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Audit under Income Tax Sec 44AB

Audit under Income Tax Sec 44AB. By CA Sanjeev Verma 204, Shalimar Square 126/31, B. N. Road, Lalbagh , Lucknow M-09415001322 Email Id: taxverma@gmail.com. Audit under Income Tax Sec 44AB. Initial Questions Who is Auditee? Who can be Auditor?

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Audit under Income Tax Sec 44AB

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  1. Audit under Income Tax Sec 44AB By CA Sanjeev Verma 204, Shalimar Square 126/31, B. N. Road, Lalbagh, Lucknow M-09415001322 Email Id: taxverma@gmail.com

  2. Audit under Income Tax Sec 44AB Initial Questions • Who is Auditee? • Who can be Auditor? • Reporting Requirements & format - if different for different auditee? • When to submit? • How to file the report • Guidance made available by ICAI. • Compliance of Standards & documentation.

  3. Audit under Income Tax Sec 44AB WHO IS AUDITEE:- • Person carrying out business/profession • Turnover –Exceeding 40Lacs(60Lacs*) for business & 10Lacs(15 Lacs*) for profession • Under deeming provisions of sec 44AD, 44AE* & 44AF* being lower than specified centage

  4. Audit under Income Tax Sec 44AB WHO IS AUDITEE:- Terminology used- Business – Includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture Case laws:- Baredra Prasad Roy vs ITO CIT v Bharat Nidhi Ltd CIT v Manmohan Das

  5. Audit under Income Tax Sec 44AB Terminology used- Sales or Turnover – Aggregate amount for which sales are effected or services rendered by an enterprise. Not part of sales- • Excise duty/ Vat/Service Tax-if recovered separately • Sale of fixed asset/ assets held for investment • Consignment sales where commission is part of turnover • Rental Income/ Interest income unless assessed as business income • Dividends on shares if not held as investments • Write back –creditors/ expenses-provisions no longer required

  6. Audit under Income Tax Sec 44AB Terminology used- Sales or Turnover – Part of sales/ turnover- • In cases of speculative transactions, aggregate of both positive and negative differences • Total of favourable and unfavourable differences in respect of derivatives, futures & options and the premium received on sale of options • Reimbursement of Expenses, hire charges of cold storage,

  7. Audit under Income Tax Sec 44AB Who can not be auditor • Of a concern in which he and/or his relatives have substantial interest- it will constitute him as guilty of professional misconduct [Clause 4 Part I Schedule Second] • Of a professional firm by any partner or employee of such firm • By the Internal Auditor if employed in the concern • Auditors exceeding prescribed ceiling on tax audit assignments- 45 per partner/ proprietor- records required to be maintained as per format on page 1127 ICAI Journal May 2003

  8. Audit under Income Tax Sec 44AB Auditors to comply:- • Required to give his opinion as whether particulars are true and correct • Required to express opinion regarding true and fair view of state of affairs of assessee] • Audit to be conducted as per generally accepted auditing procedures • Materiality to be kept in mind • Statutory auditor should carry out both audits concurrently, if so appointed • Maintenance of Audit working papers

  9. Audit under Income Tax Sec 44AB Different situations • Audit of Companies vs. Other entities • Reliance on another statutory auditors • Assessee carrying out more than one business activity- • Different business may be audited be different auditors vs all audited by single auditor • Aggregate sales/ turnover and/or gross receipts of all business to be taken for ascertaining limit • For opting u/sec 44AD, 44AE or 44AF such turnovers to be excluded

  10. Audit under Income Tax Sec 44AB Caution –while reporting:- • If there is any difference of opinion of the tax auditor and assessee-state both views • Not to left reporting column blank-if particular clause not applicable- auditor to state the same • In computing allowance/ disallowance, law applicable to the relevant year should be kept in mind, even if form of audit report not amended. • If assessee refuses to furnish relevant record/s or any specific information or give in piecemeal, auditor required to report the same & qualify instead of withholding entire report. • If a particular income/ expenditure covered in more than one clauses, care to be taken to make suitable cross reference at appropriate places

  11. Audit under Income Tax Sec 44AB Form 3CD- Clause 1 to 6- • Correct filing of information like in case of Name of assessee- in case of proprietor-name of Assessee with fact as Prop-M/S ABC & CO • In case of branch Audit- Name of branch • Address as per record- If change- report fact with new address • In case of multiple business being consolidated in one report –fact to detailed in each clauses

  12. Audit under Income Tax Sec 44AB Form 3CD- Clause 7(a) ,7(b) • Indicate name of partners/ members and sharing ratios • No requirement to report if changes made in towards remuneration clause • All changes in profit sharing ratios during relevant year to be mentioned after verification of deeds/ addenda/ supplementary deed etc

  13. Audit under Income Tax Sec 44AB Form 3CD- Clause 8(a) ,8(b) • To furnish nature of all business/ profession • To furnish principal line of each business/ profession • Similar to information required in ITR • In practice , activities that constitute>10% are to be reported • Report any material change like- • Starting of new business • If business discontinued(No mention required for temporary discontinuance)

  14. Audit under Income Tax Sec 44AB Form 3CD- Clause 9(a) ,9(b) & 9(c) • To furnish List of books prescribed, maintained and examined – All 3 may not be the same • Rule-6F- prescribes books to be maintained for certain professionals mentioned in Sec 44AA(1) but not so prescribed for business & others mentioned in sec 44AA(2) • To furnish list for all locations(Including Stock Registers) -if more than one location. • To report if maintained on Computer system • Obtain list from management • AUDITORS TO EXERCISE PROFESSIONAL JUDGEMENT & GIVE RESERVATIONS IF CERTAINS BOOKS REQUIRED ARE NOT MAINTAINED

  15. Audit under Income Tax Sec 44AB Form 3CD- Clause 10- Whether P & L includes profits assessable on presumptive basis • Reporting is for amounts included in P & L • Amount under presumptive section need not be given • If 2 or more business including presumptive section applicable to some, allocation of expenses may become necessary if one set of books maintained

  16. Audit under Income Tax Sec 44AB Form 3CD- Clause 11(a) to (d)- Method of Accounting • Accrual vs. Cash( Mixed method not allowed) • Method to be followed consistently • Cash basis not possible for companies • Allow ability of remuneration in case of professional firm following cash basis. • Deviation from Accounting Standards prescribed u/sec 145. Sec 145 notified 2 AS • AS-1(IT) similar to AS-1 of ICAI requiring disclosure of all significant accounting policies • AS-2(IT) similar to AS 5 of ICAI

  17. Audit under Income Tax Sec 44AB Form 3CD- Clause 11(a) to (d)- Method of Accounting –Contd. • Change in Method of Accounting • Allowed in following cases as per para 9 of AS-2(IT)- • Adoption required by statute • Change to result in more appropriate presentation of financial statements • Materiality to be considered • Impact of change on P & L to be stated • Changed policies to be followed consistently

  18. Audit under Income Tax Sec 44AB Form 3CD- Clause 11(a) to (d)- Method of Accounting –Contd. • Find all accounting policies followed for: • Revenue Recognition • Inventory Valuation • Fixed Assets & depreciation • Investments • Foreign exchange Fluctuations • Employees Benefits etc • If disclosed at one place • Changes need to be reported even if there is no change in taxable income- e.g. Depreciation

  19. Audit under Income Tax Sec 44AB Form 3CD- Clause 12(a),(b)- Method of Valuation of Stock • Normal Valuation principles to be followed: • At cost or Net Realisable Value whichever is less • To follow absorption costing • To include all costs including Excise Duty-Sec 145A • Mention how cost has been determined • If cost arrived at Sale Price Less GP- Whether OK? • Allowed at Sale Price- In certain cases • SC decision of British Paints 188 ITR 44 • Section 145A requires “Inclusive Method” against “Exclusive Method” mandated by AS-2

  20. Audit under Income Tax Sec 44AB Form 3CD- Clause 12(a),(b)- Method of Valuation of Stock…contd. • To mention effect of 145A on: • Any tax, duty, cess etc paid/ incurred on inputs to be added to the cost of the inputs-if not already added: • Any Tax duty, cess, etc paid/ incurred on sale of goods to be added in Sales- if not already added • Any tax, duty, cess etc paid/ incurred on inventory to be added to inventory valuation- if not already added • ICAI Guidance Notes on Tax Audit mentions with an illustration that in both methods, impact on profit/ loss is NIL

  21. Audit under Income Tax Sec 44AB Form 3CD- Clause 12(a),(b)- Method of Valuation of Stock…contd. • Entities following “Exclusive Method” guidance notes has suggested disclosure in following table:-

  22. Audit under Income Tax Sec 44AB Form 3CD- Clause 12(a),(b)- Method of Valuation of Stock…contd. • Auditors to obtain & verify: • List of Inventory: • Confirm Inclusion of all types of Inventory & valuation thereof: • Confirm method of Valuation( Including determination of cost etc) • Confirm applicability of Sec 145A & disclosure if 145A not followed

  23. Audit under Income Tax Sec 44AB Form 3CD- Clause 12A(a), (b), (c )Capital Asset converted in Stock in Trade • Section 2(47), 45(2), 47(iv) & (v)and 47A relevant for reporting • Reporting is only for conversion- Taxability of the gains from such transfer not to be disclosed • Auditors to confirm • Whether any entry passed for conversion: • If amount at which asset is converted is stated other than at cost, to ascertain basis thereof: • Disclosure for the same

  24. Audit under Income Tax Sec 44AB Form 3CD- Clause 13(a) to(e )Amounts not credited to P & L A/C • Items falling within scope of sec 28(sub sec (i) to (vi) • Performa credits, refunds are admitted as due by authorities • Escalation claims accepted during the previous year • Any other item of income • Capital receipts, if any • Reporting for a, d & e with reference to entries passed in a/c • Reporting for b & c with reference to documents made available • If reporting done for items under b, c & d – same again need not be reported in a • Receipts directly taken to reserves or capital/ current accounts of partners

  25. Audit under Income Tax Sec 44AB Form 3CD- Clause 13(a) to(e )Amounts not credited to P & L A/C …. Contd. • Reporting necessary irrespective whether amounts are taxable or exempt • Income Tax refunds • Subsidies Received • Remission of loans • Share of Profit from Partnership Firms • Compensation for surrendering tenancy rights etc • Auditors to confirm whether receipts covered u/sec 28 has been taken directly to reserves or capital a/c • If such credits etc-admitted, though not received-to be reported • If assessee disputes any item based on legal decisions- to mention the same • GENERAL DISCLAIMER MAY BE GIVEN-THAT AUDITOR HAS NOT GONE BEYOND BOOKS OF ACCOUNTS & HAS NOT INVESTIGATED TO FIND OUT IF ASSESSEE HAS NOT CREDITED ANY AMOUNTS IN BOOKS

  26. Audit under Income Tax Sec 44AB Form 3CD- Clause 14(a) to(f )Fixed Assets & Depreciation. • Auditors to confirm Opening block from last year • To cross tally addition/ deductions with Fixed Assets Schedule-Addition normally to be bifurcated into –Used for more than 180 days and Others (Cut Off date would be 2nd October not 30th September) • Confirm dates when Asset is put to use • Confirm whether adjustment for CENVAT, Foreign Exchange gain/ loss is as per relevant section • Confirm depreciation rates and whether additional depreciation claimed in appropriate cases

  27. Audit under Income Tax Sec 44AB Form 3CD- Clause 15(a) to(l )Amount admissible.. • Ascertain if assessee eligible for claim of any expenses as per sec 33AB, 33ABA, 33AC, 35, 35ABB, 365 AC, 35 CCA, 35CCB, 35D, 35DD, 35DDA &35E • To confirm, if amount fully w/off, with statement of calculation of DTA in cases of companies • If claim pertains to a capital asset, confirm that no depreciation claimed u/s 32 in conformity with Clause 14 of Form 3CD

  28. Audit under Income Tax Sec 44AB Form 3CD- Clause 16(a) & (b)Sum paid to Employees as bonus etc.. • Relevant Sections are • For 16(a)- 36(1)(ii) • For 16(b)- 36(i)(va) & sec 2(24)(x) • Section 36(1)(ii) would not be applicable in most of cases, unless bonus or commission is paid, which would be otherwise payable as profit or dividend • Under sec 2(24)(x)-sums received from employees as cont. to any PF, ESI etc are included in income • U/Sec 36(i)(va)- if said amount deposited on or before due date (Due date to include grace period also) • In cases of defaults- Amount deducted, due date for repayment and actual date are to be reported • In cases of large data, test check may be done but so mentioned

  29. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. • Expenditure of Capital nature –Concept s as per Accounting Standards & Income Tax law may differ • Reference may be made to past precedence & case laws like CIT v SarvanaSpg Mill P. Ltd 293ITR201(SC) ,CIT v Mangayarkasi Mills (SC) etc • Clause 17(a) to 17(d) & (k) requires reporting factual information-Auditors not required to express any opinion • Clause 17(f), (j) &(m) requires auditor to express opinion- sum debited to P & L –not allowable • The expenditure has to be personal qua assessee • If estimated personal element in expenditure like conveyance, telephone etc is directly disallowed/ not claimed by the assessee, the fact to be highlighted- Clause 17(b)

  30. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause-17(c )-Advt Exp etc- contribution to DurgaPuja etc, political party souvenir etc to be reported • Reference may be made to past precedence & case laws like CIT v SarvanaSpg Mill P. Ltd 293ITR201(SC) ,CIT v Mangayarkasi Mills (SC) etc • Clause 17(a) to 17(d) & (k) requires reporting factual information-Auditors not required to express any opinion • Clause 17(f), (j) &(m) requires auditor to express opinion- sum debited to P & L –not allowable

  31. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(e)- penalties or fine- to be distinguished from contractual obligations-even if such payments are labeled as ‘penalty’ in a contract- Ref para 32.1 of Guidance Notes of ICAI, precedents given therein why not allowable. Expln. To sec 37(1)- Expenses for…. Purpose which is an offence should also be carefully considered & examined • Not a penalty/ offence- like Compounding charges, compensatory payments • Generally penalties cover imposed by Statutory/ regulatory authorities

  32. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(f)- Amounts inadmissible u/sec 40(a) • Review all expenses payable and provision foe expenses for 43B & TDS defaults • Furnish details of payments/ expenditures on which tax has not been deducted • Tax short deducted • Tax deducted but not deposited till date of audit • Obtain management representation

  33. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(g)- Interest, salary, bonus commission or remunerations to partners u/sec 40(b)/40(ba) • Applicable only to Partnership Firm • Verify clauses of partnership deed. Also verify if any wavier clause of remuneration/ interest by partners.

  34. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(h)- Certificate from Assessee towards exp. Covered u/sec 40A(3) & Amounts inadmissible u/sec 40A(3) read with Rule 6DD • Only Revenue payments covered. • As per ICAI guideline, in case no proper evidence for verification of payments by a/c payee cheque / draft available, the report should comment that it is not possible for us to verify whether the payments in excess of Rs.20,000/- have been made otherwise than by a/c payee cheque or DD as the necessary evidence not in possession of assessee. • Review the payments in cash book and adjustments to advances/ deposits to ensure all cash expenses exceeding Rs 20000/- have been reported. • Obtain certificate from auditee that all payments exceeding Rs 20,000/- for expenses if made by cheque/ DD are made by account payee cheque/ draft.

  35. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(i)- Provision for payment of gratuity not allowable u/sec 40 A(7) • Obtain schedule indicating provision for payment of gratuity not allowable u/sec 40A(7) • Whether contributions have been made to approved gratuity funds-review trust deed & rules. • Enquire if CIT/ RPFC has withdrawn exemption during the year • Verify that the PF trust recognised by CIT is also recognised by PF authorities

  36. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(j)- Sums paid by Assessee as Employer not allowable u/sec 40 A(9) • Towards setting up or formation or contribution to any fund, trust, company etc , other than- -recognised provident fund - Any PF of which exemption has been withdrawn by CIT - Recognised gratuity fund - recognised superannuation fund -As required by or any other law • Review Staff Welfare & other relevant accounts to ensure that all such sums not allowable have been appropriately disclosed

  37. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(k)- Particulars of any liability of contingent nature • As per ICAI guidelines, these are normally expenditure connected with disputed claims which will be revealed only on basis of the scrutiny of correspondence relating to cases pending in court of law.

  38. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(l)- Expenses inadmissible in terms of sec 14A- incurred in relation to income not part of total income • Obtain management representation as to income going to claim as exempt for the year. • Obtain details of such expenses-like interest on funds borrowed, personal cost, rent, travelling & other relevant administrative cost • If computation bases on particular interpretation, give basis of interpretation • If there are no direct expenses then disallowance has to be worked out as per Rule 8D • In cases of companies having undertaking of the nature of 10A/ 10B/ 10C, then appropriate note be given disclosing both income and expenditure as per Audit Report issued u/sec 10A/10B

  39. Audit under Income Tax Sec 44AB Form 3CD- Clause 17(a) to (m) Amounts debited to P & L A/c being ….etc.. Contd • Clause 17(m)- Expenses inadmissible under the proviso to sec 36(1)(iii) • Obtain details of fixed assets acquired by borrowings • In cases of funds of CC a/c used and which can not be correlated, determine interest cost as per As-16 • Interest capitalisation criteria- • Borrowing should be for acquisition of capital asset • In extension of existing business • Explanation 8 to sec 43- prohibition on capitalisation after asset put to use

  40. Audit under Income Tax Sec 44AB Form 3CD- Clause 17A -Amounts of Interest inadmissible u/sec 23 of the Micro Small and Medium Enterprises Development Act,2006(MSMEDA) • As per sec 23 of MSMEDA- • If assessee purchased goods/ obtained services from a supplier as defined in sec 2(m) under MSMEDA and • There has been a delay in payment to such supplier(i.e. beyond 45 days) • The interest paid/ payable –not to be allowed as a deduction • Verify if Assessee has obtained information regarding supplier recognised under this Act • If so, whether interest paid/ provided • If not identified- suitable disclosure required

  41. Audit under Income Tax Sec 44AB Form 3CD- Clause 18 –Payments to persons specified u/sec 40A(2)(b) • Obtain list of such specified persons from the Assessee & details of expenditure incurred • Review the relevant accounts to identify any payments made to specified persons • In case of companies consider disclosure in the register maintained u/sec 301 & as per As-18 • Give full particulars of transactions –no judgment or rationalisation on part of auditor required- only facts to be stated • Word used is ‘payment’ –rational interpretation is payment in respect of expenditure • Disclosure suggested where such information not made available

  42. Audit under Income Tax Sec 44AB Form 3CD- Clause 19 –Amounts deemed to be profit and gain u/sec 33AB or 33ABA or 33AC -Go through relevant sections Clause 20 –Amounts of Profit chargeable to tax u/sec 41 and computation thereof –Remission/ Cessation of trading liability • Obtain schedule indicating amount chargeable to tax under aforesaid clause • Review relevant accounts • Mere applicability of limitation Act does not result in Sec 41(1) being triggered • Some case laws • The anatomy of the section and the collocation of the words employed therein would suggest that the test of cessation or remission of liability has to be applied vis–a-vis trading liability and cannot be projected into the previous clause- Polyfex(India)Pvt Ltd v CIT(2002)124Taxman373/ 257 ITR343(SC) • Fiction introduced is indivisible and cannot be enlarged- CIT v. Bharat Iron & Steel Ind. (1993)199 ITR 67(Guj) • Burden is on assessee to prove that liability subsists- Kesoram Ind. & Cotton Mills Ltd v. CIT(1992) 196 ITR 845(Cal) • Unilateral entries in accounts will not amount to cessation of liability- CIT v. Sugauli Sugar Works P. Ltd(1999) 236 ITR 518 , CCIT v. Kesaria Tea Co. Ltd(2002) 254 ITR 434 • Unpaid Wages can not automatically be treated as Income- J.K.Chemicals Ltd. V. CIT91966) 62 ITR 34(Bom)

  43. Audit under Income Tax Sec 44AB Form 3CD- Clause 21 –Liability in respect of any sum referred to in clauses (a) to(F) of sec 43B – (A) Preexisted on 1st day but not allowed in assessement of any preceding previous year and was(a)- paid during the previous year (b)- not paid during previous year: (B) incurred in previous year-(a) paid before due date or(b) not paid on or before due date • Details to be given • No requirement to determine admissibility • If tax computation done on advise of another professional- apply concerned Standard on Auditing • If payment not made as at the date of report, but assessee asserts to pay the sum before due date, consequential note/ disclosure required • Capitalised expenses would also be covered under this clause • State whether trade tax, custom duty, excise duty, service tax or any other levy, cess, impost etc is passed through the P & L a/c

  44. Audit under Income Tax Sec 44AB Form 3CD- Clause 21 –Liability in respect of any sum referred to in clauses (a) to(F) of sec 43B – (A) Preexisted on 1st day but not allowed in assessement of any preceding previous year and was(a)- paid during the previous year (b)- not paid during previous year: (B) incurred in previous year-(a) paid before due date or(b) not paid on or before due date • Details to be given • No requirement to determine admissibility • If tax computation done on advise of another professional- apply concerned Standard on Auditing • If payment not made as at the date of report, but assessee asserts to pay the sum before due date, consequential note/ disclosure required • Capitalised expenses would also be covered under this clause • State whether trade tax, custom duty, excise duty, service tax or any other levy, cess, impost etc is passed through the P & L a/c

  45. Audit under Income Tax Sec 44AB Form 3CD- Clause 21 –Liability in respect of any sum referred to in clauses (a) to(F) of sec 43B – Contd (A) Preexisted on 1st day but not allowed in assessement of any preceding previous year and was(a)- paid during the previous year (b)- not paid during previous year: (B) incurred in previous year-(a) paid before due date or(b) not paid on or before due date • Some case laws: • Deletion of second proviso to sec 43B by Finance Act 2003-is retrospective and would operate w.e.f. 1-4-1988- CIT v. Alom Extrusions Ltd(2009) 185 Taxman 416(SC) • Interest payable to financial institution can be allowed under sec 43B only when same is actually paid- TriveniEngg. & Ind Ltd v. CIT(2009) 184 Taxman179(Delhi) • Rescheduling of interest payment by means of a fresh loan can not be treated as non-payment so as to disallow interest payment u/sec 43B- VinirEngg P. Ltd v. DCIT(2009) 313 ITR 154(Kar) • Where the assessee maintaining mercantile system –collected service tax but did not deposited a portion thereof, but had neither debited the amount to P & L a/c as expenditure nor had claimed any dedn., question of disallowing any amount u/sec 43B would not arise -CIT v. Noble & Hewitt(I) P. Ltd(2008) 166 Taxman48(Del)

  46. Audit under Income Tax Sec 44AB Form 3CD- Clause 22(a) –Amount of MVAT credits availed of or utilised during the previous year and its treatment in P& L a/c and treatment of outstanding MVAT credits in a/c • State the treatment given in books to MODVAT/ CENVAT in books & excise record with reconciliation • Go through reconciliation and report difference • No requirement to determine admissibility • If payment not made as at the date of report, but assessee asserts to pay the sum before due date, consequential note/ disclosure required

  47. Audit under Income Tax Sec 44AB Form 3CD- Clause 22(b) –Particulars of Income or Expenditure of prior period credited/ debited to P& L a/c • Relevant for those following Mercantile system • Revision of estimates does not result in prior period item- errors or omissions in earlier period- AS-5

  48. Audit under Income Tax Sec 44AB Form 3CD- Clause 23 –Amounts borrowed on hundi or any amount due thereon-Sec 69D • Presently not commonly used as a means of finance • Obtain schedule of such borrowings and repayments (including interest) of hundi loans otherwise than by account payee cheques • Obtain management representation • Agree the details with the audited schedules and relevant supporting documents • AS per ICAI guideline, in absence of conclusive or satisfactory evidence a suitable comment should be made

  49. Audit under Income Tax Sec 44AB Form 3CD- Clause 24(a/b/c) –Particulars of each loan/ deposit….. • Need not be given in case of a Government Company , banking company or a corporation established by a central/ state/ provincial act. • ICAI Guidance Note proceeds on a footing that transfers by book entries are covered • For determining threshold level of Rs20,000/- aggregation of entries to be made • Practical difficulties for e.g. where loans are rolled over-but nonetheless, duty to report can not be diluted • Obtaining of certificate as referred in (c) does not absolve responsibility of the auditor to verify and report the facts. • For the purpose of this clause, loan/ deposit would include among others-following- a) Security deposits from staff, agents, customers with or without interest b) Loans from financial institutions c) Advances in the nature of loan deposit d) Fixed deposit from public

  50. Audit under Income Tax Sec 44AB Form 3CD- Clause 24(a/b/c) –Particulars of each loan/ deposit…..contd • Case laws • The words “any deposit’ in sec 269T have been used to cover all sort of deposits and include’ trade deposit’ also- Chaubey Overseas Corpn. V. CIT(2008) 170 Taxman 9/ 303 ITR 9(All) • If there was a genuine and bonafide transaction and if for any reason the taxpayer could not get a loan or deposit by a/c payee cheque/ Dd for some bonafide reasons, authority vested with power to impose penalty has got discretionary power- Ass. Director of Investigation v. Kum. A.B. ShanthiChamundiGranotes P. Ltd v. Dy CIT(2002) 255 ITR258

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