J. B. NAGAR CPE Study Circle of WIRC TAX AUDIT: Practical issues

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6Clause 13: Amounts not credited to Profit & loss A/c.What if not accounted for in accounts? Example : One of the partners enjoys free foreign tourorganized by supplier on firm achieving a target turnover.Scope restricted to books of account. However documents that came across while conductingaudit needs also to be considered.Clause 13 (d): Amount not credited to Profit & Loss A/c. : Any other item of incomeIn case of non-corporate assessee amounts credited to capital accounts can be looked in tosuch as interest on income tax refunds.Clause 13(e): Whether amount of capital gains or capital receipt be mentioned?Should money received on share application be reported in 13(e)The objective of details required against “any other item of income” & “capital receipt, if any” isto assess income, as such details should be given accordingly. Hence tax auditor may restrict totaxable receipts.Clause 14: Particulars of DepreciationCENVAT and Vat amount should be deducted from cost to the extent credit thereof is availed.Can depreciation be claimed in following situation?A Company holds an asset in the name of a director.A partnership firm holding fixed asset in the name of a partner.Under cash system of accounting, payment for purchase of fixed assets is not made.If an assessee wants to claim no or lower depreciation on an asset, what is the responsibility ofan auditor? Amendment to Explanation 3 to Section 32(1) by Finance (No.2) Act, 2009 wherein the word“block of assets” is substituted with the word ”assets”. As such particulars of additionaldepreciation should be given assets wise and not block wise.Clause 16: Bonus, Commission, PF recoveries etc. There is an amendment in S.43B for allow ability of late payment of PF. However In view ofno amendment in the provision of section 2(24)(x) and section 36(1)(va) if assessee fails topay any PF contribution deducted from the salary of employees within specified due dateunder respective Acts, the deduction will continue to be disallowed.Clause 17: General & also on penalty & fine etc.Penalty : Infraction of law or arising out of contractual obligation compensatory in nature?Interest on arrears of sales-tax is compensatory in nature and, therefore, it is allowable asdeduction. LACHMANDAS MATHURDAS Vs. CIT (2002) 254 ITR 799 (SC)
7Penalty paid to Municipal Corporation for regularization of unauthorized construction (plan notapproved) is in nature of penalty for violation of law. Not allowable u/s. 37(1). Radha ballabhSilk Mills v. DCIT 12 SOT 423 (Mum)Payment to Municipal Corporation for condoning deficiency in open space is not a penalty forinfraction of law. CIT vs. Lokenath & Co 147 ITR 624 (Del)Amounts inadmissible under Section 40A (3) read with rule 6DD: Aggregate of payments madein a day by Cash or payments otherwise than by A/c. Payee Cheque or bank draft in excess ofRs. 20,000 (Rs. 35,000 in case payment is made for plying, hiring or leasing goods carriages.Where payment is made to sundry creditors for an expense allowed in earlier year in aggregatemore than Rs. 20,000 in a day otherwise than through A/c Payee cheque or bank draft, thesame would be considered as business income of the year in which such payment is made. Section 40A(3) is not applicable when income is determined by applying net profit rate. CITvs. Purshottamlal Tamrakar Uchera [2003] 184 CTR (MP) 349.Clause 17 (a) Capital expenditure3 tests to be applied to determine whether expenditure is capital or revenue – test of enduringbenefit, ownership test, functional test.In case of software ownership test alone may not be sufficient – functional test and enduringbenefit may be more important.Clause 17 (f) (amount inadmissible u/s 40(a))Section 40 a (i) TDS on sum payable outside India or to non resident is to be paid within timeprescribed u/s. 200(1), otherwise expense would be deductible in the year of TDS payment.Section 40 a (ia) TDS on sum payable to resident is to be paid before filing of return or due dateof filing, whichever is earlier, otherwise expense would be deductible in the year TDS is paid.TDS on salary is still outside preview of section 40 a (ia)Clause 17 (l): Amount of deduction inadmissible in terms of section 14ARule 8D: Expenditure in relation to exempt income shall be aggregate ofi. Amount of expenditure directly relating to exempt incomeii. Interest paid if not directly attributable to any particular income or receipt, such interestin ratio of average investments with exempt income to average total assetsiii. ½ % of average investment with exempt incomeSection 14A is highly controversial. If auditor is in agreement with the computation of assessee,he should report the amount along with suitable disclosure of material assumptions.Otherwise, if auditor is not in agreement with the assessee he should either give qualifiedopinion, adverse or disclaimer of opinion.
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J. B. NAGAR CPE Study Circle of WIRC TAX AUDIT: Practical issues

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