jb nagar cpe study circle of wirc of icai
jb nagar cpe study circle of wirc of icai
jb nagar cpe study circle of wirc of icai
- No tags were found...
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Shri Mahaviray NamahJ. B. NAGAR CPE Study Circle<strong>of</strong> WIRCTAX AUDIT: Practical issues
Reference Material GUIDANCE NOTE PUBLISHED BY THE ICAI ISSUES ON TAX AUDIT PUBLISHED BY THE ICAI STANDARDS ON AUDITING PRESCRIBED BY ICAI ACCOUNTING STANDARDS PRESCRIBED BY ICAI ACCOUNTING STANDARDS NOTIFIED U/S. 145 OF I.T. ACT GUIDANCE NOTE ON TAX AUDIT u/s. 44AB 12.10.07(www.<strong>icai</strong>.org .. Resources)
What is the Objective <strong>of</strong> Tax audit ?Circular No. 387 dated 6 th July 1984 ensure that the books <strong>of</strong> a/c & other records properly maintained faithfully reflect the income <strong>of</strong> the tax payer claims for deduction are correctly made checking fraudulent practices proper presentation <strong>of</strong> the accounts before the tax authorities A. O. attending to more important investigational aspects <strong>of</strong> a case
Who is liable for tax audit u/s. 44AB ?Enhanced limits <strong>of</strong> Turnover or Pr<strong>of</strong>essional receipts (60/15)Limits under DTC (100/25) Can a person having less than prescribed turnover be liable for tax audit u/s.44AB ?Amended S. 44ADEligible assesseesWho does not claim deduction u/s. 10A, 10AA, 10B, 10BA or 80H to 80RRB.Eligible businessPrescribed % <strong>of</strong> Pr<strong>of</strong>itNo liability for advance taxWho is covered ?Who is not covered ?Distinction between Business or Pr<strong>of</strong>essionSimilarly S. 44AE
Who can be appointed as Tax Auditor ? Communication with previous auditor, whether necessary ? How many Tax Audits a Chartered Accountant can undertake? How can a Company remove Tax Auditor?
Is it mandatory to submit to tax audit report to AO after e-filling return <strong>of</strong>income ?Annexure less return and Rule 12(2)Filling up particulars <strong>of</strong> tax audit in the e-return Consequence <strong>of</strong> failure to carry out tax audit in time (S. 271B)Penalty amount increased from 1,00,000 to 1,50,000Reasonable cause Sec. 273B Can penalty u/s. 271B be imposed when books <strong>of</strong> account not maintained ? Is ICAI Guidance Note binding? What about `Issues on Tax audit’ ? Should the tax auditor obtain signature <strong>of</strong> assessee on Form 3CD ?
Can a tax audit report be revised ?GN13.10.i. revision <strong>of</strong> accounts <strong>of</strong> a company after its adoption in annual generalii.iii.meeting.change <strong>of</strong> law e.g., retrospective amendment.change in interpretation, e.g., CBDT Circular, judgements, etc.Must mention said report is revised with reference <strong>of</strong> earlier report . Extensive uses <strong>of</strong> ‘N.A.’ in tax audit report by Auditors, whether proper ?a) There is no change in the nature <strong>of</strong> businessb) There has been no deviation in method <strong>of</strong> accountingc) There is no such paymentd) Should good tax audit reports be published ?
What is Turnover ?GN on Tax Audit Para 5.1 to para 5.16.Issues on Tax Audit answer to issues No. 6 to 331 st check is it Business or pr<strong>of</strong>essionPr<strong>of</strong>ession : Only gross receiptsBusiness : Sales, turnover or gross receipt all to be considered. How to distinguish Pr<strong>of</strong>ession with Business ?Coaching classes run by a CA vis a vis by non qualified businessman. ISOTA issue 29Turnover / Gross ReceiptGN 5.11 (a) Day trader / speculator : sum total <strong>of</strong> differences, +ve or –ve.GN 5.11 (b) Security Deri. Transactions: ∑ +ve or –ve. + premium on sale <strong>of</strong> options.GN 5.11 (c) Commodity Deri. Transactions : Settlement without delivery ∑ +ve or –veGN 5.13 (vi) Clearing & forwarding agent: Exclude reimbursement custom duty etcNot Turnover: Purchases, WIP, Sale <strong>of</strong> fixed assets, write back <strong>of</strong> Crs. A/cs.
Sales tax, excise duty charged on salesISOTA issue 11: In accordance with method <strong>of</strong> accounting regularly employedSection 145A provides ‘sale <strong>of</strong> goods’ includes any tax, duty, cess or fees.This applies to CENVAT, VAT but does not apply to service tax.
Use <strong>of</strong> Form 3CA & 3 CBForm no. 3CA tax auditor to enclose copy <strong>of</strong> the audit reportWhere no statutory report form no. 3CB.Contents <strong>of</strong> 3CDPart A (clause 1 to 6),Part B (Clause 7 to 32),Annexure I (PartA & PartB)Form will be treated incomplete if “Annexure I” is not filled up.Clause 4: Status in case <strong>of</strong> a LLP ? S. 2 (23)
Clause 7: Change in partners’ pr<strong>of</strong>it sharing ratioChange in partner’s remuneration or Interest rate on CapitalMinor becoming major & opting to share in lossesClause 8 (a): Nature <strong>of</strong> business or pr<strong>of</strong>essionIt is important to specify exhaustive list <strong>of</strong> nature <strong>of</strong> business. Why ?Clause 9: Books <strong>of</strong> AccountIs it necessary to have hard copy <strong>of</strong> printouts?Section 2[12A) Books includes data stored in a floppy, disc, tape or any other form<strong>of</strong> electro-magnetic data storage device.Whether stock records are books <strong>of</strong> account?Tax auditor’s responsibility where proper stock records not maintained.Clause 11: Method <strong>of</strong> AccountingChange in method <strong>of</strong> accounting vis a vis change in accounting policy (GN 22.7)
What if previous year accounts are not audited?Scope <strong>of</strong> Section 145A. Gross Method vs. Net Method.ICAI’s GUIDANCE NOTE ON TAX AUDIT u/s. 44AB dated 12.10.2007Clause 12: Valuation <strong>of</strong> closing stockIn cash system <strong>of</strong> accounting, whether closing stock will come ?Clause 12A : Capital assets converted in to stock in tradeDefinition <strong>of</strong> Capital Assets u/s. 2 (14) and <strong>of</strong> “transfer” u/s. 2 (47)(iv).Clause 13: Amounts not credited to Pr<strong>of</strong>it & loss A/c.What if not accounted for in accounts ?Clause 13 (d): Amount not credited to Pr<strong>of</strong>it & Loss A/c. : Any other item <strong>of</strong> incomeClause 13(e): Whether amount <strong>of</strong> capital gains or capital receipt be mentioned ?Should money received on share application be reported in 13(e)
Clause 14: Particulars <strong>of</strong> DepreciationCENVAT and Vat credit availed be deducted from costCan depreciation be claimed in following situation ?• A Company holds an asset in the name <strong>of</strong> a director.• A firm holding asset in the name <strong>of</strong> a partner.• Cash system <strong>of</strong> accounting: Unpaid Fixed Assets• If an assessee wants to claim no or lower depreciation on an assetExplanation 3 to Section 32(1) by Finance (No.2) Act, 2009 “block <strong>of</strong>assets” is substituted with the word ”assets”.
Clause 16: Bonus, Commission, PF recoveries etc.Employers contribution to PF U/s. S.43BVs. Employees contribution to PF S. 36(1)(va) rws S. 2(24)(x)Clause 17: General & also on penalty & fine etc.Penalty : Infraction <strong>of</strong> law or arising out <strong>of</strong> contractual obligationInterest on sales-tax arrears Compensatory Lachmandas Mathurdas 254 ITR 799 (SC)Penalty to Mun. Corpn. for unauthorized construction (plan not approved)Radha Ballabh Silk Mills v. DCIT 12 SOT 423 (Mum)Paid to Mun. Corpn. for deficiency in open spaceCIT vs. Lokenath & Co 147 ITR 624 (Del)
Amounts inadmissible under Section 40A (3) read with rule 6DD:• Aggregate <strong>of</strong> payments made in a day in > Rs. 20,000• Payment made for plying, hiring or leasing goods carriages > Rs. 35,000• Payment to sundry creditors > prescribed in a day business income for that year• Income determined by applying net pr<strong>of</strong>it rate. Purshottamlal Tamrakar 184 CTR (MP)349.Clause 17 (a) Capital expenditure• 3 tests to be applied• Test <strong>of</strong> enduring benefit, Ownership test, Functional test.• In case <strong>of</strong> s<strong>of</strong>twareClause 17 (f) (amount inadmissible u/s 40(a))Section 40 a (i) to be paid within time prescribed u/s. 200(1)Section 40 a (ia) to be paid before filing <strong>of</strong> return or due date
Clause 17 (l): Amount <strong>of</strong> deduction inadmissible in terms <strong>of</strong> section 14ARule 8D: Expenditure in relation to exempt income shall be aggregate <strong>of</strong>Section 14A is highly controversial.If auditor in agreement with assessee - report amount with suitable disclosureOtherwise give qualified opinion, adverse or disclaimer <strong>of</strong> opinion.Clause 17A: Amount <strong>of</strong> interest inadmissible u/s. 23 <strong>of</strong> the MICRO, Small andMedium Enterprises Development Act, 2009Amount to be reported whether sum debited to Pr<strong>of</strong>it and Loss Account or not.Clause 20: Amounts chargeable u/s. 41?Only if deduction allowed in earlier year.Mere time barring liability without write backWaiver <strong>of</strong> principal amount <strong>of</strong> loan by bank
Clause 21: Payments covered u/s. 43BFurnishing <strong>of</strong> bank guarantee for unpaid liability Udaipur Distillery 186 CTR (Raj) 1Excess deposit in “account current” with excise departmentUnutilised MODVAT credit (Glaxo Smithkline Chandigarh, Special Bench).Clause 24(b): Loan and Deposit RepaidIf firm pays LIP on behalf <strong>of</strong> family members from whom loans taken. 269T.Clause 27:Tax deducted at sourceThere are lots <strong>of</strong> debatable issues, appropriate comments shall be made.CBDT Circular No.4 <strong>of</strong> 2008 TDS on service tax on rent u/s. 194ICBDT clarification 30.6.08 to Bombay Chamber TDS on service tax on pr<strong>of</strong>essional feesNew Section 206AA mandatory PAN.
GENERAL ISSUESAssessee vis a vis Auditors duty• Information to be complied & authenticated by assessee• Auditors duty to check the details• Conflicting views with assessee the auditor may state both views• Conflicting judicial precedents, auditor should state the judgment relied uponWorking papersWorking papersNo one will believe you did something on an audit if there is nothing in yourworking papers file to show for it.They are aid inPlanning and Performance <strong>of</strong> auditsSupervision and Review <strong>of</strong> audit workProvide evidence <strong>of</strong> audit performed / support auditor’s opinion.
Documentation for Tax Audit:SA - 210 : Appointment letter defining scope <strong>of</strong> auditSA - 580 : Management representation letterSA - 310 : Notes on the nature <strong>of</strong> businessSA - 500 : Sample Purchase & Sales billsPro<strong>of</strong> <strong>of</strong> assets purchased & Revenue exp. CapitalizedTrial balanceFinancial statements duly signed b the assesseeSA - 505 : Bank loan statement,Bank balance confirmationMajor sundry debtors and creditors balance confirmation,SA – 520 : analytical ratio analysisSA - 550 : List <strong>of</strong> related parties and transaction
AS -1 Notes on accounts and disclosure <strong>of</strong> accounting policiesAS -2 Valuation <strong>of</strong> inventories with quantitative inflow and outflow statementAS – 5 Extraordinary Items nature & disclosureAS – 6 : Depreciation calculation statementAS – 29 : Estimation <strong>of</strong> liabilities including contingent liabilities3CD check list, documentations, 3CD specific certificates, statutory compliances etc.Abatement? BEWAREAbatement? BEWAREA person other than tax payer who willfully makes or causes to tax payer tomake any false entry in the books <strong>of</strong> accounts or any statement to evade anytax liability would be made liable to imprisonment range from 3 months to 3years with fine. (Abatement u/s. 277A)
To sum up, one must keep in mind:Concept <strong>of</strong> Prudence, Substance overform, Materiality & Matching Concept.