BY GYAN AGNIHOTRI : BY GYAN AGNIHOTRI TAX AUDIT Slide 2: Introduction :
Tax Audit refers to the audit carried out under the provisions of section 44AB of the Income Tax Act, 1961.
Originally introduced by The Finance Act, 1984, in the Income-tax Act, 1961 w.e.f. 1 April 1985 through Section 44AB.
Even if income is below taxable limit, tax audit needs to be carried out if turnover exceeds prescribed limit.
Applicable to both Residents and Non-Residents. Slide 3: Basic Elements of Sec. 44AB
carrying on business shall, if his total sales, turnover or gross receipts in business exceeds forty lakh rupees in any previous year ; or
carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year; or
carrying on the business shall, if his profits and gains from business are deemed to be profits and gains under *[section 44AD or 44AE or 44AF] [or Sec. 44BB or Sec. 44BBB] and who has claimed his income to be lower than the deemed profits and gains of this section,
* Words “Sec. 44AE shall be substituted for the words” Sec. 44AD or Sec. 44AE or Sec. 44AF by the Finance (No. 2) Act 2009 w.e.f. 01.04.2011 Slide 4: Cont…
The following clause (d) shall be inserted after clause (c) of section 44AB by Finance (No. 2) Act 2009 w.e.f. from 01.04.2011 ;
d) Carrying on business shall, if the profits and gains from the business are deemed to be profits & gains u/s 44AD, and he has claimed such income to be lower than profits & gains of his business and his income exceeds maximum amount which is not chargeable to income-tax in any previous year.
get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant & setting forth such particulars as may be prescribed…… Slide 5: Object Of Tax Audit:-
To assist the Assessing Officer in computing the total income
of the assessee.
Involves expression of opinion on the truth and correctness of
certain factual details by assesses to the Income Tax Dept.
To enable proper assessment of tax by the Department.
To ensure that income-tax assessments are made simpler and
faster since the basic data required for assessments are
provided with the return of income, by filing Forms 3CA, 3CB
and 3CD of the tax audit report.
Increases self compliance by the tax payer and educates them. Slide 6: Applicability of Sec. 44AB:- Person carrying on business:-
Sales turnover, gross receipts exceeds Rs. 40 lacs in
Deemed profit U/s 44AD, 44AE, 44AF, 44BB & 44BBB
and claims it to be lower.
Not applicable if covered by Sec. 44B and 44BBA.
Person carrying on Profession:-
- Gross receipts in profession exceeds Rs. 10 lacs. Slide 7: Position from AY-2011-2012:- (Changes made by Finance (No.2) Act 2009 U/s 44AD):-
44AD now applicable to all “eligible assessees” engaged in any “eligible business”.
Eligible assessee – Individual, HUF or General Firm.
Eligible business – any business except buying/leasing or hiring goods carriage referred to in Sec. 44AE and turnover from eligible business does not exceed Rs. 40 lacs. Slide 8: Cont…Salient Features:- Not applicable to Company and LLP.
Limit of turnover business wise.
Option of presumptive scheme-business wise.
Audit for that business only which does not opt for presumptive norms and total income exceeds taxable limit.
Applicability of TDS provisions. Slide 9: Total Sales, Turnover or Gross Receipts
Not defined in Sec. 44AB or any other provision of the Act.
Can be interpreted as volume of business, total is for all three expressions.
Sale denotes sale of movable commodity, turnover is receipt from other
Turnover is aggregate amount for which sales effected or services rendered
(as per guidance note of ICAI).
Gross receipt to include all receipts whether in cash or kind from carrying of
Sales, turnover & gross receipts should be determined as per method of
accounting regularly employed.
Transaction in shares is turnover or not will depend whether shares held
as stock in trade or capital assets.
Types of transaction in shares/derivatives :
-Delivery based transaction. Slide 10: Who can be appointed as Tax Auditor?:-
A Chartered Accountant or a firm of Chartered
Accountants in full time practice.
A CA/firm appointed as Tax Consultants.
Internal Auditor cannot be Tax Auditor- (decided
in 281st meeting of Council in October 2008,
w.e.f 12.12.2008.) Slide 11: Due date for Audit:
Obligation on the aforesaid persons to obtain
before the "specified date" a report of the audit.
Report to be in the prescribed form duly signed
and verified by the “accountant”.
“specified date" relevant to the assessment year,
means 30th of September of the A.Y. Slide 12: Audit Planning
Obtain Appointment letter
Issue engagement letter
Obtain representation letter
Obtain certificates as required in clause of 3CD Slide 13: Forms applicable for Tax Audit Report:- Slide 14: Contents of Form 3CD:- PART A - General particulars
- Clause 1 to 6.
PART B - Disclosure of particulars
- Clauses 7 to 32.
ANNEXURE 1 - Financial Parameters
- Part A and Part B.
ANNEXURE II - Valuation of Fringe Benefits. Slide 15: Salient Features for Major Clauses:- CLAUSE 1 - In case of proprietary business mention (Name of Assesse) name of proprietor with name of
CLAUSE 2 – Address shall be:-
(Address) > as communicated to department.
> address of branch office in case of
> principal place – new assessee.
> registered office – for company. Slide 16: CLAUSE 4 - LLP formed in India – Firm
(Status) - LLP formed outside India – Company
CLAUSE 9 - Books of accounts:
(Maintenance of > Sec. 2(12A) – inclusive definition.
books of accounts) > would cover books of original entry & other books of
> If books specified in Rule 6F, list shall be same for
clause (a), (b) & (c).
> Other cases- (b) and (c) shall be same.
CLAUSE 11 - Clause (a) to (c) applicable to all assessees.
(Method of - Clause (d) to assessee following mercantile
accounting) system of accounting. Slide 17: CLAUSE 12A - Reportable to audit report signed after
(Capital assets 10.08.06
Converted into - Capital asset - Sec. 2(14)
Stock in trade) - Transfer – Sec. 2(47)(iv)
- Purpose is to determine fair market value
for capital gain tax purpose.
CLAUSE 13 - Sub clause (b) & (c) will not apply if cash
(amount not system is followed.
Credited to - Sub clause (a), (d) & (e) will apply
P&L A/c) irrespective of method of accounting. Slide 18: CLAUSE 14 - Asset wise or block wise depreciation
(Particulars of - Additional depreciation – asset wise
Depreciation) - Block of asset omitted by Finance (No.2)
Act, 2009 from explanation 3 to Sec. 32(1)
- Block of asset as defined in Sec. 2(11) of the Act -Tangible or intangible asset.
CLAUSE 16 - Clause (a):
(a. Payment of bonus > Requirement is towards disclosure only and
& commission not to allowability.
b. Sum received from > Payment made within time allowed U/s 43B.
employees towards - Clause (b):
contribution to PF etc.) > Reporting of amount deducted
from employees have been paid on or before due date.
> Due date as per PF Act 1952. Slide 19: CLAUSE 17 - Applies to all assessees, except clause (g), which
(Amount debited to applies to Firm and LLP.
P&L A/c )
- Clause (a):- capital nature
Sec. 37(1) does not allow expenditure of capital nature.
- Clause (d):- expenditure at club
(i) no express disallowance
(ii) for purpose of FBT.
- Clause (f):- amount in admissible u/s 40(a)
> Sec. 40(a)(ia) amended by Finance Act 2008 with retrospective effect from 01.04.05
> Circular No. 1/2009, dated 27.03.2009.
- Clause (g):- payment to partners
> applicable to firm , Indian LLP only
> determine and qualify inadmissible amount. Slide 20: - Clause (h):- sec. 40 A(3) payments
> amended provision for AY 2009-10 : aggregate of payment in a day.
> limit enhanced to 35000 w.e.f. 1.10.2009 in case of transporters
> Rule 6DD substituted by Notification no. 97/2008,
- Clause (k):- contingent liability
> As per AS-29, no provision shall be made for contingent liability.
> to report if provision made.
- Clause (l):- sec. 14A
> Primary duty is of assessee to furnish details
> Rule 6DD w.e.f. 24.03.2008.
- Clause (m):-payment in admissible u/s 36(1)(iii)
> Refers to interest paid for capital borrowed for acquiring asset for
extension of existing business/profession for the period when capital
borrowed to put to use.
> Distinct with AS – 16. Slide 21: CLAUSE 17A - New clause inserted in Form 3CD by Notification
(Interest to MSM No. 36/2009, dated 13.04.09.
Enterprises) - Amount to be reported whether sum debited to P&L A/c
CLAUSE 18 - Ascertain specified persons for selection.
(Payment to specified - To provide particulars of payment and not to report
CLAUSE 20 - Reporting of items such as recovery against any
(Profit chargeable deduction, balancing charge, sale of assets for scientific
U/s 41) research, recovery of bad debts.
. Slide 22: CLAUSE 21: - Refers to following sums:
(43B payments) (a) Tax duty, Cess or Fee
(b) Employer’s contribution to PF, Superannuation Fund
(c) Bonus or commission to employees
(d) Interest payable to FI, SFC,HC, State Ind. Investment Corp.
(e) Interest payable to scheduled bank in respect of loan or
(f) Leave encashment.
- Deduction only on actual payment
- Conversion of interest into loan not repaid.
- Liability incurred during year and paid before due date of filing of
return are allowable.
- Liability which pre existed have to be paid during previous year.
- Sales Tax / Excise Duty collected separately disclosed. Amount
not paid to be reported. Slide 23: CLAUSE 24 - Sec. 24(a) not applicable to Banking company, Corporation established by (Particulars of Central, State Act, Govt. co. U/s 617 of the Companies Act.
acceptance or - Transactions between sister concerns
repayment of loan) - Transfer entries
- Transactions through electronic transfer, - Direct deposit of cash into bank A/c.
CLAUSE 26 - Covers section wise details of deduction admissible under Chapter VI A.
(Deduction under - For payment – for income – other deduction - 80JJA, 80U
Chapter VI A) - Tax auditor has to ascertain admissibility of claim.
- Deduction to be reported based on business activity.
- Amendment of Sec. 80A with retrospective effect – impact of
multiple deduction for same profit – subsection (4),(5) referring
to deduction U/s 10A, 10AA, 10B, etc., Subsection (6) to transfer pricing.
- Reliance on certificates for various deductions to be mentioned Slide 24: CLAUSE 27 - Reporting of Clause (a) depends on compliance to clause (b).
(Provision of - As there are lot of debatable issues, appropriate comment shall be made
TDS) against clause (a).
- Late deposit of deducted amount need not be reported.
- TDS under other law not to be reported.
- New Sec. 206AA inserted – furnishing of PAN to deductor to avoid deduction at higher rate and amendment to 194C w.e.f. 1.10.09.
CLAUSE 28 - clause (a): for trader only
(Quantitative - clause (b): for manufacturer
details) - clause (b): for manufacturer cum trader also.
CLAUSE 32 - All ratios in monetary terms only.
(Accounting - Ratio for business as a whole
ratio) - Consistency to be maintained
- Ratio to be calculated based on figures as per books of accounts.
- For clause (c) – existence of closing stock is a must. Slide 25: Annexure – I to Form No. 3 CD
Part A – repetition of item 1 to 6 of form 3CD
Capital Account- Non corporate assessee
Fixed capital in item no. 1, current account balance in item no.2
Annexure- II - Salient Features
FBT abolished w.e.f. Asstt. Year 2010-11
Following items executed from FBT – w.e.f. Asstt. Year 2009-10
- credit facility for employee’s children
- payment to sponsor on employee sportsman
- expenditure to organize sports events for employees
- maintenance of guest house other than for training purpose- state N.A.
- valuation for festival celebration reduced from 50% to 20%
- expenditure through electronic meal card subject to
condition. Slide 26: Levy of Penalty:- Sec. 271B
Failure to get accounts audited as required by Sec. 44AB.
Lower of 0.5% of total sales, turnover or gross receipts of business/profession and Rs. 1 lac.
Not to be imposed if reasonable cause is proved, Sec. 273B.
Annexure less tax return – No levy of penalty unless audit report not obtained. Slide 27: Certain Issues:- Immunity from Scrutiny / disallowance under various sections.
Applicability where income exempt U/s 10
Applicability on Stock Brokers/Speculative Transactions
Acceptability of tax auditors certificate as regards amount of various expenses under FBT in Annexure – II to Form 3CD.
Rectification/revision of audit report.
When accounting year is different from financial year
Accounts written in other languages. Slide 28: ThankS