issues in tax audit report

7/23/2019 Issues in Tax Audit Report

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CA Pankaj G. Shah|FCA|L.L.B.(Hons.)|C.S.|B.B.A.|DISA(ICA)

Issues in Tax Audit

ReportGwalior Branch ofICAISeptember 13, 2015



Brand CA - class apart

• Supreme Court in case of T.D. Venkat Rao v. UOI (237

ITR 315) has upheld the superiority of CAs by noting

that

Chartered Accountants, by reason of their training have special

aptitude in the matter of audits and no other person can be held

eligible to conduct audit under Section 44AB. Supreme Court further held that CAs are a Class by themselves meaning that

CAs are the brand for auditing itself.



Interesting Issues inApplicability of

Tax Audit



Individual Proprietor

Audit in Presumptive Provisions



Turnover

In case of a day trader/speculator



FOR !CA " !CB



Form !CA or !CB#

• When there is different Accounting Year and

Financial Year?

(Calender Year is followed as Accounting Year byvarious Companies Eg. HUL, P!, etc, "ome

companies also #ave year ending on $% t# &une every

year )

CBDT Circular 56 dated !!/"5/##" $ different

accounting and financial year then F%&' (CB and

not (CA)



Can Tax Audit Report be revised#

•%nly on follo*ing grounds $

• &e+ision of Accounts ,y Co-pany after its

adoption in the A.'

• Changes in a* i)e) &etrospecti+e a-end-ent

• Change in Interpretation0 +ie* due to su,se1uent

e+ent li2e clarifying CBDT circular0 3udg-ent

/Decision of any court0 etc



Auditor $is%uali&cationsDis1ualifications &ule 5A



Reporting



$isclosures

Form 3CA/3CB



Form !CB ' Clause (

Category of 4ualifications

On Books of Accounts

Inventory related

Insufficiency of audit evidences

ot ascertaina!le



Category 4ualification Type %,ser+ations/4ualifications

Books of Accounts related

Proper !ooks of account" to ena!le reportin# in form3C$" %ave not !een maintained !y t%e assessee&

All t%e information and e'planations %ic% to t%e !estof my/our knoled#e and !elief ere necessary fort%e purpose of my/our audit %as not !een provided !yt%e Assessee&

$ocuments necessary to verify t%e reporta!letransaction ere not made availa!le&

Inventory related Proper stock records are not maintained !y t%eassessee&

aluation of closin# stock is not possi!le&

*ield/percenta#e of asta#e is not ascertaina!le&

t

r

e

-e




Insufficiency of Audit +vidences$isclaimers

,ecords necessary to verify personal nature ofe'penses not maintained !y t%e assessee&

-$. returns could not !e verified it% t%e!ooks of account&

,ecords produced for verification of paymentst%rou#% account payee c%eue ere notsufficient

'o

d

e

r

a

te



01


ot Ascertaina!ledisclaimer

Amount of e'pense related to e'empt income u/s 02A ofIncometa' Act" 0410 could not !e ascertained

Creditors under 5icro" .mall and 5edium +nterprises$evelopment Act" 6771 are not ascertaina!le

Prior period e'penses are not ascertaina!le from !ooksof account&

Fair market value of s%ares u/s81 (6) (viia)/(vii!) is notascertaina!le

,eports of audits carried !y +'cise/.ervice ta'

$epartment ere not made availa!le9P ratio is not ascertaina!le from t%e financialstatements prepared !y t%e assessee&

Information re#ardin# demand raised or refund issueddurin# t%e previous year under any ta' las ot%er t%anIncometa' Act" 0410 and :ealt% ta' Act" 048; as not

made availa!le&

T

e

ch

n

i

ca

l



FOR !C$



Clause ) * I$T Registration

$etails“Whether the Assessee is liable to pay indirect taxlike excise duty, service tax, sales tax, customsduty,etc. if yes, please furnish the registrationnumber or any other identication number allotted

for the same” All ,e#istration um!ers to !e #iven



Clause ++ ,b

“(b) ist of boo!s of account maintained and the

address at "hich the boo!s of accounts are !ept.#

.urvey Action can !e done at places %ere !ooks are kept



Clause ++,c

“List of books of account and nature ofrelevant documents examined”

<=I5I-+$ ,+=+A- $OC<5+-. >



et.od of Accounting

Accrual vs& Cas% met%od (mi'ed or %y!rid met%od not alloed)



Cl/ +(* Capital Asset converted into 0toc1 intrade

63

Only evidence of suc% Conversion



Clause +2* Cases u"s (3C and )!CA

'(#ere any land or building or bot# is transferred during t#e

previous year for a consideration less t#an value adopted or

assessed or assessable by any aut#ority of a "tate !overnment

referred to in section )$CA or *%C, please furnis#+

Details of7roperty

Consideration&ecei+ed or

Accrued

8alue Adopted orAssessed orAssessa,le



Clause +2* Audit C.ec1list



Clause +2* Audit C.ec1list

Cross c%eck value on #lo!al !asis !ased on $istrict

,e#istrar 9uidelines at %ttp>//indore&nic&in/.ervices

alue Adopted/Assessed / Assessa!le to !eo!tained from ,e#istered aluer?s report %eretransfer not re#istered +#& POA" @$A

Copy of Appeals/Orders !efore .tamp Aut%orities

http://indore.nic.in/Services

http://indore.nic.in/Services



Clause +2* Issue +

,eportin# of all cases of -ransfer of =and or Buildin#

Details of 7roperty Consideration&ecei+ed or Accrued

8alue Adopted orAssessed orAssessa,le

.%op at Indore 0"77"77"777 6"77"77"777

Buildin# at Indore 0"77"77"777 0"77"77"777

“….. consideration less than value adopted orassessed or assessable… please furnish”

.)3) 9hah : Co-panyC#artered Accountants



Clause +2* Issue 4

Auction of mort#a#ed property !y Bank

'(#ere any land or building or bot# is transferred-.

,eportin# %as to !e done



Clause +2 * Issue ! *Real 5state Business ,)!CA

7roperty Install-ent A-ount

6702 I 0 =ak%

6708 II 0 =ak%

6701 III 0 =ak%

670; Final 6 =ak%

Total 5 a2h

• Flat ,oo2ing throughAgree-ent

• &eporting in *hich Year?

• -..transferred during t#e previous year -.. Pleasefurnis#+

• Consideration &ecei+ed orAccrued ; ! a2h or 5a2h?

• 9ta-p 8alue of !"< or!"=?

• Issues *ith <<AD?

Detailsof7roperty

Consideration&ecei+ed orAccrued

8alueAdopted orAssessed orAssessa,le



Clause +2* Issue )

• =and %eld in personal capacity sold for !elo 87C

value• :%et%er ,eportin# reuired

Proprietor maintains !ooks only for !usiness

$isclaimer Audit of Only !usiness andPersonal assets not included&

,eportin# In case of Firm/Companies" etc&



Clause 18: epreciation



Clause 18: epreciation• :%ere a ve%icle is re#istered in t%e name of a $irector" %oever it is in

possession of company& :%et%er $epreciation is eli#i!le

#e Hon/ble "upreme Court in Mysore Minerals Ltd Vs. CIT (239 ITR 775)

#eld t#at t#e terms 0own0, 0owners#ip0 and 0owned0 are generic and relative

terms. #e term 0owned0 as occuring in section $1 234 of t#e Act must be

assigned a wider meaning. Anyone in possession of property in #is own title

e5ercising suc# dominion over t#e property as would enable ot#ers beinge5cluded t#erefrom and #aving t#e rig#t to use and occupy t#e property and 6

or to en7oy its usufruct in #is own rig#t would be t#e owner t#oug# a formal

deed of title may no #ave been e5ecuted and registered as contemplated by

t#e ransfer of Property Act, t#e 8egistration Act, etc.

• :%ere due to lock out in 5aruti plant" it did not funtion for 3 years& :%et%er

$epreciation is availa!le for t%ose 3 years

9n Swati Synthetics Case (3 S!T 2"), it is #eld t#at condition of :use; is

relevant only in w#ic# asset is purc#ased, t#ereafter it forms part of bloc<

and is passively used even if t#e plant is closed. #erefore depreciation is

allowable in case of a closed unit too.



Clause +6 * Reporting of ne7ly included0pecial deductions

9ection 7articulars

36AC Investment in ne plant ormac%inery

38(0(i) In%ouse .cientific ,esearc% (.,)

38(0)(ii) Outside .,

38(0)(iia) Approved ., Company

38(0)(iii) Approved .ocial .cience,esearc%" etc

38(0)(iv) Cape' .,

38(6AA) Contri!ution to oted Institution

38(6AB) In %ouse ,$

38ABB -elecom =icense e'pense

9ection A-ount de,ited

to profit and loss

account

.)3) 9hah : Co-panyC#artered Accountants



Clause +6 * 0pecial $eductions

DA-ounts ad-issi,le as per t%e provisions of t%e

Income -a' Act" 0410 and also fulfils t%e

conditions" if any specified under t%e conditions" if

any specified under t%e relevant provisions ofIncome -a' Act" 0410 or Income -a' ,ules"0416

or any other guidelines0 circular0 etc)0 issued in

this ,ehalf)>

Any ot%er #uidelines" circular" etc&

under %ic% .tatutes

'anage-ent &epresentation on Ad-issi,ility

usde-

.eneris



Clause 43,b $etails of 5mployee8sContribution to Funds

9erial

nu-,er

@ature of

fund

9u-

recei+ed

fro-

e-ployees

Due date

for

pay-ent

The

actual

a-ount

paid

The actual date

of pay-ent to

the concerned

authorities

Issues it% +filin# <tility For +#& Actual $ate of Payment

cant !e left !lank %ere t%e payment is not made Amount paid up to due date of filing the return,held to be allowable in following cases:-

• 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 4+,a

@ature 9)@o) 7articulars A-ount in

&s)

Capital" Personal" Advertisement e'penditure

etc

+'penditure incurred at clu,s !ein# cost for clu!

services and facilities used

+'penditure !y ay of penalty or fine for violation of

any la for t%e time !ein# force

+'penditure !y ay of any ot%er penalty or fine not

covered a!ove

+'penditure incurred for any purpose %ic% is an

offence or %ic% is prohi,ited ,y la*



Capital v/ Revenue 5xpenses

3;

Benefit of endurin# nature +mpire @ute (.C)



Follo7ing expenses .ave been .eld asrevenue

3E

@ature of pense Decision

Cost of ater proofin# of ,oof Area

(366 I-, 847)

,enovation e'penses includin#

replacement of tiles" paintin#"false ceilin#" portions etc&

(371 I-, 0E6) ($el&)

,eplacement of a part of t%emac%inery

013 -a'man 670 (.C)

,econstruction of ,oad (077 -a'man 62;)(A%d)

,epairs to Boundary :all (6707-IO=12EC$+=I-)

Internal furnis%in#s" paintin# andpolis%in# ork" dismantlin# of oldfalse ceilin#" fees for interiordesi#nin#" lift maintenance" etc&

060 I-, 018 (PunG& ar&)&(072 I-$ 26;) ($el)



Cl! "1#a$: %ersonal expense debitedto %&L• .crutinise folloin# +'pense Accounts >

0& 5em!ers%ip and .u!scription"

6& .taff :elfare +'penses"

3& 9eneral +'penses"

2& 9ifts and Presentation"

8& -ravellin# +'penses""

1& +ntertainment +'penses" etc

• 9eneral ote t%at Dpayments made as per contractual o!li#ations not

considered for t%is clauseH

• ,efer Auditors &eport CA&% for any comments on personal e'penses

• If no appeal filed in earlier years for certain disallo*ances for epensesto*ards personal -otor car epenses0 telephone0 etc0 the sa-e should

,e -entioned in report)

• Scr#tinise Credit card $ay%ents



Clause "1#a$: 'xpenses on (ne)penalt*) etc

5ateriality to !e considered %ile reportin#



Clause 4+,b,i*T$0 $isallo7ances

,eportin# $isalloance for



Clause 4+,d* )3A,!

$isalloance/deemed income under section 27A(3)

9)@o)Date of

pay-ent

@ature of

pay-entA-ount

@a-e and 7er-anent

Account @u-,er of

the payee0 if a+aila,le



Clause 4+,. - $isallo7ance u"s +)A

22

Income from folloin# Investment is e'empt



Cl! "1#+$: Amount inadmissible u,s1-A

.& 02A disallos

Cl 4+,. - Rule 9$ and Tax



Cl/4+,. Rule 9$ and TaxAudit

21

i ependiture directly relating to earning ee-pt inco-e

ii Interest A+erage In+est-ents

A+erage Total Assets

iii E of A+erage In+est-ents

,ule E$ is applica!le %en t%e Assessin# Officer is not satisfied



Cl/4+,.- 0ection +)A applicability to Traders

2;

ot Applica!le

• CCI =td& vs& @CI-687 C-, 640 (ar)

• *atis% -radin# Co064 I-$ 63;

• =eena,amac%andran

334 I-, 641 (er)

Applica!le

• $%anuka .ons334 I-, 304 (Cal)

• $& & .ecurities(I-A- 5um!ai)

• American +'pressBank (I-A- 5um)



Cl-4+,. +)A on 0trategic Investments

2E



Cl 4+,.- +)A - $isallo7ance of Interest

24

Interest $isalloance %en t%ere are !ot% On and !orroed funds

Cl 4+,. I i 0 ti +)A



Cl/4+,. - Issues in 0ection +)A

87

$isalloance %en o e'empt Income

Cl 4+,. - Issues in 0ection



Cl/ 4+,. Issues in 0ection+)A

80

$isalloance not on .tatutory alloances like $epreciation



Cl! ".: Amount c+ar/eable u,s -1

• ,efers to remission or cessation of lia!ility or !ad de!ts

for %ic% alloance or deduction %as !een claimed in an

earlier year

• Creditors are outstandin# for more t%an 3 years (!eyond

=imitation period) and no confirmation is availa!le&

:%et%er reportin# reuired

• Accept representation from 5ana#ement t%at t%ey are paya!le

• .upport from .ilver Cotton 5ills Co =td (682 I-, ;6E)(9uG&)

• +#& Bad $e!ts ,ecovered" :rite !ack of Provisions to !e

reported %ere

!.&. "#a# Co.C#artered Accountants



Clause 49* 0ection (:,4,viia



Clause 46* 0ection (:,4,viib

Assessee Company %as issued s%ares to ,esident

Pu!lic are not su!stantially interested in suc% Company

Issue price is %i#%er t%an F5

,eport +'cess from F5 received after folloin# c%ecks>

• Insist for DCF 8aluation &eport fro- a CA

• %,tain 'anage-ent &epresentation

9)@o) @a-e of the personfro- *ho-

consideration recei+edfor issue of shares

7A@ of theperson0 ifa+aila,le

@o) of9haresissued

A-ount ofconsideration recei+ed

Fair 'ar2et+alue of theshares



Clause !+,c * 4:600 ; 4:6T

Accepted durin# t%e year



4:600 and 4:6T

=t#erwise t#an Account Payee C#e>ue



Clause !4,c * 0peculation <oss

DWhether the Assessee has incurred any speculation loss

referred to in section 7 during the previous year, !f yes,

please furnish the details of the same.”

Caution

Am!it of .peculation =oss c%an#ed in Finance Act !y amendin#

.ection 23(8)(e) %oldin# t%at only t%ose commodity derivatives on

%ic% C-- is paid ill !e !usiness loss&

A9,IC<=-<,A= CO55O$I-I+. A,+ +J+5P- F,O5 C--

.P+C<=A-I+



Clause !4 ,d 0peci&ed Business <oss

“"hether the Assessee has incurred any loss

referred to in section 7A in respect of any

specied business during the previous year, if yes,

please furnish details of the same.”

.pecified Business K .ection 38A$

• :are%ousin# for a#ro" Coldc%ain facility• Cross country natural #as or crude"

• Built and Operate 6 star and a!ove %otel

• ospitalL077 !eds

• ousin# ProGect

• FertiliMer" etc&



Clause !4,e* 5xpl to 0/2!

.uc% loss on account of s%ares s%all !e speculative

Incurs loss from purc%ase and sale in s%ares

ot in Bankin# or s%are tradin# !usiness

Company 5ainly %avin# Business Income

,eportin# of deemed speculation loss



Clause !),a* T$0

TA@9CTI%@

@ATG& %F

7AY'@T

T%TA

7AY'@T

%F@ATG&

T%TA

7AY'@T %@

WHICH TD9A77ICAB

(0) (6) (3) (2) (8)

xxx +6)C

Payment

to

Contracto

rs

+333 933



CO=T$>

T%TA

A'%G@T %@

WHICH TA

WA9DDGCTD %&

C%CTD

AT 97CIFID

&AT

%GT %F 5

TA

DDGCTD %&C%CTD

AT 97CIFID

&AT

out of 6

T%TA

A'%G@T %@

WHICH TA

WA9DDGCTD %&

C%CTD

AT 99 THA@

97CIFID

&AT %GT %F

=

A-ount of ta

deducted orcollected AT

%W& TH@

97CIFID

&AT on J

A-ount of ta

deducted or

collected not

deposited tothe credit of

the Central

.o+ern-ent

out of 6 and

J

(1) (;) (E) (4) (07)

:33 +4 433 4 +



Clause !),b* T$0 0tatement

“"hether the assessee has furnished the statement oftax deducted or tax collected within the prescribed

time. If not , please furnish the details#

TA@TY7 %F

F%&'

DG DAT

F%&

furnishing

Date of

furnishing0

if

furnished

Whether the state-ent

of ta deducted or

collected contains

infor-ation a,out

all transactions

*hich are re1uiredto ,e reported

Cannot be

blank in

0tilit*

Only t%ose forms to !e reported %ic% %ave !een filed late



T$0 on Foreign Remittances

Insist on Form 08CB certificate for all forei#n remittances durin# Audit from Clien



Clause !),c* T$0 0tatement

“Whether the Assessee is liable to pay interest under section

$%&'&A( or section $%)*'7(. !f yes, please furnish#”

TA@I@T&9T

7AYAB G/9

!"A /

!"6C=

I@T&9T7AID %GT %F

7AYAB

A%@. WITH

DAT %F7AY'@T)



Clause !:* $$T

• In t%e case of a domestic company" details of ta' on

distri!uted profits under section 008O in t%e folloin#

form >•

(!) amount of reduction as referred to in section 008O(0A)(i)N• (c) amount of reduction as referred to in section 008O(0A)(ii)N

$ividend received from .u!sidiary after payment of $$-&

-o avoid cascadin# effect



Clause !2 to !6 * Cost"5xcise"0T Audit

-o #ive details of

• $isualification or

• $isa#reement on any

matter/item/value/uantity

As may !ereported/identified in t%e

report of

• +'cise Auditor

• Cost auditor&

• .ervice -a' Auditor



Clause )3* Ratio Analysis

9erial

nu-,er 7articulars 7re+ious year

7receding

pre+ious year

)T%TA TG&@%8& of the

Assessee

!) .ross profit/turno+er

() @et profit/turno+er

<) 9toc2KinKtrade/turno+er

5)'aterial consu-ed/

finished goods produced

Only applica!le to 5anufacturin# and -radin# concerns

Cl )+ $ d R f d f



Clause )+* $emand Refund ofI$T• Please furnis% t%e details of de-and raised or refund

issued durin# t%e previous year under any ta' las ot%er

t%an Incometa' Act" 0410 and :ealt%ta' Act" 048;

alon#it% details of rele+ant proceedings&

5AA9+5+- ,+P,+.+-A-IO

,efer CA,O

issues in tax audit report

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