Tax audit changes and issues

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

General Issues
 Communication with Previous Auditor
 Management Representation Letter
(14A also)
 Applicability of Accounting Standards
 General Purpose Financial Statements
 AS 1 (Accounting Policies), 2, 5, 16, 22
etc..
 Materiality
CA Ashok Seth, Lucknow 211th July 2013

SECTION 44AD
 Amended from Asstt Year 2011-12
 Eligible- Individual, HUF,
Partnership Firm (NOT being LLP)
AND who have not claimed
deductions u/s 10A, 10AA, 10B,
10BA, 80HH to 80RRB
 Applicable to ALL business (Except
those covered in 44AE- truck
plying).
11th July 2013 CA Ashok Seth, Lucknow 3

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

 If Common books maintained for
eligible and non-eligible business then
expenses have to be divided on
logical parameters-
 Samurao Techno 37 DTR 386

 44AD is non Obstante Section-
 It starts with “Notwithstanding anything
to the contrary contained in section
sections 28 to 43C”
 Thus 40A(3), 41(1), 43B and 41a(ia) are
not applicable.

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

 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)

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

Professional Income
 Share of profit and remuneration
from professional firm – Can not be
treated as turnover for 44AB- Hitesh
D. Gajaria 40-A BCAJ 16 (Apr 2008)

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.
 3CB Report
 Membership No of signatory and FRN
no of firm should be given.

3CD
 9(b)- Books of account maintained
(……… the books of account generated
by such computer by such computer
system.)
 11(a)- Method of accounting
employed in the previous year- Refer
to Significant Accounting Policies
Followed.

12(b) Deviation from 145A
 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 74 from Para 23.7 of
GN)
 Adjustments are profit neutral – CIT v.
Indo Nippon Chemicals Co. Ltd. 261 ITR
275 (SC)

3CD
 14- Depreciation- Note for pending
assessment, differences and disputes.
Additional Depreciation also Refer
Para 26.7 of GN for disputes
 16(b)- 2(24)(x) amount received
from employees. Chart to be given.
 16(e)(I to iii)- Penalty for violation of
Law- Should not include for
contractual violations.

Clause 17(L)- Inadmissible
under 14-A
 Sub S 2 and 3 inserted by FA 2006
 AO to determine inadmissible
expenses in accordance with method
prescribed – IF not satisfied with the
claim having regard to the accounts
of the assessee
 Rule 8D inserted by I Tax (Fifth
Amendment) Rules 2008

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.)
 Auditor shall examine the details as
furnished by the assessee.
 Entitled to rely on management
representation after evaluation
 Established principles of allocation
based on logical parameters to be
followed by auditor.

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 18- 40A(2)(b) Refer
Page 236 of GN
 Old: A company having substantial
interest in the business of the assessee
or any director of such company or
relative of such director was covered –
sub section (iv)
 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 22(b)- Prior Period
expenditure- Refer AS 5
 Clause 25(a)- Brought forward loses-
appropriate disclosure.

E-FILLING OF RETURNS
 Amendment of Income Tax Rule 12
Following reports to be e-filed
 U/S 44AB
 Form 3CEB (Section 92E Transfer
Pricing Report – international &
domestic),
 115JB (MAT)
 10B, 10BB, 10CCB

Steps to be followed
 Registration by CA as Chartered
Accountant (DOB- PAN v ICAI)- Link to
be activated to be received in e-mail
 Assessee to add CA from his login
 CA to generate TAR in XML format- Exe
Utility in Forms Other Than ITR
 CA to upload XML (with DSC) and attach
signed scanned copy of B Sheet and P&L

Steps Continued
 Assessee to approve the report from
his work list by clicking “View form” in
work list with his DSC
 If rejected by Assessee the uploading
process to start again

Steps Continued
 The date when assessee approves will
be date of furnishing of TAR not the
date when CA uploaded the report.
 Assessee to put the date of furnishing
of TAR etc. in his XML of return
 Assessee to upload the return.

Registration

CA Registration

Assessee Log In

Add CA

Uploading by CA

Assessee Work List

Approval by assessee

View Uploaded Form

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 3911th July 2013

Please mail your comments to
as@sethspro.com
40CA Ashok Seth, Lucknow11th July 2013

41
Have a good day
CA Ashok Seth, Lucknow11th July 2013

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