Issues in Tax Audit u/s 44 AB . CA Rajiv Jain. NIRC of ICAI On 19 th September 2009 At Hotel Crown Plaza New Delhi. Section 44 AB . Every person--
CA Rajiv Jain
NIRC of ICAI
On 19th September 2009
At Hotel Crown Plaza New Delhi
……. report by an accountant in the form prescribed under this section.
Accountancy, Architectural, Authorised Representative, Company Secretary, Engineering, Film Artists/Actors, Camera man, Director, Singer, Story Writer, Etc., Interior Decoration, Legal, Medical, Technical Consultancy, Information Technology
Computation of Specified Limit of Rs 40 Lacs
It means a transaction, in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
Depends on facts and circumstances of each case taking into consideration nature, frequency and volume of transaction.
Landmark Judgments :
It is possible for tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock in trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.
Instances of Receipts forming part of Gross Receipts
Instances of receipts not forming part of Gross Receipts
(247 ITR 785 THANTI TRUST SC, 107 ITD 403 CIT V. Beer Shiva Educational Social Welfare Society, Haldwani, 105 ITD 29 Samaj Kalyan Parishad, Modinagar v. ITO.)
Section 2(15) defining ‘Charitable Purpose’ amended w.e.f. 1-4-2009
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity;
(1) The report of audit of the accounts of a person required to
be furnished under section 44AB shall,-
(a) in the case of a person who carries on business or profession and who is required by or under any other law to get his accounts audited, be in Form No.3CA;
(b) in the case of a person who carries on business or profession, but not being a person referred to in clause (a), be in Form No.3CB.
(2)The particulars which are required to be furnished under section 44AB shall be in Form No.3CD.
……………Subject to above
Framework for Preparation and Presentation of financial statements issued by ICAI.
Financial Statements are frequently described as showing a true and fair view of the financial position, performance and cash flows of an enterprises. Although this framework does not deal directly with such concepts,the application of the principal qualitative characteristics and of appropriate accounting standardsnormally result in financial statements that convey what is generally understoodas true and fair viewof such information.
Modifications not affecting Audit opinion
Modification affecting Audit opinion
Emphasis on Matter
Disclaimer of OpinionAAS-28 The Auditor’s Report on Financial Statements
It is hereby clarified that the mandatory accounting standards also apply in respect of financial statements audited u/s 44AB of the Income Tax Act, 1961. Accordingly, the members should examine compliance with the mandatory accounting standards when conducting such audit.
(Published in The Chartered Accountant Journal, August 1994.)
CA Rajiv Jain
(a) Description of capital asset,
(b) Date of acquisition;
(c) Cost of acquisition;
(d) Amount at which the asset is converted into stock-in-trade
The particulars to be stated are required to be furnished with reference to the previous year in which the conversion has taken place.
The taxability of capital gains or business income arising from such deemed transfer is not required to be reported.
The legislation has not visualized the situation where stock in trade is to be converted into capital asset. In the absence of a specific provision, the formula which is favorable to assessee should be accepted. (ITA 6374/MUM/2004, ACIT v Bright Star Inv P Ltd)
Clause 12A- Conversion of Capital Asset into Stock in Trade at fair market value: Section 45(2)
State whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess, impost etc. is passed through the profit and loss account.
22. (a) Amount of Modified Value Added Tax credits availed of or utilised during the previous year and its treatment in the profit and loss account and treatment of outstanding Modified Value Added Tax credits in the accounts.
S-145 A: Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be–
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.
Explanation.--For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.
AS-2 ICAI: Valuation of Inventory
Cost of Purchase
Cost of Inventories
Exclusive Method for valuation of Purchases resulting in exclusive method for valuation of inventory.
Disallowance u/s 43B ?
ACIT V Real Image Media Tech P Ltd (Chennai) 114 ITD 573
2. The amount of turnover should be disclosed in the following manner on the face of the statement of profit and loss:
Turnover (Gross) XXXX
Less: Excise Duty XXXX
Turnover (Net) XXXX
3. The amount of excise duty to be shown as deduction from turnover as per paragraph 2 above should be the total excise duty for the year except the excise duty related to the difference between the closing stock and opening stock. The excise duty related to the difference between the closing stock and opening stock should be recognised separately in the statement of profit and loss, with an explanatory note in the notes to accounts to explain the nature of the two amounts of excise duty.
Presentation of excise duty and sales in Profit& Loss Accountas per ASI-14/AS-9 ICAI
Sales Basic Rs 1200/- Excise Duty Rs 192/- Gross Sales Rs 1392/-
Opening Stock Basic Rs 200 Excise Rs 32 Total Rs 232
Purchases Basic Rs 1000 Excise Cenvat Rs 160 Total Rs1160
Closing Stock Basic Rs 400 Excise Rs 64 Total Rs 464
Finished Goods in bonded House
Opening Stock Basic Rs 100 Excise Rs 16 Total Rs 116
Closing Stock Basic Rs 250 Excise Rs 40 Total Rs 290
- Cumbersome calculations
- Guidance Note CENVAT inclusive method
withdrawn w.e.f 1-4-1999.
- Contradictory to mandatory AS-2
- Disallowance u/s 43B
Point at which excise duty is incurred in respect of Finished Goods lying in bonded house:  14 SOT 475 (All) Shyam Biri Works Ltd. V. Asst. Commissioner of income tax, Allahabad
The above accounting treatment has no impact on current year`s profit or loss.
Refer para 12(b). Further Rs 192/- the amount of excise duty on sales is debited to Excise Duty on sales which is reduced from gross sales turnover in the Profit & Loss account.
201 ITR 684 Prakash Cotton SC, 205 ITR 163 Ahemadabad Cotton.
Penalty is required to be examined as per the provisions of the relevant statue notwithstanding the nomenclature. If the impost is compensatory in nature, it is to be allowed, however, if it is penal in nature it is to be disallowed.
Clause 17 (f): 40(a)
8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year,he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :
(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :
A x B/C
A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ;
B= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ;
C= the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ;
(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
3. For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.
The auditor to compute the amount inadmissible under the proviso to section 36(1)(iii).
Interest paid, in respect of capital borrowed for acquisition of an asset or extension of existing business or profession (whether capitalized in the books of account or not) for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was put to use, shall not be allowed as a deduction.
17A. Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises development Act, 2006(NOTIFICATION NO. 36/2009, DATED 13-4-2009)
THE MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006
23. Interest not to be allowed as deduction from income.- Notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.
In respect of any sum referred to in clauses (a), (b), (c), (d), (e)or (f) of section 43B, the liability for which was incurred in the previous year and was
Clause 16 (b)
Any sum received from employees towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x); and due date for payment and the actual date of payment to the concerned authorities under section 36(1) (va).
Provisions of Section 43B which is applicable in respect of the Employer’s Contribution, is quite different than the provisions of section 36(1)(va) which is applicable in case of the employee’s contribution. JCIT v ITC Ltd. (2008) 299 ITR(AT) 341 (Kol) dated 7-9-2007
Contrary –Prevailing View
Now as per the present provisions of section 43B the payment made by the employer towards contribution of PF, ESI, and other welfare funds are allowable if the same are paid before filing the return of income. Now no disallowance of such payment would be made even if the same are made beyond the due dates prescribed in section 36(1)(va) ADD CIT v Vistas RRB (India) Ltd ,92 ITD 1 (Delhi)
The view of the Tribunal deserves to be sustained as it is no longer res integra in view of the decision of the SC in the case of CIT v Vinay Cement 213 ITR 268 which was followed by DHC in CIT v Dharmender Sharma 297 ITR 320.CIT v P M Electronics Ltd (313 ITR 121 Delhi dated 3-11-2008)
Also See: C IT v M. N. Chari. 310 ITR 445 (Kar), CIT v. Sabari Enterprises 298 ITR 141 (KOL)
Business loss cannot be carried forward and set off in the previous year in which a change in shareholding takes place in case of a company in which public are not substantially interested , if on the last day of the previous year in which the change in shareholding took place and on the last day of the previous year in which the loss was incurred, the shares of the company carrying not less than 51% of the voting power were not beneficially held by the same persons.
Reporting under Clause 17(h):
Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft , in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee.
No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit if- ….
CA Rajiv Jain