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TAX AUDIT BY SANJAY KUMAR AGARWAL http://www.simpletaxindia.org/
Tax Audit Report Under section 44AB
Form 3CA/3CB Form 3CD Annexure – I
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Tax Audit under Section 44AB
Said Section provides for the Compulsory Audit of accounts of following persons A Person Carrying on Business
If his total Sales, Turnover or Gross Receipts, as the case may be in business exceed or exceeds 40 Lakhs rupees in any Previous Year.. http://www.simpletaxindia.org/
Different Tax Payers A Person Carrying on Profession If his Gross Receipts exceed 10 Lakhs Rupees in any Previous Year.
A Person covered U/sec. 44AD, 44AE, 44AF, 44BB or 44BBB If such person claims that the profits and gains form the business are lower than the profits and gains computed under above sections irrespective of his Turnover 3
Scope and Liability of Tax Audit
Where the assessee offers an income on presumptive basis u/s 44AD, 44AE and 44AF, there is no need for tax audit report, if the turnover does not exceed the specified limits.
A charitable trust , cooperative society etc., though their income may be exempt, yet if their turnover in business exceeds Rs.40 lakhs, they should get their account audited.
Even if income of an assessee is below the taxable limit, yet he will be liable to get his account audited, if his turnover in business exceeds Rs. 40 lakhs.
Section 44AB is not applicable to non residents deriving income from shipping business (Sec 44B) and also where special provision are applicable for computing profits and gains of business of operations of aircraft in the case of non residents (Sec 44BBA).
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Rule 6G Rule 6G(1) provides that the report of audit of accounts of a person required to be furnished u/s 44AB shall be in Form No.
3CA: In case of a person who carries on Business or Profession and who is required by or under any other law to get his accounts audited.
3CB: In case of non corporate entities where audit is not required to be carried out under any other law. As per Rule 6G(2), particulars which are required to be furnished u/s 44AB shall be in Form 3CD.
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Forms of Report Nature of Persons Who is required to get his Book of Account Audited under Any other Law
Audit Report Form 3CA
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Due Date for Getting books Audited and Submission of Audit Report 30th Sept. of A.Y Statement Particulars Form 3CD
Who is not required to get his Book of Account Audited under Any other Law
+
Audit Report Form 3CB
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Tax Audit Report Special Points
Proviso to Sec 44AB: The proviso to Sec 44AB lays down that where the accounts of an assessee are required to be audited by or under any other law, it shall be sufficient compliance with the provisions of this section, if such person gets the accounts of such business or profession audited under such other law before the specified date and furnishes by that date the report by an accountant only. W.e.f 1.4.2001, tax audit can be carried only by an accountant only. Accordingly, in case of any assessee like a co-operative society where the accounts under the relevant law have been audited by a person other than a chartered accountant, the tax audit will have to be conducted by the ‘accountant’ as defined u/s 44AB. This has invalidated the Circular No. 561, dated 22 may, 1990. Same was also held in the case T.D. venkata rao v. Union of india [1999] 237 ITR 315 (SC)
Joint audit report: There could be no objection to joint report, as long as the audit report is signed by all the chartered accountants who have done the audit. As per Statement of Responsibility of Joint Auditors, http://www.simpletaxindia.org/ there could be an agreed report by joint auditor or in case of disagreement, separate reports on matters of disagreement.
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Cont.
In case where an assessee follows an accounting year different from financial year: It is necessary that the financial year should be fully covered, though the accounts for the financial year may fall in two different years in assessee’s accounts (Board Circular No. 561, dated 22.5.1990)
Incomplete report: An incomplete report may constitute professional negligence and render the Chartered Accountant liable for proceedings under u/s 288 of the I.T. Act, and may result in complaint to the ICAI.
Consequences of assessment overlooking Sec 44AB: Though tax audit report u/s 44AB was not filed, where the accounts had been examined by the Assessing officer and assessment was made thereafter, such an assessment cannot be subject to revision u/s 263 merely because the assessment was made without tax audit report. Revision could be justified only, where such assessment is prejudicial to revenue. In such a case http://www.simpletaxindia.org/
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Cont. only a penalty can be levied on the assessee for not filing tax audit report u/s 271B of the Act, if there is no reasonable cause. In a case of a non-resident, where the assessing officer had accepted the returned loss with draft assessment order approved by Additional commissioner, exercise of revision jurisdiction is not valid [CIT v. Clough engineering ltd. [2008] 300 ITR 435 (Uttarakhand)].
Internal auditor of an assessee, whether working with the organisation or independently practising chartered accountant or a firm of chartered accountants, cannot be appointed as his tax auditor [ICAI guidelines as on 12-12-08].
A chartered accountant in practice can take up 45 tax audits (earlier limit was 30 per chartered accountant)
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Eligibility, Appointment & Removal
Eligibility: As per sec. 288 the Accountant (who is appointed as Tax Auditor) should be a Charted Accountant within the meaning of Charted Accountant Act. 1949. Appointment: He is appointed by Assessee. The tax auditor should obtained the letter of appointment for conducting the audit as mentioned in sec. 44AB Removal: There is no specific procedure for removal of a tax auditor appointed under sec. 44AB However it is possible for the management to remove a tax auditor where there are any valid grounds for such removal.
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Auditor’s Responsibility
Forms of Certificate and report: Forms No. 3CA and 3CB require certificate as to the reliability of the books in the sense that proper books have been kept and that the report is made after all the necessary information given by the assessee with the assertion that profit and loss account/income and expenditure account and the balance-sheet give a true and fair view as required under clause 3(c) of Form No. 3CB applicable to cases which have not been statutorily audited. At the same time particulars in Form No. 3CD are required to be certified as true and correct. In respect of audited accounts, the requirement of accounts being true and fair is absent in Form No. 3CA applicable to them obviously because statutory accounts would have been so certified as true and fair. Form No. 3CD has to be true and correct even for this class of accounts. Form No, 3CD requires signature of the auditor with his full name and date.
Disqualification of Tax Auditor: http://www.simpletaxindia.org/ Though there is no specific disqualification for a Chartered
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Cont. Accountant being an auditor u/s 44AB, disqualification for purposes of company audit u/s 226 of the Companies Act, 1956 should apply even for tax auditor.
The Chartered Accountant is bound by regulations imposed on him by the Chartered Accountant Act, 1949, and is expected to follow the guidelines issued by the institute from time to time.
Guidance Notes are of a general nature guiding the auditor in the performance of his duties, while opinions relate to specific matters which may involve interpretation of law and may get superseded by either weightier opinions based upon legal precedents, instructions from the concerned authorities, changes in law, etc.
Liability of the auditor: Chartered Accountant may be liable for professional negligence under the Chartered Accountants Act, 1949. However that does not spare him from any civil liability as under consumer http://www.simpletaxindia.org/ protection law, where it is applicable, or for damages or criminal 12
Cont. liability under the prevalent law on failure on his part, if his actions becomes vulnerable under such other laws.
Auditor cannot be responsible, if sufficient time is not given to him to take up and complete the work in time, so that audit report can be filed on or before the due date. However, where the delay had occurred in auditor’s office and if there is any unreasonable delay on the part of the auditor, he is answerable to the ICAI, if a complaint is made by the client, making him vulnerable to disciplinary proceedings for tax audit as for any other professional misconduct relating to audit [Para 7 of GN].
Neither the assessing officer nor the assessee are bound by the opinion of the tax auditor in his report. They may have their own views for their own reasons.
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Sales, Turnover and Gross Receipts
The terms ‘sales’, ‘turnover’, and ‘gross receipt’ have not been defined in the statue.
Gross Receipts are the amounts received by the assessee from the clients for the contract and does not include within its purview the value of materials supplied by the clients.
As per board circulars and Institute guidelines following items will fall within the scope of gross receipts: (a) All assistance from the government whether by way of duty drawback, cash grant, import licence, including profit therefrom. (b) Exchange difference on export sales. (c) Liquidated damages, insurance claims and sale of scrap, etc. (d) In the case of leasing business, hire charges, lease rent and rental or interest for finance leases, installments received in hire purchases.
Gross receipts is confined to professional receipts, hence out-of14 pocket expenses would not form part of it.
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Cont. U/s 145(1) “Sales”, “Turnover” or “Gross Receipts” are computed either on cash or mercantile system of accounting.
The term ‘Turnover’ would mean, the total sales after deducting therefrom goods returned, price adjustment, trade discounts and cancellation of bills for the period of audit, if any. Adjustment which do not relate to turnover should not be made e.g. writing off bad debts, royalty etc.
Items not regarded as turnover: (a) Discount and rebates. (b) Sales return. (c) Sale of fixed assets/investments. (e) Miscellaneous incomes such as dividend, rent and interest but they will be included in the turnover in case of dealers.
If sales tax and excise duty are included in the sales price, no adjustment in respect thereof should be made for considering the quantum of turnover.
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Cont.
As per ICAI guidelines, in case of non-residents, it is only indian turnover arising out of indian operations which would be relevant for reckoning the limit of turnover.
Where an assessee has both profession and business, each being a separate source of income below the limit, there is no need for tax audit.
Since each firm is separate and partner is different from firm, limit has to be reckoned for each separately.
Though the assessee may have had turnover exceeding the limit and, therefore, liable for tax audit, it will not be liable for tax audit for the year for which it falls short of the limit.
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Cont.
In case of Share brokers • Transaction entered on his personal a/c are also included in the sale value for the purpose of Sec 44AB. • Sub-broker is not different from a share broker.
Turnover for transacting in case of shares, securities & derivatives (a)
Speculative Transaction:- The aggregate of both positive or negative differences arising from settlement of contracts is to be considered as Turnover. [Para 5.11 of GN on tax audit].
(b) • • •
Derivatives, Future & options:Difference of total favorable & unfavorable Premium received on sale of option Difference of any reverse trade entered
(c)
Delivery based Transactions:- Total value of sales is to be considered as turnover.
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Cont.
In case of Kaccha arahtiya, the turnover is only the commission and does not include the sales on behalf of the principals. On the other hand in case of pucca arahtiya, the total sales/turnover of the business should be taken into consideration for determining the applicability of the provisions of Sec 44AB of the I.T. Act [Para 5.9 of GN on tax audit (Revised 2005)].
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E-filing of Return
All the companies has to mandatorily file the return electronically.
All the partnership firms which are subject to tax audit has to mandatorily file the return electronically.
The Central Board of Direct Taxes had, vide circular No.3/2009 dated 21.05.2009, required assessees who filed their income tax returns in electronic form without digital signature to submit their verified ITR-V form, within a period of 30 days. The ITR-V form was required to be sent to Post Bag No.1, Electronic City Post Office, Bengaluru, Karnataka-560100, by ordinary post. However the CBDT has now extended the time limit of 30 days, as now the ITR-V form in case of returns filed electronically (without digital signature) on or after 1st April, 2009 can now be filed on or before the 30th September, 2009 or within a period of 60 days of uploading of the electronic return data, whichever is later.
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Penalty for failure to get accounts Audited
If the assessee fails to get his accounts audited u/s 44AB in respect of any previous year or years relevant to an assessment year,
¾
a flat penalty u/s 271B shall be attracted which is equal to: ½% of the total Sales, turnover or gross receipts Or Sum of Rs. 100,000 (Whichever is less)
¾
Sec 273B provides that no penalty shall be imposed for any failure referred to in Sec 271B if assessee proves that there was reasonable cause for such failure.
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Cont. Reasonable Cause It is a subjective matter. Instances where Tribunals/ Courts have accepted as “reasonable cause” (a) Resignation of the tax auditor and consequent delay; (b) Bona fide interpretation of the ‘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; http://www.simpletaxindia.org/
(g) Natural calamities, commotion, etc.
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Cont. Case Law: CIT v. Capital Electronics 261 ITR 4 (Cal). Sec 271B does not imply that the default must be continuous one and that if the audit is made before the completion of the assessment, then the penalty is not imposable. Tools India Distributors v. ITO (2000) 111 Taxman 216 (Mum) (Mag). Where acting on advice of its Chartered Accountant, who relied on Guidance notes issued by the ICAI, assessee entertained a bona fide belief that its turnover did not exceed prescribed limit u/s 44AB, hence, could be said to be prevented by reasonable cause in not getting its accounts audited.
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Penalty u/s 277 A
Falsification of books of accounts or documents etc: The Finance (No.2) Act, 2004 has inserted section 277 A w.e.f 110-2004. Accordingly any person shall be punishable with rigorous imprisonment, which may extend form 3 months to 3 years and shall be liable to fine if the following conditions are satisfied: (i) He willfully and with intent to enable any other person (assessee) to evade any tax or interest or penalty chargeable and imposable under the Income Tax Act. (ii) He makes or causes to be made, any entry or statement in any books or other documents relevant for any proceeding under the Act which is false. (iii) He knows it to be false or dose not believe it to be true.
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FORM 3CD PART A Clause (1 to 6) 1.
Name of the assessee
2.
Address
3.
Permanent Account Number
4.
Status
5.
Previous year ended
6.
Assessment year
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Analysis of Clause (1 to 6)
In case of proprietorship firm, it is advisable to furnish the name of proprietorship firm with the name of the proprietor.
In case of Branch audit, name of such branch should be mentioned along with the name of the assessee.
If there is change in the name of the company, the name of such company as on the date of signing of the audit report has to be mentioned along with the original name of the assessee.
The address that is given should be one from where the assessee carries on business. In case of a company, the address of the registered office should be stated.
In case of audit of a branch or a unit, the address of the branch or the unit should be given.
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Cont.
If the application of PAN allotment is pending, it should be reported as PAN has been applied for and the GIR No. may be given.
‘Status’ means status as per Sec 2(31) of I.T. Act and not ‘residential status’.
As per Sec 3 of I.T. Act, previous year should end on 31st March.
In case of a Business or profession newly set up in the said financial year, the previous year will begin with the date of setting up of business but will end on 31st march only.
U/s 2(9) of I.T. Act “Assessment year” means the period of 12 months commencing on the 1st day of April every year.
The Assessment year relevant to the previous year for which the http://www.simpletaxindia.org/ 26 audit has been done should be mentioned.
PART B
Clause 7 7.
(a) If firm or Association of Persons, indicate names of partners/members and their profit sharing ratios. (b) 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.
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Analysis of Clause 7
This applies only on Firm and association of persons.
If the ratio of loss is different from the ratio of profits, then loss ratio should also be given.
All the details of partners or members during the entire previous year must be furnished.
In case partner is a partner in representative capacity, such fact should be stated.
This clause does not cover remuneration and interest to partners, hence there is no need to mention the same.
Change in remuneration is not required to be reported. (Para 18.1 28 of the GN on tax audit).
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Clause 8 8.
(a) Nature of business or profession. (b) If there is any change in the nature of business or profession, the particulars of such change.
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Analysis of Clause 8
As per Sec 2(13) of I.T. Act, ‘Business’ includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
As per Sec 2(36) of I.T. Act, ‘Profession’ includes vocation. The word profession implies special knowledge acquired only after patent study and application. Share broker does not come within the definition of profession.
Permanent discontinuance of a particular line of business requires reporting under this clause (Para 19.2 of the GN on tax audit).
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Clause 9 9.
(a) Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed. (b) Books of account maintained. In case books of account are maintained in a computer system, mention the books of account generated by such computer system. (c) List of books of account examined.
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Analysis of Clause 9 Sec 44AA
Specified Profession
Non Specified Profession or Business
Limit Rs 1,50,000 Receipts
Limit Total income Rs 1,20,000 or Total Sale Receipts Rs 10,00,000
Exceeds
Does not Exceeds
Exceeds
Does not Exceeds
Prescribes Books Rule 6F
Any books
Any books
No books are mandatory
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Cont.
Prescribed Books under rule 6F: - Cash book - Journal (if the accounts are kept on mercantile bases) - Ledger - Serial numbered carbon copies of the bills and receipts issued - Original purchase bill/payment vouchers. In addition to the above, a person carrying on medical profession shall maintain following: (i) A daily cash register in form no. 3C. (ii) An inventory of drugs and medicines on first and last day of previous year.
Specified Profession: Legal, medical, engineering, or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other notified profession.
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Cont.
As per Sec 2(12A), Books or Books of account includes:- Ledgers - Day Books - Cash books - Account book - Others Whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro- magnetic data storage device.
Proper print outs of accounts generated by the computer system are mandatory.
Where the books of accounts are seized by government authorities and are not available for audit, the fact should be precisely mentioned in 3CA/3CB.
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Clause 10 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 (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other relevant section).
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Relevant sections of clause 10 S.No.
Section
Business Covered
1.
44AD
Civil construction business.
2.
44AE
Plying, hiring or leasing goods carriages.
3.
44AF
Retail trade.
4.
44B
Shipping business in case of non-residents.
5.
44BB
Providing service or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils.
6.
44BBA
Operation of aircraft in case of non-residents.
7.
44BBB
Civil construction etc. in certain turnkey power project of foreign companies.
8.
Any other This refers to the sections not listed above relevant section under which income may be assessable on presumption basis like Sec 44D and sec 115A(1)(b) and will include any other section http://www.simpletaxindia.org/ that may be enacted in future for presumptive36 taxation.
Analysis of Clause 10
Gross receipt does not include the value of material supplied by the client and value of work in progress would not constitute turnover.
If composite books of accounts are maintained for the business, then common expenses may be apportioned between the businesses, and the facts and circumstances in each case will determine the basis of such apportionment.
Mostly turnover basis is accepted by I.Tax Dept.
If profit is credited to Profit & Loss a/c, appropriate qualification will be required but if it is credited to capital a/c of partners/members, there is no requirement of reporting.
Eliminate the turnover covered by the presumptive provisions for purposes of limit u/s 44AB.
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Clause 11 a)
Method of accounting employed in the previous year.
b)
Whether there has been any change in the method of accounting employed vis-a-vis the method employed in the immediately preceding previous year.
c)
If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss.
d)
Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit or loss.
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Analysis of Clause 11
As per Sec 145 the income of the assessee may be computed in accordance with either cash or mercantile system of accountancy regularly employed by him.
The hybrid system of accounting (i.e. mixture of cash and mercantile) is not permitted .
A non corporate, having more than one business, may adopt cash system of accounting for some business and mercantile system of accounting for another business.
Corporate assessee's have to follow accrual basis of accounting in view of Sec 209 of the companies act.
It should be legitimate for an assessee to change the method of accounting as long as the change is not casual and is thereafter regularly adopted by the assessee.
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Cont.
It is not necessary to have the opening stock revalued on the same basis, where the assessee bonafide changes its method of valuation.
Change in accounting policy need not be reported because such changes in accounting policy could not mean that there is change in method of accounting.
U/s 145(2), Accounting Standard I relating to “disclosure of accounting policies” and Accounting standard II relating to “disclosure of prior period and extraordinary items and changes in accounting policies” is to be followed by the assessee following mercantile system of accounting. Case law:
CIT v. Biharilal investment P. ltd. [2008] 299 ITR 1 (SC) Supremacy of system of accounting consistently adopted in the case of a dispute over accounting for chit system was upheld. http://www.simpletaxindia.org/ Recognition of surplus on the basis of completed contract basis40 was found acceptable.
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.
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Analysis of Clause 12
The word “Closing stock” read with Sec 145A and AS-2 will include finished goods, raw material, work-in-progress, maintenance supplies, consumables and loose tools.
The revised AS-2 states that the inventory costs should be assigned by using FIFO, or weighted average or specific identification cost formula which should reflect the fairest possible approximation to the cost incurred in bringing the terms of inventory to their present location and condition.
Statement showing basis of valuation of inventories to be reported: i. Raw material, stores and spares at historical cost. Rates are determined at FIFO basis. ii. Self generated scrap and non-reusable waste at net realizable value. http://www.simpletaxindia.org/ iii. Work-in-progress valued at actual cost of material, labour and 42 production overheads are adjusted/estimated.
Cont. iv. Finished goods other than by-product at cost or market value, whichever is lower. Cost is determined on the basis of absorption cost. By-product is valued at net realizable value.
Since the Liability for excise duty arises when the manufacture of goods is complete, it is necessary to create a provision for liability of unpaid excise duty on stock lying in the factory or bonded warehouse. [GN on Accounting treatment for Excise duty].
The provisions of Sec145A require grossing up of value of sale, purchase and inventories. As such it should not affect or impact the profit or loss otherwise worked out. Assessee may include sales tax, excise duty, octroi or exclude from the value of sales, purchase and inventories depending on the method generally followed.
If assessee follows inclusive method, no adjustments in the computation of income are required. If assessee follows exclusive method of accounting, adjustments are to be made in computation of total income and the same should be reported as a deviation from Sec 145A under this clause.
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Cont.
It is not necessary to change the amount of purchases, sales and inventory recorded in the books. The adjustment can be made in a Memorandum of account while computing the income for the purpose of preparing return of income (Para 23.15 of GN on tax audit). Effect of deviation on the Profit or loss will be nil.
If an assessee made Advance Payment of Excise duty without liability, no deduction shall be given u/s43B. Case Law: CIT v. Realest Builders and Services Ltd. [2008] 307 ITR 202 (SC) While upholding the consistent method adopted by the assessing officer did observe, that where the system is defective, the Assessing officer is free to recompute the income on a basis to accord with the accounting principles.
CIT v. Amrithalakshmi [2008] 300 ITR 78 (Mad.) When cost or market value whichever is less is followed, the inventories may be valued at cost in one year and at market value in another, when it is lower. This cannot be construed as a change 44 http://www.simpletaxindia.org/ in method of accounting..
Clause 12A 12A 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
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Analysis of Clause 12A
It has been inserted in the new form to include the contingency of capital gains on conversion of capital asset into Stock-in-trade taxable under Sec 45(2).
Such conversion is treated as transfer u/s 2(47).
U/s 45(2) notional capital gain arising from such transfer will be chargeable to tax in the year in which such stock-in-trade is sold.
Cost of capital asset in case of: ¾ Purchase – actual cost from invoice, Books etc. ¾ Self constructed – direct related cost. ¾ Exchange – FMV or Net Book value of asset given up. ¾ Inheritance – if no evidence exists, then auditor should rely
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upon the report of the experts such as valuers.
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Clause 13 13. Amounts not credited to the profit and loss account, being: (a) the items falling within the scope of section 28; (b) the Proforma credits, drawbacks, refund of duty of customs or excise or service tax, or refunds of sales tax, where such credits, drawbacks or refunds are admitted as due by the authorities concerned; (c) escalation claims accepted during the previous year; (d) any other item of income; (e) capital receipt, if any.
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Analysis of Clause 13
Sec 28 cannot be considered as exhaustive. Where there are specific items which are not credited to P & L a/c, or credited to P & L a/c but not considered as income, such items would require reporting. Auditor can rely on management representation.
Sec 28 w.e.f 1-04-2010 will also include any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed or transferred, if the whole of expenditure on such capital asset has been allowed as a deduction u/s 35AD.
In case of assessee following cash system, it should be clearly brought out that admittance of claims during the previous year without actual receipt has no significance in such cases.
In case of import entitlements which an exporter is entitled to receive in view of its exports, the date on which the exporter applies for the same will be the date of accrual for the assessee.
Escalation claims which has been made and merely expected but not admitted by the other party are not required to be stated.
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Cont.
A certificate is necessary from the assessee especially in the cases of contractors where such claims are normal.
Professional expertise and judgment have to be used in judging whether any particular receipt is of capital or revenue nature. Due regard should be given to AS-9 “Revenue recognition”.
The word income has been defined u/s 2(24) of the I.T. Act and clause (x) of Sec 2(40) includes any amount received by the assessee from his employees, as contribution to any provident fund as income. Normally such contributions are not shown as income in the P & L a/c. Such contributions can be reported here.
Sub clause (e) would cover a case where the amounts are treated as capital account in the books and agreed by the auditor e.g. premium on issue of new shares, sale of assets which may gave rise to capital gains but are not passed through profit and loss account.
For grants and subsidy, AS-12 “Accounting for government 49 grants” should be followed.
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Cont. Case Law: CIT v. Kisan sahkari chini mills Ltd. [2006] 284 ITR 418 (All) All subsidies aiding production and not for establishing an industry should necessarily be treated as revenue receipts, so that sales tax subsidies or concession in power tariff or water charges cannot be treated as revenue receipts. Subsidy is based upon the size of installed machinery, electricity charges or excise or sales tax liability shall also be regarded as capital receipt.
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Clause14 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 written down value, as the case may be. (d) Additions/Deductions during the year with dates; in case of any addition of an asset, date of put to use, including adjustment on account of: (i) Modified Value Added Tax credit claimed and allowed under the Central Excise Rules 1944, in respect of assets acquired on or after 1st March, 1994, (ii) Change in rate of exchange of currency and (iii) Subsidy or grant or reimbursement by whatever name called. (e) Depreciation allowable. http://www.simpletaxindia.org/ (f) Written down value at the end of the year.
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Analysis of Clause 14
Registered ownership is not necessary. Exclusive possession right, to exclude others from enjoyment of asset, full control over the asset etc, will entitle the enterprise to claim depreciation.
AS-19 on leases, require capitalization of the asset by the lessee in financial lease transaction. This will bear no impact on depreciation allowable.
Firm can claim depreciation of vehicle registered in partners name.
On the assets used partly for business purposes, the deductions u/s 32(1) shall be restricted to a fair proportionate part thereof [Proviso to Sec 32(2)].
Adjustment as contemplated u/s 43A and AS-11 (revised) “Accounting for effects in changes in foreign exchange rates” are required to be made.
Depreciation claim is mandatory for an assessee in calculating taxable income. [Explanation 5 to Sec 32(1)].
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Cont.
Where a claim or non-claim of depreciation is based on judicial pronouncement or on opinion or other contention, it is advisable to disclose such particulars.
The interest relatable to any period after such asset is first put to use shall not form part of actual cost. [Explanation 8 to Sec 43(1)].
Depreciation is not allowed on an amount equivalent to CENVAT credit claimed and allowed. [Explanation 9 to Sec 43(1)]
Part cost met directly or indirectly by central or state government or any authority established under any law or by any other person, in the form of a subsidy or reimbursement or grant, then such amount which is relatable to any asset is to be excluded from the cost of assets. [Explanation 10 to Sec 43(1)].
Sub clause (iia) of Sec 32(1) provides for additional depreciation to a manufacturing concern on fulfilling certain conditions.
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Cont.
Lessee is not eligible for the depreciation but the hire purchaser is so eligible. [Instruction No. 1079, dated Sep 19, 1977]
Vehicles standing in the name of directors, but financed by the company with repayment made by the company and vehicles shown as assets in the balance sheet of the company would entitle depreciation for the company. [CIT v. Fazilka dabwali TPT Co. Pvt. Ltd. (2004) 270 ITR 398 (P & H)
Fractional ownership of an asset is recognized. [Sec 31(1) of I.T. Act]
Where there is trial production or merely use of standby, right to depreciation is available.
Interest paid before commencement of production on the amounts borrowed by the assessee for the acquisition and installation of plant and machinery, buildings, furniture and fixture forms part of the actual cost. [Challapalli sugar mills Ltd. (1975) 98 ITR 167 (SC)]
Revaluation of assets does not have any impact under the I.T. Act. 54
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Cont.
No depreciation shall be allowed in respect of any plant or machinery if the actual cost thereof is allowed as deduction in one or more years under an agreement under Sec 42.
Expression “used” to be given a wider meaning. It would include not only cases where the machinery, plant were actively employed but also cases where there was what may be described as passive user of the same in the business. An asset could be said to be used, when it was kept ready for use [CIT v. Geotech construction corporation [2000] 244 ITR 452 (Ker)] Similar view has been accepted in case CIT v. Khanna (O.P.) and sons (1983) 140 ITR 558 (P & H), where steps taken to get building into gear for running business constitutes use of building.
This has invalidated the earlier decision taken in case Dineshkumar Gulabchand agarwal (2004) 267 ITR 768 (Bom). Also there was an amendment to Sec 32 of the act using the word “used” in past sense, so that earlier decision would no more have application. http://www.simpletaxindia.org/
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Cont. Case law: Skyline caterers P. Ltd. V. ITO [2008] 306 ITR (AT) 369 (Mum). Goodwill could be a commercial asset of similar nature on the fact that it is related to right to carry on catering business, so as to be eligible for depreciation. CIT v. Agra beverages corporation P. Ltd. [2008] 300 ITR 286 (All). Bottles and crates were held to be plant.
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Clause 15 15. Amounts admissible under sections 33AB, 33ABA, 33AC, 35, 35ABB, 35AC, 35AD*, 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.
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Brief summary of Relevant sections of clause 15 S.No Section Details 1
33AB
2
33ABA Site Restoration Fund
3
33AC
Reserve for Shipping. (N.A. w.e.f. 1-4-2002)
4
35
Expenditure on Scientific Research
5
35ABB Expenditure on license to operate telecommunication services.
6
35AC
7
35CCA Rural development programme
8
35CCB Conservation of Natural resources
9
35D
Amortization of Preliminary Expenses
10
35DD
Amortisation of Expenditure in case of amalgamation or demerger
11
35DDA Amortisation of expenditure incurred under voluntary Retirement Scheme
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12
35E
Tea Development
Eligible Projects/Schemes
Expenditure on prospecting certain minerals.
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Analysis of Clause 15
Where the assessee is eligible for deductions under one or more sections, state the deduction allowable under each section separately.
A new sec 35AD has been inserted w.e.f 1-4-2010 which provide for a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively , for the purposes of any specified business carried on by the assessee during the previous year in which such expenditure is incurred by him. Case law: Rajhans metals P. Ltd. v. ITO [2008] 306 ITR (AT) 245 (Mum). Expenses on the entire cost of the project for setting up a windmill is eligible for amortisation u/s 35D.
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Clause 16 16. (a) 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. [Section 36(1)(ii)]. (b) 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).
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Analysis of Clause 16
There is no restriction on the amount of bonus and it may exceed the bonus payable under the Payment of Bonus Act, 1965.
Amount of bonus or commission paid to a person, which would have otherwise been payable to him as profits or dividend, is not allowable as a deduction.
Only the amount is required to be disclosed and expression of opinion about allowability or inadmissibility is not required.
Part (b) of clause 16 clearly brings out the provision in law that the delayed payment of welfare dues by way of contribution to provident fund or superannuation fund would lose the benefit of deduction altogether only to the extent of the employee’s contribution and not the employer’s contribution. Sec 43B would allow listed expenses in the year of payment or where it pertains to the year, if payment had been made before the due date for filing the return.
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Clause 17 17. Amounts debited to the profit and loss account, being: (a) expenditure of capital nature; (b) expenditure of personal nature; (c) expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party; (d) expenditure incurred at clubs: (i) as entrance fees and subscriptions; (ii) as cost for club services and facilities used; (e) (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; http://www.simpletaxindia.org/
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Cont. (f) amounts inadmissible under section 40(a): (g) interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/40(ba) and computation thereof; (h) (i) whether a certificate has been obtained from the assessee regarding payments relating to any expenditure covered under section 40A(3) that the payments were made by account payee cheques drawn on a bank or account payee bank draft, as the case may be, [Yes/No]: (ii) amount inadmissible under section 40A(3), read with rule 6DD [with break-up of inadmissible amounts] http://www.simpletaxindia.org/
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Cont. (i) provision for payment of gratuity not allowable under section 40A(7); (j) any sum paid by the assessee as an employer not allowable under section 40A(9); (k) particulars of any liability of a contingent nature. (l) amount of deduction inadmissible in terms of section 14A in respect of expenditure incurred in relation to income which does not form part of the total income (m) amount inadmissible under the proviso to section 36(1)(iii).
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Analysis of Clause 17
Explanation to Sec 30 & 31 provides that cost of repairs & current repairs to building and current repairs to machinery, plant & furniture shall not be treated as capital expenditure.
Auditor should qualify the audit report if capital expense were written off against revenue in the P&L a/c.
“Personal expenses” includes those on personal needs of assessee and those having purposes unrelated to business.
Since Sec 37(2B) would disallow any expenditure on advertisement in souvenirs etc. published by a political party, information is required under sub-clause (c) of clause17.
Donations given directly to political party is not to be reported under this clause.
Sec 37(2B) as well as clause 17(c) use the term “Souvenir, brochure, tract, and pamphlet. Or the like”. Newspaper is not a http://www.simpletaxindia.org/ publication and such expenses need not be reported. 65
Cont.
Payments to club would not include service organizations like Lions, Rotaries, Jaycees, Giants etc., but will include Gymkhana. [GN on tax audit]
If the payment is partially compensatory and partially punitive, on the basis of appropriate criteria, the amount charged will have to be bifurcated and only the amount relating to penalty should be stated. [Malwa Vanaspati & chemical Co. v. CIT (1997) 225 ITR 383 (SC)]
Expenditure incurred due to failure to deduct TDS is not allowable as a business expense. [Indian aluminium co. ltd. v. CIT (1971) 79 ITR 574 (SC)]
Interest paid in respect of delayed payment of income-tax is not deductible. [Federal bank ltd. v. CIT (1989) 180 ITR 37 (Ker)]
Any interest/penalty paid under Direct tax laws is not deductible.
Interest paid by the assessee to sales tax department on arrears of sales tax is an admissible deduction. [CIT v. Western indian state http://www.simpletaxindia.org/ 66 motors (1987) 163 ITR 194 (Raj)]
Cont.
Demurrage paid to port authorities in connection with release of confiscated goods is not a fine for infraction of law and thus allowable. [Nanhoomal jyoti prasad v. CIT (1980) 123 ITR 269 (All)]
Interest paid under employees Provident fund & Misc. Provisions Act, 1952 is allowable, if it is compensatory and not penal. [CIT v. Hyderabad allwyn metal works ltd. (1988) 172 ITR 113 (AP)]
Penalty paid by assessee contractor for non-compliance of contract within stipulated time is allowable. [CIT v. R.D. Sharma & co. (1982) 137 ITR 333 (Bom)]
Penalty for failure to supply goods under a contract are allowable. [Central trading agency v. CIT (1965) 56 ITR 561 (All)]
Securities transaction tax is now allowed as expenditure.
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Cont.
A retrospective amendment is made u/s 40(a)(ia) by the Finance act, 2008 w.e.f. 1.4.2005 which provides that no disallowance will be made where deduction was delayed but all the same paid before the end of the year and in case where deduction has been made on the last day of the previous year and tax is paid before the due date for filing return.
Valuation fees paid for valuation of assets does not represent wealth tax and is allowable as deduction.
If TDS is deducted late even by one day, the salary paid outside india or to a non-resident in india shall not be allowed as deduction.
If TDS is not deducted but paid by the assessee from his own pocket, then also salary payable outside india or to a non-resident in india shall not be allowed as deduction. [Sec 40(a) (iii)]
Any tax actually paid by an employer referred to in Sec 10(10CC) would be disallowed [Sec40(a)(v)].
Income-tax payable under I.T. Act or paid under the tax laws of a 68 foreign country is not allowable as deduction.
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Cont.
Sec 40(a)(iv) disallows payment to any recognised provident fund, unless effective arrangement is made for tax deduction at source out of payment therefrom.
Deduction of remuneration to working partner will not be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration [Circular No. 739, dated 25th march].
Sec40A(3) amended by Finance act 2008 shall be attracted if 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.
Purchase of stocks or raw materials constitute expenditure referred to in Sec 40A(3). Therefore, if payments are made exceeding Rs. 20,000 otherwise than by account payee cheque or account payee bank draft for purchase of stocks or raw materials, then such expenditure will be disallowed [Attar singh gurmukh singh (1991) 191 ITR 667 (SC)]. http://www.simpletaxindia.org/
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Cont.
Purchase of capital assets on which 100% (or even normal) depreciation is allowable does not constitute expenditure and is not covered by Sec 40A(3).
Where a pucca ahartiya purchases goods from the principal and makes the payment exceeding Rs. 20,000 otherwise than by account payee cheque or account payee bank draft, then Sec 40A(3) shall be applicable.
Where the exception under Rule 6DD is applicable, there is no need for reporting such specific payments.
If the gratuity fund is unapproved, deduction for gratuity shall not be allowed even if the provision for gratuity is made as per actuary [Sec 40A(7)].
If a policy is taken from LIC for providing gratuity to employees, then annual premium is allowed as deduction u/s 37(1).
Where the assessee contests the claim but all the same makes a provision in the accounts without intimating acceptance of the claim or even while disputing it, such expenses will have to be http://www.simpletaxindia.org/ 70 indicated as contingent liability and will be disallowed.
Cont.
Expenditure relatable to income which does not form part of total income cannot be set off against other taxable income [Sec 14A].
The amount of the interest paid in respect of capital borrowed for acquisition of an 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 deduction [Sec 36(1)(iii)]. Case law: CIT v. Usha iron and ferro metal corporation ltd. [2008] 296 ITR 140 (Del.) Cost of melting shop unit, which was started as an additional facility for producing the necessary raw materials, was deductible since it is expansion of existing business.
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Cont. J.K. Manufacturers ltd. V. CIT [2008] 300 ITR 297 (All.) Expenditure for advertising a new product is deductible. But where no business is carried on with no prospect of resumption, such expenditure will be in admissible. CIT v. G.E. Capital services ltd. [2008] ITR 420 (Del.) Cost of upgradation of software was held to be revenue expenditure as technological changes and the need to upgrade software on regular basis cannot be treated as an enduring advantage. Dr. T.A. Quereshi v. CIT [2006] 287 ITR 547 (SC). Heroin seized from the doctor on the ground of illegal possession is allowable u/s 28(1) since such heroin formed part of his stockin-trade. It was also held that Explanation to Sec 37 applies only to business expenditure and not to business loss. http://www.simpletaxindia.org/
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Cont. CIT v. Smt. Santosh jain [2008] 296 ITR 324 (P&H) Where an assessment is made rejecting assessee’s books of accounts in computing the income on estimate basis, Sec 40A(3) would have no application.
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Clause 17A 17A. Amount of interest inadmissible under section 23 of the Micro, small and Medium Enterprises Development Act, 2006.
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Analysis of Clause 17A
In exercise of the powers conferred by section 295 read with section 44AB of the Income-tax Act, 1961, the CBDT through its Notification No. 36/2009, dated 13-4-2009, has inserted a new clause 17A in Form 3CD in Appendix-II of the Income Tax Rules, 1962.
Amount inadmissible u/s 23 of MSMED Act, 2006 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.
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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 MSMED 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. The tax auditor while reporting in respect of clause 17A should take the following steps: (a) The auditor should seek information regarding status of the enterprise i.e. whether the same is covered under the Micro, Small and Medium Enterprises Development Act, 2006. Where the information is available and has been disclosed the same should be reported as such in Form No. 3CD. Where the information is not available the auditor should also mention the same in the Form No.3CD.
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(b) Since Schedule VI and Section 22 of the Micro, Small and Medium Enterprises Development Act, 2006 requires disclosure of information, the tax auditor should cross check the disclosure made in the financial statements. (c) Obtain a full list of suppliers of the assessee which fall within the purview of the definition of “Supplier” under section 2(n) of the Micro, Small and Medium Enterprises Development Act, 2006. It is the responsibility of the auditee to classify and identify those suppliers who are covered by this Act. (d) Review the list so obtained. (e) Verify from the books of account whether any interest payable or paid to the buyer in terms of section 16 of the MSMED Act, 2006 has been debited or provided for in the books of account.
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(f) Verify the interest payable or paid as mentioned above on test check basis. (g) Verify the additional information provided by the auditee relating to interest under section 16 of MSMED Act, 2006 in his financial statement. (h) If on test check basis, the auditor is satisfied, then the amount so debited to the profit and loss account should be reported under clause 17A. Where the tax auditor, upon due verification, finds that the auditee has neither provided for nor paid any interest payable under the MSMED Act, the no amount is inadmissible under section 23 of MSMED Act. In such a case ‘Nil’ can be reported against clause 17A.
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A question may come up, as to what would be disallowance, in case the auditee is liable to pay any interest under MSMED Act, but he has not provided the interest in his accounts. In such a case, there can be no disallowance, as he has not claimed the same in his accounts. But whenever he pays and claim such interest, the same will be disallowable in year of payment. In case the auditee has adopted mercantile system of accounting, the non-provision may affect true and fair view and the auditor should give suitable qualification. The salient features of the MSMED Act, 2006 (i.e. “The Micro, Small and Medium Enterprises Development Act, 2006”) are summarized below: Disallowance under Income Tax (Sec 23 of MSMED Act, 2006) Interest paid or payable u/s 16 of MSMED Act, 2006 shall not, be allowed as deduction for the purpose of computation of income under the Income Tax Act, 1961.
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Interest u/s Sec 16 of MSMED Act, 2006 In case of delay in payment as per section 15, compound interest with monthly rests from the day following the date agreed/appointed day at the rate of three times the RBI rate, shall be paid by buyer to the supplier. (Present bank rate is 6%) Buyers to make payment - Sec 15 of MSMED Act, 2006 Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make the payment on or before the date agreed upon in writing (which shall not exceed 45 days from the day of acceptance or the day of deemed acceptance) or where there is no agreement in this behalf, on or before the appointed day (which means 15 days from the date of acceptance of goods or services). “day of acceptance” means the day of actual delivery of the goods or the rendering of service or where any objection is made in writing by the buyer regarding the acceptance of goods or services within 15 days from the day of delivery of goods or rendering of services, the day on which the objection is removed by the supplier. http://www.simpletaxindia.org/
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“day of deemed acceptance” means , where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of delivery of the goods or rendering of services, the day of the actual delivery of goods or the rendering of services. Who is Supplier - Sec. 2(n) of MSMED Act, 2006 Supplier means a micro or small enterprises which has filed a memorandum with the authority u/s 8(1) and includes NSIC, SIDC of a state and any company, cooperative society, trust or body registered under any law, engaged in selling the goods produced by micro or small enterprise. Categorisation of enterprises as per Sec. 7 of MSMED Act, 2006 Enterprises engaged in the manufacture or production of goods pertaining to any industry specified in first schedule to Industries (Development and Regulation) Act, 1951 (IDR Act) or engaged in providing or rendering services, are classified according to investment in plant & machinery and equipments respectively as under: http://www.simpletaxindia.org/
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Enterprises
Investment in P&M (Industries)
Investment in equipments (Service provider)
Micro Enterprise
Upto 25 Lacs
Upto 10 Lacs
Small Enterprise
> 25 Lacs but < > 10 Lacs but < 5 Crore 2 Crore
Medium Enterprise
> 5 Crore but < > 2 Crore but < 10 Crore 5 Crore
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Disclosure Requirement as per Sec 22 of MSMED Act, 2006 Where any buyer is required to get his accounts audited under any law following additional information shall be given in the balance sheet: 9 The principal amount and the interest due thereon (to be shown separately) remains unpaid to any supplier as at year end. 9 Interest paid alongwith the amounts of payment made to the supplier beyond the appointed day or due date during each accounting year. 9 Interest due and payable for the period of delay in making payment (paid beyond the appointed day during the year) but without adding the interest. 9 Interest accrued and remaining unpaid as at year end. 9 The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues are actually paid to the small enterprises for the purpose of http://www.simpletaxindia.org/ disallowance u/s 23.
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Clause 18 18.
Particulars of payments made to persons specified under section 40A(2)(b).
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Analysis of Clause 18
If payments made to specified persons is excessive and unreasonable, it should be indicated.
There is no ceiling on the total amount paid to vulnerable persons, if it represents fair market value.
If the assessee bona fide sells his goods to a vulnerable person at a rate, which is lower than the market rate, there is no “expenditure” incurred by him and Sec 40A(2) cannot be invoked.
Payments, which are made for commercial considerations and which are real and genuine and incurred wholly and exclusively for the purpose of business, cannot be disallowed, even partly, u/s 40A(2)(b).
Any Payment made by AOP to its member for supply of goods should be reported.
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Cont. Case law: Dy Cit v Joshi Formulabs (P) Ltd (2000) 67 TTJ 396 (Rajkot) A fully vouched and genuine expenditure cannot be disallowed u/s 40A(2)(b) even if made to sister concern. Khan Carpets v CIT (2003) ITR 325 (All) When there was disproportionate increase in salary without showing exceptional circumstances for it, in such case increase in salary could be disallowed.
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Clause 19 19. Amounts deemed to be profits and gains under section 33AB or 33ABA or 33AC.
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Analysis of Clause 19
Sec 33AB - Tea Development Account.
Sec 33ABA - Site Restoration Fund
Sec 33AC – Reserve for Shipping Business. [No deduction is allowed under this section w.e.f. A.Y 2005-06]
The above three items are also covered under clause 15, where information is required as regards to the extent of admissible deduction but such information deals only with the amount of deduction in the year of payment.
Amount withdrawn from such deposit account for other than the specified purposes is to be deemed as income chargeable to tax.
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Clause 20 20.
Any amount of profit chargeable to tax under section 41 and computation thereof.
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Sec 41 Sec 41(1)
Recovery of expenditure & remission and cessation of trading liability.
Sec 41(2)
Balancing charge in case of Power generating undertakings.
Sec 41(3)
Sale of Capital Asset used for Scientific research.
Sec 41(4) -
Bad debt recovery.
Sec 41(4A)
Amount withdrawn from Special Reserve created & maintained u/s 36(1)(viii).
Sec 41(5)
Adjustment of loss (in case of discontinued business)
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Analysis of Clause 20
Where a deduction has been allowed in respect of a trading liability and subsequently there is a remission or cessation of the trading liability, then the amount of trading liability so ceased shall be deemed to be the income of the previous year in which such remission or cessation took place. This shall apply even if the business is not in existence.
Writing off the liability unilaterally will also bring about a remission or cessation of the trading liability.
For the applicability of Sec 41(4), the assessee who claimed the deduction of bad debt and the assessee who recovers the bad debt must be the same. Where a bad debt has been allowed to a firm and the firm makes a recovery thereof, then Sec41(4) is attracted in the hands of the firm. But if the firm is dissolved and the business is continued by an erstwhile partner, then recovery made by the partner towards bad debt will not attract Sec 41(4).
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Cont.
Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds together with the amount of deduction allowed u/s 35 exceeds the amount of capital expenditure, such surplus or the amount of deduction allowed, whichever is less, is chargeable to tax as business income in the year in which such sale took place. This will apply even if the assessee’s business is not in existence during the previous year.
Where moneys payable in respect of the assets together with the scrap value, exceeds the written down value, then so much of the excess as does not exceed the difference between the actual cost and W.D.V. shall be chargeable to tax as income of the business of the previous year in which the moneys payable for the assets become due.
Any amount allowed as deduction u/s 36(1)(viii) but subsequently withdrawn from the reserve for approved infrastructure industries will become taxable and is required to be reported.
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Clause 21 21. (i) 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. (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.
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Analysis of Clause 21
As per clause (d) of Sec 43B, any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or any state financial corporation or any state industrial investment corporation is allowed as deduction in the previous year in which such interest is actually paid by the assessee.
Explanation 3C to Sec 43B provide that conversion of such interest payable into loan or borrowing shall not be deemed to have been actually paid.
Clause (e) of Sec 43B provides that any sum payable by the assessee as interest on any loan or borrowing from a scheduled bank shall be allowed as deduction in the previous year in which such interest is actually paid by the assessee.
As per Explanation 3D to Sec 43B, if a scheduled bank converts the interest payable into loan, then such conversion shall not be deemed to have been actually paid. http://www.simpletaxindia.org/
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Cont.
Sales tax should be routed through profit and loss account.
Sales tax and excise duty collected to be included as part of trade receipts even where they are kept in separate accounts.
The deduction u/s 36(1)(va) shall be allowed even if the payment is made within the grace period falling after the due date [GN on tax audit].
Deduction shall be allowed in the previous year in which the employer’s contribution is actually paid. If however the same is deposited on or before the due date of filing of return u/s 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 ROI, then such sum shall be allowed as deduction in the previous year in which liability was incurred.
The date of payment for P.F. etc. when made by cheque will be the date of clearing.
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Clause 22 22. (a) Amount of modified value added tax credits availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of outstanding modified value added tax credits in the accounts. (b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.
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Analysis of Clause 22
The information furnished under this clause should be compatible with the information furnished under clause 12(b).
The information required should be checked with the relevant statutory records i.e. RG-23.
Classification is required as regards “CENVAT” credit as between capital goods and others indicating the balance brought forward, the credit earned, the credit utilized and the balance outstanding as at the end of the year.
AS (5) Revised and AS-II u/s 145 of the I.T. Act requires prior period items to be shown separately.
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Cont. Case law: CIT v. Durga Jewelers 172 ITR 417 (M.P) Sustained loss due to theft in one year, but became finally irrecoverable in subsequent year was allowable in the year in which loss became irrecoverable. Kalinga Tubes Ltd v. CIT 169 TTR 374 (Orissa) Disputed wages for the year end which was settled and accounted during the next year is not regarded as an error or omission and hence such expenses cannot be considered as prior period expenditure.
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Clause 23 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].
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Analysis of Clause 23
Where any amount is borrowed on a hundi from a person, or any amount due thereon is repaid to any person, otherwise than through an account payee cheque drown 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 in the P.Y. in which the amount was borrowed or repaid, as the case may be.
However, in case the amount borrowed under this section has been deemed as income of the borrower, then the borrower shall not be liable to be assessed again in respect of such amount under this section on repayment of such amount.
It is advised to get a copy of complete list of hundi loans obtained by a mode other than account payee cheque and verify the same with books of account. Where it is not able to get all the relevant details, proper reporting should be there.
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Clause 24 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;
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(v) whether the loan or deposit was taken or accepted otherwise than by an account payee cheque or an account payee bank draft. 101
Cont. (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 the 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.
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Cont. (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 certificates 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.
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Analysis of Clause 24
Agent’s collection of sale proceeds on behalf of principal and advance against sale will not be treated as deposit, but security deposit, or amount received in current account, or interest free account will be so included.
In respect of mixed accounts, the transactions relating to loans and deposit should be segregated from other accounts and the transactions relating to loan/deposit only should be stated under this clause.
Advance against sale is not loan/deposit.
No information is required to be given in respect of brought forward loan/deposit where there is no acceptance/repayment of loan/deposit during the year under audit.
Opening balance of Loan a/c is to be considered for calculation of maximum amount outstanding.
Security Deposit against contract etc will be covered under http://www.simpletaxindia.org/ Deposits 104 .
Cont.
Interest free loans are also loans.
Loans and deposits by means of transfer entries otherwise than by an account payee cheque/draft have to be reported under this clause.
For violation of Sec 269SS and Sec 269T, Sec 271D and 271E provide for an equivalent amount. Penalty is excused, if there is a reasonable cause for adoption of any other mode.
Disallowance can be done only u/s 68. Case law: CIT Vs Noida Toll Bridge Co. Ltd 262 ITR 260 (Del) Where the transaction is by an A/c Payee Cheque and no payment was made in Cash . Sec 269SS shall not be attracted.
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Clause 25 25. (a) Details of brought forward loss or depreciation allowance, in the following manner, to the extent available: Sl. No
Assessment Nature of Year loss/allowance (in rupees)
Amount as returned (in rupees)
Amount as assessed (give reference to relevant order)
Remarks
(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 Sec 79;
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Analysis of Clause 25
Change in shareholding beyond 49% will not affect the right to set off depreciation, since Sec79 is limited to losses and not depreciation.
The information should be separately given in respect of each head of income under which the loss/depreciation has remained unabsorbed.
Information regarding pending appellate proceedings, delay in filing loss return etc. may be furnished in remark column.
The provisions of Sec 72A of amalgamation or demerger or cases of succession u/s 47(xiii) or (xiv), where a company succeeds an individual or a firm in the light of the conditions u/s 72A, should be kept in mind.
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Clause 26 26.
Section-wise details of deductions, if any, admissible under Chapter VI-A.
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Analysis of Clause 26
Deductions is available in respect of: (a) Certain Payments - Sec 80D to 80GGA, 80GGB & 80GGC (b) Certain deductions - Sec 80HH to 80RRA (c) in respect of certain assessee - Sec 80U
Requirement relating to deductions admissible under Chapter VIA will have to be restricted to the items appearing in books of accounts.
The amount calculated by the Auditor & the amount claimed by the assessee may be different (on basis of judicial pronouncement), state this fact in the Report.
Separate Audit Report Certificate is required u/s 80IA, 80IB, 80JJA etc of Chapter VI.
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Cont.
Sec 80E has been amended by budget 2009. Its scope has been extended to cover all fields of study, including vocational studies, pursued after completion of schooling.
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Clause 27 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] (b) If the provisions of Chapter XVII-B have not been complied with, please give the following details*, namely: (i) Tax Deductible and not deducted at all (ii) Shortfall on account of lesser deduction than required to be deducted (iii) Tax deducted late (iv) Tax deducted but not paid to the credit of the Central Government *Please give the details of cases covered in (i) to (iv) above
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Analysis of Clause 27
Tax auditor is made responsible to give all items which are tax deductible, but not deducted apart from any short deduction, late deductions and failure to deposit the tax so deducted in time with the central government. He has to carry out complete audit of TDS transactions and verify the necessary returns etc. filed with the department.
Hire of movables are also now included for tax deduction u/s 194-I, while royalty and non-compete fees are covered by Explanation (2) to Sec 9(1)(vi) and 28(va) respectively. Case law: CIT v. Tej quebeccor printing ltd. [2006] 281 ITR 170 (Del.) Obligation to deduct tax at source u/s 192 arises only when salary is paid and not when it is credited.
Govt. milk scheme v. Asst. CIT [2006] 281 ITR (AT) 88 (Pune) In order for a payment to be called “commission” u/s 194H, there http://www.simpletaxindia.org/ must be a relationship of a principal and agent between the payer112 and payee.
Clause 28 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.
(b) In the case of a manufacturing concern, give quantitative details of the principal items of raw material, finished products and by products: http://www.simpletaxindia.org/
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Cont. 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; (vi) Percentage of yield; http://www.simpletaxindia.org/
(vii) Shortage/excess, if any.
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Cont. 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. http://www.simpletaxindia.org/
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Analysis of Clause 28
Information about petty items need not be given.
Normally items which constitute more than 10% of the aggregate value of purchases, consumption or turnover may be classified as principal items.
By-product if produced continuously, qualitative details thereof may also be given.
In cases where day-to-day qualitative details are not maintained, based on statement on amendment to schedule VI of the Companies act, 1956 the auditor can consider to comment as under: “Physical inventory has been taken by the management at the year end and we have relied on the same as certified by the management. Further the statue does not specifically require the assessee to maintain quantitative records relating to purchase and sales. Also in view of large volume of the turnover and numerous items traded by the assessee, it is neither practical nor economically viable to maintain day-to-day records”.
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Clause 29 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.
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Analysis of Clause 29
Sec 115-O provides for special levy at the prescribed rate, on the amount of dividend declared, distributed or paid (interim or other wise) out of current Profits or accumulated Profits.
This tax shall be payable even if no Income tax is payable by such Company on its total Income.
“Dividend” means dividend under clause (22) of Sec 2 exclusive of sub clause (e) advance or loan out of accumulated profit or shareholders etc.
This tax should be paid within 14 days of declaration or distribution or payment whichever is earlier.
Computation of distributed profits is not required. Only the http://www.simpletaxindia.org/ amount actually distributed is to be stated. 118
Clause 30 30. Whether any cost audit was carried out? if yes, enclose a copy of the report of such audit [see section 139(9)].
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Analysis of Clause 30
Cost audit report, where it has been done u/s 233B of the companies act, is required to be filed along with return of income u/s 139(9), so that any omission to include the same cannot be treated as a defect within the meaning of Explanation (e) of Sec 139(9).
No comments on such cost audit report is required, but it is advisable to note material observation which would have bearing on his report.
Where assessee claims that there has been a cost audit, but no report is as yet available, report to that effect may be necessary.
Auditor should examine the time period of the audit, which falls within the relevant previous year.
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Clause 31 31. Whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit.
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Analysis of Clause 31
Audit report under the Excise act more particularly Sec 14A of the Central Excise Act would also require to be enclosed with tax audit report.
No comments on such audit report is required, but it is advisable to note material observation which would have bearing on his report.
Where assessee claims that there has been a excise audit, but no report is as yet available, report to that effect may be necessary.
Auditor should examine the time period of the audit, which falls within the relevant previous year
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Clause 32 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.
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Analysis of Clause 32
It is necessary that while reporting, the calculations of gross profit is indicated by way of note as to the adjustments made to trading account or manufacturing and trading account for purposes of calculation.
Calculation sheet of adjustments as for the ratio of net profit to turnover should also be annexed.
Adjustments as for MODVAT will be necessary as for the ratio of stock in trade and the turnover of stocks.
There should be consistency between numerator and denominator, while calculating the above ratios. Any significant deviation thereof should be pointed.
The term “finished goods” would not include the stock of raw material and work in progress.
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Cont.
The above ratios are to be calculated only for the assessee engaged in manufacturing or trading activities.
Ratio mentioned in sub clause (d), need not be given for trading concerns.
Ratios are to be calculated in terms of value only.
Calculate Ratios for the business as a whole and not product wise.
The ratio are to be calculated based on data to be found in books of accounts for the business as a whole.
It is advisable to exclude extraordinary items while calculating ratios in order to make them comparable from year to year.
Depreciation on Plant & Machinery should be considered for valuation of Finished goods [AS-2 (revised)]
Depreciation on P&M should be deducted to arrive at gross profit.
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Annexure -I
Annexure I requires business-wise, nature of business.
Paid up share capital and share application money will include capital of partner/proprietor and current account of partner/proprietor respectively.
Net profit (or loss) before tax will have the suffix “as per Profit & Loss account.”
FBT have been abolished by Finance Act 2009.
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Annexure -II
For assessment year 2007-08 and subsequent assessment years, the value of fringe benefits in respect of contribution by the employer to an approved superannuation fund shall be the amount of contribution which exceeds one lakh rupees in respect of each employee.
Expenditure on hospitality does not include the following:(i) any expenditure on, or payment for, food or beverage provided by the employer to his employees in office or factory; (ii) any expenditure on, or payment through paid vouchers which are not transferable and usable only at eating joints or outlets.
In the case of an employer engaged in the business of hotel 5% shall be substituted for 20%. In addition to this, in the case of an http://www.simpletaxindia.org/ employer engaged in the business of carriage of passengers or127 goods by aircraft or by ship 5% shall be substituted for 20%.
Cont.
For the purposes of this clause, any expenditure on conveyance, tour and travel (including foreign travel), on hotel or boarding and lodging in connection with any conference shall be deemed to be expenditure incurred for the purposes of conference.
The following expenditure on advertisement shall not be considered as expenditure on sales promotion including publicity:(i) the expenditure (including rental) on advertisement of any form in any print (including journals, catalogues or price lists) or electronic media or transport system; (ii) the expenditure on the holding of, or the participation in any press conference or business convention, fair or exhibition; (iii) the expenditure on sponsorship of any sport event or any other event organized by any Government agency or trade association or body; (iv) the expenditure on the publication in any print or electronic media of any notice required to be published by or under any law or by an order of a court or Tribunal;
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Cont. (v) the expenditure on advertisement by way of signs, art work, painting, banners, awnings, direct mail, electric spectaculars, kiosks, hoardings, bill boards or by way of such other medium of advertisement; (vi) the expenditure by way of payment of any advertising agency for the purposes of clauses (i) to (v) above; (vii) the expenditure on distribution of free samples of medicines or of medical equipment, to doctors (not to be considered as expenditure on sales promotion, including publicity for assessment year 2007-08 and subsequent assessment years); (viii) the expenditure by way of payment to any person of repute for promoting the sale of goods or services of the business of the employer (not to be considered as expenditure on sales promotion, including publicity for assessment year 2007-08 and subsequent assessment years).
For the purposes of this clause, any expenditure incurred or payment made to fulfill any statutory obligation or mitigate occupational hazards or provide first aid facilities in the hospital http://www.simpletaxindia.org/ or dispensary run by the employer shall not be considered as129 expenditure for employees’ welfare.
Cont.
In the case of an employer engaged in the business of construction, or in the business of manufacture or production of pharmaceuticals or computer software, 5% shall be substituted for 20%.
In the case of an employer engaged in the business of manufacture or production of pharmaceuticals or computer software, 5% shall be substituted for 20%. Besides, in the case of an employer engaged in the business of carriage of passengers or goods by aircraft or by ship 5% shall be substituted for assessment year 2007-08 and subsequent assessment years.
In the case of an employer engaged in the business of carriage of passengers or goods by motor car, 5% shall be substituted for 20%.
In the case of an employer engaged in the business of carriage of passengers or goods by aircraft, ‘Nil’ shall be substituted for 20%. This clause is applicable for assessment year 2007-08 and 200809.
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Thank You – Presentation By:
CA Sanjay K. Agarwal [email protected] Cell 9811080342 – Assisted By: Neha Garg [email protected]
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Tax Audit Report Under section 44AB
Form 3CA/3CB Form 3CD Annexure – I
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Tax Audit under Section 44AB
Said Section provides for the Compulsory Audit of accounts of following persons A Person Carrying on Business
If his total Sales, Turnover or Gross Receipts, as the case may be in business exceed or exceeds 40 Lakhs rupees in any Previous Year.. http://www.simpletaxindia.org/
Different Tax Payers A Person Carrying on Profession If his Gross Receipts exceed 10 Lakhs Rupees in any Previous Year.
A Person covered U/sec. 44AD, 44AE, 44AF, 44BB or 44BBB If such person claims that the profits and gains form the business are lower than the profits and gains computed under above sections irrespective of his Turnover 3
Scope and Liability of Tax Audit
Where the assessee offers an income on presumptive basis u/s 44AD, 44AE and 44AF, there is no need for tax audit report, if the turnover does not exceed the specified limits.
A charitable trust , cooperative society etc., though their income may be exempt, yet if their turnover in business exceeds Rs.40 lakhs, they should get their account audited.
Even if income of an assessee is below the taxable limit, yet he will be liable to get his account audited, if his turnover in business exceeds Rs. 40 lakhs.
Section 44AB is not applicable to non residents deriving income from shipping business (Sec 44B) and also where special provision are applicable for computing profits and gains of business of operations of aircraft in the case of non residents (Sec 44BBA).
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Rule 6G Rule 6G(1) provides that the report of audit of accounts of a person required to be furnished u/s 44AB shall be in Form No.
3CA: In case of a person who carries on Business or Profession and who is required by or under any other law to get his accounts audited.
3CB: In case of non corporate entities where audit is not required to be carried out under any other law. As per Rule 6G(2), particulars which are required to be furnished u/s 44AB shall be in Form 3CD.
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Forms of Report Nature of Persons Who is required to get his Book of Account Audited under Any other Law
Audit Report Form 3CA
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Due Date for Getting books Audited and Submission of Audit Report 30th Sept. of A.Y Statement Particulars Form 3CD
Who is not required to get his Book of Account Audited under Any other Law
+
Audit Report Form 3CB
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Tax Audit Report Special Points
Proviso to Sec 44AB: The proviso to Sec 44AB lays down that where the accounts of an assessee are required to be audited by or under any other law, it shall be sufficient compliance with the provisions of this section, if such person gets the accounts of such business or profession audited under such other law before the specified date and furnishes by that date the report by an accountant only. W.e.f 1.4.2001, tax audit can be carried only by an accountant only. Accordingly, in case of any assessee like a co-operative society where the accounts under the relevant law have been audited by a person other than a chartered accountant, the tax audit will have to be conducted by the ‘accountant’ as defined u/s 44AB. This has invalidated the Circular No. 561, dated 22 may, 1990. Same was also held in the case T.D. venkata rao v. Union of india [1999] 237 ITR 315 (SC)
Joint audit report: There could be no objection to joint report, as long as the audit report is signed by all the chartered accountants who have done the audit. As per Statement of Responsibility of Joint Auditors, http://www.simpletaxindia.org/ there could be an agreed report by joint auditor or in case of disagreement, separate reports on matters of disagreement.
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Cont.
In case where an assessee follows an accounting year different from financial year: It is necessary that the financial year should be fully covered, though the accounts for the financial year may fall in two different years in assessee’s accounts (Board Circular No. 561, dated 22.5.1990)
Incomplete report: An incomplete report may constitute professional negligence and render the Chartered Accountant liable for proceedings under u/s 288 of the I.T. Act, and may result in complaint to the ICAI.
Consequences of assessment overlooking Sec 44AB: Though tax audit report u/s 44AB was not filed, where the accounts had been examined by the Assessing officer and assessment was made thereafter, such an assessment cannot be subject to revision u/s 263 merely because the assessment was made without tax audit report. Revision could be justified only, where such assessment is prejudicial to revenue. In such a case http://www.simpletaxindia.org/
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Cont. only a penalty can be levied on the assessee for not filing tax audit report u/s 271B of the Act, if there is no reasonable cause. In a case of a non-resident, where the assessing officer had accepted the returned loss with draft assessment order approved by Additional commissioner, exercise of revision jurisdiction is not valid [CIT v. Clough engineering ltd. [2008] 300 ITR 435 (Uttarakhand)].
Internal auditor of an assessee, whether working with the organisation or independently practising chartered accountant or a firm of chartered accountants, cannot be appointed as his tax auditor [ICAI guidelines as on 12-12-08].
A chartered accountant in practice can take up 45 tax audits (earlier limit was 30 per chartered accountant)
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Eligibility, Appointment & Removal
Eligibility: As per sec. 288 the Accountant (who is appointed as Tax Auditor) should be a Charted Accountant within the meaning of Charted Accountant Act. 1949. Appointment: He is appointed by Assessee. The tax auditor should obtained the letter of appointment for conducting the audit as mentioned in sec. 44AB Removal: There is no specific procedure for removal of a tax auditor appointed under sec. 44AB However it is possible for the management to remove a tax auditor where there are any valid grounds for such removal.
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Auditor’s Responsibility
Forms of Certificate and report: Forms No. 3CA and 3CB require certificate as to the reliability of the books in the sense that proper books have been kept and that the report is made after all the necessary information given by the assessee with the assertion that profit and loss account/income and expenditure account and the balance-sheet give a true and fair view as required under clause 3(c) of Form No. 3CB applicable to cases which have not been statutorily audited. At the same time particulars in Form No. 3CD are required to be certified as true and correct. In respect of audited accounts, the requirement of accounts being true and fair is absent in Form No. 3CA applicable to them obviously because statutory accounts would have been so certified as true and fair. Form No. 3CD has to be true and correct even for this class of accounts. Form No, 3CD requires signature of the auditor with his full name and date.
Disqualification of Tax Auditor: http://www.simpletaxindia.org/ Though there is no specific disqualification for a Chartered
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Cont. Accountant being an auditor u/s 44AB, disqualification for purposes of company audit u/s 226 of the Companies Act, 1956 should apply even for tax auditor.
The Chartered Accountant is bound by regulations imposed on him by the Chartered Accountant Act, 1949, and is expected to follow the guidelines issued by the institute from time to time.
Guidance Notes are of a general nature guiding the auditor in the performance of his duties, while opinions relate to specific matters which may involve interpretation of law and may get superseded by either weightier opinions based upon legal precedents, instructions from the concerned authorities, changes in law, etc.
Liability of the auditor: Chartered Accountant may be liable for professional negligence under the Chartered Accountants Act, 1949. However that does not spare him from any civil liability as under consumer http://www.simpletaxindia.org/ protection law, where it is applicable, or for damages or criminal 12
Cont. liability under the prevalent law on failure on his part, if his actions becomes vulnerable under such other laws.
Auditor cannot be responsible, if sufficient time is not given to him to take up and complete the work in time, so that audit report can be filed on or before the due date. However, where the delay had occurred in auditor’s office and if there is any unreasonable delay on the part of the auditor, he is answerable to the ICAI, if a complaint is made by the client, making him vulnerable to disciplinary proceedings for tax audit as for any other professional misconduct relating to audit [Para 7 of GN].
Neither the assessing officer nor the assessee are bound by the opinion of the tax auditor in his report. They may have their own views for their own reasons.
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Sales, Turnover and Gross Receipts
The terms ‘sales’, ‘turnover’, and ‘gross receipt’ have not been defined in the statue.
Gross Receipts are the amounts received by the assessee from the clients for the contract and does not include within its purview the value of materials supplied by the clients.
As per board circulars and Institute guidelines following items will fall within the scope of gross receipts: (a) All assistance from the government whether by way of duty drawback, cash grant, import licence, including profit therefrom. (b) Exchange difference on export sales. (c) Liquidated damages, insurance claims and sale of scrap, etc. (d) In the case of leasing business, hire charges, lease rent and rental or interest for finance leases, installments received in hire purchases.
Gross receipts is confined to professional receipts, hence out-of14 pocket expenses would not form part of it.
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Cont. U/s 145(1) “Sales”, “Turnover” or “Gross Receipts” are computed either on cash or mercantile system of accounting.
The term ‘Turnover’ would mean, the total sales after deducting therefrom goods returned, price adjustment, trade discounts and cancellation of bills for the period of audit, if any. Adjustment which do not relate to turnover should not be made e.g. writing off bad debts, royalty etc.
Items not regarded as turnover: (a) Discount and rebates. (b) Sales return. (c) Sale of fixed assets/investments. (e) Miscellaneous incomes such as dividend, rent and interest but they will be included in the turnover in case of dealers.
If sales tax and excise duty are included in the sales price, no adjustment in respect thereof should be made for considering the quantum of turnover.
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Cont.
As per ICAI guidelines, in case of non-residents, it is only indian turnover arising out of indian operations which would be relevant for reckoning the limit of turnover.
Where an assessee has both profession and business, each being a separate source of income below the limit, there is no need for tax audit.
Since each firm is separate and partner is different from firm, limit has to be reckoned for each separately.
Though the assessee may have had turnover exceeding the limit and, therefore, liable for tax audit, it will not be liable for tax audit for the year for which it falls short of the limit.
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Cont.
In case of Share brokers • Transaction entered on his personal a/c are also included in the sale value for the purpose of Sec 44AB. • Sub-broker is not different from a share broker.
Turnover for transacting in case of shares, securities & derivatives (a)
Speculative Transaction:- The aggregate of both positive or negative differences arising from settlement of contracts is to be considered as Turnover. [Para 5.11 of GN on tax audit].
(b) • • •
Derivatives, Future & options:Difference of total favorable & unfavorable Premium received on sale of option Difference of any reverse trade entered
(c)
Delivery based Transactions:- Total value of sales is to be considered as turnover.
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Cont.
In case of Kaccha arahtiya, the turnover is only the commission and does not include the sales on behalf of the principals. On the other hand in case of pucca arahtiya, the total sales/turnover of the business should be taken into consideration for determining the applicability of the provisions of Sec 44AB of the I.T. Act [Para 5.9 of GN on tax audit (Revised 2005)].
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E-filing of Return
All the companies has to mandatorily file the return electronically.
All the partnership firms which are subject to tax audit has to mandatorily file the return electronically.
The Central Board of Direct Taxes had, vide circular No.3/2009 dated 21.05.2009, required assessees who filed their income tax returns in electronic form without digital signature to submit their verified ITR-V form, within a period of 30 days. The ITR-V form was required to be sent to Post Bag No.1, Electronic City Post Office, Bengaluru, Karnataka-560100, by ordinary post. However the CBDT has now extended the time limit of 30 days, as now the ITR-V form in case of returns filed electronically (without digital signature) on or after 1st April, 2009 can now be filed on or before the 30th September, 2009 or within a period of 60 days of uploading of the electronic return data, whichever is later.
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Penalty for failure to get accounts Audited
If the assessee fails to get his accounts audited u/s 44AB in respect of any previous year or years relevant to an assessment year,
¾
a flat penalty u/s 271B shall be attracted which is equal to: ½% of the total Sales, turnover or gross receipts Or Sum of Rs. 100,000 (Whichever is less)
¾
Sec 273B provides that no penalty shall be imposed for any failure referred to in Sec 271B if assessee proves that there was reasonable cause for such failure.
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Cont. Reasonable Cause It is a subjective matter. Instances where Tribunals/ Courts have accepted as “reasonable cause” (a) Resignation of the tax auditor and consequent delay; (b) Bona fide interpretation of the ‘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; http://www.simpletaxindia.org/
(g) Natural calamities, commotion, etc.
21
Cont. Case Law: CIT v. Capital Electronics 261 ITR 4 (Cal). Sec 271B does not imply that the default must be continuous one and that if the audit is made before the completion of the assessment, then the penalty is not imposable. Tools India Distributors v. ITO (2000) 111 Taxman 216 (Mum) (Mag). Where acting on advice of its Chartered Accountant, who relied on Guidance notes issued by the ICAI, assessee entertained a bona fide belief that its turnover did not exceed prescribed limit u/s 44AB, hence, could be said to be prevented by reasonable cause in not getting its accounts audited.
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22
Penalty u/s 277 A
Falsification of books of accounts or documents etc: The Finance (No.2) Act, 2004 has inserted section 277 A w.e.f 110-2004. Accordingly any person shall be punishable with rigorous imprisonment, which may extend form 3 months to 3 years and shall be liable to fine if the following conditions are satisfied: (i) He willfully and with intent to enable any other person (assessee) to evade any tax or interest or penalty chargeable and imposable under the Income Tax Act. (ii) He makes or causes to be made, any entry or statement in any books or other documents relevant for any proceeding under the Act which is false. (iii) He knows it to be false or dose not believe it to be true.
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FORM 3CD PART A Clause (1 to 6) 1.
Name of the assessee
2.
Address
3.
Permanent Account Number
4.
Status
5.
Previous year ended
6.
Assessment year
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Analysis of Clause (1 to 6)
In case of proprietorship firm, it is advisable to furnish the name of proprietorship firm with the name of the proprietor.
In case of Branch audit, name of such branch should be mentioned along with the name of the assessee.
If there is change in the name of the company, the name of such company as on the date of signing of the audit report has to be mentioned along with the original name of the assessee.
The address that is given should be one from where the assessee carries on business. In case of a company, the address of the registered office should be stated.
In case of audit of a branch or a unit, the address of the branch or the unit should be given.
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25
Cont.
If the application of PAN allotment is pending, it should be reported as PAN has been applied for and the GIR No. may be given.
‘Status’ means status as per Sec 2(31) of I.T. Act and not ‘residential status’.
As per Sec 3 of I.T. Act, previous year should end on 31st March.
In case of a Business or profession newly set up in the said financial year, the previous year will begin with the date of setting up of business but will end on 31st march only.
U/s 2(9) of I.T. Act “Assessment year” means the period of 12 months commencing on the 1st day of April every year.
The Assessment year relevant to the previous year for which the http://www.simpletaxindia.org/ 26 audit has been done should be mentioned.
PART B
Clause 7 7.
(a) If firm or Association of Persons, indicate names of partners/members and their profit sharing ratios. (b) 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.
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Analysis of Clause 7
This applies only on Firm and association of persons.
If the ratio of loss is different from the ratio of profits, then loss ratio should also be given.
All the details of partners or members during the entire previous year must be furnished.
In case partner is a partner in representative capacity, such fact should be stated.
This clause does not cover remuneration and interest to partners, hence there is no need to mention the same.
Change in remuneration is not required to be reported. (Para 18.1 28 of the GN on tax audit).
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Clause 8 8.
(a) Nature of business or profession. (b) If there is any change in the nature of business or profession, the particulars of such change.
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Analysis of Clause 8
As per Sec 2(13) of I.T. Act, ‘Business’ includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
As per Sec 2(36) of I.T. Act, ‘Profession’ includes vocation. The word profession implies special knowledge acquired only after patent study and application. Share broker does not come within the definition of profession.
Permanent discontinuance of a particular line of business requires reporting under this clause (Para 19.2 of the GN on tax audit).
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Clause 9 9.
(a) Whether books of account are prescribed under section 44AA, if yes, list of books so prescribed. (b) Books of account maintained. In case books of account are maintained in a computer system, mention the books of account generated by such computer system. (c) List of books of account examined.
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Analysis of Clause 9 Sec 44AA
Specified Profession
Non Specified Profession or Business
Limit Rs 1,50,000 Receipts
Limit Total income Rs 1,20,000 or Total Sale Receipts Rs 10,00,000
Exceeds
Does not Exceeds
Exceeds
Does not Exceeds
Prescribes Books Rule 6F
Any books
Any books
No books are mandatory
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32
Cont.
Prescribed Books under rule 6F: - Cash book - Journal (if the accounts are kept on mercantile bases) - Ledger - Serial numbered carbon copies of the bills and receipts issued - Original purchase bill/payment vouchers. In addition to the above, a person carrying on medical profession shall maintain following: (i) A daily cash register in form no. 3C. (ii) An inventory of drugs and medicines on first and last day of previous year.
Specified Profession: Legal, medical, engineering, or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other notified profession.
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Cont.
As per Sec 2(12A), Books or Books of account includes:- Ledgers - Day Books - Cash books - Account book - Others Whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro- magnetic data storage device.
Proper print outs of accounts generated by the computer system are mandatory.
Where the books of accounts are seized by government authorities and are not available for audit, the fact should be precisely mentioned in 3CA/3CB.
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Clause 10 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 (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any other relevant section).
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Relevant sections of clause 10 S.No.
Section
Business Covered
1.
44AD
Civil construction business.
2.
44AE
Plying, hiring or leasing goods carriages.
3.
44AF
Retail trade.
4.
44B
Shipping business in case of non-residents.
5.
44BB
Providing service or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils.
6.
44BBA
Operation of aircraft in case of non-residents.
7.
44BBB
Civil construction etc. in certain turnkey power project of foreign companies.
8.
Any other This refers to the sections not listed above relevant section under which income may be assessable on presumption basis like Sec 44D and sec 115A(1)(b) and will include any other section http://www.simpletaxindia.org/ that may be enacted in future for presumptive36 taxation.
Analysis of Clause 10
Gross receipt does not include the value of material supplied by the client and value of work in progress would not constitute turnover.
If composite books of accounts are maintained for the business, then common expenses may be apportioned between the businesses, and the facts and circumstances in each case will determine the basis of such apportionment.
Mostly turnover basis is accepted by I.Tax Dept.
If profit is credited to Profit & Loss a/c, appropriate qualification will be required but if it is credited to capital a/c of partners/members, there is no requirement of reporting.
Eliminate the turnover covered by the presumptive provisions for purposes of limit u/s 44AB.
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Clause 11 a)
Method of accounting employed in the previous year.
b)
Whether there has been any change in the method of accounting employed vis-a-vis the method employed in the immediately preceding previous year.
c)
If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss.
d)
Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit or loss.
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Analysis of Clause 11
As per Sec 145 the income of the assessee may be computed in accordance with either cash or mercantile system of accountancy regularly employed by him.
The hybrid system of accounting (i.e. mixture of cash and mercantile) is not permitted .
A non corporate, having more than one business, may adopt cash system of accounting for some business and mercantile system of accounting for another business.
Corporate assessee's have to follow accrual basis of accounting in view of Sec 209 of the companies act.
It should be legitimate for an assessee to change the method of accounting as long as the change is not casual and is thereafter regularly adopted by the assessee.
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Cont.
It is not necessary to have the opening stock revalued on the same basis, where the assessee bonafide changes its method of valuation.
Change in accounting policy need not be reported because such changes in accounting policy could not mean that there is change in method of accounting.
U/s 145(2), Accounting Standard I relating to “disclosure of accounting policies” and Accounting standard II relating to “disclosure of prior period and extraordinary items and changes in accounting policies” is to be followed by the assessee following mercantile system of accounting. Case law:
CIT v. Biharilal investment P. ltd. [2008] 299 ITR 1 (SC) Supremacy of system of accounting consistently adopted in the case of a dispute over accounting for chit system was upheld. http://www.simpletaxindia.org/ Recognition of surplus on the basis of completed contract basis40 was found acceptable.
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.
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Analysis of Clause 12
The word “Closing stock” read with Sec 145A and AS-2 will include finished goods, raw material, work-in-progress, maintenance supplies, consumables and loose tools.
The revised AS-2 states that the inventory costs should be assigned by using FIFO, or weighted average or specific identification cost formula which should reflect the fairest possible approximation to the cost incurred in bringing the terms of inventory to their present location and condition.
Statement showing basis of valuation of inventories to be reported: i. Raw material, stores and spares at historical cost. Rates are determined at FIFO basis. ii. Self generated scrap and non-reusable waste at net realizable value. http://www.simpletaxindia.org/ iii. Work-in-progress valued at actual cost of material, labour and 42 production overheads are adjusted/estimated.
Cont. iv. Finished goods other than by-product at cost or market value, whichever is lower. Cost is determined on the basis of absorption cost. By-product is valued at net realizable value.
Since the Liability for excise duty arises when the manufacture of goods is complete, it is necessary to create a provision for liability of unpaid excise duty on stock lying in the factory or bonded warehouse. [GN on Accounting treatment for Excise duty].
The provisions of Sec145A require grossing up of value of sale, purchase and inventories. As such it should not affect or impact the profit or loss otherwise worked out. Assessee may include sales tax, excise duty, octroi or exclude from the value of sales, purchase and inventories depending on the method generally followed.
If assessee follows inclusive method, no adjustments in the computation of income are required. If assessee follows exclusive method of accounting, adjustments are to be made in computation of total income and the same should be reported as a deviation from Sec 145A under this clause.
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Cont.
It is not necessary to change the amount of purchases, sales and inventory recorded in the books. The adjustment can be made in a Memorandum of account while computing the income for the purpose of preparing return of income (Para 23.15 of GN on tax audit). Effect of deviation on the Profit or loss will be nil.
If an assessee made Advance Payment of Excise duty without liability, no deduction shall be given u/s43B. Case Law: CIT v. Realest Builders and Services Ltd. [2008] 307 ITR 202 (SC) While upholding the consistent method adopted by the assessing officer did observe, that where the system is defective, the Assessing officer is free to recompute the income on a basis to accord with the accounting principles.
CIT v. Amrithalakshmi [2008] 300 ITR 78 (Mad.) When cost or market value whichever is less is followed, the inventories may be valued at cost in one year and at market value in another, when it is lower. This cannot be construed as a change 44 http://www.simpletaxindia.org/ in method of accounting..
Clause 12A 12A 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
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Analysis of Clause 12A
It has been inserted in the new form to include the contingency of capital gains on conversion of capital asset into Stock-in-trade taxable under Sec 45(2).
Such conversion is treated as transfer u/s 2(47).
U/s 45(2) notional capital gain arising from such transfer will be chargeable to tax in the year in which such stock-in-trade is sold.
Cost of capital asset in case of: ¾ Purchase – actual cost from invoice, Books etc. ¾ Self constructed – direct related cost. ¾ Exchange – FMV or Net Book value of asset given up. ¾ Inheritance – if no evidence exists, then auditor should rely
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upon the report of the experts such as valuers.
46
Clause 13 13. Amounts not credited to the profit and loss account, being: (a) the items falling within the scope of section 28; (b) the Proforma credits, drawbacks, refund of duty of customs or excise or service tax, or refunds of sales tax, where such credits, drawbacks or refunds are admitted as due by the authorities concerned; (c) escalation claims accepted during the previous year; (d) any other item of income; (e) capital receipt, if any.
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Analysis of Clause 13
Sec 28 cannot be considered as exhaustive. Where there are specific items which are not credited to P & L a/c, or credited to P & L a/c but not considered as income, such items would require reporting. Auditor can rely on management representation.
Sec 28 w.e.f 1-04-2010 will also include any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed or transferred, if the whole of expenditure on such capital asset has been allowed as a deduction u/s 35AD.
In case of assessee following cash system, it should be clearly brought out that admittance of claims during the previous year without actual receipt has no significance in such cases.
In case of import entitlements which an exporter is entitled to receive in view of its exports, the date on which the exporter applies for the same will be the date of accrual for the assessee.
Escalation claims which has been made and merely expected but not admitted by the other party are not required to be stated.
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48
Cont.
A certificate is necessary from the assessee especially in the cases of contractors where such claims are normal.
Professional expertise and judgment have to be used in judging whether any particular receipt is of capital or revenue nature. Due regard should be given to AS-9 “Revenue recognition”.
The word income has been defined u/s 2(24) of the I.T. Act and clause (x) of Sec 2(40) includes any amount received by the assessee from his employees, as contribution to any provident fund as income. Normally such contributions are not shown as income in the P & L a/c. Such contributions can be reported here.
Sub clause (e) would cover a case where the amounts are treated as capital account in the books and agreed by the auditor e.g. premium on issue of new shares, sale of assets which may gave rise to capital gains but are not passed through profit and loss account.
For grants and subsidy, AS-12 “Accounting for government 49 grants” should be followed.
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Cont. Case Law: CIT v. Kisan sahkari chini mills Ltd. [2006] 284 ITR 418 (All) All subsidies aiding production and not for establishing an industry should necessarily be treated as revenue receipts, so that sales tax subsidies or concession in power tariff or water charges cannot be treated as revenue receipts. Subsidy is based upon the size of installed machinery, electricity charges or excise or sales tax liability shall also be regarded as capital receipt.
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Clause14 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 written down value, as the case may be. (d) Additions/Deductions during the year with dates; in case of any addition of an asset, date of put to use, including adjustment on account of: (i) Modified Value Added Tax credit claimed and allowed under the Central Excise Rules 1944, in respect of assets acquired on or after 1st March, 1994, (ii) Change in rate of exchange of currency and (iii) Subsidy or grant or reimbursement by whatever name called. (e) Depreciation allowable. http://www.simpletaxindia.org/ (f) Written down value at the end of the year.
51
Analysis of Clause 14
Registered ownership is not necessary. Exclusive possession right, to exclude others from enjoyment of asset, full control over the asset etc, will entitle the enterprise to claim depreciation.
AS-19 on leases, require capitalization of the asset by the lessee in financial lease transaction. This will bear no impact on depreciation allowable.
Firm can claim depreciation of vehicle registered in partners name.
On the assets used partly for business purposes, the deductions u/s 32(1) shall be restricted to a fair proportionate part thereof [Proviso to Sec 32(2)].
Adjustment as contemplated u/s 43A and AS-11 (revised) “Accounting for effects in changes in foreign exchange rates” are required to be made.
Depreciation claim is mandatory for an assessee in calculating taxable income. [Explanation 5 to Sec 32(1)].
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Cont.
Where a claim or non-claim of depreciation is based on judicial pronouncement or on opinion or other contention, it is advisable to disclose such particulars.
The interest relatable to any period after such asset is first put to use shall not form part of actual cost. [Explanation 8 to Sec 43(1)].
Depreciation is not allowed on an amount equivalent to CENVAT credit claimed and allowed. [Explanation 9 to Sec 43(1)]
Part cost met directly or indirectly by central or state government or any authority established under any law or by any other person, in the form of a subsidy or reimbursement or grant, then such amount which is relatable to any asset is to be excluded from the cost of assets. [Explanation 10 to Sec 43(1)].
Sub clause (iia) of Sec 32(1) provides for additional depreciation to a manufacturing concern on fulfilling certain conditions.
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53
Cont.
Lessee is not eligible for the depreciation but the hire purchaser is so eligible. [Instruction No. 1079, dated Sep 19, 1977]
Vehicles standing in the name of directors, but financed by the company with repayment made by the company and vehicles shown as assets in the balance sheet of the company would entitle depreciation for the company. [CIT v. Fazilka dabwali TPT Co. Pvt. Ltd. (2004) 270 ITR 398 (P & H)
Fractional ownership of an asset is recognized. [Sec 31(1) of I.T. Act]
Where there is trial production or merely use of standby, right to depreciation is available.
Interest paid before commencement of production on the amounts borrowed by the assessee for the acquisition and installation of plant and machinery, buildings, furniture and fixture forms part of the actual cost. [Challapalli sugar mills Ltd. (1975) 98 ITR 167 (SC)]
Revaluation of assets does not have any impact under the I.T. Act. 54
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Cont.
No depreciation shall be allowed in respect of any plant or machinery if the actual cost thereof is allowed as deduction in one or more years under an agreement under Sec 42.
Expression “used” to be given a wider meaning. It would include not only cases where the machinery, plant were actively employed but also cases where there was what may be described as passive user of the same in the business. An asset could be said to be used, when it was kept ready for use [CIT v. Geotech construction corporation [2000] 244 ITR 452 (Ker)] Similar view has been accepted in case CIT v. Khanna (O.P.) and sons (1983) 140 ITR 558 (P & H), where steps taken to get building into gear for running business constitutes use of building.
This has invalidated the earlier decision taken in case Dineshkumar Gulabchand agarwal (2004) 267 ITR 768 (Bom). Also there was an amendment to Sec 32 of the act using the word “used” in past sense, so that earlier decision would no more have application. http://www.simpletaxindia.org/
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Cont. Case law: Skyline caterers P. Ltd. V. ITO [2008] 306 ITR (AT) 369 (Mum). Goodwill could be a commercial asset of similar nature on the fact that it is related to right to carry on catering business, so as to be eligible for depreciation. CIT v. Agra beverages corporation P. Ltd. [2008] 300 ITR 286 (All). Bottles and crates were held to be plant.
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56
Clause 15 15. Amounts admissible under sections 33AB, 33ABA, 33AC, 35, 35ABB, 35AC, 35AD*, 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.
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Brief summary of Relevant sections of clause 15 S.No Section Details 1
33AB
2
33ABA Site Restoration Fund
3
33AC
Reserve for Shipping. (N.A. w.e.f. 1-4-2002)
4
35
Expenditure on Scientific Research
5
35ABB Expenditure on license to operate telecommunication services.
6
35AC
7
35CCA Rural development programme
8
35CCB Conservation of Natural resources
9
35D
Amortization of Preliminary Expenses
10
35DD
Amortisation of Expenditure in case of amalgamation or demerger
11
35DDA Amortisation of expenditure incurred under voluntary Retirement Scheme
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12
35E
Tea Development
Eligible Projects/Schemes
Expenditure on prospecting certain minerals.
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Analysis of Clause 15
Where the assessee is eligible for deductions under one or more sections, state the deduction allowable under each section separately.
A new sec 35AD has been inserted w.e.f 1-4-2010 which provide for a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively , for the purposes of any specified business carried on by the assessee during the previous year in which such expenditure is incurred by him. Case law: Rajhans metals P. Ltd. v. ITO [2008] 306 ITR (AT) 245 (Mum). Expenses on the entire cost of the project for setting up a windmill is eligible for amortisation u/s 35D.
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Clause 16 16. (a) 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. [Section 36(1)(ii)]. (b) 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).
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Analysis of Clause 16
There is no restriction on the amount of bonus and it may exceed the bonus payable under the Payment of Bonus Act, 1965.
Amount of bonus or commission paid to a person, which would have otherwise been payable to him as profits or dividend, is not allowable as a deduction.
Only the amount is required to be disclosed and expression of opinion about allowability or inadmissibility is not required.
Part (b) of clause 16 clearly brings out the provision in law that the delayed payment of welfare dues by way of contribution to provident fund or superannuation fund would lose the benefit of deduction altogether only to the extent of the employee’s contribution and not the employer’s contribution. Sec 43B would allow listed expenses in the year of payment or where it pertains to the year, if payment had been made before the due date for filing the return.
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Clause 17 17. Amounts debited to the profit and loss account, being: (a) expenditure of capital nature; (b) expenditure of personal nature; (c) expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party; (d) expenditure incurred at clubs: (i) as entrance fees and subscriptions; (ii) as cost for club services and facilities used; (e) (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; http://www.simpletaxindia.org/
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Cont. (f) amounts inadmissible under section 40(a): (g) interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/40(ba) and computation thereof; (h) (i) whether a certificate has been obtained from the assessee regarding payments relating to any expenditure covered under section 40A(3) that the payments were made by account payee cheques drawn on a bank or account payee bank draft, as the case may be, [Yes/No]: (ii) amount inadmissible under section 40A(3), read with rule 6DD [with break-up of inadmissible amounts] http://www.simpletaxindia.org/
63
Cont. (i) provision for payment of gratuity not allowable under section 40A(7); (j) any sum paid by the assessee as an employer not allowable under section 40A(9); (k) particulars of any liability of a contingent nature. (l) amount of deduction inadmissible in terms of section 14A in respect of expenditure incurred in relation to income which does not form part of the total income (m) amount inadmissible under the proviso to section 36(1)(iii).
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Analysis of Clause 17
Explanation to Sec 30 & 31 provides that cost of repairs & current repairs to building and current repairs to machinery, plant & furniture shall not be treated as capital expenditure.
Auditor should qualify the audit report if capital expense were written off against revenue in the P&L a/c.
“Personal expenses” includes those on personal needs of assessee and those having purposes unrelated to business.
Since Sec 37(2B) would disallow any expenditure on advertisement in souvenirs etc. published by a political party, information is required under sub-clause (c) of clause17.
Donations given directly to political party is not to be reported under this clause.
Sec 37(2B) as well as clause 17(c) use the term “Souvenir, brochure, tract, and pamphlet. Or the like”. Newspaper is not a http://www.simpletaxindia.org/ publication and such expenses need not be reported. 65
Cont.
Payments to club would not include service organizations like Lions, Rotaries, Jaycees, Giants etc., but will include Gymkhana. [GN on tax audit]
If the payment is partially compensatory and partially punitive, on the basis of appropriate criteria, the amount charged will have to be bifurcated and only the amount relating to penalty should be stated. [Malwa Vanaspati & chemical Co. v. CIT (1997) 225 ITR 383 (SC)]
Expenditure incurred due to failure to deduct TDS is not allowable as a business expense. [Indian aluminium co. ltd. v. CIT (1971) 79 ITR 574 (SC)]
Interest paid in respect of delayed payment of income-tax is not deductible. [Federal bank ltd. v. CIT (1989) 180 ITR 37 (Ker)]
Any interest/penalty paid under Direct tax laws is not deductible.
Interest paid by the assessee to sales tax department on arrears of sales tax is an admissible deduction. [CIT v. Western indian state http://www.simpletaxindia.org/ 66 motors (1987) 163 ITR 194 (Raj)]
Cont.
Demurrage paid to port authorities in connection with release of confiscated goods is not a fine for infraction of law and thus allowable. [Nanhoomal jyoti prasad v. CIT (1980) 123 ITR 269 (All)]
Interest paid under employees Provident fund & Misc. Provisions Act, 1952 is allowable, if it is compensatory and not penal. [CIT v. Hyderabad allwyn metal works ltd. (1988) 172 ITR 113 (AP)]
Penalty paid by assessee contractor for non-compliance of contract within stipulated time is allowable. [CIT v. R.D. Sharma & co. (1982) 137 ITR 333 (Bom)]
Penalty for failure to supply goods under a contract are allowable. [Central trading agency v. CIT (1965) 56 ITR 561 (All)]
Securities transaction tax is now allowed as expenditure.
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Cont.
A retrospective amendment is made u/s 40(a)(ia) by the Finance act, 2008 w.e.f. 1.4.2005 which provides that no disallowance will be made where deduction was delayed but all the same paid before the end of the year and in case where deduction has been made on the last day of the previous year and tax is paid before the due date for filing return.
Valuation fees paid for valuation of assets does not represent wealth tax and is allowable as deduction.
If TDS is deducted late even by one day, the salary paid outside india or to a non-resident in india shall not be allowed as deduction.
If TDS is not deducted but paid by the assessee from his own pocket, then also salary payable outside india or to a non-resident in india shall not be allowed as deduction. [Sec 40(a) (iii)]
Any tax actually paid by an employer referred to in Sec 10(10CC) would be disallowed [Sec40(a)(v)].
Income-tax payable under I.T. Act or paid under the tax laws of a 68 foreign country is not allowable as deduction.
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Cont.
Sec 40(a)(iv) disallows payment to any recognised provident fund, unless effective arrangement is made for tax deduction at source out of payment therefrom.
Deduction of remuneration to working partner will not be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration [Circular No. 739, dated 25th march].
Sec40A(3) amended by Finance act 2008 shall be attracted if 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.
Purchase of stocks or raw materials constitute expenditure referred to in Sec 40A(3). Therefore, if payments are made exceeding Rs. 20,000 otherwise than by account payee cheque or account payee bank draft for purchase of stocks or raw materials, then such expenditure will be disallowed [Attar singh gurmukh singh (1991) 191 ITR 667 (SC)]. http://www.simpletaxindia.org/
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Cont.
Purchase of capital assets on which 100% (or even normal) depreciation is allowable does not constitute expenditure and is not covered by Sec 40A(3).
Where a pucca ahartiya purchases goods from the principal and makes the payment exceeding Rs. 20,000 otherwise than by account payee cheque or account payee bank draft, then Sec 40A(3) shall be applicable.
Where the exception under Rule 6DD is applicable, there is no need for reporting such specific payments.
If the gratuity fund is unapproved, deduction for gratuity shall not be allowed even if the provision for gratuity is made as per actuary [Sec 40A(7)].
If a policy is taken from LIC for providing gratuity to employees, then annual premium is allowed as deduction u/s 37(1).
Where the assessee contests the claim but all the same makes a provision in the accounts without intimating acceptance of the claim or even while disputing it, such expenses will have to be http://www.simpletaxindia.org/ 70 indicated as contingent liability and will be disallowed.
Cont.
Expenditure relatable to income which does not form part of total income cannot be set off against other taxable income [Sec 14A].
The amount of the interest paid in respect of capital borrowed for acquisition of an 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 deduction [Sec 36(1)(iii)]. Case law: CIT v. Usha iron and ferro metal corporation ltd. [2008] 296 ITR 140 (Del.) Cost of melting shop unit, which was started as an additional facility for producing the necessary raw materials, was deductible since it is expansion of existing business.
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Cont. J.K. Manufacturers ltd. V. CIT [2008] 300 ITR 297 (All.) Expenditure for advertising a new product is deductible. But where no business is carried on with no prospect of resumption, such expenditure will be in admissible. CIT v. G.E. Capital services ltd. [2008] ITR 420 (Del.) Cost of upgradation of software was held to be revenue expenditure as technological changes and the need to upgrade software on regular basis cannot be treated as an enduring advantage. Dr. T.A. Quereshi v. CIT [2006] 287 ITR 547 (SC). Heroin seized from the doctor on the ground of illegal possession is allowable u/s 28(1) since such heroin formed part of his stockin-trade. It was also held that Explanation to Sec 37 applies only to business expenditure and not to business loss. http://www.simpletaxindia.org/
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Cont. CIT v. Smt. Santosh jain [2008] 296 ITR 324 (P&H) Where an assessment is made rejecting assessee’s books of accounts in computing the income on estimate basis, Sec 40A(3) would have no application.
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Clause 17A 17A. Amount of interest inadmissible under section 23 of the Micro, small and Medium Enterprises Development Act, 2006.
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Analysis of Clause 17A
In exercise of the powers conferred by section 295 read with section 44AB of the Income-tax Act, 1961, the CBDT through its Notification No. 36/2009, dated 13-4-2009, has inserted a new clause 17A in Form 3CD in Appendix-II of the Income Tax Rules, 1962.
Amount inadmissible u/s 23 of MSMED Act, 2006 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.
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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 MSMED 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. The tax auditor while reporting in respect of clause 17A should take the following steps: (a) The auditor should seek information regarding status of the enterprise i.e. whether the same is covered under the Micro, Small and Medium Enterprises Development Act, 2006. Where the information is available and has been disclosed the same should be reported as such in Form No. 3CD. Where the information is not available the auditor should also mention the same in the Form No.3CD.
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(b) Since Schedule VI and Section 22 of the Micro, Small and Medium Enterprises Development Act, 2006 requires disclosure of information, the tax auditor should cross check the disclosure made in the financial statements. (c) Obtain a full list of suppliers of the assessee which fall within the purview of the definition of “Supplier” under section 2(n) of the Micro, Small and Medium Enterprises Development Act, 2006. It is the responsibility of the auditee to classify and identify those suppliers who are covered by this Act. (d) Review the list so obtained. (e) Verify from the books of account whether any interest payable or paid to the buyer in terms of section 16 of the MSMED Act, 2006 has been debited or provided for in the books of account.
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(f) Verify the interest payable or paid as mentioned above on test check basis. (g) Verify the additional information provided by the auditee relating to interest under section 16 of MSMED Act, 2006 in his financial statement. (h) If on test check basis, the auditor is satisfied, then the amount so debited to the profit and loss account should be reported under clause 17A. Where the tax auditor, upon due verification, finds that the auditee has neither provided for nor paid any interest payable under the MSMED Act, the no amount is inadmissible under section 23 of MSMED Act. In such a case ‘Nil’ can be reported against clause 17A.
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A question may come up, as to what would be disallowance, in case the auditee is liable to pay any interest under MSMED Act, but he has not provided the interest in his accounts. In such a case, there can be no disallowance, as he has not claimed the same in his accounts. But whenever he pays and claim such interest, the same will be disallowable in year of payment. In case the auditee has adopted mercantile system of accounting, the non-provision may affect true and fair view and the auditor should give suitable qualification. The salient features of the MSMED Act, 2006 (i.e. “The Micro, Small and Medium Enterprises Development Act, 2006”) are summarized below: Disallowance under Income Tax (Sec 23 of MSMED Act, 2006) Interest paid or payable u/s 16 of MSMED Act, 2006 shall not, be allowed as deduction for the purpose of computation of income under the Income Tax Act, 1961.
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Interest u/s Sec 16 of MSMED Act, 2006 In case of delay in payment as per section 15, compound interest with monthly rests from the day following the date agreed/appointed day at the rate of three times the RBI rate, shall be paid by buyer to the supplier. (Present bank rate is 6%) Buyers to make payment - Sec 15 of MSMED Act, 2006 Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make the payment on or before the date agreed upon in writing (which shall not exceed 45 days from the day of acceptance or the day of deemed acceptance) or where there is no agreement in this behalf, on or before the appointed day (which means 15 days from the date of acceptance of goods or services). “day of acceptance” means the day of actual delivery of the goods or the rendering of service or where any objection is made in writing by the buyer regarding the acceptance of goods or services within 15 days from the day of delivery of goods or rendering of services, the day on which the objection is removed by the supplier. http://www.simpletaxindia.org/
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“day of deemed acceptance” means , where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of delivery of the goods or rendering of services, the day of the actual delivery of goods or the rendering of services. Who is Supplier - Sec. 2(n) of MSMED Act, 2006 Supplier means a micro or small enterprises which has filed a memorandum with the authority u/s 8(1) and includes NSIC, SIDC of a state and any company, cooperative society, trust or body registered under any law, engaged in selling the goods produced by micro or small enterprise. Categorisation of enterprises as per Sec. 7 of MSMED Act, 2006 Enterprises engaged in the manufacture or production of goods pertaining to any industry specified in first schedule to Industries (Development and Regulation) Act, 1951 (IDR Act) or engaged in providing or rendering services, are classified according to investment in plant & machinery and equipments respectively as under: http://www.simpletaxindia.org/
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Enterprises
Investment in P&M (Industries)
Investment in equipments (Service provider)
Micro Enterprise
Upto 25 Lacs
Upto 10 Lacs
Small Enterprise
> 25 Lacs but < > 10 Lacs but < 5 Crore 2 Crore
Medium Enterprise
> 5 Crore but < > 2 Crore but < 10 Crore 5 Crore
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Disclosure Requirement as per Sec 22 of MSMED Act, 2006 Where any buyer is required to get his accounts audited under any law following additional information shall be given in the balance sheet: 9 The principal amount and the interest due thereon (to be shown separately) remains unpaid to any supplier as at year end. 9 Interest paid alongwith the amounts of payment made to the supplier beyond the appointed day or due date during each accounting year. 9 Interest due and payable for the period of delay in making payment (paid beyond the appointed day during the year) but without adding the interest. 9 Interest accrued and remaining unpaid as at year end. 9 The amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues are actually paid to the small enterprises for the purpose of http://www.simpletaxindia.org/ disallowance u/s 23.
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Clause 18 18.
Particulars of payments made to persons specified under section 40A(2)(b).
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Analysis of Clause 18
If payments made to specified persons is excessive and unreasonable, it should be indicated.
There is no ceiling on the total amount paid to vulnerable persons, if it represents fair market value.
If the assessee bona fide sells his goods to a vulnerable person at a rate, which is lower than the market rate, there is no “expenditure” incurred by him and Sec 40A(2) cannot be invoked.
Payments, which are made for commercial considerations and which are real and genuine and incurred wholly and exclusively for the purpose of business, cannot be disallowed, even partly, u/s 40A(2)(b).
Any Payment made by AOP to its member for supply of goods should be reported.
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Cont. Case law: Dy Cit v Joshi Formulabs (P) Ltd (2000) 67 TTJ 396 (Rajkot) A fully vouched and genuine expenditure cannot be disallowed u/s 40A(2)(b) even if made to sister concern. Khan Carpets v CIT (2003) ITR 325 (All) When there was disproportionate increase in salary without showing exceptional circumstances for it, in such case increase in salary could be disallowed.
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Clause 19 19. Amounts deemed to be profits and gains under section 33AB or 33ABA or 33AC.
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Analysis of Clause 19
Sec 33AB - Tea Development Account.
Sec 33ABA - Site Restoration Fund
Sec 33AC – Reserve for Shipping Business. [No deduction is allowed under this section w.e.f. A.Y 2005-06]
The above three items are also covered under clause 15, where information is required as regards to the extent of admissible deduction but such information deals only with the amount of deduction in the year of payment.
Amount withdrawn from such deposit account for other than the specified purposes is to be deemed as income chargeable to tax.
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Clause 20 20.
Any amount of profit chargeable to tax under section 41 and computation thereof.
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Sec 41 Sec 41(1)
Recovery of expenditure & remission and cessation of trading liability.
Sec 41(2)
Balancing charge in case of Power generating undertakings.
Sec 41(3)
Sale of Capital Asset used for Scientific research.
Sec 41(4) -
Bad debt recovery.
Sec 41(4A)
Amount withdrawn from Special Reserve created & maintained u/s 36(1)(viii).
Sec 41(5)
Adjustment of loss (in case of discontinued business)
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Analysis of Clause 20
Where a deduction has been allowed in respect of a trading liability and subsequently there is a remission or cessation of the trading liability, then the amount of trading liability so ceased shall be deemed to be the income of the previous year in which such remission or cessation took place. This shall apply even if the business is not in existence.
Writing off the liability unilaterally will also bring about a remission or cessation of the trading liability.
For the applicability of Sec 41(4), the assessee who claimed the deduction of bad debt and the assessee who recovers the bad debt must be the same. Where a bad debt has been allowed to a firm and the firm makes a recovery thereof, then Sec41(4) is attracted in the hands of the firm. But if the firm is dissolved and the business is continued by an erstwhile partner, then recovery made by the partner towards bad debt will not attract Sec 41(4).
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Cont.
Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds together with the amount of deduction allowed u/s 35 exceeds the amount of capital expenditure, such surplus or the amount of deduction allowed, whichever is less, is chargeable to tax as business income in the year in which such sale took place. This will apply even if the assessee’s business is not in existence during the previous year.
Where moneys payable in respect of the assets together with the scrap value, exceeds the written down value, then so much of the excess as does not exceed the difference between the actual cost and W.D.V. shall be chargeable to tax as income of the business of the previous year in which the moneys payable for the assets become due.
Any amount allowed as deduction u/s 36(1)(viii) but subsequently withdrawn from the reserve for approved infrastructure industries will become taxable and is required to be reported.
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Clause 21 21. (i) 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. (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.
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Analysis of Clause 21
As per clause (d) of Sec 43B, any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or any state financial corporation or any state industrial investment corporation is allowed as deduction in the previous year in which such interest is actually paid by the assessee.
Explanation 3C to Sec 43B provide that conversion of such interest payable into loan or borrowing shall not be deemed to have been actually paid.
Clause (e) of Sec 43B provides that any sum payable by the assessee as interest on any loan or borrowing from a scheduled bank shall be allowed as deduction in the previous year in which such interest is actually paid by the assessee.
As per Explanation 3D to Sec 43B, if a scheduled bank converts the interest payable into loan, then such conversion shall not be deemed to have been actually paid. http://www.simpletaxindia.org/
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Cont.
Sales tax should be routed through profit and loss account.
Sales tax and excise duty collected to be included as part of trade receipts even where they are kept in separate accounts.
The deduction u/s 36(1)(va) shall be allowed even if the payment is made within the grace period falling after the due date [GN on tax audit].
Deduction shall be allowed in the previous year in which the employer’s contribution is actually paid. If however the same is deposited on or before the due date of filing of return u/s 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 ROI, then such sum shall be allowed as deduction in the previous year in which liability was incurred.
The date of payment for P.F. etc. when made by cheque will be the date of clearing.
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Clause 22 22. (a) Amount of modified value added tax credits availed of or utilized during the previous year and its treatment in the profit and loss account and treatment of outstanding modified value added tax credits in the accounts. (b) Particulars of income or expenditure of prior period credited or debited to the profit and loss account.
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Analysis of Clause 22
The information furnished under this clause should be compatible with the information furnished under clause 12(b).
The information required should be checked with the relevant statutory records i.e. RG-23.
Classification is required as regards “CENVAT” credit as between capital goods and others indicating the balance brought forward, the credit earned, the credit utilized and the balance outstanding as at the end of the year.
AS (5) Revised and AS-II u/s 145 of the I.T. Act requires prior period items to be shown separately.
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Cont. Case law: CIT v. Durga Jewelers 172 ITR 417 (M.P) Sustained loss due to theft in one year, but became finally irrecoverable in subsequent year was allowable in the year in which loss became irrecoverable. Kalinga Tubes Ltd v. CIT 169 TTR 374 (Orissa) Disputed wages for the year end which was settled and accounted during the next year is not regarded as an error or omission and hence such expenses cannot be considered as prior period expenditure.
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Clause 23 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].
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Analysis of Clause 23
Where any amount is borrowed on a hundi from a person, or any amount due thereon is repaid to any person, otherwise than through an account payee cheque drown 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 in the P.Y. in which the amount was borrowed or repaid, as the case may be.
However, in case the amount borrowed under this section has been deemed as income of the borrower, then the borrower shall not be liable to be assessed again in respect of such amount under this section on repayment of such amount.
It is advised to get a copy of complete list of hundi loans obtained by a mode other than account payee cheque and verify the same with books of account. Where it is not able to get all the relevant details, proper reporting should be there.
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Clause 24 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;
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(v) whether the loan or deposit was taken or accepted otherwise than by an account payee cheque or an account payee bank draft. 101
Cont. (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 the 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.
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Cont. (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 certificates 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.
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Analysis of Clause 24
Agent’s collection of sale proceeds on behalf of principal and advance against sale will not be treated as deposit, but security deposit, or amount received in current account, or interest free account will be so included.
In respect of mixed accounts, the transactions relating to loans and deposit should be segregated from other accounts and the transactions relating to loan/deposit only should be stated under this clause.
Advance against sale is not loan/deposit.
No information is required to be given in respect of brought forward loan/deposit where there is no acceptance/repayment of loan/deposit during the year under audit.
Opening balance of Loan a/c is to be considered for calculation of maximum amount outstanding.
Security Deposit against contract etc will be covered under http://www.simpletaxindia.org/ Deposits 104 .
Cont.
Interest free loans are also loans.
Loans and deposits by means of transfer entries otherwise than by an account payee cheque/draft have to be reported under this clause.
For violation of Sec 269SS and Sec 269T, Sec 271D and 271E provide for an equivalent amount. Penalty is excused, if there is a reasonable cause for adoption of any other mode.
Disallowance can be done only u/s 68. Case law: CIT Vs Noida Toll Bridge Co. Ltd 262 ITR 260 (Del) Where the transaction is by an A/c Payee Cheque and no payment was made in Cash . Sec 269SS shall not be attracted.
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Clause 25 25. (a) Details of brought forward loss or depreciation allowance, in the following manner, to the extent available: Sl. No
Assessment Nature of Year loss/allowance (in rupees)
Amount as returned (in rupees)
Amount as assessed (give reference to relevant order)
Remarks
(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 Sec 79;
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Analysis of Clause 25
Change in shareholding beyond 49% will not affect the right to set off depreciation, since Sec79 is limited to losses and not depreciation.
The information should be separately given in respect of each head of income under which the loss/depreciation has remained unabsorbed.
Information regarding pending appellate proceedings, delay in filing loss return etc. may be furnished in remark column.
The provisions of Sec 72A of amalgamation or demerger or cases of succession u/s 47(xiii) or (xiv), where a company succeeds an individual or a firm in the light of the conditions u/s 72A, should be kept in mind.
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Clause 26 26.
Section-wise details of deductions, if any, admissible under Chapter VI-A.
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Analysis of Clause 26
Deductions is available in respect of: (a) Certain Payments - Sec 80D to 80GGA, 80GGB & 80GGC (b) Certain deductions - Sec 80HH to 80RRA (c) in respect of certain assessee - Sec 80U
Requirement relating to deductions admissible under Chapter VIA will have to be restricted to the items appearing in books of accounts.
The amount calculated by the Auditor & the amount claimed by the assessee may be different (on basis of judicial pronouncement), state this fact in the Report.
Separate Audit Report Certificate is required u/s 80IA, 80IB, 80JJA etc of Chapter VI.
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Cont.
Sec 80E has been amended by budget 2009. Its scope has been extended to cover all fields of study, including vocational studies, pursued after completion of schooling.
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Clause 27 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] (b) If the provisions of Chapter XVII-B have not been complied with, please give the following details*, namely: (i) Tax Deductible and not deducted at all (ii) Shortfall on account of lesser deduction than required to be deducted (iii) Tax deducted late (iv) Tax deducted but not paid to the credit of the Central Government *Please give the details of cases covered in (i) to (iv) above
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Analysis of Clause 27
Tax auditor is made responsible to give all items which are tax deductible, but not deducted apart from any short deduction, late deductions and failure to deposit the tax so deducted in time with the central government. He has to carry out complete audit of TDS transactions and verify the necessary returns etc. filed with the department.
Hire of movables are also now included for tax deduction u/s 194-I, while royalty and non-compete fees are covered by Explanation (2) to Sec 9(1)(vi) and 28(va) respectively. Case law: CIT v. Tej quebeccor printing ltd. [2006] 281 ITR 170 (Del.) Obligation to deduct tax at source u/s 192 arises only when salary is paid and not when it is credited.
Govt. milk scheme v. Asst. CIT [2006] 281 ITR (AT) 88 (Pune) In order for a payment to be called “commission” u/s 194H, there http://www.simpletaxindia.org/ must be a relationship of a principal and agent between the payer112 and payee.
Clause 28 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.
(b) In the case of a manufacturing concern, give quantitative details of the principal items of raw material, finished products and by products: http://www.simpletaxindia.org/
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Cont. 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; (vi) Percentage of yield; http://www.simpletaxindia.org/
(vii) Shortage/excess, if any.
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Cont. 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. http://www.simpletaxindia.org/
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Analysis of Clause 28
Information about petty items need not be given.
Normally items which constitute more than 10% of the aggregate value of purchases, consumption or turnover may be classified as principal items.
By-product if produced continuously, qualitative details thereof may also be given.
In cases where day-to-day qualitative details are not maintained, based on statement on amendment to schedule VI of the Companies act, 1956 the auditor can consider to comment as under: “Physical inventory has been taken by the management at the year end and we have relied on the same as certified by the management. Further the statue does not specifically require the assessee to maintain quantitative records relating to purchase and sales. Also in view of large volume of the turnover and numerous items traded by the assessee, it is neither practical nor economically viable to maintain day-to-day records”.
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Clause 29 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.
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Analysis of Clause 29
Sec 115-O provides for special levy at the prescribed rate, on the amount of dividend declared, distributed or paid (interim or other wise) out of current Profits or accumulated Profits.
This tax shall be payable even if no Income tax is payable by such Company on its total Income.
“Dividend” means dividend under clause (22) of Sec 2 exclusive of sub clause (e) advance or loan out of accumulated profit or shareholders etc.
This tax should be paid within 14 days of declaration or distribution or payment whichever is earlier.
Computation of distributed profits is not required. Only the http://www.simpletaxindia.org/ amount actually distributed is to be stated. 118
Clause 30 30. Whether any cost audit was carried out? if yes, enclose a copy of the report of such audit [see section 139(9)].
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Analysis of Clause 30
Cost audit report, where it has been done u/s 233B of the companies act, is required to be filed along with return of income u/s 139(9), so that any omission to include the same cannot be treated as a defect within the meaning of Explanation (e) of Sec 139(9).
No comments on such cost audit report is required, but it is advisable to note material observation which would have bearing on his report.
Where assessee claims that there has been a cost audit, but no report is as yet available, report to that effect may be necessary.
Auditor should examine the time period of the audit, which falls within the relevant previous year.
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Clause 31 31. Whether any audit was conducted under the Central Excise Act, 1944, if yes, enclose a copy of the report of such audit.
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Analysis of Clause 31
Audit report under the Excise act more particularly Sec 14A of the Central Excise Act would also require to be enclosed with tax audit report.
No comments on such audit report is required, but it is advisable to note material observation which would have bearing on his report.
Where assessee claims that there has been a excise audit, but no report is as yet available, report to that effect may be necessary.
Auditor should examine the time period of the audit, which falls within the relevant previous year
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Clause 32 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.
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Analysis of Clause 32
It is necessary that while reporting, the calculations of gross profit is indicated by way of note as to the adjustments made to trading account or manufacturing and trading account for purposes of calculation.
Calculation sheet of adjustments as for the ratio of net profit to turnover should also be annexed.
Adjustments as for MODVAT will be necessary as for the ratio of stock in trade and the turnover of stocks.
There should be consistency between numerator and denominator, while calculating the above ratios. Any significant deviation thereof should be pointed.
The term “finished goods” would not include the stock of raw material and work in progress.
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Cont.
The above ratios are to be calculated only for the assessee engaged in manufacturing or trading activities.
Ratio mentioned in sub clause (d), need not be given for trading concerns.
Ratios are to be calculated in terms of value only.
Calculate Ratios for the business as a whole and not product wise.
The ratio are to be calculated based on data to be found in books of accounts for the business as a whole.
It is advisable to exclude extraordinary items while calculating ratios in order to make them comparable from year to year.
Depreciation on Plant & Machinery should be considered for valuation of Finished goods [AS-2 (revised)]
Depreciation on P&M should be deducted to arrive at gross profit.
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Annexure -I
Annexure I requires business-wise, nature of business.
Paid up share capital and share application money will include capital of partner/proprietor and current account of partner/proprietor respectively.
Net profit (or loss) before tax will have the suffix “as per Profit & Loss account.”
FBT have been abolished by Finance Act 2009.
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Annexure -II
For assessment year 2007-08 and subsequent assessment years, the value of fringe benefits in respect of contribution by the employer to an approved superannuation fund shall be the amount of contribution which exceeds one lakh rupees in respect of each employee.
Expenditure on hospitality does not include the following:(i) any expenditure on, or payment for, food or beverage provided by the employer to his employees in office or factory; (ii) any expenditure on, or payment through paid vouchers which are not transferable and usable only at eating joints or outlets.
In the case of an employer engaged in the business of hotel 5% shall be substituted for 20%. In addition to this, in the case of an http://www.simpletaxindia.org/ employer engaged in the business of carriage of passengers or127 goods by aircraft or by ship 5% shall be substituted for 20%.
Cont.
For the purposes of this clause, any expenditure on conveyance, tour and travel (including foreign travel), on hotel or boarding and lodging in connection with any conference shall be deemed to be expenditure incurred for the purposes of conference.
The following expenditure on advertisement shall not be considered as expenditure on sales promotion including publicity:(i) the expenditure (including rental) on advertisement of any form in any print (including journals, catalogues or price lists) or electronic media or transport system; (ii) the expenditure on the holding of, or the participation in any press conference or business convention, fair or exhibition; (iii) the expenditure on sponsorship of any sport event or any other event organized by any Government agency or trade association or body; (iv) the expenditure on the publication in any print or electronic media of any notice required to be published by or under any law or by an order of a court or Tribunal;
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Cont. (v) the expenditure on advertisement by way of signs, art work, painting, banners, awnings, direct mail, electric spectaculars, kiosks, hoardings, bill boards or by way of such other medium of advertisement; (vi) the expenditure by way of payment of any advertising agency for the purposes of clauses (i) to (v) above; (vii) the expenditure on distribution of free samples of medicines or of medical equipment, to doctors (not to be considered as expenditure on sales promotion, including publicity for assessment year 2007-08 and subsequent assessment years); (viii) the expenditure by way of payment to any person of repute for promoting the sale of goods or services of the business of the employer (not to be considered as expenditure on sales promotion, including publicity for assessment year 2007-08 and subsequent assessment years).
For the purposes of this clause, any expenditure incurred or payment made to fulfill any statutory obligation or mitigate occupational hazards or provide first aid facilities in the hospital http://www.simpletaxindia.org/ or dispensary run by the employer shall not be considered as129 expenditure for employees’ welfare.
Cont.
In the case of an employer engaged in the business of construction, or in the business of manufacture or production of pharmaceuticals or computer software, 5% shall be substituted for 20%.
In the case of an employer engaged in the business of manufacture or production of pharmaceuticals or computer software, 5% shall be substituted for 20%. Besides, in the case of an employer engaged in the business of carriage of passengers or goods by aircraft or by ship 5% shall be substituted for assessment year 2007-08 and subsequent assessment years.
In the case of an employer engaged in the business of carriage of passengers or goods by motor car, 5% shall be substituted for 20%.
In the case of an employer engaged in the business of carriage of passengers or goods by aircraft, ‘Nil’ shall be substituted for 20%. This clause is applicable for assessment year 2007-08 and 200809.
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Thank You – Presentation By:
CA Sanjay K. Agarwal [email protected] Cell 9811080342 – Assisted By: Neha Garg [email protected]
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