Issues in Tax Audit

1. Issues in Tax Audit CA Manoj Gupta Indore Branch of ICAI August 30, 2014

2. FORM 3CA / 3CB

3. Form 3CA or 3CB? • When there is different Accounting Year and Financial Year? (Calender Year is followed as Accounting Year by various Companies Eg. HUL, P&G, etc, Some companies also have year ending on 30th June every year) CBDT Circular 561 dated 22/05/1990 – different accounting and financial year then FORM 3CB and not 3CA.

4. Can Tax Audit Report be revised? • Only on following grounds – • Revision of Accounts by Company after its adoption in the AGM • Changes in Law i.e. Retrospective amendment • Change in Interpretation, view due to subsequent event like clarifying CBDT circular, Judgement/Decision of any court, etc

5. AUDIT QUALIFICATIONS/ OBSERVATIONS

6. Qualification In Schema

7. Form 3CB – Clause 5

8. Extreme - No Audit Opinion

9. Serious – Major Disclaimers

10. Technical Disclaimers

11. FORM 3CD Analysis Clause By Clause

12. New Clause 4 : IDT Registration Details “Whether the Assessee is liable to pay indirect tax like excise duty, service tax, sales tax, customs duty, etc. if yes, please furnish the registration number or any other identification number allotted for the same”

14. New Clause 8 : Category of Audit “Indicate the relevant clause of section 44AB under which the audit has been conducted”

16. New Clause 11 (b) “(b) List of books of account maintained and the address at which the books of accounts are kept.”

18. New Clause 11(c) “List of books of account and nature of relevant documents examined”

20. New Clause 12

21. Tabular Form Provided Cl.13(c) Effect of Change in Method of Accounting • Cl.14(b) Details of Deviation from the Method of Valuation of Closing Stock • Prescribed U/S 145 A

22. CL. 13(a) & (d) METHOD OF ACCOUNTING • Deviation from accounting standards prescribed u/s 145. Sec 145 has notified 2 Accounting Standards: AS 1 (IT) – Similar to AS 1 of ICAI – Disclosure of Significant Accounting Policies AS 2(IT) – Similar to AS 5 of ICAI – Net profit or loss for the period, prior period items and changes in accounting policies • Exception to Sec 145 –interest on compensation or enhanced compensation taxable in the year of receipt irrespective of method of accounting.

23. Clause 15 : Capital Asset converted into Stock in trade

24. New Clause 17: Cases u/s 50C and 43CA “Where any land or building or both is transferred during the previous year for a consideration less than value adopted or assessed or assessable by any authority of a State Government referred to in section 43CA or 50C, please furnish:”

25. Clause 17: Audit Checklist

26. Clause 17: Audit Checklist

27. Clause 17: Issue 1 Reporting of all cases of Transfer of Land or Building? “….. consideration less than value adopted or assessed or assessable… please furnish”

28. Clause 17: Issue 2 Auction of Property by Bank below 50C value

29. Clause 17 : Issue 3 : Real Estate Business (43CA) • Flat booking through Agreement • Reporting in which Year? • …..transferred during the previous year….. Please furnish: • Consideration Received or Accrued = 2 Lakh or 5 Lakh? • Stamp Value of 2014 or 2017?

30. Clause 17: Issue 4

31. Clause 18: Depreciation • Assets less than Rs.5000 ?- (Sch. XIV of Companies Act) Report all such items in Cl 21(a) and claim depreciation thereon at specified rates • Details of all additions date wise Additions upto September and after September • Computer Software: whether asset? (Special Bench in case of Amway India Enterprises v. Dy. CIT 111 ITD 112 (Del) has laid down 3 tests to be applied to determine whether expenditure is capital or revenue – test of enduring benefit, ownership test, functional test) • If new asset are put to use for less than 180 days, balance 50% Additional Depreciation will be allowable next year? Balance Allowable next year - Cosmo films [24 taxmann.com 189 (Delhi)

32. Clause 18: Depreciation on Intangibles

33. New Clause 18 “Modified Value Added Tax” (MODVAT) changed to “Central Value Added Tax” (CENVAT)

34. Clause 18: Depreciation • Where a vehicle is registered in the name of a Director, however it is in possession of company. Whether Depreciation is eligible? The Hon'ble Supreme Court in Mysore Minerals Ltd Vs. CIT (239 ITR 775) held that the terms "own", "ownership" and "owned" are generic and relative terms. The term "owned" as occuring in section 32 (1) of the Act must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having the right to use and occupy the property and / or to enjoy its usufruct in his own right would be the owner though a formal deed of title may no have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc. • Where due to lock out in Maruti plant, it did not funtion for 3 years. Whether Depreciation is available for those 3 years? In Swati Synthetics Case (38 SOT 208), it is held that condition of ‘use’ is relevant only in which asset is purchased, thereafter it forms part of block and is passively used even if the plant is closed. Therefore depreciation is allowable in case of a closed unit too.

35. New Clause 19 : Reporting of newly included Special deductions

36. New Clause 19 : Special Deductions “Amounts admissible as per the provisions of the Income Tax Act, 1961 and also fulfils the conditions, if any specified under the conditions, if any specified under the relevant provisions of Income Tax Act, 1961 or Income Tax Rules,1962 or any other guidelines, circular, etc., issued in this behalf.” Any other guidelines, circular, etc. – under which Statutes? Ejusdem Generis Management Representation on Admissibility

37. Clause 20(b) Details of Employee’s Contribution to Funds • Amount paid up to due date of filing the return, held to be allowable in following cases:- • ` • CIT vs. AIMIL Ltd. and others 321 ITR 508 (Del HC) • DCIT v. D&H Secheron (ITA No. 172/Ind/2011) • Som Distilleries v. DIT (ITA Nos.296 & 297/Ind/2009)

38. Clause 21(a) : Consolidation of 17(a), (b) and (c) “Please furnish the details of amounts debited to the profit and loss account, being in the nature of capital, personal, advertisement expenditure etc”

39. New Clause 21(a)

40. Capital v. Revenue Expenses • Supreme Court in CIT V. Ramaraju Mills (294 ITR 328)

41. Following expenses have been held as revenue

42. Cl. 21(a): Personal expense debited to P&L • Scrutinise following Expense Accounts : • Membership and Subscription, • Staff Welfare Expenses, • General Expenses, • Travelling Expenses, etc. • General Note that “payments made as per contractual obligations not considered for this clause” • Refer Auditors Report (CARO) for any comments on personal expenses • If no appeal filed in earlier years for certain disallowances for expenses towards personal motor car expenses, telephone, etc, the same should be mentioned in report. • Scrutinise Credit card payments

43. Clause 21(a): Expenses on fine, penalty, etc

44. New Clause 21(d): Cash Payments • Disallowance/deemed income under section 40A(3A): Deemed Income Year 1 – Expense A/c Dr. 25000 To Creditors.. Cr 25000 Year 2 – Creditors Dr. 25000 To Cash … Cr. 25000

45. Clause 21(d): 40A(3A) - Issues

46. Clause 21(h) - Disallowance u/s 14A

47. Cl. 21(h): Amount inadmissible u/s 14A

48. Cl.21(h) - Rule 8D and Tax Audit (i) expenditure directly relating to earning exempt income (ii) Interest * Average Investments Average Total Assets (iii) ½ % of Average Investments

49. Cl.21(h)- Section 14A applicability to Traders/Stock-in-trade • Applicable • Not Applicable • Dhanuka & Sons 339 ITR 319 (Cal) • D. H. Securities (ITAT Mumbai) • American Express Bank (ITAT Mum) • CCI Ltd. vs. JCIT 250 CTR 291 (Kar) • Yatish Trading Co 129 ITD 237 • LeenaRamachandran339 ITR 296 (Ker)

50. S.14A & Strategic Investments