully allowed in the year in which expenditure is incurred.
iii. Assessee in business of laying cross country pipelines if they commence business from 1.4.2007 to 31.3.2009, then any capital expenditure incurred before 1.4.2009 which is not yet amortised by way of depreciation or otherwise shall be allowed as deduction in Assessment Year 2010-11.
Note: Expenditure on land, goodwill and financial instrument shall not be allowed as deduction.
Conditions: 1. New Plant & Machinery. Exception imported Plant &
Machinery. Exception 20% of total Plant & Machinery can be old.
2. Not formed by splitting or reconstruction of business already in existence.
3. Assessee in business of laying cross country pipelines should be approved by prescribed authority and 1/3rd or more of the pipeline capacity should be available for use on common carrier basis.
4. No deduction under Chapter VI-A shall be allowed.
Taxation of Mining of Coal Limestone, Iron, Zinc, Gold, Etc.,
SECTION 35E
1. Section 35E applies to an assessee who is engaged in the operation of
Prospecting for, or Extraction of, or Production of
any mineral like coal, limestone, iron, zinc, gold, etc.
2. Expenditure incurred wholly and exclusively on: any operations relating to prospecting for any mineral, or on the development of a mine or other natural
deposit of any mineral,
shall be allowed in equal installments over a period of 10 years from the year in which the commercial production has been commenced.
3. Such expenditure should be incurred during the "year of commercial production" and 4 years immediately preceding that year.
4. The amount deductible for each year is limited to "Income (before deduction under section 35E) of the previous year arising from commercial exploitation of any mine (Income of all mines shall be taken)"
Tax auditor to state the amount debited in the profit and loss account and the amount actually admissible in case of sub clause a.
Tax auditor should verify the working of amount debited to the profit and loss account.
In sub clause b, the amount not debited to the profit and loss account and admissible as a deduction under any of the above sections is to be stated.
If assessee is eligible for deduction under one or more of the above sections, the tax auditor has to state the deduction allowable under each of the above sections separately.
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
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 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.
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
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.
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
A. In a case where the tax was deductible and was deducted during the last month of the previous year, on or before the due date specified in section 139(1); or
B. In any other case, on or before the last day of the previous year he same will not be allowed as a deduction in the previous year.
If the same is paid subsequently, it will be allowed as a deduction in the year in which it is paid.
40(a)(ia) non-Compliance Of Provision of TDS Where Payment Is Made To A Resident
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 contractor or sub-contractor being resident for carrying out any work (including supply.of labour for carrying out any work),
on which tax is deductible at source under Chapter XVIIB and
such tax has not been deducted or,
after deduction, has not been paid
A. in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in section 139(1); or
B. in any other case, on or before the last day of the previous year.
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted
a. during the last month of the previous year but paid after the said due date; or
b. during any other month of the previous year but paid after the end of the said previous year,
Such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid.
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.
• 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 ProfitBook Profit Allowable RemunerationAllowable Remuneration
On the first Rs.3,00,000 of the book-On the first Rs.3,00,000 of the book-profit profit
Rs. 1,50,000/- or 90% of the book-Rs. 1,50,000/- or 90% of the book-profit, whichever is more. profit, whichever is more.
On the balance of the book-profit On the balance of the book-profit 60% of book-profit 60% of book-profit
In case of loss In case of loss Rs. 1,50,000/- Rs. 1,50,000/-
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.
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
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
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
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. RBIii. SBIiii. Any co-operative bank or land mortgage bankiv. Any primary agricultural credit societyv. 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.
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),
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
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.
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).
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.
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.
• 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/CA = 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
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.
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.
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.
Section 15 of the MSME Act
• 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
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:-
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.
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/profession3. 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
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)
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
WHERE PERSON HAVING SUBSTANTIAL INTEREST IN THE
BUSINESS OR PROFESSION OF THE ASSESSEE IS Individual Association
of personsHUF Company
His
relatives
Its
Members
Its
Members
Its
Directors
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)
Director Partner Member of AOP Member of HUF
Companies in which he is a Director
Firm in which heis a partner
AOP of which he is a member
All other Directors of such companies
All other partnersOf such firms
All other members of such AOP
All other members of such HUF
Their Relatives Their relatives Their relatives Their relatives
PART III
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
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).
Transfer to Special Reserve
36(1)(viii) Eligible assesseeDeduction under section 36(1)(viii) is available to the following-
1. (a) Financial Corporation specified in section 4A of Companies Act (ICICI, lDBI, IFCI, etc.)
(b) Financial Corporation which is a public sector company
(c) Banking Company including co-operative banks engaged in the business of providing long
term finance for: Industrial or agricultural development Development of infrastructure facility in India, or Development of housing in India
2. Housing finance Company engaged in business of providing long term finance for construction or purchase of in India for residential purposes.
3. Any other financial corporation including a public company engaged in the business of providing long term finance for development of infrastructure facility in India.
Quantum of Deduction Amount of deduction under section 36(1)(viii) is as
follows- a. The amount transferred during the previous year to
the special reserve account created for the purpose of section 36(1)(viii); OR
b. 20% of the profits derived from the business activities mentioned above, which is computed under section 28 to 44D but before claiming deduction under section36(1)(viii); OR
c. 200% of paid up-share capital and general reserve as on the last day of the previous year minus the balance of the special reserve account on the first day of the previous year;
WHICHEVER IS LOWER.
Note: Any amount withdrawn from reserve shall be taxable as PGBP
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
(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,
A) Liability pre- existing on first day of previous year
Sr. No.
Nature of liability
Outstanding 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 remaining unpaid as at the end of the year
Whether passed through profit & loss account
Remarks
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
Remarks
1 2 3 4 5 6 7
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.
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.
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.
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
• The term “hundi” has not been defined in the 1961 Act. • In common commercial parlance, it denotes an indigenous
instrument in vernacular language which can be used by the holder thereof to collect money due thereon without using the medium of currency.
• It may also be regarded as an indigenous form of bill of exchange expressed in vernacular language which has been in use in the mercantile community in India for the purpose of collecting dues.
• There are numerous varieties of hundis, for example, darshani hundi, muddati hundi, shahjog hundi, jokhmi hundi, namjog hundi, dhanijog hundi, jwabi hundi and zickri chit.
• The characteristics of hundis differ according to the varieties of the same.
• 1.A hundi is payable to a specified person or order or negotiable without endorsement by the payee.
• 2. A holder is entitled to sue on a hundi without an endorsement in his favour.
• 3. A hundi accepted by the drawee could be negotiated without endorsement.
• 4. If a hundi is lost, the owner could claim a duplicate or a triplicate from the drawer and present it to the drawee for payment. Interest can be charged where usage is established.
The following characteristics are found in most of the hundis :
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.]
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.
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 :
• 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.
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.
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
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.
(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.
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.
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.
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]
This 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.
This reporting requirement is to be read with the
specific non compliances stated under clause (b).
Amount
(i) Tax deductible and not deducted at all …………
(ii) Shortfall on account of lesserdeduction than required to bededucted
…………
(iii) Tax deducted late …………
(iv) Tax deducted but not paid to the creditof 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.
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;ii. purchases during the previous year;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;ii. purchases during the previous year;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.
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
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 @ 16.99%within 14 days of declaration/distribution or payment whichever is earlier.
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.
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.
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 1,00,000/-
NO PENALTY IS IMPOSABLE U/S 271B, IF THE ASSESSEE PROVES THAT THERE WAS A REASONABLE CAUSE FOR THE FAILURE..
Words “one hundred fifty thousand rupees” shall be substituted for “one hundred thousand rupees” by the Finance Act, 2010, w.e.f. 1-4-2011
“Reasonable cause"
• 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.
Penalty u/s 277AFalsification 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.
269
ConclusionAction 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)
270
Conclusion
PIB Press Release dated 10.12.1999
The CBDT has instructed its field officers to report any professional negligence on the part of CA in preparing tax audit report to ICAI in terms of section 288 of the IT Act as the ICAI is entitled to institute proceedings against its member chartered accountants who submit faulty tax audit reports.
271
