ISSUES IN TAX AUDIT, FORM 3CA/ 3CBCLAUSE 1 – 20 OF FORM 3CD CA NITIN S BANGAD Partner M/s. S. M. Bangad & Co. Chartered Accountants
AGENDA • Importance of Tax Audit • Interplay of Sec. 44AB & 44AD • ICAI requirements. • Sales / Turnover / Gross Receipts • Documentation • E-filing & care to be taken • Form 3CA / 3CB • Clauses 1-20 of Form 3CD
Importance • The dept. relies heavily on the report for the assessment proceedings. • The tax audit report is virtually an assessment order wherein details of disallowances, additions, deductions, etc. are all available except certain other details. • Quality of reporting & its utilisation by the dept. being monitored by C&AG (Ref. Report no. 32 of 2014 by C&AG to Govt. of India). • Huge penalty u/s 271B for failure to get accounts audited.
Interplay of Sec. 44AB & 44AD • The following applies in case of eligible assessee & eligible business as defined in sec. 44AD • (*) On a combined reading of sec. 44AD & 44AB.
ICAI Requirement • Ceiling on the no. of assignments. • Communication with earlier auditor for new assignments, wherever applicable. • Restriction on acceptance of assignment in case of • Indebtedness • Internal audit • Relative / employee of the assessee • Part time COP • Accounting work • Applicability of Accounting Standards (AS) & Standards on Auditing(SA). • Normally the non corporate entities cover under tax audit would be treated as Level-II enterprises, wherein most of the AS are applicable. Exemptions from disclosures are given in certain AS.
ICAI Requirement…………..Continued • There are nearly 45 SA’s issued by ICAI, but the following SA’s are important for the Tax Audit. • SA 210 – Agreeing to the terms of audit engagement • SA 230 – Audit documentations • SA 250 – Consideration of laws & regulation in audit of financial • statements. • SA 580 – Written representation • SA 700 – Forming an opinion & reporting on financial statements • SA 705 – Modification to the opinion in the Independent Auditors Report. • SA 706 – Emphasis of matter para and other matter para in • Independent Auditors Report. • Guidance note on Tax Audit issued by ICAI, would be bible for CA’s while conducting the tax audits, as it is highly relied by the Dept. & also by the judiciary.
Sale / Turnover / Gross receipts • Limits are Rs 1 cr. u/s 44AB(a) & Rs 50 lacs u/s 44AB(b). • Turnover not defined under the IT Act, but reference can be drawn from the definition under CST Act, Companies Act, 2013, Institutes pronouncement & various HC/SC judgments. • Impact of ICDS needs to be considered. • Limits of turnover whether qua assessee or qua business • Limit of Rs 50 lacs whether applicable to all professionals • Special situations & treatment • Speculation Transactions • Derivatives, Futures & Options • Trusts / co-op societies
Documentation • Letter of appointment & engagement • Communication with outgoing auditor. • The documentation should be such which should provide the nature, timing & extent of audit procedures performed, the results of the audit procedures, significant matters arising during audit, conclusions reached thereon. • Audit programme, query papers, other documents & information gathered during audit & management representation letter. • MRL to include information such as applicability of indirect taxes, incomes not credited to P&L, date of assets put to use, details of demand raised & refunds issued under other Act, etc.
E-Filing & care to be taken • More than one auditor can be appointed & their reports can be uploaded. • Cross referencing of similar items reported at more than one place is important since mismatch of TAR & ITR data leading to limited / complete scrutiny. • In case of difference of opinion with the assessee, details not given by the assessee, the various judgments relied on by the auditor & the assessee, etc., proper disclosure in the report needs to be given. • For the reporting requirements, the format in which details have to be given is not specified in some the clauses, hence at such places the requirement of the e-filing utility has to be referred. • Sign of all partners / director to be taken on Form 3CD in case of any dispute amongst partners / directors to avoid our liability in future.
Form 3CA & 3CB • Where Statutory audit not completed Form 3CB to be issued other wise Form 3CA. • Compliance of SA-700 was exempted in 2013, but now required in Form 3CA/3CB. SA-700 disclosure.pdf • Form 3CA requires “True & Correct” & Form 3CB requires “True & Fair” view. • Para 3 of Form 3CA & para 5 of Form 3CB gives space to the auditor to give his comments/ discrepancies/observations/ qualifications, etc.
Clause 1 to 8 • In case of audit of proprietorship concern name of the proprietor needs to be given & not the name of the concern. • The address of the principal place of business needs to be given, in case of company’s address of registered office. • To identify indirect taxes applicable to the assessee & the details to be given. • What if liable for registration but not registered? • In case of starting of new business, date of closing down of the business, amalgamation, demerger, etc. the date of previous year may be different. (Proviso to sec. 3) • Relevant clause of sec. 44AB as applicable to the reported.
Clause 9 – AOP / Firm & change in constitution • In case of change in the sharing of remuneration & rate of interest on capital, whether reporting required. • Minor partner becoming major during the year Clause 10 – Nature of Business & change therein • Backward & / or forward integration of business whether to be reported. • Discontinuation of segment of business whether to be reported
Clause 11 – Books of Accounts • Books of accounts prescribed, maintained, examined. • As per sec. 2(12A) “books or books of account” includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device” • As per Sec2(22AA)“Document" includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000. • Documents will include original purchase invoice, copy of bank statements, bills, vouchers, various agreements/ contracts or any other document on the basis of which preliminary entries are passed in the books of accounts. • Address where the books of accounts are kept to be obtained from the assessee. • In case of accounts maintained on computer system, the address where the server is located to be given. • In SAP environment various reports are generated, which should be properly co-related with the terminologies, commonly understood such as Purchase, Sale registers, etc.
Clause 13 (a) / (b) / (c) - Method of Accounting • Each source of income can have different method of accounting. • Change in accounting policy not to be considered as change in method of accounting. • If there is any change in the method of accounting as compared to the previous year then the effect thereof has to be quantified in terms of increase / decrease in profit in clause C
ICDS • Effect of ICDS to be given only in computation of income & not in the accounts prepared • ICDS do not apply in the following. • Assessee following cash system of accounting • Individual & HUF not liable to Tax Audit u/s 44AB • An income can be taxed only when income has accrued in accordance with the charging provisions of sec. 4 & 5. • SC in the case of CIT Vs Excel Industries Ltd., (358 ITR 295) has laid following tests to determine the accrual of income • Whether the income accrued is real or hypothetical • Whether there is any corresponding liability of other party to pay the amount • Whether there is realistic probability of recovery of the amount by the assessee
ICDS ………… Contd. • While implementing ICDS following hierarchy needs to be kept in mind • Specific provisions of the Income Tax Act & Rules • Real income theory • Tax jurisprudence on the matter • ICDS • Commercial accounting principles • A writ petition has been filed in Delhi High Court challenging the issuance of ICDS by Chamber of Tax Consultants.
Clause 13 (d) / (e) / (f) – ICDS (Newly inserted) • A check list on verification to be done for compliances of ICDS needs to be prepared & implemented for each assessee. • The calculation of impact due to implementation of ICDS needs to be worked out & a track / reconciliation of the same needs to be maintained. • Disclosure of compliance to ICDS needs to be made • Wherever not complied due to different interpretation jurisprudence etc. the same needs to be properly disclosed.
Clause 14- Valuation of Stock • Sec. 145A overrides the provision of sec. 145 • Inventories to include FG, RM, WIP, maintenance supplies, consumables & loose tools. • Where valuation inventories is done at NRV, whether the same is to be enhanced with the tax element for valuation purposes.
Clause 16- Amount not credited to P&L • Items falling u/s 28 may include free or concessional holiday trip to the partner / director , free samples received, gifts from suppliers, barter transactions with suppliers, etc. • Clause (b) : “admitted as due by the authorities concerned” in the relevant previous year is important. • Care to be taken regarding the method of accounting followed (Clause (c)). • Clause (d) to include items of income exempt or taxable • Clause (e) to include subsidy, Govt. grants, profit on sale of fixed assets / investments but not to include loans, etc.
Clause 17 - Sec. 43CA & 50C • In case of more than one property transferred details of all properties given. • Property not registered, opinion of advocate, compliance to sec. 43CA, 50C needs to be checked. Auditors needs to take professional judgement (Ref. NavneetThakker Vs ITO (2008) 110 ITD 525 Jodhpur), wherein it is held that 50C would be applicable only on registration. • Whether lease hold rights/ development rights /TDR/ FSI etc. would be covered? • As per Kolkata & Mumbai Tribunal Sec. 50C not applicable in case of “”Rights in” land & building, while as per Lucknow Tribunal Sec. 50C would be applicable. (DCIT Vs Tejinder Singh (ITA No. 1459/kol/2011) & Atul G Puranik Vs ITO (2011) 141 TTJ 69, Mumbai)
Clause 18– Depreciation • Determination of correct classification of particular assets is important. • Additional depreciation on P&M put to use in last year. • Depreciation on intangible such as good will, one time license fees, non compete fees, etc. • Service tax amount is included in CENVAT • Explanation 9 to sec. 43(1) of the I. T Act, 1961 & Rule 4(4) of CENVAT CREDIT Rules 2004 requires that CENVAT on capital good should be reduced from the cost of the assets so as to be eligible to claim the credit.
Clause 19 - Admissible Ded’n • The compliance with the requirements of the relevant section, circulars / notifications etc. issued for that matter have to be checked and the amount of admissible deduction to be specified. • In case of certain sections like 35(1)(iv), 35AD & other sections, no amount would be debited to the P&L A/c. as its relates to capital expenditure/ deposit.
Clause 20 - Employee Contributions • Clause (b) requires disclosure regarding all labour funds such PF, ESIC, LWF, etc. • Required disclosure are only to be made without any comment on the disallowability of any payment. • Due date under PF has been recently changed, wherein grace period of 5 days in payment has been removed & the due date is revised to 15th of the next month w.e.f. Jan-2016. • For delay in payment, but paid before the due date of filing of ITR, no disallowance in view of judgments of HC / SC.
Thank you Questions . ??? CA NITIN S BANGAD Partner M/s. S. M. Bangad & Co. Chartered Accountants