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TAX AUDIT- TAX ISSUES

TAX AUDIT- TAX ISSUES. BY : DR. RAKESH GUPTA. FCA, FCS, AICWA, LL.B, Ph.d Ex- Member, Income Tax Appellate Tribunal. C-8, EAST OF KAILASH, NEW DELHI-110065 PHONE : 011-41625000 (Multilines) E-mail : consult@taxindia.net. PAYMENT OF ESI/ EPF & OTHERS U/S 43B.

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TAX AUDIT- TAX ISSUES

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  1. TAX AUDIT- TAX ISSUES BY : DR. RAKESH GUPTA FCA, FCS, AICWA, LL.B, Ph.d Ex- Member, Income Tax Appellate Tribunal C-8, EAST OF KAILASH, NEW DELHI-110065 PHONE : 011-41625000 (Multilines) E-mail : consult@taxindia.net

  2. PAYMENT OF ESI/ EPF & OTHERS U/S 43B • EMPLOYER’S AND EMPLOYEES’ CONTRIBUTION-DIFFERENT TREATMENT • DELAYED PAYMENT BUT ON OR BEFORE THE DUE DATE OF FILING OF RETURN- AMENDMENT BY FINANCE ACT 2003- WHETHER TO HAVE RETROSPECTIVE EFFECT-KWALITY MILK FOODS LTD 100 ITD 199(CHENNAI)(SB)

  3. ON OR BEFORE THE “DUE DATES”- GRACE PERIOD-258 ITR 360(MADRAS) • DUE DATE TO BE RECKONED FROM WHICH DATE- KANOI PAPER AND INDUSTRIES LTD VS ACIT 75 TTJ 448(CAL) • INTEREST ON SALES TAX IS PART OF SALES TAX AND COVERED BY SECTION 43B- 260 ITR 218

  4. INTEREST ON OUTSTANDING LOANS CONVERTED INTO LOAN IS EQUIVALENT TO PAYMENT AND NO DISALLOWANCE IS CALLED FOR U/S 43B- 79 TTJ 158(DEL)- CONTRARY VIEW 175 CTR 549(Madras)-NOW RETROSPECTIVE AMENDMENT BY FINANCE ACT 2006

  5. EXCISE DUTY COLLECTED BUT DISPUTED AND HENCE NOT PAID- AMOUNT KEPT IN FD AND BANK GUARNTEE FURNISHED. IT IS NOT EQUIVALENT TO PAYMENT OF DUTY. SECTION 43B DISALLOWANCE JUSTIFIED- 261 ITR 69(AT) (AHEMDABAD)/ 125 TAMAN 819(RAJ) • SECTION 43B HAS GOT NO APPLICATION WHEN NO DEDUCTION WAS CLAIMED – CIT VS INDIA CARBON LTD 262 ITR 327(GAUHATI)

  6. TDS • TDS OUT OF SPECIFIED PAYMENTS TO PERSONS RESIDENT OUTSIDE INDIA OR NON RESIDENTS AND FOREIGNE COMPANIES IN INDIA- SECTION 195 AND SECTION 40(a)(i)

  7. TDS OUT OF SPECIFIED PAYMENTS TO RESIDENTS- AMENDMENT BY FINANCE ACT 2004 BY INSERTING SECTION 40(a)(ia) • MULTIFARIOUS CONSEQUENCES OF NON DEDUCTION AND NON PAYMENT-SECTION 201, 201(1A),221,271C,276B

  8. SECTION 40A(2) • APPLICABLE TO REVENUE EXPENDITURE ALONE • IN APPLICABLE TO INCOME - GOODS SOLD TO ASSOCIATES AT LOWER THAN THE MARKET PRICE-SECTION 40A(2) NOT APPLICABLE-123 ITR 592(MAD),139 ITR 827(MP)

  9. BURDEN TO PROVE UPON REVENUE-CIRCULAR 6P DT 6-7-1968-BUT INITIAL EVIDENCE MAY BE LED BY ASSESSEE • DISALLOWANCE ONLY OF EXCESSIVE AND NOT WHOLE OF THE EXPENSE • RELATIONSHIP MUST BE ONE OUT OF THE SPECIFIED RELATIONSHIPS ONLY

  10. SPECIFIC FINDING AS TO EXCESSIVENESS NECESSARY- 117 ITR 569(SC) • REASONABLENESS OR LEGITIMATE NEEDS OF THE BUSINESS TO BE VIEWED FROM THE POINT OF VIEW OF THE BUSINESSMAN-265 ITR 77(ALL)

  11. SECTION 40A(3) • CONSTITUTIONAL VALIDITY UPHELD BY THE APEX COURT IN ATTAR SINGH GURMUKH SINGH 191 ITR 667 IN VIEW OF RULE 6DD(j) • CLAUSE (j) OF RULE 6DD ABOLISHED YET CONSTITUTIONAL VALIDITY UPHELD -239 ITR 687(AP)

  12. GENUINE AND BONAFIDE TRANSACTIONS ARE ALSO HIT AFTER AMENDMENT • REVENUE EXPENDITURE ALONE HIT AND NOT THE CAPITAL EXPENDITURE- PURCHASES ALSO COVERED-191 ITR 667(SC)

  13. ADVANCE PAYMENT FOR REVENUE EXPENDITURE ALSO COVERED-169 ITR 12 (RAJ) • PAYMENT EXCEEDING RS 20000/- ALONE COVERED • PAYMENT TO EMPLOYEES FOR SALARIES ALSO COVERED

  14. SECTION NEGATIVELY WORDED SO TECHNICALLY IT COVERS BOOK ADJUSTMENTS AND TRANSFER ENTRIES ALSO-BUT EXCLUDED THROUGH NOTIFICATION NO. 624 DATED 14.2.1969 71 ITR 93(st)

  15. INDIVIDUAL PAYMENTS LESS THAN 20K BUT IN AGGREGATE EXCEED 20K-ALOO SUPPLY COMPANY 121 ITR 680(ORISSA) • DISALLOWANCE OF EXPENSE TO BE IN THE YEAR OF INCURRENCE OF EXPENDITURE • WHEN INCOME IS ESTIMATED ON THE BASIS OF G.P. RATE, NO DISALLOWANCE U/S 40A(3) POSSIBLE-229 ITR 229(ALL)

  16. SECTION 269SS/269T • (CORRESPONDING PENALTIES U/S 271D AND 271E) • BACKGROUND OF INTRODUCTION • CBDT CIRCULAR 387 DT 6.7.1984 AND 345 DT 28.6.1982 EXPLAINING OBJECTIVES OF TAX EVASION

  17. APPLICABLE TO LOANS AND DEPOSITS AND NOT ON CAPITAL • RECENT DECISION OF JHARKHAND HIGH COURT IN THE CASE OF BHALOTIA ENGG WORKS LTD 275 ITR 399-SHARE APPLICATION MONEY RECEIVED IN CASH PARTAKES CHARACTER OF DEPOSIT • CONTRA DECISIONS-52 ITD 504(Jp)-NO OBLIGATION TO REFUND SHARE APPLICATION MONEY-ESSENTIAL OF DEPOSIT NOT EXISTING

  18. NEGATIVELY WORDED- TRANSFER ENTRIES AND BOOK ADJUSTMENTS LIABLE TO BE HIT BUT 88 TTJ 85 (DELHI) LAYS THAT LOANS THROUGH BOOK ADJUSTMENTS ARE NOT IN MONEY AND HENCE SECTION 269SS NOT APPLICABLE-ALSO 89 TTJ 324(AHEMDABAD) • GENUINENNESS OF LOANS AND DEPOSITS- WHETHER A CONSIDERATION-283 ITR 329 (MADRAS)-276 ITR 638(P&H)-263 ITR 487(GAUHATI)

  19. DEFENCE UNDER SECTION 273B • INTIATION WHETHER DURING THE COURSE OF ASSESSMENT • INITIATION OF PENALTY RECOGNISED FROM WHICH DATE- RELEVANT ASPECT FOR LIMITATION-98 ITD 200(CHD)(SB)

  20. QUANTUM OF PENALTY-SEVERAL INTERPRETATIONS POSSIBLE • TECHNICALITY OR VENIALITY WHETHER A GROUND OF DEFENCE

  21. CONTINGENT LIABILITY • PROVISION IN RESPECT OF A CLAIM DISPUTED BY ASSESSEE e.g. WAGE REVISION DEMANDS, CLAIMS BY CUSTOMERS ETC. • LEAVE ENCASHMENT EXPENSE BASED ON LEAVE STANDING TO THE CREDIT OF THE EMPLOYEE–WHETHER CONTINGENT OR FIRM- BHARAT EARTH MOVERS CASE IN 245 ITR 428(SC)

  22. WARRANTY BASED ON PAST FIGURES ALLOWABLE-VINITEC CORPORATION 278 ITR 337(DELHI)

  23. SECTION 41 • ALLOWANCE OR DEDUCTION MADE AND ALLOWED • BENEFIT OBTAINED IN CASH OR IN ANY OTHER MANNER OR BY WAY REMISSION OR CESSATION IN SUBSEQUENT YEAR

  24. BURDEN TO PROVE IS ON REVENUE • UNILATERAL WRITE BACK OF LIABILITY WHETHER AMOUNTS TO CESSATION OR REMISSION- SUGAULI SUGAR WORKS 236 ITR 518(SC) AND AMENDMENT FINANCE ACT 1996 • ENLARGEMENT OF MEANING OF “INCOME”- T.V.SUNDERAM IYENGAR VS CIT 222 ITR 344(SC)

  25. CREDITORS’ BALANCES LYING SINCE LAST SO MANY YEARS – IMPLICATIONS-IN THE ABSENCE OF CONTRARY EVIDENCE, ADDITION NOT POSSIBLE-99 TTJ 718(DELHI)-90 TTJ 776(CHANDIGARH)-125 TAXMAN 179(AHD-TRIB) • BAD DEBTS RECOVERED

  26. SECTION 32 • COMPOSITE VALUE OF LAND AND BUILDING-VALUE TO BE BIFURCATED • “PUT TO USE”-IMPLICATIONS • ALLOWANCE- WHETHER MANDATORY OR DISCRETIONARY

  27. SECTION 37 CAPITAL EXPENDITURE PERSONAL EXPENSES ADVERTISMENT CLUB EXPENSES PENALTY FOR INFRACTION OF LAW OR OTHERWISE

  28. DEDUCTION UNDER CHAPTER VIA • MEANING OF THE WORD “DERIVED”- PANDIAN CHEMICAL 262 ITR 278(SC) • RESULTS OF TRADING AND MANUFACTURING TO BE AGGREGATED FOR DEDUCTION U/S 80HHC- IPCA LABORATORIES-BOMBAY HIGH COURT DECISION AFFIRMED BY APEX COURT

  29. NETTING OF INTEREST RECIVED AND PAID BY AN EXPORTER- LALSONS ENTERPRISES 82 TTJ 1048 (DEL)(SB) • TWO DISTINCT BUSINESSES- SEPARATE BOOKS OF ACCOUNTS MAINTAINED- LOSS IN ONE AND PROFIT IN OTHER- WHETHER TO BE SET OFF FOR DEDUCTION U/S 80HHC- CONTROVERSIAL ISSUE- DECISIONS BOTHWAYS

  30. EXCISE AND SALES TAX NOT TO BE PART OF TURNOVER-SUDERSHAN CHEMICALS DECISION OF BOMBAY HIGH COURT • AUDIT REPORT TO BE ENCLOSED WITH THE RETURN-WHETHER MANDATORY OR DIRECTORY • DEDUCTION U/S 80-O- WHETHER ON GROSS OR NET

  31. SECTION 40(b) • METHOD OF VALUATION OF STOCKS- BRITISH PAINTS 188 ITR 44

  32. IMPLICATION FOR DEFAULT- PENALTY U/S 271B • QUASI CRIMINAL PROCEEDINGS • STRICT INTERPRETATION • IN CASE OF AMBIGUITY, IT TO BE RESOLVED IN FAVOUR OF TAX PAYER • SUSPICION CAN NOT BE GOOD PROOF

  33. PRIOR TO 01.07.95 – OBTAINING WITHIN SPECIFIED TIME- CONTROVERSY MORE OR LESS RESOLVED –246ITR489(P&H), 245ITR563(ALL),245ITR857(ALL) • AFTER 01.07.95 – FURNISHING BEFORE SPECIFIED DATE • “OBTAIN BEFORE” SUBSTITUTED BY “FURNISH BY” – WHETHER REPORT OBTAINED ON 31ST OCTOBER COULD BE SAID THAT IT WAS OBTAINED BEFORE”. 62ITD106(ALL)

  34. (B) REASONABLE CAUSE- A DEFENCE- SECTION 273B • PLEADING TO BE MADE COMPREHENSIVELY ON FACTS • BURDEN OF PROOF

  35. BONAFIDE BELIEF-PLAUSIBILITY OF EXPLANATION AND NOT ANY FANTASTIC EXPLANATION • IGNORANCE OF LEGAL PROVISION

  36. TECHNICAL OR VENIAL BREACH THEORY • ONLY 3CA/3CB/3CD FILED W/O BALANCE SHEET, PROFIT AND LOSS ACCOUNT-NATURE OF DEFAULT • SOME INSTANCES OF REASONABLE CAUSE

  37. DELAY IN OBTAINING STATUTORY REPORT • NEGLIGENCE OF COUNSEL • SICKNESS/DISPUTE/STAFF TURNOVER • 271A VIS-À-VIS 271B- 77ITD 210 (PUNE), 222ITR691(GAU)

  38. Thank You !

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