Tax audit changes and issues patna sept 2014

TAX AUDIT- CHANGES &
ISSUES
ASHOK SETH, Lucknow
B. Sc, FCA, DISA (ICA)
as@sethspro.com

Introduction
 TAR finalized before 25th July 2014
 Revision ?
 New TAR applicable for earlier years also
if audit not complete return not filed.
 Extension of date to obtain & file TAR
 Strategy to file returns
 Before- 34 clauses + 2 annexures
 After- 41 clauses = NIL annexures
13th Sept 2014 Patna CA Ashok Seth, Lucknow 2

General Issues
 Communication with Previous Auditor
 Management Representation Letter
(e.g. 14A, Demands Created, Audits
done)
 Applicability of Accounting Standards
 General Purpose Financial Statements
 AS 1 (Accounting Policies), 2, 5, 16, 22
etc..
 Materiality
CA Ashok Seth, Lucknow 313th Sept 2014 Patna

SECTION 44AD
 Not applicable on Profession (S 44AA)
 Turnover limit- Does not exceed 1
Crore (increased from 60 lacs)
 Multiple Eligible business- turnover to
be clubbed for all such business
 Mixture of Eligible and Non-eligible
business- Turnover of Eligible
Bussiness only

Applicability of 44AB
 44AD(5) – Applicability of 44AB if
profits of eligible business lower than
8% AND his income exceeds
maximum amount not chargeable to
tax

SECTION 44AD (Contd.)
 The 8% income has to be income under
profits and gain from business head
 Income assessable under the head other
sources or other heads of income other
than PGBP (e.g. FDR interest, Rent etc.)
not to be considered- Allied Construction
291 ITR (AT) 16 (Del)

SECTION 44AD (Contd.)
 Not applicable on Profession (S 44AA)
 Turnover limit- Does not exceed 1
Crore (increased from 60 lacs)
 Multiple Eligible business- turnover to
be clubbed for all such business
 Mixture of Eligible and Non-eligible
business- Turnover of Eligible
Bussiness only

Decision Matrix
Income from
Eligible
Bussiness
Total Income Applicability
of 44AD
Applicability
of 44AB &
44AA
> 8% of
turnover
Exceeds
Exemption
Limited
Yes No
= 8% of
turnover
Exceeds
Exemption
Limited
Yes No
< 8% of
turnover
Exceeds
Exemption
Limited
No Yes
< 8% of
turnover
Less than
Exemption
Limited
No No

TURNOVER
 Gross turnover - as understood in
commercial sense
 VAT part of Turnover?
 Excise part of Turnover?
 Commission and labour charges -
part of turnover
 Sales of Commission Agent, Stock
Broker

Turnover in Speculative
Bussiness and Derivatives
In case of a day trader/speculator, &
derivatives transactions in Security and
Commodity Markets: -
 Sum total of differences, whether
positive or negative (Para 5.11(a) to
(c) of ICAI Guidance Note) and also
premium on sale of options unsettled
transactions at year end

Example of Turnover
Type Shares Profits (a) Loss (b)
Future RIL 500.00
Future Tata 200.00
Future Infosys 800.00
Total 1,300.00 200.00
GROSS TURNOVER WILL BE (a + b) 1,500.00

Tax Audit Report – 3CB
 Requires Assurance whether Financial
Statements are True and Fair?
AND
 That Particulars in Form 3CD are True
and Correct.

True and Fair- 3CB
 To include disclaimer as per Para 19
of SA 700 (AAS 28) relating to
preparation of accounts by the
assessee and the scope of audit.
 Membership No of signatory and FRN
no of firm should be given. Stamp of
auditor (In hard copy only)

Changes in 3CA
 Para-1(a) The audited profit and loss
account for the period beginning
from_____ to ending on _______
 Para-3 In our opinion ……………and
according to examination of books of
account including other relevant
documents and explanations given
______ subject to the following
observations/qualifications, if any:

Changes in 3CB
 Para-1- The audited profit and loss
account for the period beginning
from_____ to ending on _______
 Para-2- books of account maintained
at the head office at _______ and
__(number)_ branches.
 Para-3(a)- We report the following
observations /comments/
discrepancies/ inconsistencies, if any:

Changes 3CB continued- Para 5
 In our opinion, and to the best of our
information and according to
explanations given to us the
particulars given in the said Form
No.3CD are true and correct subject
to following observations /
qualifications, if any:
 New Utility- Observations

Changes in 3CD
 Clause 4- Whether the assessee is
liable to pay indirect tax like excise
duty, service tax, sales tax, customs
duty, etc. (Para 17.6 Page of GN
2014)- report for all Branches if
separate
 If applicable but not registered
appropriate disclosure.
 Registration taken but not liable ?

Clause 6 & 8
 Previous Year from______ to ______
 Relevant clause of section 44AB under which
the audit has been conducted- More than one ?
a) Sale > 1 Crore Sub Clause (a)
b) Profession > 25 Lacs Sub Clause (b)
c) 44AE Truck plying, 44BB,
44BBB
Sub Clause (C)
d) 44AD NP < 8% Sub Clause (d)

Clause 11(b)- Books
 Books of account maintained and the
address at which the books of accounts
are kept.
 If the books of accounts are not kept at
one location, furnish the addresses of
locations along with the details of books
of accounts maintained at each
location.)
 Books in SAP or in cloud
 Books generated by Computer

CLASUE 11(C)
 List of books of account and nature of
(not list) relevant documents
examined
 Documents- Sec 2(22AA)- includes
electronic records.
 E.g. Bills/Invoices/ Receipts/ Cr or Dr
Notes/Statutory Registers/
Agreements/ Correspondence/ Third
party confirmations etc.

Clause 13
 13(a) Method of accounting employed-
In Utility Cash or Mercantile
 13(d)- Details of deviation, if any, in the
method of accounting employed from
accounting standards prescribed under
section 145 and the effect thereof on
the profit or loss
 Method of accounting Vs. Accounting
Policy

Clause 17
 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
 Un-Registered Documents
 In Individual- Capital assets forming
not forming part of accounts ?

Clause 17 Issues: -
 When and whether transfer takes
place- Auditors duty on difference of
opinion
 Land and Building forming part of
block- where block is still positive sec
50 not applicable- Auditors Stand?

Reporting Clause 17
Detail of
Property
Considerat
ion
received
or accrued
Value
adopted or
assessed
or
assessable

Clause 20(b)
 Details of contributions received from
employees for various funds as
referred to in section 36(1)(va) (Sec
2(24)(x)) Col: -
 Nature of fund
 Sum Received from employees
 Due date
 Actual amount Paid
 Actual Date of payment

Clause 21
 In some clauses “amounts debited to
P&L Account being” (sub clause (a))
 Expenditure incurred at clubs being cost
of services and facilities used.
 Penalty or fine for violation of law
 (b) Inadmissible u/s 40(a)
 On Payments to NR under sub clause(i)
 under sub clause(ia)

Clause 21(d) Sec 40A(3)
 Disallowance Clause 21(d)(A)
 Deemed Income Clause 21(d)(B)
 On the basis of the examination of
books of account and other relevant
documents/evidence
 Certificate dispensed with

Clause 24
 Amounts deemed to be profits and
gains under
 section 32AC- Special deduction for
New Machinery > 100 Crore
 33AB (Tea Development)
 33ABA (Site Restoration Fund)
 33AC (Reserve for Shipping business)

Clause 28 (Page 188 of GN
2014)
 Whether during the previous year the
assessee has received any property,
being share of a company not being a
company in which the public are
substantially interested, without
consideration or for inadequate
consideration as referred to in section
56(2)(viia), if yes, please furnish the
details of the same

Clause 28 Contd.
 Section 56(2)(viia)- Applicable to
Firms and Companies
 Valuation to be done as per 11UA
(Rule 11U provides Definitions)
 Controversy on right issue, Bonus
Shares, allotment of shares by
company
 Details required in utility no format in
form 3CD

Clause 28- Details
 Name of the person from whom
shares received
 PAN if available
 Name of the Co whose shares Recd
 CIN
 No of Shares
 Consideration paid
 Fair Market value of shares

Clause 29 (Applicable to Cos)
 Whether during the previous year the
assessee received any consideration for
issue of shares which exceeds the fair
market value of the shares as referred
to in section 56(2)(viib), if yes, please
furnish the details of the same
 Rule 11U and 11UA applicable
 No format in form but details required in
Utility

Clause 31 for 269SS and 269T
 New sub clause (c)- Whether the
taking or accepting loan or deposit, or
repayment of the same were made by
account payee cheque drawn on a
bank or account payee bank draft
based on the examination of books of
account and other relevant
documents
 No Certificate Now.

Clause 32(c), (d) & (e)
 Whether the assessee has incurred any
speculation loss referred to in section 73
or 73A (Specified business sec 35AD)
during the previous year, If yes, please
furnish the details of the same. (Page
204 of GN)
 In the case of company whether the
company is deemed to be carrying on
speculation business if yes furnish
details

Clause 33- Deductions
admissible
 Chapter III (section 10A Free trade
zones and 10AA Special economic
zones) newly included for deduction
 Amounts admissible as per the
provision of the Act, and fulfils the
conditions, if any, specified under the
relevant provisions of Act, or Rules,
or any other guidelines, circular, etc.,
issued in this behalf

Clause 34 for TDS & TCS
 If assessee required to deduct
TDSTCS- required to furnish details
as per chart
 Whether TDS returns filed in time

TDS TCS- Detail Chart
 Col-4 Total amount of the nature
 Col-5 Amount on which Tax was liable to
be deducted
 Col-6 Total amount on which TDs
deducted at specified rates
 Col-7 Tax deducted
 Col-8 Total amount on which TDS at less
than specified rate
 Col-9 TDS on Col 8 amounts
 Col-10 TDS not deposited

34(b)- Return filling
 If returns not filed in time then the
following also to be certified: -
 Whether the statement of Tax
deducted or collected contains
information about all transactions
which are required to be reported

Clause 34(C)
 Whether liable to pay interest u/s
201(1A) or 206C(7)- If yes furnish
details of payments.-
 Diff in computation of month by
Traces and assessee.
 Should auditor take cognizance of
traces notice and their method of
calculation

Clause 36- Dividend
Distribution Tax
 In case of DDT u/s 115-O
 Total amount of Dividend Distributed
 Less: - amount of reduction as
referred to in s. 115-O(1A)(i)
(Dividend Recd from subsidiary) &
115-O(1A)(ii) (Dividend paid under
New Pension scheme)
 Total tax paid and dates of payment

Clause 37 to 39
 Whether any: -
 Cost audit was carried out,
 Audit was conducted under the Central
Excise Act, 1944,
 Audit was conducted under section 72A
of the Finance Act,1994- Service Tax

 Audit report not to be attached
 the details, if any, of disqualification
or disagreement on any matter/ item/
value/ quantity as may be reported/
identified by the auditor to be
provided
 Status of Show cause Notice after
audit

Clause 40- Ratios
 Now previous year’s figures also to be
given.
 If previous year’s figures regrouped
the ratios should be recomputed ?
 The details required to be furnished
for principal items of goods traded or
manufactured or services rendered

Clause 41
 Furnish the details of demand raised
or refund issued during the previous
year under any tax laws other than
Income Tax Act, and Wealth tax Act,
along with details of proceedings
 VAT Customs Excise Service Tax
State Excise Entertainment Tax
Professional Tax etc. etc. etc.
 Management Representation

General
 If previous years audit was done by
other auditor note should be given:-
 The Financial statements of the
Company as at ______ and for the year
then ended were audited by another
firm of Chartered Accountants, who vide
their report dated _____, expressed an
un-modified opinion on those financial
statements.

Important Un-changed clauses
14(b)- 145(A) variation
 145A(ii)- further adjusted to include the
amount of any tax, duty, cess or fee
actually paid or incurred by the assessee
to bring the goods to the place of its
location and condition as on the date of
its valuation (Page 99 of GN 2014)
 Adjustments are profit neutral – CIT v.
Indo Nippon Chemicals Co. Ltd. 261 ITR
275 (SC)

Others
 Clause 18- Dispute in Depreciation
e.g. additional Depreciation issues-
 Clause 21(h)- Disallowance under
section 14A- Judicial pronouncements

14A (Contd.)
 The amount of inadmissible expenses
depends upon facts and
circumstances of the case.
 Rule 8D does not mandate that
assessee should necessarily compute
the disallowance as per Rule 8D(2)
 The Auditor will have to verify the
amount of inadmissible expenditure
as determined by the assessee.

14A (Contd.)
 If in agreement with computation by
assessee, report amount with suitable
disclosure of material assumptions
 If not in agreement, either give
Qualified opinion, Adverse opinion, or
Disclaimer of opinion – where neither
basis nor supporting documents
provided

Clause 17A- Interest to MSME
 Interest inadmissible u/s 23 of the
MSME Development Act, 2006.
 Sec 16 of MSME Act the Date from
which and rate at which interest is
payable.
 Sec 22 Provides for additional
information in Audited Financial
statements.
 Appropriate qualification

Clause 17A- Interest to MSME
(Contd.)
 Where auditee neither provided nor
paid any interest under MSME act-
NIL can be reported in clause 17A.
 If interest payable and not provided
in financial statements- effect on true
and fairness to be seen

Clause 23- 40A(2)(b) Refer
Page 158 & 273 of GN 2014
 Now: Any other company carrying on
business in which the first mentioned
company has substantial interest will
also be covered – refer – sub
section (v)

Miscellaneous
 Clause 27(b)- Prior Period
expenditure- Refer AS 5
 Clause 32- Brought forward loses-
appropriate disclosure.
 Clause 32(b)- Losses carry over –
Section 79 Change of share holding

If you wait for happy moments,
you will wait forever.
But if you start believing that you
are happy,
you will be happy forever.
Good Day!
CA Ashok Seth, Lucknow 5413th Sept 2014 Patna

Please mail your comments to
as@sethspro.com
55CA Ashok Seth, Lucknow13th Sept 2014 Patna

56
Have a good day
CA Ashok Seth, Lucknow13th Sept 2014 Patna

Tax audit changes and issues patna sept 2014

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