Issue in Tax Audit and Documentation - Mulund Study Circle - CA Gautam M...

ISSUES IN TAX AUDIT AND DOCUMENTATION
MULUND CPE STUDY CIRCLE OF WIRC OF ICAI

CA GAUTAM RAJESH MOTA
7th September, 2019 (c) UKG & Associates 1

THRUST OF PRESENTATION
Issues in Tax Documentation

Value addition Clauses
Audit requirement
Impact considering Impact on

Emphasis on ICAI Code of
recent judicial computation of
practical aspects Ethics
pronouncements income
Common areas of
Auditing Standards
mistake

FM SAYS …. (In 1984)
 The compulsory audit is intended to ensure proper maintenance of books of account and other
records, in order to reflect the true income of the tax payer and to facilitate the administration of tax
laws by a proper presentation of the accounts before the tax authorities. This would also save the time
of the Assessing Officers considerably in carrying out the verification
 As observed by the FM, while presenting the Union Budget for 1984-85 and as stated in the
Memorandum explaining the provisions of the Finance Bill, 1984

BACKGROUND
 Section 44AB of the Income-tax Act, 1961
 Objective - Assist AO in computing total income and complete assessments
 Also applicable to Non resident (for India related operations)
 Trigger point – applicability

 Business - sales, turnover or gross receipts > Rs. 1 cr / Profession – gross receipts > Rs. 50 L
 Presumptive taxation – 44AD, 44ADA etc.
 Tax Audit Report – Form 3CA / 3CB and Form 3CD

 Penalty - Sec 271B – lower of 0.5% of T/o or 150000/-
 True and Fair v/s True and Correct

 Penalty – 271J – Rs 10,000 - for furnishing inaccurate information
BUSINESS V/S PROFESSION
 “Business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade,
commerce or manufacture [S. 2 (13)]
 Barendra Prasad Roy v ITO [1981] 129 ITR 295 (SC)
Activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an
income. The expression "business" does not necessarily mean trade or manufacture only.
 “Profession” includes vocation [S. 2 (36)] - vocation not defined under Act
 CIT Vs. Manmohan Das (1966) 59 ITR 699 (SC)
The expression "profession" involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the
intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for
the production or sale of commodities.
 Whether Company can carry on profession ?

 ITO vs. Ashalok Nursing Home (P) Ltd (ITA 2455/Del/2003)

TURNOVER / GROSS RECEIPTS
 Para 5.8 of GN - considering that the words "Sales", "Turnover" and "Gross receipts“ are commercial
terms - construed in accordance with the method of accounting regularly employed
 Para 5.16 of GN - Gross Receipts includes all receipts whether in cash or in kind which will normally
be assessable as business income under the Act
 Also to consider whether the transaction is made on “principal to principal’ basis or ‘principal to
agent’ basis
 GST is not to be included since it is collected on behalf of government and is credited to a separate
account

TURNOVER / GROSS RECEIPTS
Whether to be included while computing

Turnover for F&O transaction / Option
Turnover / Gross receipts – [refer Para
Contracts – [refer Para 5.14 of GN of ICAI]
5.11/5.17 of GN of ICAI]
• Dividend Income • Favorable and unfavorable difference in

absolute terms
• Share of profit of partner [exempt u/s
10(2A)] • Premium received on sale of options is
also to be included in turnover
• Capital Receipts
• In respect of any reverse trades entered,
• Out of pocket expense recovered [Para the difference thereon, should also form
5.19] part of the turnover

PRECAUTIONS FOR FORM 3CA, 3CB
Items that may require qualification / drawing
attention: (Form 3CA cases)
• Method of accounting followed –accrual or cash
• Mandatory AS not followed (esp. for Companies)
• Non provision of Employee bonus and retirement benefits
• Confirmations for balances
Notes to Accounts to normally specify (Form 3CB

cases)
• Method of accounting followed –accrual or cash
• Revenue Recognition
• Inventory valuation / Investments
• Fixed Assets and Depreciation
• Interest Capitalization
• Accounting of Forex fluctuations

REVISION OF TAX AUDIT REPORT ?
 Generally revision of Tax Audit Report is not advisable but in certain conditions the same can be
revised through addendum or issuance of fresh report300
 Revision could be on account of following reasons:

 Business reorganization – effective date is date prior to previous year
 Arithmetical / Typographical Error
 Change in interpretation of law
 Any other technical issues
 After revising the TAR, the revised report should be in line with SA 560 (Subsequent events) in
which reasons for revision should be mentioned

ICAI CODE OF ETHICS
 Appointment and NOC procedures
 Same person cannot conduct Internal Audit & Tax Audit
 The auditor should not be indebted for more than Rs.10,000
 Ceiling on number of tax audit assignments

 60 per partner
 HO and branch considered as 1 assignment
 Audits conducted under section 44AD or under GST laws not to be included in the limits
 Record of tax audit assignments in prescribed format
 Mentioning of UDIN
 Formation of Quality Review Board by ICAI (24th July, 2018)

IMPACT OF SA 700 (REVISED) WHILE ISSUING AUDIT REPORT
 ICAI has issued SA 700 (revised), “Forming an Opinion and Reporting on Financial Statements”,
which prescribes a revised format of the auditor’s report on financial statements.
 SA 700(R), besides other clauses, also requires the auditor to clearly lay down management’s
responsibility and auditor’s responsibility
 Para 11.9 of the GN suggests that the Tax auditor should issue an Audit Report as per the SA 700 (R)
 Recommended that in case of reporting under Form 3CB, SA 700 format is followed (additional
disclosures can be included in annexure to Form 3CB)
 In case of Form 3CA, SA 700 format not required to be followed since comments are only on Form
3CD
AUDIT PROCEDURES
SA 210 – Agreeing to the terms of Audit Engagement - Engagement letter to be issued
SA 230 – Audit Documentation
SA315 – Identifying and Assessing risk of material misstatement through understanding the
entity
SA 330 – Auditors’ responses to assessed risks
SA 520 – Analytical Procedures
SA 610 – Relying on work of Internal Auditors

DOCUMENTATION REQUIREMENT
 Letter of Engagement (Appointment Letter)
 NOC Letter
 Management Representation Letter (MRL)
 Compliance with SA 230 – Audit Documentation, SA 530 – Audit Sampling
 Necessary working papers to substantiate the following

 work done while conducting the audit and by whom;
 explanations and information given to him during the course of the audit and by whom;
 the judicial pronouncements relied upon by him while making the audit report;
 decision on the various points taken;

TAX AUDIT APPROACH
 Awareness - Applicability of tax audit, applicable form
 Knowledge - Income tax provisions and amendments
 Knowledge - Clients business, accounting policies
 Reference – Previous tax audit reports
 Review of financials, director report
 Relevance of notes - implications of matters reported
 Publications issued by ICAI (Guidance Note, Implementation Guide)

FORM 3CD CLAUSES AND RELEVANT ISSUES

CLAUSE 4 – INDIRECT TAX REGISTRATION
 Basic knowledge of indirect tax laws
Issues
 If assessee is liable to pay taxes however not registered – reporting ??
 In case there are diverse opinions regarding applicability of indirect tax – reporting requirements?
 Indirect Tax Registration number – however not liable to pay tax during the previous year ? (Eg: ST,
VAT)
 In case of Foreign Branch - Reporting for foreign indirect tax registration number ??

CLAUSE 6 – PREVIOUS YEAR
 Previous year might be different in following case:
 Amalgamation / Demerger / New Business / Closure of Business
 S. 28 – Charging Section for PGBP

“the profits and gains of any business or profession which was carried on by the assessee at any time during the previous
year”
 S. 3 – Defines previous year

“business newly set up…., the previous year shall be the period beginning with the date of setting up of the business and
ending with the said financial year”
 Principles – set up of business were first laid down in

 Western India Vegetable Products Ltd v. CIT– (1954) 26 ITR 151 (Bom HC) - Business is set up when major
activities are completed and necessary infrastructures required for commencement of the business are in place

CLAUSE 9 – Change in Partners / Members PSR Ratio
 In case partner / members acts in representative capacity – details of beneficial owner to be reported
[Para 18.1 of GN]
 Minor admitted for benefit of partnership
 Assignment of partners right in LLP (Sec 42 of LLP Act)
 AOP – Share of Partner not determinable – appropriate disclosures required [Para 18.5 of GN]
 If profit and loss sharing ratio different – then both to be stated

CLAUSE 12 – PRESUMPTIVE TAXATION
44AD – Presumptive Income for Business
 Recent Changes
 No deduction for interest on capital and partners remuneration
 Applicability for 5 years
 Breakup of T/o - Other than cash T/o (6%) / Cash T/o (8%) – Additionally to verify whether same has been received
before filing the ROI u/s 139(1)
 Income from Derivatives (F&O) – if loss - whether tax audit required
 8% / 6% of turnover or gross receipt – whether inclusive of taxes (GST) ?
 Condition of maximum amount not chargeable to tax for Partnership Firm ? – S. 44AD(5)
 Whether LLP can opt for presumptive taxation – S. 2(31) v/s Expln. to S. 44AD

44ADA – Presumptive Income for Profession
 50% of gross receipt – considered as income

 Partners remuneration whether part of gross receipts?
 Whether Company / LLP can claim benefit of S. 44ADA ?

 Provisions of the Act v/s Memorandum explaining Finance Bill

Common Issues
 PF offering income u/s 44AD / 44ADA – partners remuneration – deductibility and taxability ?
 Can assessee offer 8% or 6% / 50% of turnover or gross receipt to tax, even if the actual income
earned is higher ?
 Remuneration received by partner in excess of limits - whether tax audit required ?
 Eligible business + Ineligible business

 T/O of eligible business to be excluded for computing the overall limit for applicability of 44AB
 Expenses for eligible business are deemed to have been allowed
 What about common expenses for both eligible and non eligible business – Whether proportionate disallowance to be
made ??

CLAUSE 13 – METHOD OF ACCOUNTING
 Change in method of accounting v/s change in accounting policy
 A change in method need not have the approval of I.T. authorities - Snow white Food
Products Limited 141 ITR 861 (Cal.)
 If method is changed for a permanent period, it has to be accepted by the department, even if
it results in a reduction of tax liability - Melmould Corporation Vs. CIT 202 ITR 789 (Bom.)
 Different method of accounting can be followed for different heads of income
 Project Completion for one project and Percentage completion for another project - CIT Vs.
Umang Hiralal Thakkar (2014) 42 taxmann.com 194 (Guj)

CLAUSE 13 – ICDS
Notification Revised Delhi HC Finance Act,

No. 892 dated Notification Decision TS- 2018
31 March 2015 No. 3079 dated 499-HC- • Finance Act 2018
29 September 2017(Delhi) amended
2016 provisions of the
• Came into force • Upheld Act to negate Delhi
from 1 April 2015 constitutional High Court
validity of ICDS decision
• Came into force
• Rescinded two AS from 1 April 2016
earlier • Struck down pro- • Applicable
notified by CBDT - revenue standards retrospectively
Notified 10 ICDS • Rescinded earlier which were
notification no. 892 from FY 2016-17
overriding judicial
precedents and the
• Made substantial Act
changes in ICDS
notified earlier • Challenged
principle of not
following prudence

CLAUSE 13 – ICDS
ICDS Delhi HC Decision Whether negated by FA 2018
ICDS 1 Concept of prudence (earlier done away with by ICDS I) continues Yes
to apply. Thus one can claim expected loss and mark to market loss
on the basis of prudence. Sec.36(1)(xviii) &
Sec.40A(13) inserted
ICDS 2 Held ultra vires and hence struck down Yes
- Negating SC decision in Sakthi Trading Co. (2001) 250 ITR 871
(SC); Sec. 145A substituted
ICDS 3 Retention money – not taxable in absence of right to receive (ICDS Yes
III requires the same to form part of contract revenue) and hence
provision struck down to this extent Sec. 43CB inserted
Borrowing Cost – incidental income reduction from borrowing cost

not allowed as per ICDS, contrary to SC decision in Bokaro Steel Ltd
and hence relevant provisions struck down

CLAUSE 13 – ICDS
ICDS Delhi HC Decision Whether negated by FA 2018
ICDS 4 Export incentives – continued to be recognised as per decision in Yes
Excel Industries
ICDS recognises percentage of completion method only Sec. 43CB and 145B
inserted
ICDS 6 Marked to Market loss or gain in case of foreign currency Yes
derivatives not allowed – contrary to SC decision in Sutlej Cotton
Mills – hence struck down Sec. 43AA inserted
ICDS 7 Government grants cannot be postponed beyond the date of actual Yes
receipt – ultra vires accrual concept
Sec. 145B(3) inserted
ICDS 8 Securities (entities not governed by RBI) is ultra vires to the extent Yes
the same is contrary to AS – hence struck down
Sec. 145A substituted

CLAUSE 14 – DEVIATION FROM S. 145A
Deviation from method of valuation prescribed u/s 145A
 Dispute – AS-2 v/s 145A
 S. 145A is tax neutral - Hawkins Cooker – (2008) 14 DTR 206 Mum ITAT
 Judicial Pronouncement – adjustment not only to closing stock but opening stock also
 Section 145A - What if closing inventory is valued at market price (NRV) – Whether taxes to be
included for valuation?
 In case of deviation, format of reporting specified - Reference to GN of ICAI

CLAUSE 16 – AMOUNTS NOT CREDITED TO PROFIT AND LOSS
 Tax auditor not obligated to report items outside the books of account and which cannot be found by
normal audit procedures
 Refers to items not ‘credited to P&L account’ and not books of account
 the item is credited to a liability account - e.g. GST collected from customers credited to GST
payable account
 the item in question is credited to an asset account (i.e., reduced from the cost of the asset)
 items directly credited to reserve / partner’s capital/ current account
 the item is netted off from the relevant expense heads ??

CLAUSE 16 – AMOUNTS NOT CREDITED TO PROFIT AND LOSS
Sub Clause (a) – Sub Clause (d) –

Sub Clause (e) –
items falling within Any other item of
Capital Receipt
scope of S. 28 income
Sale proceeds of capital Employees Contribution
asset on which to PF / ESIC – 2(24) Premium received on
deduction u/s 35AD issue of shares
already claimed
Income under section
43CA
Conversion of stock-in- Profit on sale of fixed
trade into capital asset – Income referred to Asset not routed through
28(via) section 41(1) P&L

CLAUSE 17 – TRANSFER OF LAND / BLDG
 Whether reporting is at all required for items covered by Section 50C
 Scope shall be confined to Business Income ? (Ghai Constructions– Bom HC – Order Dt. 30-4-2007)
 Amendment - Where stamp duty valuation is less than 105% of the actual consideration received,
actual consideration will be considered as full value of consideration
 Addition deleted since difference is less than 10% and no evidence of additional consideration - Surendra S Gupta (93
taxmann.com 456) – May 2018
 Section 43CA – whether applies in the case of Percentage completion method ?
 Does S. 43CA apply to sale of flat under construction ?

CLAUSE 17 – TRANSFER OF LAND / BLDG
 Assignment of leasehold rights - Section 50C not applicable [Atul puranik 132 ITD 499 (Mum)]
 Whether transaction of Sale of building used for business purpose requires reporting under this
clause? - ETC Industries (2012) 21 taxmann.com 457 (Indore Tribunal)
 Whether S. 43CA has to be considered for computing deduction u/s. 80-IBA

CLAUSE 18 – DEPRECIATION
 Proper classification based on legal precedents – important to claim depreciation
 Rate of Depreciation on Computer peripherals
 Assets used partly for Business purpose, deduction u/s 32(1) restricted to proportionate part
 Ascertainment of actual cost – S. 43(1)
 Capitalization of interest – Proviso to S. 36(1)(iii) / Explanation 8 to S. 43(1)
 Foreign Currency adjustments – S. 43A

 Impact of ICDS – Exchange difference on monetary items

CLAUSE 18 – DEPRECIATION
 Asset used for business – active as well as passive use
 Nirma Credit & Capital Ltd. (2008) 220 CTR 537 (SC)
 Depreciation on Intangibles
 Compensation to retiring partner - Swastik Industries 240 Taxman 510 (Guj)
 Goodwill – Smifs Securities, United Breweries Ltd
 Non Compete Fees - Medicorp Technologies – (2009) 30 SOT 506 (Mad)

CLAUSE 20 – EMPLOYEE CONTRIBUTION TO FUNDS
 S.2(24)(x) – Contribution received from employee
 S. 36(i)(va) – allowable as expenditure if paid within due date
 Due date as prescribed under respective laws
 Circular granting benefit of Grace period withdrawn
 Contribution paid after due date but before filing of return of income
 Bom HC - CIT vs. Ghatge Patil Transports Ltd – Favour
 Gujarat State Road Transport Corp (2014) 265 CTR 64 (Guj HC) –Against
 Is it mandatory to disclose that employers have not deducted/ collected Provident Funds from
Employees ?

CLAUSE 21 – CASH PAYMENTS S. 40A(3) / S.40A(3A)
 Disallowance for expenditure / liability– where payment in cash beyond prescribed limits
 Exceptions provided in Rule 6DD
 Notification no. 97/2008 dated 10.10.2018 has amended Rule 6DD.
 Genuineness of payment and business compulsion – even if Rule 6DD exception does not apply –
no disallowance
 Anupam Tele Services .v. ITO – (2014) 88 CCH 035 (Gujarat HC)
 Honey Enterprises Vs. CIT 381 ITR 258 (Del.)

CLAUSE 21 – S. 14A – AMOUNT INADMISSIBLE
 Disallowance of expenditure incurred in relation to income which does not form part of total income (S 14A
expenses)
 AO is empowered to determine amount inadmissible as per R. 8D only if not satisfied with correctness of
Assessee’s claim
 Sufficient own funds for investments
 No Disallowance in absence of exempt income - Dismissal of SLP by SC in CIT vs. Chettinad Logistics (P) Ltd.
 Disallowance cannot be in excess of expenditure incurred
 Applicability to shares held as investment / investment in partnership firm
 Applicability to shares held as Stock in trade - Maxopp Investment Ltd. vs. CIT (SC)
 Applicability to computation of book profit – S. 115JB self contained code – only actual expense to be added –
Rule 8D not applicable

CLAUSE 21 – CAPITAL EXPENDITURE
 Few tests whether expenses capital / revenue in nature – Ref. GN of ICAI
 Whether it brings into existence an asset or advantage of enduring benefit
 Capital field v/s Revenue field
 Whether it is referable to fixed capital or fixed assets in contrast to circulating capital or current assets
 Construction Expenditure incurred on an abandoned project is allowable as revenue expenditure

 Binani Cement Ltd. Vs. ACIT 380 ITR 116 (Cal.) - No asset is created
 Expenses on Computer Software – Whether capital or revenue in nature

 CIT v. Raychem RPG Ltd –(2013) 346 ITR 138 (Bom HC)
 Non Compete Fees - Cyanamid Agro Ltd. Vs. ACIT 148 ITD 606 (Mum.)
 Payment made for avoiding competition over a reasonable long period of time – Capital in nature
 If the period is uncertain and competition can again start any time – Revenue Expenditure
CLAUSE 21 – FINE / PENALTIES / OFFENCE
 Explanation to S. 37(1)
 Penalty or fine for violation of any law for the time being in force
 Expenditure incurred for any purpose – offence – prohibited by law
 Nature of Penalty
 Compensatory – deductible
 Penal – non deductible
 Composite (Part Compensatory/Penal) – Compensatory to be allowed - Prakash Cotton Mills 201 ITR 684 (SC)
 CBDT Circular No. 5/2012- Freebees provided in violation of Indian Medical Council Regulation, 2002
(IMC) – inadmissible u/s 37(1)
 Settlement Charges paid to SEBI without admitting guilt – Held allowable – Anil D Ambani - (Mum ITAT)
 Payment made to avoid defamation of name – allowable –Hitachi Koki India Ltd. 230 Taxman 643 (Karn.)
CLAUSE 21 – TDS DISALLOWANCE – 40(a)(i)/(ia)/(ib)
 TDS deduction on payment basis – Non-resident – Disallowance ?
 Disallowance - amounts “payable” v/s amounts already “paid”

 Palam Gas Service (2017) 394 ITR 300 (SC)
 No TDS on reimbursement of expenses

 DLF Commercial Project Corporation 379 ITR 538 (Del)
 Deduction of TDS at lesser rate – Whether disallowance required

 Chandabhoy and Jassobhoy 49 SOT 448 (Mum.)
 Second proviso – If tax paid by the recipient – No disallowance to be made – Form 26A – Interest
liability u/s 201
 Tax Deducted & Paid but TDS Return not filed – whether disallowance required ?
CLAUSE 21 – TDS DISALLOWANCE – 40(a)(i)/(ia)/(ib)
 TDS on Provisions - If payee not identifiable – no disallowance
 Pfizer Ltd - ITA No. 1667/Mum/2010 & IDBI 107 ITD 45 (Mum)
Nature of Provisions Amount known Payee known Relevant section TDS
for withholding, Applicability
if required
Rent of March (invoice awaited) Yes Yes 194 I Yes
Interest on cumulative transferable bonds (due Yes No 193 No (Based on

on 30.6.2020) ITAT Ruling in
case of IDBI)
Commission on net sales by distributors to No Yes 194H Yes
ultimate customers
Estimated provision to account for expense on No No 194C No
pending obligation under a contract which is
substantially complete

CLAUSE 21 – INTEREST DEDUCTION – 36(1)(iii)
 Proviso – Capital borrowed for acquisition of FA
 Interest cost – date of borrowing till date of asset put to use not allowed as deduction
 Extension of existing business – not required
 ICDS more favorable than provisions of the Act
 Hypothetically for each and every purchase of FA – capitalization required
 Arguments relevant to S. 14A could be applicable

CLAUSE 22 – INTEREST TO MSME
 Interest paid to MSME – inadmissible
 Disclosure, even if not provided in books of accounts ?
 Whether reporting under ICDS – fundamental accounting assumptions not followed ?
 Affects true and fair view of accounts – whether qualification of Form 3CA / 3CB ?
 Whether required to deduct TDS on interest not provided in books of accounts ?

CLAUSE 25 – AMOUNT CHARGEABLE TO TAX - 41(1)
 Cessation / Remission of liability [S. 41(1)] – Benefit obtained by way of remission or cessation of
a trading liability, loss or expenditure which is allowed as deduction in past is taxable in the year of
remission or cessation
 Taxability of waiver of loan - CIT v. Mahindra & Mahindra Ltd. [2018] 404 ITR 1 (SC)
 Principal amount of loan was never claimed as deduction, S. 41(1) does not have any applicability (Applicable for
term loan as well as working capital)
 Waiver of loan is not taxable S. 28(iv)

CLAUSE 26 – LIABILITIES ALLOWED ON PAYMENT BASIS
 S. 43B – certain specific liabilities covered
 Taxes paid after the completion of audit but before filing of report
 Amendment to section 143(1)
 Conversion of interest into loans does not amount to payment of Interest – Constructive payment
v/s actual payment – Consequential implication u/s 41 needs to be evaluated
 Write back of liability – post 31st March not allowable

CLAUSE 29A– FORFEITED INCOME – 56(2)(ix)
 Sum / Advance received in course of negotiation for transfer of capital asset
 Negotiation does not result in transfer
 Difficult to identify forfeiture unless accounted in books of accounts
 Verify whether any negotiations have been conducted by assessee for transfer of capital asset from
Board Minutes, other relevant information etc.

CLAUSE 29B – GIFT TAXATION - 56(2)(X)
 Taxability of “Receipt” in case where received without consideration / for inadequate consideration
 Money / Movable Property / Immovable Property
 Rule 11UA – Difficulty in case where you needs to determine fair value of shares where there is
multi layered holding structure
 Fair market valuation to be done on the valuation date – cumbersome
 Registered valuer’s report in case of jewellery / artistic work
 Applicability to following transactions

 Bonus Issue
 Rights Issue - Sudhir Menon HUF Vs. ACIT 148 ITD 260 (Mum.)
 Tax audit of Individual – Whether personal transaction to be reported ?

CLAUSE 30A – SECONDARY ADJUSTMENT (TP)
 Secondary adjustment – actual allocation of profits between Assessee and AE

 applies only if primary adjustment exceeds Rs 1 Cr & belongs to AY 2016-17 and thereafter
 Primary adjustment – deemed as advance to Associated Enterprise – needs to be repatriated within

prescribed time limit – 90 days from specified date
 No exception provided – even when repatriation not permitted by other jurisdiction

 Amendment to Act – option to pay one time tax @ 18% + surcharge and cess or pay deemed tax on interest @ 30% until
principal amount is repatriated
 Whether any adjustment would also results in deemed dividend ? - G. R. Govindarajulu Naidu (90
ITR 13)
 Primary adjustment “made” in FY 2018-19 are to be reported in Tax audit report of AY 2019-20
CLAUSE 30B – THIN CAPITALIZATION
 Applicability of provisions
 Loan taken by Indian company or PE of a foreign company (not applicable to PF, LLP etc.)
 Debt taken from AE or from non AE based on guarantee given by AE – annual interest exceed Rs 1 crore in a previous
year
 Interest expense – which is deductible under PGBP
 Interest deduction restricted to

 30% of EBIDTA or Interest paid / payable to AE, whichever is lower
 EBITDA – figure to be as per final audited standalone account of the company
 If EBITDA is negative – then no interest allowable for the year
 Excess Interest to be carried forward for eight assessment years

CLAUSE 30C – GAAR
 Deferred by CBDT vide circular No. 9/2019 dated 14th May, 2019
 For Invoking GAAR – Assessing Officer – Commissioner – Approving panel
 Impermissible avoidance arrangement means an arrangements entered into for the main purpose of
obtaining tax benefit:
 Creates rights or obligations, which are not ordinarily created between persons dealing at arm’s length
 Results directly or indirectly, in the misuse or abuse of the provisions of this Act
 Lacks commercial substance or is deemed to lack commercial substance u/s 97
 Tax benefit to all parties of agreement to be reported
 Tax benefit obtained from an arrangement post 1st April 2017 – Grandfathering not applicable

CLAUSE 31 – 269SS / 269T
 Transactions by Journal entry whether covered
 CIT v. Triumph International Finance (I) Ltd. [2012] 22 taxmann.com 138 (Bom.) (followed in Lodha Builders (P.)
Ltd. v. Asstt. CIT [2014] 163 TTJ 778 (Mum. - Trib.)), it was held that where loan/deposit has been repaid by merely
debiting account through journal entries, it must be held that assessee has contravened provisions of section 269T.
 Reporting for “specified sum” accepted / repaid during the year

 Specified Sum – any money in relation to transfer of immovable property
 Cumbersome reporting for Large Real Estate Builders

CLAUSE 31 – 269ST
Particulars Otherwise than Otherwise than by a account
by a cheque or payee cheque or an account
bank draft payee bank draft
Particulars of each receipt in an amount exceeding the limit specified in section 269ST Clause 31(ba) Clause 31(bb)
Particulars of each payment in an amount exceeding the limit specified in section 269ST Clause 31(bc) Clause 31(bd)
 All receipts covered – capital / revenue receipts (including exempt receipts)
 Clauses 31(ba) to 31(bd) make a reference to section 269ST only for the limited purpose of limit
 No exception for items exempted from scope of S. 269ST
 Possibility of double reporting – in clause relating to 269SS and 269ST

CLAUSE 34 – TDS REPORTING
TAN Section Nature of Total amount of Total amount on Total amount on Amount of tax Total amount on Amount of Amount of tax deducted
Payment Payment or which tax was which tax was deducted Or which tax was tax or collected not deposited
Receipt of the required to be deducted or collected Out deducted or deducted or to the credit of the Central
nature specified deducted or collected at of (6) collected at less than collected on Government out of (7)
in Col. (3) collected out of specified rate out specified rate out of (8) and (9).
(4) of (5) (7)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
194J Prof fee 1,00,000 80,000 80,000 8,000 0 0 0
194J Prof fee 1,00,000 80,000 60,000 6,000 20,000 1,000 0
194J Prof fee 1,00,000 80,000 60,000 6,000 20,000 1,000 1,500
 Cumbersome reporting requirement – figure directly picked from TDS return
 Clause 34(a)
 Reconciliation with profit and loss ?
 Inclusion of perquisite ?

CLAUSE 34 – TDS REPORTING
 Clause 34(b)
 Details of all transactions which are reportable but not reported in the statement – Auditing techniques to be used /
Appropriate disclaimer required
 Reporting of salary transaction where payment is below threshold limit
 Q4 Salary TDS for FY 2018-19 – due date extended
 Clause 34(c)
 Details to be provided – total liability of interest u/s 201(1A) / 206C(7)
 Reference – Part G of 26 AS Statement

CLAUSE 36A – DEEMED DIVIDEND
 Reporting for person who has received the dividend
 Loan or advance is made by the closely held company to the concern

 Madhur Housing & Development Co. (Civil Appeal 3961 of 2013) (SC)
 CIT vs. Ankitech Private Limited (2012) 340 ITR 14 (Del)
 National Travel Services vs. CIT (2018) 401 ITR 154 (SC)
 Lending of money is a substantial part of the business of the company - where 20% or more funds
have been deployed in the business of lending money the test of substantial part will be satisfied
 Tanuj Holdings (P.) Ltd. v. DCIT 46 ITR (T) 420 (Kolkata- Trib.)
 CIT v. Jayant H. Modi 232 Taxman 337 (Bom.)

CLAUSE 36A – DEEMED DIVIDEND
 Loan or advance to HUF – provisions of S. 2(22)(e) applicable - Gopal and Sons (HUF)
 Trade advances in the nature of commercial transactions would not fall within the ambit of the
provisions of section 2(22)(e) – CBDT Circular dated 12th June, 2017

CLAUSE 42 – FORM 61 / 61A / 61B
 Form No.61:- Statement containing particulars of declaration received in Form No.60
 Rule 114D(1)- Half yearly statement containing particulars of declaration in Form No.60 to be furnished online
 Due date for filing form 61 – 31st October and 30th April
 Rule 114B – Compulsory quoting of PAN on all documents
 One of such transaction is sale or purchase, by any person of goods or services of any nature for an amount
exceeding Rs.2 lacs per transaction
 Form No.61A:- Statement of Specified Financial Transaction u/s 285BA(1)

 Rule 114E - Yearly statement containing particulars of declaration in Form No.61A to be furnished online
 Due date for filing form 61 – 31st May

CLAUSE 42 – FORM 61 / 61A / 61B
 Common Transactions that are covered
 Receipt of cash payment exceeding Rs.2 lacs for sale of goods or services of any nature - person who is liable for audit
u/s 44AB
 Receipt from any person of an amount aggregating to ten lakh rupees or more in a financial year for acquiring shares
 Form No.61B:- Statement of Reportable Account (FATCA)

 This form is in compliance with the intergovernmental agreement entered between India and USA to implement
Foreign Account tax Compliance Act (FATCA)
 Rule 114H - Every reporting financial institution shall furnish the statement of reportable account in Form No.61B in
respect of each account which has been identified as a reportable account in pursuant to due diligence procedure
specified in Rule 114H.
 Statement to be furnished for every calendar year –by the 31st May of the following year
 Even if no account is reportable- Nil statement to be filed

CLAUSE 43 – CBCR REPORTING
 Furnishing of CBCR report is applicable only if group revenue exceeds Rs. 5500 crores
 Reporting requirement only for assessee or its parent entity or alternate reporting entity, resident in
India
 No reporting for constituent entity
 Report to be filed in Form 3CEAD – 12 months from the end of the reporting accounting year
 The clause requires the assessee to report on the furnishing of CBCR during the year
(Implementation Guide issued by ICAI)
 Eg: Report for FY 2017- 18, will be filed in FY 2018-19, which to be reported by Tax auditor in its report for FY 2018-
19

CLAUSE 44 – BREAKUP OF GST EXPENDITURE
 Reporting deferred till 31.03.2020 vide circular No. 9/2019 dated 14th May, 2019
 Cumbersome reporting requirement
 Proper understanding of GST law required
 GST levy only on supply – however reporting required for all expenditure

WAY FORWARD….
 Make standard checklist for purpose of reporting
 Ensure proper disclosures / notes in the tax audit report
 Emphasis on proper documentation
 Learn, Unlearn & Relearn on a continuous basis

Questions

THANK YOU
CA GAUTAM RAJESH MOTA
UKG & ASSOCIATES
[email protected]
+91 95943 39945

Issue in Tax Audit and Documentation - Mulund Study Circle - CA Gautam M...

Uploaded by

Copyright:

Available Formats

Issue in Tax Audit and Documentation - Mulund Study Circle - CA Gautam M...

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Issue in Tax Audit and Documentation - Mulund Study Circle - CA Gautam M...

Uploaded by

Copyright:

Available Formats

ISSUES IN TAX AUDIT AND DOCUMENTATION

MULUND CPE STUDY CIRCLE OF WIRC OF ICAI

7th September, 2019 (c) UKG & Associates 1

Issues in Tax Documentation

Impact considering Impact on

7th September, 2019 (c) UKG & Associates 2

of the Assessing Officers considerably in carrying out the verification

Memorandum explaining the provisions of the Finance Bill, 1984

7th September, 2019 (c) UKG & Associates 3

 Objective - Assist AO in computing total income and complete assessments

 Also applicable to Non resident (for India related operations)

 Trigger point – applicability

 Presumptive taxation – 44AD, 44ADA etc.

 Tax Audit Report – Form 3CA / 3CB and Form 3CD

 True and Fair v/s True and Correct

 Whether Company can carry on profession ?

7th September, 2019 (c) UKG & Associates 5

7th September, 2019 (c) UKG & Associates 6

Whether to be included while computing

• Dividend Income • Favorable and unfavorable difference in

7th September, 2019 (c) UKG & Associates 7

Notes to Accounts to normally specify (Form 3CB

7th September, 2019 (c) UKG & Associates 8

 Revision could be on account of following reasons:

 Arithmetical / Typographical Error

 Change in interpretation of law

 Any other technical issues

7th September, 2019 (c) UKG & Associates 9

 Same person cannot conduct Internal Audit & Tax Audit

 The auditor should not be indebted for more than Rs.10,000

 Ceiling on number of tax audit assignments

 HO and branch considered as 1 assignment

 Record of tax audit assignments in prescribed format

 Formation of Quality Review Board by ICAI (24th July, 2018)

which prescribes a revised format of the auditor’s report on financial statements.

responsibility and auditor’s responsibility

disclosures can be included in annexure to Form 3CB)

SA 210 – Agreeing to the terms of Audit Engagement - Engagement letter to be issued

SA 230 – Audit Documentation

SA 330 – Auditors’ responses to assessed risks

SA 520 – Analytical Procedures

SA 610 – Relying on work of Internal Auditors

7th September, 2019 (c) UKG & Associates 12

 Management Representation Letter (MRL)

 Compliance with SA 230 – Audit Documentation, SA 530 – Audit Sampling

 Necessary working papers to substantiate the following

 decision on the various points taken;

7th September, 2019 (c) UKG & Associates 13

 Knowledge - Income tax provisions and amendments

 Knowledge - Clients business, accounting policies

 Reference – Previous tax audit reports

 Review of financials, director report

 Relevance of notes - implications of matters reported

 Publications issued by ICAI (Guidance Note, Implementation Guide)

7th September, 2019 (c) UKG & Associates 14

7th September, 2019 (c) UKG & Associates 15

 If assessee is liable to pay taxes however not registered – reporting ??

7th September, 2019 (c) UKG & Associates 16

 S. 28 – Charging Section for PGBP

 S. 3 – Defines previous year