Issues in Tax Audit
Indore Branch of ICAI
August 30, 2014
CA Manoj Gupta
FORM 3CA / 3CB
2
Form 3CA or 3CB?
 When there is different Accounting Year and Financial
Year?
(Calender Year is followed as Accounting Year by various Companies Eg.
HUL, P&G, etc, Some companies also have year ending on 30th June
every year)
CBDT Circular 561 dated 22/05/1990 – different
accounting and financial year then FORM 3CB and
not 3CA.
3
Can Tax Audit Report be revised?
 Only on following grounds –
 Revision of Accounts by Company after its adoption in
the AGM
 Changes in Law i.e. Retrospective amendment
 Change in Interpretation, view due to subsequent
event
like
clarifying
CBDT
Judgement/Decision of any court, etc
4
circular,
AUDIT QUALIFICATIONS/ OBSERVATIONS
3(a). We report the following observations/comments/
discrepancies / inconsistencies; if any:
Report Issues related to General
Accounting aspects, policies, etc.
Eg. Test check and other general
disclaimers.
5. In our opinion and to the best of our information and according to
explanations given to us, the particulars given in the said Form No.3
CD are true and correct subject to following
observations/qualifications, if any:
Report Issues related to clauses in 3CD
only
5
Eg. Disclaimer that verification of all
cheques as account payee not possible
Qualification In Schema
6
Form 3CB – Clause 5
Category of Qualifications
On Books of Accounts
Inventory related
Insufficiency of audit evidences
Not ascertainable disclaimer
7
Extreme - No Audit Opinion
Category
Books of
Accounts
related
Qualification Type
Proper books of account, to enable reporting in form 3CD, have not
been maintained by the assessee.
All the information and explanations which to the best of my/our
knowledge and belief were necessary for the purpose of my/our
audit has not been provided by the Assessee.
Documents necessary to verify the reportable transaction were not
made available.
Inventory
related
Proper stock records are not maintained by the assessee.
Valuation of closing stock is not possible.
8
Yield/percentage of wastage is not ascertainable.
Observati
ons/
Qualificat
ions
Serious – Major Disclaimers
Category
Qualification Type
Records necessary to verify personal nature of
expenses not maintained by the assessee.
Insufficiency of Audit
Evidences
Disclaimers
TDS returns could not be verified with the books of
account.
Records produced for verification of payments
through account payee cheque were not sufficient
9
Observations/
Qualifications
Technical Disclaimers
Category
Qualification Type
Amount of expense related to exempt income u/s 14A of Income-tax
Act, 1961 could not be ascertained
Creditors under Micro, Small and Medium Enterprises Development
Act, 2006 are not ascertainable
Prior period expenses are not ascertainable from books of account.
Not
Fair market value of shares u/s56 (2) (viia)/(viib) is not ascertainable
Ascertainabl
e disclaimer Reports of audits carried by Excise/Service tax Department were not
made available
GP ratio is not ascertainable from the financial statements prepared by
the assessee.
10
Information regarding demand raised or refund issued during the
previous year under any tax laws other than Income-tax Act, 1961 and
Wealth tax Act, 1957 was not made available.
Observati
ons/
Qualificat
ions
FORM 3CD
Analysis Clause By Clause
11
New
Clause 4 : IDT Registration Details
“Whether the Assessee is liable to pay indirect tax like
excise duty, service tax, sales tax, customs duty, etc. if
yes, please furnish the registration number or any
other identification number allotted for the same”
All Registration Numbers to be given
Cross check key figures
• i.e. sales, purchases, production
Effective subject to Co-ordination
12
13
Clause 8 : Category of Audit
New
“Indicate the relevant clause of section 44AB
under which the audit has been conducted”
a)Business Receipts > 1 Crores
b)Professional Receipts > 25 Lakhs
c)Presumptive S.44BB, 44BBB, 44AE
d)U/s 44AD
14
If a case falls in multiple clauses then all multiple
selections can be done
Voluntary Audit
15
Clause 11 (b)
New
“(b) List of books of account maintained and the
address at which the books of accounts are kept.”
Survey Action can be done at places where books are kept
‘Books of account’ defined in S.2(12A)
• Ledgers, Day books, Account books,
• Cash book and Other books
All places to be reported
• Management Representation must
Cross check with Companies Act, etc
16
17
New
Clause 11(c)
“List of books of account and nature of relevant
documents examined”
UNLIMITED RELEVANT DOCUMENTS
:
Agreements, Emails, Company Law
Records, External Confirmations,
Assessment Order, Registers etc.
18
19
Clause 12
• Shipping Tonnage Tax (Chapter XII-G)
• Insurance Business (First Schedule)
20
New
Tabular Form Provided
Cl.13(c) Effect of Change in Method of Accounting
S.no.
Particular
Increase in
Profit
Decrease in
Profit
Cl.14(b) Details of Deviation from the Method of Valuation of Closing Stock
Prescribed U/S 145 A
S.no.
21
Particular
Increase in
Profit
Decrease in
Profit
CL. 13(a) & (d) METHOD OF ACCOUNTING
 Deviation from accounting standards prescribed u/s 145. Sec 145 has
notified 2 Accounting Standards:
AS 1 (IT) –
Similar to AS 1 of ICAI – Disclosure of
Significant Accounting Policies
AS 2(IT) –Similar to AS 5 of ICAI – Net profit or loss for
period, prior period items and changes in
policies

22
the
accounting
Exception to Sec 145 –interest on compensation or enhanced
compensation taxable in the year of receipt irrespective of method of
accounting.
Salary and Interest credited to Partners Capital Account in
Cash System – Allowability?
Clause 15 :
Capital Asset converted into Stock in trade
Only evidence of such Conversion
Useful in Assessment and Appellate Proceedings
JV / Ratio deal Agreement in Real estate results in ‘transfer’• Chaturbhuj Dwarkadas 129 Taxman 497(Bom HC)
Convert into stock in trade first – Definition of ‘transfer’ not applicable
on stock-in-trade
Conversion to be reported in Clause 17 if below 50C value
23
New
Clause 17: Cases u/s 50C and 43CA
“Where any land or building or both is transferred during the previous year for a consideration
less than value adopted or assessed or assessable by any authority of a State Government
referred to in section 43CA or 50C, please furnish:”
Details of
Property
24
Consideration
Received or
Accrued
Value Adopted or Assessed
or Assessable
Clause 17: Audit Checklist
Check from 26AS statement on Income tax Portal for TDS u/s 194IA
Check Fixed Assets Account, Investment in Immovable assets account
and other Ledgers
Obtain copy of Registered Deed duly certified by Auditee or Sale
Agreement
Obtain a Management Representation of land and building sold and
values.
25
Clause 17: Audit Checklist
Cross check value on global basis based on District Registrar Guidelines at
http://indore.nic.in/Services
Registered Valuer’s report where transfer not registered for stamp
value Eg. Power of Attorney transfer, conversion, etc.
Copy of Appeals/Orders of Stamp Authorities
26
Clause 17: Issue 1
Reporting of all cases of Transfer of Land or Building?
Details of Property
Consideration
Received or Accrued
Value Adopted or
Assessed or Assessable
Shop at Indore
1,00,00,000
2,00,00,000
Building at Indore
1,00,00,000
1,00,00,000
“….. consideration less than value adopted or
assessed or assessable… please furnish”
27
Clause 17: Issue 2
Auction of Property by Bank below 50C value
Reporting Required by Auditor
However return income as per Actual consideration
Addition to be contested
28
Clause 17 : Issue 3 :
Real Estate Business (43CA)
 Flat booking through




29
Agreement
Reporting in which Year?
…..transferred during the previous
year….. Please furnish:
Consideration Received or
Accrued = 2 Lakh or 5
Lakh?
Stamp Value of 2014 or 2017?
Property
Installment
Amount
2014
I
1 Lakh
2015
II
1 Lakh
2016
III
1 Lakh
2017
Final
2 Lakh
Details of
Property
Total
5 Lakh
Consideration
Received or
Accrued
Value Adopted
or Assessed or
Assessable
Clause 17: Issue 4
Proprietor maintains books only for
business
• Land held in personal capacity sold for
below 50C value
• Whether Reporting required?
Reporting In case of Firm/Companies,
etc.?
30
Clause 18: Depreciation
 Assets less than Rs.5000 ?- (Sch. XIV of Companies Act)
Report all such items in Cl 21(a) and claim depreciation thereon at specified rates
 Details of all additions date wise
Additions upto September and after September
 Computer Software: whether asset?
(Special Bench in case of Amway India Enterprises v. Dy. CIT 111 ITD 112 (Del) has laid down 3 tests to be
applied to determine whether expenditure is capital or revenue – test of enduring benefit, ownership test,
functional test)
 If new asset are put to use for less than 180 days, balance 50% Additional
Depreciation will be allowable next year?
Balance Allowable next year - Cosmo films [24 taxmann.com 189 (Delhi)
31
Clause 18: Depreciation on Intangibles
32
Item
Citation
Goodwill
SMIFS SECURITIES Ltd.
(Supreme Court)
Skill and Knowhow of Labour
BOSCH LTD v. CIT
(2009-TIOL-736-ITAT-BANG)
Brand Name
Raveendran Pillai
332 ITR 549 (Kerala HC)
Non Compete
MedicorpTech. 21 DTR 69
Marketing and Commercial Rights
Skyline Caterers (20 SOT 266)
New
Clause 18
“Modified Value Added Tax”
(MODVAT)
changed to
33
“Central Value Added Tax”
(CENVAT)
Clause 18: Depreciation
 Where a vehicle is registered in the name of a Director, however it is in possession of
company. Whether Depreciation is eligible?
The Hon'ble Supreme Court in Mysore Minerals Ltd Vs. CIT (239 ITR 775) held that the terms
"own", "ownership" and "owned" are generic and relative terms. The term "owned" as occuring in
section 32 (1) of the Act must be assigned a wider meaning. Anyone in possession of property in his own
title exercising such dominion over the property as would enable others being excluded therefrom and
having the right to use and occupy the property and / or to enjoy its usufruct in his own right would be
the owner though a formal deed of title may no have been executed and registered as contemplated by the
Transfer of Property Act, the Registration Act, etc.
 Where due to lock out in Maruti plant, it did not funtion for 3 years. Whether Depreciation
is available for those 3 years?
In Swati Synthetics Case (38 SOT 208), it is held that condition of ‘use’ is relevant only in which
asset is purchased, thereafter it forms part of block and is passively used even if the plant is closed.
Therefore depreciation is allowable in case of a closed unit too.
34
Clause 19 : Reporting of newly
included Special deductions
Section
35
New
Particulars
32AC
Investment in new plant or machinery
35(1(i)
Inhouse Scientific Research (SR)
35(1)(ii)
Outside SR
35(1)(iia)
Approved SR Company
35(1)(iii)
Approved Social Science Research, etc
35(1)(iv)
Capex SR
35(2AA)
Contribution to Noted Institutn
35(2AB)
In house R&D
35ABB
Telecom License expense
Section
Amount debited to
profit and loss
account
New
Clause 19 : Special Deductions
“Amounts admissible as per the provisions of the Income
Tax Act, 1961 and also fulfils the conditions, if any specified
under the conditions, if any specified under the relevant
provisions of Income Tax Act, 1961 or Income Tax Rules,1962
or any other guidelines, circular, etc., issued in this
behalf.”
Any other guidelines, circular, etc. – under
which Statutes?
36
Management Representation on Admissibility
Ejusdem
Generis
Clause 20(b) Details of Employee’s
Contribution to Funds
Serial
number
Nature of
fund
Sum
Due date The The actual date of
received
for
actual
payment to the
from
concerned
payment amount
employees
paid
authorities
Amount paid up to due date of filing the return,
held to be allowable in following cases:`
•
•
•
37
CIT vs. AIMIL Ltd. and others 321 ITR 508 (Del HC)
DCIT v. D&H Secheron (ITA No. 172/Ind/2011)
Som Distilleries v. DIT (ITA Nos.296 & 297/Ind/2009)
Clause 21(a) :
Consolidation of 17(a), (b) and (c)
“Please furnish the details of amounts debited to the profit and loss account,
being in the nature of
capital, personal, advertisement
expenditure etc”
38
New
Clause 21(a)
Nature
Capital, Personal, Advertisement expenditure etc
Expenditure incurred at clubs being cost for club services and
facilities used
Expenditure by way of penalty or fine for violation of any law
for the time being force
Expenditure by way of any other penalty or fine not covered
above
Expenditure incurred for any purpose which is an offence or
which is prohibited by law
39
S.No.
Particulars
Amount in
Rs.
Capital v. Revenue Expenses
Expenses incurred on leased/rental premises are
revenue in nature –
• Malabar Mills 288 ITR 815 (Mad)
• Modi Spg. & Wvg. Mills v. CIT 200 ITR 544
• Amway India v. DCIT 27 SOT 344 (DELHI)
If the production capacity remaining constant even after the
replacement of the asset it is allowable as a revenue exp.
40
• Supreme Court in CIT V. Ramaraju Mills (294 ITR 328)
Following expenses have been held as
revenue
41
Nature of Expense
Decision
Cost of water proofing of Roof Area
(322 ITR 590)
Renovation expenses including
replacement of tiles, painting, false
ceiling, portions etc.
Reconstruction of Road
(306 ITR 182) (Del.)
Repairs to Boundary Wall
Internal furnishings, painting and
polishing work, dismantling of old false
ceiling, fees for interior designing, lift
maintenance, etc.
(2010-TIOL-648-HC-DEL-IT)
(100 Taxman 247)(Ahd)
121 ITR 165 (Punj. & Har.).
(104 ITD 427) (Del)
Cl. 21(a): Personal expense debited to P&L
 Scrutinise following Expense Accounts :
1.
2.
3.
4.
Membership and Subscription,
StaffWelfare Expenses,
General Expenses,
Travelling Expenses, etc.
 General Note that “payments made as per contractual obligations not
considered for this clause”
 Refer Auditors Report (CARO) for any comments on personal expenses
 If no appeal filed in earlier years for certain disallowances for expenses
towards personal motor car expenses, telephone, etc, the same should
be mentioned in report.
 Scrutinise Credit card payments
42
Clause 21(a): Expenses on fine, penalty, etc
Materiality to be considered while reporting
No view to be expressed on allowability.
Penalty and fine are to be distinguished from contractual obligations -even if
such payments are labeled as “penalty” in a contract.
Compensatory vs. penal payments (SC decisions)
• Prakash Cotton Mills 201 ITR 684
• Ahmedabad Cotton Mfg Co Ltd 205 ITR 163
• MalwaVanaspati & Chemical Co 225 ITR 383
43
Clause 21(d): Cash Payments
New
 Disallowance/deemed income under section 40A(3A):
Deemed Income
Year 1 – Expense A/c Dr.
To Creditors.. Cr
Year 2 – Creditors Dr.
25000
To Cash … Cr.
S.No. Date of payment
44
25000
Nature of
payment
25000
25000
Amount
Name and Permanent
Account Number of the
payee, if available
Clause 21(d): 40A(3A) - Issues
Creditors for capital items not covered
Common Creditors for both revenue
and capital expenses?
Difficult to verify when Statutory
Auditor and Tax Auditor are different.
45
Clause 21(h) - Disallowance u/s 14A
Income from following
Investment is exempt
• Shares of Company
• Tax free Bonds
• Partnership firm
46
Cl. 21(h): Amount inadmissible u/s 14A
S. 14A disallows expenses incurred
in relation to earning exempt
income. Rule 8D prescribed.
Assessee should itself compute
reasonable amount and offer the
same instead on Nil disallowance
47
Cl.21(h) - Rule 8D and Tax Audit
(i)
expenditure directly relating to earning exempt income
(ii) Interest * Average Investments
Average Total Assets
(iii) ½ % of Average Investments
Rule 8D is applicable when the Assessing Officer is not
satisfied
Auditor to verify the disallowance as determined by the
Assessee
Verify estimated disallowance, allocation of expenditure
based on logical parameters
48
Cl.21(h)- Section 14A applicability to
Traders/Stock-in-trade
Applicable
Not Applicable
• CCI Ltd. vs. JCIT
250
• Yatish Trading Co
129
CTR 291 (Kar)
ITD 237
• Leena Ramachandran
339 ITR 296 (Ker)
49
• Dhanuka & Sons
339 ITR
• D. H. Securities
(ITAT
319 (Cal)
Mumbai)
• American Express Bank
(ITAT Mum)
S.14A & Strategic Investments
No disallowance on Investment in
Controlling
Interest
• GarwareWall
Ropes Ltd vs. ACIT
(ITAT Mumbai)
50
Business Interest
• ACIT vs. Spray
Engineering 53
SOT 70 (Chd)
In Subsidiary
• EIH Associated
Hotels Ltd vs.
DCIT (ITAT
Chennai)
Cl 21(h)- 14A - Disallowance of Interest
Interest Disallowance when there are
both Own and borrowed funds
51
Sufficient Own
Funds
Insufficient own
funds
No Disallowance Reliance Utilities
313 ITR 340(Bom HC)
disallowance as per Rule 8D(ii)
Cl.21(h) - Issues in Section 14A
Disallowance when No exempt Income ?
•
•
•
•
Shivam Motors P Ltd (All HC)
CIT vs. Corrtech Energy Pvt. Ltd (Guj HC)
CIT vs. Lakhani Marketing (P&H HC)
Cheminvest Ltd vs. ITO 121 ITD 318 (SB)
Can Disallowance u/s14A exceed total expenses?
• Gillette P. Ltd. v. ACIT 16 ITR(Trib) 57 (Del)
• ACIT vs. Iqbal M. Chagala (ITAT Mumbai)
Disallowance on Exemptions not deductions
• CIT vs. Kribhco 252 CTR 374 (Del)
52
Cl. 21(h) - Issues in Section 14A
No disallowance on Share
Application money
• DCIT vs. Arihant Foundations18 ITR(Trib) 588
No disallowance on
Foreign Investments
• Suzlon Energy (ITA Nos.3911/Ahd/07)
53
Cl. 25: Amount chargeable u/s 41
 Reporting of remission or cessation of trading
liability
 Creditors are outstanding for more than 3 years (beyond Limitation
period) and no confirmation is available.Whether reporting required?
 Silver Cotton Mills Co Ltd (254 ITR 728)(Guj.)
 Settlement of CC / term Loan, Interest Waiver
 Eg. Bad Debts Recovered, Write back of Provisions to be reported
here
54
55
Thank You
CA Manoj Gupta
M/s Maheshwari & Gupta
Chartered Accountant
Mobile 9826010100
E-mail: manoj.g.ca@gmail.com