half day training workshop on ‘how to conduct a tax … half day workshop on ‘how to conduct tax...
TRANSCRIPT
BCAS HALF DAY WORKSHOP ON‘HOW TO CONDUCT TAX AUDIT’
4TH SEPTEMBER 2010
By Anil Sathe, FCA
INTRODUCTION
Audit required vide section 44AB of IT Act Audit of Companies vs. Other entities Limit 40 lacs (10 lacs) since 1985 / Now revised to 60 Lacs ( 15 Lacs) Appointment and NOC Relying on another Statutory Auditor Issues where accounting year followed by entity is different from financial
year. Format of the Financial statements
Recommended by ICAI For Firms to also state whether registered
Whether previous years’ figures to be given? Minimum fees to be charged
How to Conduct Tax Audit - By CA Anil Sathe
2
APPLICABILITY OF ACCOUNTING STANDARDS
Corporate entities Mandatory as per Companies (AS) Rules, 2006 Concessions to SMCs from some AS
Non-corporate entities Compliance not given by any statute (except for AS 1 & AS 2 issued
under section 145 of Income Tax Act) As per ICAI guidelines – mandatory for auditors while reporting –
exemptions for SMEs from some AS In practice, important AS like AS 1, AS 2, AS 7, AS 10, etc need to
be followed as otherwise the accounts may not give “True and Fair” view
How to Conduct Tax Audit - By CA Anil Sathe
3
CONCEPT OF TURNOVER
Whether to include excise, sales tax, service tax? For proprietorships: total turnover for each business Whether to include sale of capital assets? When to apply limit of 40 lakhs vs. 10 lakhs
Nursing home Interior decorators Management consultants Coaching classes Gain on sale on investments Insurance agents, Financial Planning Advisors, etc
How to Conduct Tax Audit - By CA Anil Sathe
4
SALES, TURNOVER & GROSS RECEIPTS:
Nature of business What is Turnover ICAI Guidance Note [GN] – reference
Day trader/speculator Sum total of differences,whether positive or negative
Para 5.11(a) of ICAI GN
Security derivatives transactions
Sum total of differences, whether positive or negative, also premium on sale of options
Para 5.11(b) of ICAI GN
Commodity derivatives transactions
– in case of settlement without delivery, sum total of differences,whether positive or negative– in case of delivery, total value of sales
Para 5.11(b) & (c) of ICAI GN
5
How to Conduct Tax Audit - By CA Anil Sathe
SALES, TURNOVER & GROSS RECEIPTS:
Nature of business What is Turnover ICAI Guidance Note -reference
Clearing & forwarding agent
Reimbursement of customs duty & othercharges collected by an agent not part of turnover
Para 5.13(vi) of ICAI GN
Travel agent, where no commission is payable byairlines
Amount received from clients for payment to airlines is reimbursement
Para 5.13(viii) of ICAI GN
Advertising agency booking space
Advertising charges recovered notturnover, provided by way of reimbursement [ABP(P) Ltd. v/s. ACIT 23 SOT 28(Kol)]
Para 5.13(ix) of ICAI GN
6
How to Conduct Tax Audit - By CA Anil Sathe
DOCUMENTATION BEFORE COMMENCEMENT
Appointment letter Engagement Letter NOC from previous auditor wherever applicable Declaration of non-interest of auditor in auditee Documents required & permanent file. Audit Programme Accounts / Trial Balance.
How to Conduct Tax Audit - By CA Anil Sathe
7
FORM 3CA, 3CB
When to use 3CA and 3CB?
Giving comments in Para 3(a) of Form 3CB Effect thereof? Whether safeguards the auditor?
Adding responsibility and scope Para in 3CB Results in amending Form 3CB Whether justifiable?
8
How to Conduct Tax Audit - By CA Anil Sathe
FORM 3CA, 3CB …
Notes to Accounts to normally specify: Method of accounting followed – accrual or cash Method of inventory valuation Fixed Assets and Depreciation Investments Method for accounting Foreign Exchange fluctuations
Items that may require qualification: Mandatory AS not followed (esp. for Companies) Non provision of Income Tax Employee benefits – especially retirement benefits Confirmations for balances Inventory valuation on estimated basis
9
How to Conduct Tax Audit - By CA Anil Sathe
FORM 3CD
Form 3CD – revised effective 10th August 2006
For a proprietor having 2-3 different business – whether same or different Form 3CD?
Primary responsibility of management
To be certified by management
Contains Parts A/B and 2 Annexures [ Annexure- 2 not relevant for AY 2010-11 & subsequent years]
Annexure I contains 2 parts A/B
10
How to Conduct Tax Audit - By CA Anil Sathe
FORM 3CD
How to Conduct Tax Audit - By CA Anil Sathe
11
3CD
Part A
Clauses 1 to 6
Part B
Clauses 7 to 32
AnnexuresI and II
FORM 3CD
12
Annexures to 3CD
Annexure I
Part A (similar to Part A of
main 3CD – Clauses 1 to 6)
Part B (Parameters)
Annexure II*
Value of Fringe Benefits
*not relevant for AY 2010-11 & subsequent years
How to Conduct Tax Audit - By CA Anil Sathe
POINTS TO BE BORNE IN MIND WHILE CERTIFYING PRESCRIBED PARTICULARS IN FORM NO.3CDGeneral Issues Information to be compiled and authenticated by the assessee -
Auditor’s duty to check the details, applying the auditing standards andtechniques.
In the case of conflicting Judicial precedents, Auditor should state theJudgment relied upon.
In the case of conflicting views with the assessee, the Auditor may stateboth the views and leave it to the Tax Department to decide the matter.
The Auditor will be normally be guided by the Income Tax Act whilereporting the particulars in Form 3CD.
How to Conduct Tax Audit - By CA Anil Sathe
13
PART A: CLAUSES 1 TO 6 (ALSO IN ANNEXURE 1 – PART A): BASIC DETAILS OF ASSESSEE1. Name of Assessee
In case of proprietor, name of business which is being audited – with name [say., XYZ Exports (Prop. ABC)]
If audit of only branch carried out, then name of Branch
2. Address Normally of the registered office In case of a branch, division, etc addresses thereof
3. Permanent Account Number4. Status5. Previous Year ended 6. Assessment Year
How to Conduct Tax Audit - By CA Anil Sathe
14
CLAUSE 7(a), 7(b): IF ASSESSEE IS FIRM OR AOP, …
To indicate names of partners/members and profit sharing ratios (including for sharing losses, if different)
Does not cover ratios for remuneration to partners All changes in profit sharing ratios (since last date of preceding
year) to be mentioned
Audit Process Verify the Partnership Deed and Addenda thereto (retain copy in
permanent file) Whether relevant documents filed with concerned authorities like
Registrar of Firms, etc
How to Conduct Tax Audit - By CA Anil Sathe
15
CLAUSE 8(a), 8(b): NATURE OF BUSINESS OR PROFESSION, …
To give broad nature of all business/profession
To give principal line of each business/profession “Manufacturing of aromatic chemicals”, not simply
manufacturing or chemicals manufacturing
Similar to information required in ITR Match this with information required in Annexure 1 part B In practice, activities that constitute > 10 % are given
Mention of any material change like: New business started Some business discontinued – (if only temporary suspension
need not be mentioned)
How to Conduct Tax Audit - By CA Anil Sathe
16
CLAUSE 8(a), 8(b): NATURE OF BUSINESS OR PROFESSION, … Audit Process Verify the Partnership Deed / Memorandum / Minutes
Verify actual activities carried out (from the components of Income in P & L a/c)
New activities during the year to be mentioned
For companies – compare with: Quantitative details in Part III Schedule VI and particulars given in Part IV of Schedule VI
If in doubt – better to include
How to Conduct Tax Audit - By CA Anil Sathe
17
CLAUSE 9(a), 9(b), 9(c):WHETHER BOOKS PRESCRIBED U/S 44AA, … To give list of books prescribed, maintained and
examined Rule 6F prescribes books for certain professionals
mentioned in sec 44AA(1) – not so prescribed for business and others mentioned in sec 44AA(2)
Books constitute books of original entry and maybe prescribed under some other statute
To give the list for all locations (incl stock registers) If maintained in a computer system – to mention so Books would be for recording financial as well as non-
financial information
18
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 9(a), 9(b), 9(c):WHETHER BOOKS PRESCRIBED U/S 44AA, …Audit Process To obtain list from the management
All 3 lists may not be same: Some books though prescribed, may not be maintained Some books though maintained may not be examined
(say., Petty Cash Book)
To take care to include list for all branches, depots.
To exercise professional judgement and give reservations if certain books required are not maintained
19
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 10: WHETHER P & L A/C INCLUDES PROFITS ASSESSABLE ON PRESUMPTIVE BASIS?
Relevant sections for presumptive taxation are:
44AD Civil Construction Business ( all business w.e.f. AY 2011-12)
44AE Transport Business44AF Retail Trade ( will not apply from AY 2011-12)44B Shipping buisness of a non-resident44BB Providing services in prospecting or extraction of
mineral oils44BBA Operation of aircraft by non-resident44BBB Civil construction in turnkey power projects by
non-residents20
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 10: WHETHER P & L A/C INCLUDES PROFITS ASSESSABLE ON PRESUMPTIVE BASIS? … Reporting is for amounts included in P & L a/c Amount assessable under the presumptive section need not be
given If 2 or more business exist and presumptive section applicable
for some businesses, allocation of expenses may become necessary if common books are maintained
Audit Process To confirm whether any of the businesses fall under this
category If amount included in P & L a/c does not match the amount
assessable under the presumptive section a note maybe added to that effect
Confirm whether common or separate books maintained for such businesses
Verify allocation if common books maintained21
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 11(a), (b), (c), (d): METHOD OF ACCOUNTING
Method of accounting followed Accrual vs. Cash method (mixed method not allowed) If cash basis of accounting – then Specific disclosure in
Audit report Method to be consistently followed Isues regarding different methods of accounting for two
businesses Allowability of remuneration in case of professional firm
following Cash basis Cash basis not possible for companies
How to Conduct Tax Audit - By CA Anil Sathe
22
CLAUSE 11(a), (b), (c), (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 AS 2(IT) – similar to AS 5 of ICAI
Exception to Sec 145 – interest on compensation or enhanced compensation taxable in the year of receipt irrespective of method of accounting
How to Conduct Tax Audit - By CA Anil Sathe
23
CLAUSE 11(a), (b), (c), (d): METHOD OF ACCOUNTING …
AS 1(IT) requires disclosure of all significant accounting policies
Change in method of accounting Allowed as per para 9 of AS 2(IT) in 2 cases
Adoption required by statuteChange would result in more appropriate presentation of
financial Statements. Materiality to be considered Effect on profit/loss to be stated Changed policy to be followed consistently
How to Conduct Tax Audit - By CA Anil Sathe
24
CLAUSE 11(a), (b), (c), (d): METHOD OF ACCOUNTING …Audit Process
To find all accounting policies followed for: Revenue Recognition Inventory valuation, Fixed Assets and depreciation Investments Foreign exchange fluctuations Employee benefits, etc
Confirm whether the same are disclosed at one place
If any change in policy, confirm the same is as per 2 exceptions provided by para 9 of AS 2 (IT)
Change needs to be reported even though there may not be a change in taxable income – e.g. depreciation
How to Conduct Tax Audit - By CA Anil Sathe
25
CLAUSE 12(a), (b):METHOD OF VALUATION OF CLOSING STOCK Closing stock consists of RM, WIP, FG, Stores, etc Normal valuation principles to be followed:
At cost or NRV whichever is lower; To follow Absorption Costing; To include all costs incl. excise duty (sec 145A) To mention how cost is determined If cost arrived at as SP less GP margin – whether ok? Allowed at SP in certain cases SC decision of British Paints (188 ITR 44)
To also value stores, packing items Change in method of valuation covered in Clause 11
How to Conduct Tax Audit - By CA Anil Sathe
26
CLAUSE 12(a), (b):METHOD OF VALUATION OF CLOSING STOCK … 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;
Section 145A thus requires “Inclusive method” as against “Exclusive method” mandated by AS 2
ICAI GN on “Tax Audit u/s 44AB” mentions (with an illustration) that in both methods, impact on profit/loss is Nil
For an entity following “Exclusive method” ICAI GN has suggested disclosure in the following table (see next slide)
27
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 12(a), (b):METHOD OF VALUATION OF CLOSING STOCK …
Particulars Increase in Profit (Rs.)
Decrease in Profit (Rs.)
1 Increase in cost of opening stock on inclusion of excise duty on which Cenvat available/availed Xxx Xxx
2 Increase in purchase cost of RM on inclusion of excise duty on which Cenvat available/availed Xxx Xxx
3 Increase in sales of finished goods on inclusion of ED
Xxx Xxx
4 ED paid on Sale of FG due to inclusion in Sales Xxx Xxx5 Increase in closing stock of RM on inclusion of ED Xxx Xxx6 Increase in closing stock of FG on inclusion of ED xxx Xxx7 Increase in ED on closing stock of FG as a result of
its inclusion in closing stock of FG xxx Xxx8 Accounting of Cenvat credit availed and utilised on
RM consumed in payment of ED on FG accounted on basis of RM consumed
Xxx Xxx
How to Conduct Tax Audit - By CA Anil Sathe
28
CLAUSE 12(a), (b):METHOD OF VALUATION OF CLOSING STOCK …Audit Process
Get list of Closing Inventory;
Confirm whether all items like RM, WIP, FG, Stores, Packing materials, consumables, etc are valued
Confirm method of valuation (incl determination of cost, etc)
Tally inventory list with that submitted to the bank – quantity should match – value may differ due to different valuation method applied
Confirm applicability of sec 145A
Disclosure as per ICAI GN, if 145A not followed
How to Conduct Tax Audit - By CA Anil Sathe
29
CLAUSE 12A(a), (b), (c):CAPITAL ASSET CONVERTED INTO STOCK-IN-TRADE
Sections 2(47), 45(2), 47(iv),(v) and 47A relevant for reporting under this clause
Following particulars to be given: Description of capital asset; Date of acquisition; Cost of acquisition; Amount at which the asset is converted into stock-in-trade
Reporting is only for assets converted into stock-in-trade in the previous year – Taxability of the gains from such transfer need not be commented.
30
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 12A(a), (b), (c):CAPITAL ASSET CONVERTED INTO STOCK-IN-TRADE
Audit Process Confirm whether any asset has been converted to
stock-in-trade in the previous year; Verify contemporaneous evidence in this regard. Whether any entry passed for the same If amount at which asset is converted is stated other
than at cost, to ascertain the basis thereof whether disclosure made for the above
How to Conduct Tax Audit - By CA Anil Sathe
31
CLAUSE 13(a) TO (e): AMOUNTS NOT CREDITED TO P & L A/CAuditors responsibility is restricted to information contained in thebooks of accounts & records. a. Items falling within scope of section 28 [i.e. ss. (i) to (vi)]b. Proforma credits, refunds, are admitted as due by authoritiesc. Escalation claims accepted during the previous yeard. Any other item of incomee. Capital receipt, if any Reporting for (a), (d) and (e) with reference to entries passed in
the books of account Reporting for (b) and (c) with reference to documents made
available If reporting done for items under (b), (c), (d) same again need
not be reported in (a).
How to Conduct Tax Audit - By CA Anil Sathe
32
CLAUSE 13(a) TO (e): AMOUNTS NOT CREDITED TO P & L A/C … Receipts directly taken to reserves or capital/current
accounts of partners Reporting necessary irrespective whether amounts are
taxable or exempt e.g. Income tax refunds, subsidies received, remission of loans, Share of profit from firm Compensation for surrender of tenancy rights, etc Compensation from breach of contracts Capital subsidies.
33
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 13(a) TO (e): AMOUNTS NOT CREDITED TO P & L A/C …Audit Process Confirm whether any receipt covered u/s 28 has been taken
directly to reserves or capital accounts To examine all relevant correspondence for proforma credits,
refunds, claims, etc If such credits, etc have been admitted, though not received, the
same should be reported Consider implications of above on provision for tax If assessee disputes any item based on legal decisions: to
mention the same General disclaimer maybe given that the auditor has
not gone beyond the books of accounts produced tohim during audit and has not conducted aninvestigation to find out if the assessee has notcredited any amounts in the books.
How to Conduct Tax Audit - By CA Anil Sathe
34
CLAUSE 14(a) TO (f): FIXED ASSETS & DEPRECIATION Particulars of Block of Assets and depreciation
a. Descriptionb. Rate of depreciationc. Actual cost or WDVd. Additions/Deductions with dates of acquisition/put to use – whether net
of Cenvat credit, Foreign exchange fluctuations, subsidies e. Depreciation allowablef. WDV at end of the year
Additions normally bifurcated into: Used for more than 180 days and others Cut-off date would be 2nd October (not 30th Sept)
If list of additions very voluminous summarised information can be given
How to Conduct Tax Audit - By CA Anil Sathe
35
CLAUSE 14(a) TO (f): FIXED ASSETS & DEPRECIATION …
Date when Asset put to use – can differ with date of start of commercial production
Capital assets claimed as deduction R & D assets (also refer clause 15) Assets less than Rs. 5,000?? (Sch. XIV of Companies Act)
Computer Software: whether asset? (Decision of Amyway) Adjustments for currency fluctuations (as per sec 43A) Adjustments for subsidies received (as per expl 10 to sec 43) In case of disputes (which are under litigation) regarding
depreciation claim in earlier years – to clearly mention the same
How to Conduct Tax Audit - By CA Anil Sathe
36
CLAUSE 14 (b): RATE OF DEPRECIATION
Recommended Note in the ICAI Guidance Note vis-à-vis “Disputes with tax authorities”:
NOTE: Certain disputes about (a) the rate of depreciation on ________ (b) determination of WDV of block of assets relating to ___________ and (c) ownership of ____________ have arisen in the assessment years ___________ for which assessments are pending/appeals are pending. The figures of WDV and/or rate of depreciation mentioned in the above statement may require modification when these disputes are resolved. Therefore, the amount of depreciation allowable as stated in the above statement will have to be accordingly modified.
37
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 14 (b): RATE OF DEPRECIATION
Depreciation allowed @ 60% on computer including computer software.
Scope enlarged by recent decision of the Special Bench in the case Datacraft India Ltd.
Routers and switches should be classified as part of computers and be eligible for 60% depreciation.
How to Conduct Tax Audit - By CA Anil Sathe
38
CLAUSE 14 (b): RATE OF DEPRECIATION –DEPRECIATION ON INTANGIBLESItem Citation
License of “toll collection” Ashoka Info. (P) Ltd. - (2009) 22 DTR 60 (Pune) (Trib)
Non-compete fees Medicorp Technologies India Ltd. - (2009) 30 SOT 506 (Mad)
Real Image - (2009) 120 TTJ 983 (Mad)
How to Conduct Tax Audit - By CA Anil Sathe
39
CLAUSE 14 (b): RATE OF DEPRECIATION –DEPRECIATION ON INTANGIBLES
Item CitationBrand name KEC International Ltd. v/s. ACIT –
unreported decision in ITA No. 4420/Mum/2009
Commercial rights of exploration of mineral oil
ONGC Videsh Ltd. – (2010) 33 DTR 22 (Trib).
Acquiring skill and know-how of employees of business taken over
Bosch Ltd. v/s. CIT – unreported decision in ITA No. 329/Bang/09
How to Conduct Tax Audit - By CA Anil Sathe
40
CLAUSE 14(a) TO (f): FIXED ASSETS & DEPRECIATION …
Audit Process Confirm opening block from last year
Tally Additions/deductions with Fixed Assets Schedule
Confirm dates when asset is put to use – when commercial production has started
Confirm whether adjustment for Cenvat, Foreign exchange gains/losses is as per relevant section
Confirm depreciation rates and whether additional depreciation claimed in appropriate cases
41
How to Conduct Tax Audit - By CA Anil Sathe
CLAUSE 15 (A) TO (L): AMOUNTS ADMISSIBLE List of amounts admissible under 33AB, 33ABA, 33AC, 35,
35ABB, 35AC, 35CCA, 35CCB, 35D, 35DD, 35DDA, 35E
To mention whether or not the above is debited to Profit &loss a/c
As 26 does not now permit any expenditure to be classifiedas Deferred Revenue Expenditure
Due to this, in most cases amount will not be debited to P &L a/c, but may be appearing as Deferred Tax Asset (onaccount of ensuing timing difference)
How to Conduct Tax Audit - By CA Anil Sathe
42
CLAUSE 15 (a) TO (l): AMOUNTS ADMISSIBLE …
Audit Process
Ascertain whether assessee eligible for claim of any expenses as per the above sections
If amount being treated as DRE (esp. if prior to applicability of AS 26), confirm whether the same has been appropriately amortised
If amount fully written off, to confirm with the statement of calculation of Deferred Tax (unamortised amount is to be considered as DTA)
If claim pertains to a capital asset, confirm that no depreciation on the same is claimed u/s 32 (Clause 14 of Form 3CD)
How to Conduct Tax Audit - By CA Anil Sathe
43
CLAUSE 16 (a), (b): SUM PAID TO EMPLOYEE AS BONUS, ETC Relevant sections are:
For 16(a) – sec 36(1)(ii), For 16(b) – sec 2(24)(x) and 36(i)(va) Sec 36(1)(ii) would not be applicable in most cases, unless bonus
or commission is paid, which would be otherwise been payable to him as profits or dividend
Under 2(24)(x) sums received from employees as contributions to any PF, ESI, etc are included as income
Deduction allowed u/s 36(i)(va) if the said amounts are deposited on or before the due date – Due date would also include Days of Grace allowed under the respective legislation
Amount deducted, due date for repayment and actual date are to be mentioned.
How to Conduct Tax Audit - By CA Anil Sathe
44
CLAUSE 16 (a), (b): SUM PAID TO EMPLOYEE AS BONUS, ETC …Audit Process
Verify agreements, if any, with employees to ascertain whether any amount payable as profits or dividends, but paid as bonus or commission
Obtain list of contributions of employees to PF, ESIC, etc and dates of their payments (cross reference to bank statements)
Confirm due dates as per the concerned legislation
If data voluminous, test check can be done and so mentioned
How to Conduct Tax Audit - By CA Anil Sathe
45
DOCUMENTATION AFTER AUDIT
Register for Tax Audits carried out during the year
Documentation for 3CD should be separate
Check list for 3CD, if possible
For debatable issues, separate management representations, if required
Query listing / sign off
How to Conduct Tax Audit - By CA Anil Sathe
46
THANK YOU !!
47
How to Conduct Tax Audit - By CA Anil Sathe