TaxAudit Final 29.09.07

8/2/2019 TaxAudit Final 29.09.07

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CA. K Gururaj AcharyaSeptember 29, 2007

Tax AuditTaxing Audit(or) !!...


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2 of 52 Taxing Time for Tax AuditCAK.G.Acharya

Profits and Gains of Business or Profession

Tax audit report signed on or after 10-8-2006 whether in respect of AY 2006-07 or

earlier AYs should be in the revised format.

Annexure-less IT return regime Vs. Tax Audit Report.

Turnover Vs. AS-7

Accountant (Para 9.3 of ICAIs G.N on Tax Audit)

Tax consultants may be tax auditor.

CA writing / maintaining books of the assessee/any partner of such CA / the

firm in whom such CA is a partner should not accept tax audit assignment.

If a relative of a director is appointed as tax auditor of a company, suchappointment attracts the provisions of S. 314 of the Companies Act. This is

because tax auditor is an office of profit for the purposes of S. 314.

If a CA gives a tax audit report for a concern in which he or his relatives is

substantially interested, the interest must be disclosed in his report.

Tax audit of a firm of CAs cannot be done by any partner / employee of the

firm


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3 of 52 Taxing Time for Tax AuditCAK.G.AcharyaProfits and Gains of Business or Profession

Chargeability U/S. 28

Profits from business or profession [S.28(i)]

Compensation on termination of a contract of managing agency / vesting in

the Government / management of any property or business [S. 28(ii)]

Trade / professional association Income from services for its members. [S. 28(iii)]

Profits on sale of REP license/ Exim scrip, Cash Assistance, Duty Drawback ofcustoms or excise against exports [S. 28(iiia), (iiib) & (iiic)]

Profit on transfer of DEPB Scheme or DFRC [S.28 (iiie)]

Perquisite arising from business or in exercise of a profession [S. 28(iv)]

Interest, salary, bonus, commission or remuneration of a partner of a firm [S. 28(v)]Interest, salary, etc. disallowed u/s 40(b shall be adjusted in partners income [S. 28 (v) Proviso]

Interest, salary, etc., disallowed in the assessment of firm U/s 185 shall not be taxable u/s 28(v) [S. 185]

Income under an agreement for not carrying activity [S. 28(va)]

Amount received from Keyman Insurance Policy referred to u/s 10(10D)[S. 28(vi)]


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Loss, expenditure or trading liability allowed as deduction earlier andsubsequently received or remission or cessation of the liability.

Liability unilaterally written off in the accounts is deemed as remission or

cessation of liability [S. 41(1), Expl.1]

Profits on sale of a capital asset for scientific research which was allowed U/s35 earlier [S. 41(3)]

Bad debts allowed u/s 36(1)(vii) in an earlier year. [S. 41(4)]

Note:

(1) Profits from transaction not undertaken in the regular course are taxable as casualincome under the head IOS.

(2) Profits from speculation business should be kept distinct from other business. [S. 28, Expl.2]

(3) Share income of a partner, in the total income of the firm, is exempt u/s 10(2A)


Chargeability U/S. 28


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Expenses Deductible

Rent, rates, taxes, repairs (excluding capex) & insurance of buildings [S. 30]

Repairs (excluding capex) and insurance of P&M and furniture [S. 31]

Depreciation

Additional Depreciation @ 20% -New P&M used for manufacture.

Assets used for < 180 days depreciation restricted to 50%.

Business of growing and manufacturing tea or coffee or rubber = Deduction

lower of Amount deposited in Tea/Coffee/Rubber Development Account or

40% of its profits from business [S.33AB]

Expenditure on scientific research related to business, (including capex less

land cost) [S. 35(1)(i) and (iv)]

125% of amount paid to approved scientific research association, university,

college or other institution for scientific research / research in social science

or statistical research.[S.35(1)(ii) and (iii)]



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125% of sum paid to a National laboratory or a University or an IIT with a specificdirection that it shall be used for scientific research under a program approvedin this behalf by the prescribed authority [S. 35(2AA)]

Company in business of bio-technology or manufacture of drugs,pharmaceuticals, electronic equipments, computers, telecommunicationequipments, chemicals or other notified articles. Deduction upto 125% ofexpenditure incurred (upto 31.3.2012) on scientific research (excluding land orbuilding) / on in-house R& D facility [S. 35(2AB)]

Capex on acquisition on right to operate telecommunication services allowed asa deduction over the license period [S. 35ABB]Then no deduction allowed u/s 32

Expenditure for promoting the social and economic welfare or upliftment of thepublic paid to PSU, local authority or an approved association. Specified projectsinclude drinking water projects in rural areas and urban slums, construction ofdwelling units or schools for the EWS, projects of non-conventional and

renewable source of energy systems, bridges, public highways, roads, promotionof sports, pollution control, etc. [S.35AC&Rule1(k)]

Expenditure on payment to association and institution for carrying out ruraldevelopment programmes or to a notified rural development fund, or theNational Urban Poverty Eradication Fund. [S. 35CCA]


Expenses Deductible


7/527 of 52 Taxing Time for Tax AuditCAK.G.Acharya

Preliminary expenses - Deductible in 5 EYI upto a max of 5% of COP or capital

employed.

Expenditure upto 31.3.1998 allowable in 10 EMI upto a maximum of 2.5% of COP or capital employed. [S. 35D]

Expenditure incurred on amalgamation or demerger in 5 EYI [S. 35DD]

VRS Expenditure allowable in 5 EYI [S. 35DDA]

Deduction for expenditure on prospecting, etc., for certain minerals [S. 35E]

Insurance premium for stocks or stores. [S. 36(1)(i)]

Insurance premium paid on employees health by any mode other than Cash

to GIC or any other insurer and approved by IRDA. [S.36(1)(ib)]Bonus or commission to employees, irrespective of the limit under the Payment

of Bonus Act. [S. 36(1)(ii)]

Interest on borrowed capital. [S. 36(1)(iii)]

Interest paid on borrowing for acquisition of new asset for extension of existing business or

profession from the date of borrowing till the date on which such asset is first put to use, shall notbe deductible.

Provident and superannuation fund contribution. [S. 36(1)(v),Rules 87 & 88]

Approved gratuity fund contributions. [S. 36(1)(v), Rules 103&104]

Sum received from employees and credited to their account in the relevant

fund before due date. [S. 36(1)(va)]


Expenses Deductible


8/528 of 52 Taxing Time for Tax AuditCAK.G.Acharya

Loss on death or becoming permanently useless of animals. [S. 36(1)(vi)]

Bad debt actually written off (Excluding provision for bad debts). [S. 36(1)(vii)]

Family planning expenditure. [S. 36(1)(ix)]Contributions towards Exchange Risk Administration Fund set up by PFI [S. 36(1)(x)]

BCTT [S.36(1)(xiii)]

Expenditure (Other than Capex or personal or for a purpose which is an offence or

is prohibited by law) incurred in furtherance of trade. [S.37(1)]

Following expenditures can also be claimed u/s 37(1), if incurred in furtherance of

business and is not of personal or capital nature:

Entertainment expenditure.

Expenditure on presentation articles,

Expenditure on advertisement outside India, incurred in foreign currency,

Travelling expenditure,

Expenditure on maintenance of guest house.


Expenses Deductible


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Payment of salary to working partner subject to specified limits and interest on capital(max 12%) to partners - authorized by partnership deed [S. 40(b)]1. Partnership deed will not have retrospective effect.

2. Deduction for remuneration shall not be allowed unless the partnership deed either specifiesthe amount of remuneration payable to each individual working partner or lays down themanner of quantifying such remuneration.

Expenses deductible on actual payment only- 43BProvision made for payment of contribution to an approved gratuity fund, or forpayment of gratuity payable during the year. [S. 40A(7)]Advertisement in any souvenir, brochure, etc. of political party. [S. 37(2B)]

Interest, royalty, fees for technical services or other sums payable outside Indiaor to NRI, foreign company in India on which TDS is not made or not depositedwithin the time limit. [S. 40(a)(i)]Salaries payable outside India or to a non-resident on which TDS is not paid ordeducted [S. 40(a)(iii)]

Interest, commission or brokerage, rent, royalty, fees for professional or technicalservices to resident on which TDS is not deducted or paid within the due date.

For the above 3 cases, where TDS is deducted or paid in any subsequent year,then such sum is deductible in the PY in which TDS is paid [S. 40(a)(ia)]


Expenses NOT Deductible


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STT [S. 40(a)(ib)]

FBT [S. 40(a)(ic)]

Tax on profits/ gains of business/ profession [S. 40(a)(ii)]Wealth Tax [S. 40(a)(iia)]

Payment to a PF or other fund established for employees benefit, unless

proper arrangements of TDS on any taxable payment out of such fund are

made [S. 40(a)(iv)]

Income Tax paid by employer on Perquisites of employee [S. 40(a)(v)]

Interest, salary, bonus, commission or remuneration made by AOP/BOI to its

members.

Expenditure > Rs. 20,000 paid otherwise than by account payee cheque/

bank draft (Exception Rule 6DD) [S. 40A(3)]

Where deduction is claimed on accrual basis and payment (exceeding Rs. 20,000) is made in a

subsequent year, the payment shall be deemed as profit of the assessee for the year in which the

payment is made. Upto A.Y.2007-08, the income was being recomputed and rectification was made

u/s154




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Annual listing fee paid to stock exchange.

Expenditure incurred by way of stamp paper, underwriting commission,

registration fees, lawyer fees etc., for raising debenture issue.

Initial expenditure on installation of fluorescent light.

Expenses on defending any proceedings for breach of any law relating to

sales tax.



F N 3CD P t A


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Form No. 3CD - Part A

1. Name of the assessee

2. Address

3. Permanent Account Number

4. Status

Status refers to assessee-status-i.e.

Individual/HUF/Firm/Company/AOP/BOI/AJP

5. Previous year ended

6. Assessment year

F N 3CD P t B


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7 (a) If firm or Association of Persons, indicate names of partners/membersand their, profit sharing ratios.

(b) If there is any change in the partners or members or in their profitsharing ratio since the last date of the preceding year, the particulars ofsuch change

Clause 7(a)

No need to furnish remuneration or interest to partners. [Para 18.1]

Clause 7(b)

The word particulars includes the date/s of change/s also. Dates ofchanges in salary to partners are also to be mentioned.

Admitting a minor to the benefits of partnership is also a change in thepartners.

Form No. 3CD - Part B


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8

(a) Nature of business or profession (if more than one business or profession is

carried on during the previous year, nature of every business or profession)

(b) If there is any change in the nature of business or profession the particularsof such change.

Form No. 3CDPart B

Change after the balance sheet date should be ignored.Instances of change in business or profession that is to be reported


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9.

a. Whether books of account are prescribed u/s 44AA, if yes, list of books

so prescribed.b. Books of account maintained (In case books of account are

maintained in a computer system, mention the books of accountgenerated by such computer system.)

c. List of books of account examined.

Form No. 3CDPart B

CBDT has prescribed books of account only for specified professionals

Accountancy

Architectural

Authorized representativeCompany secretary

Engineering

Film artist

Information Technology

Interior decoration

LegalMedical

Technical consultancy

Company cannot be a professional


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16 of 52 Taxing Time for Tax AuditCAK.G.AcharyaForm No. 3CDPart B

Books of Account to be maintainedBy Specified professionals IFF gross receipts > Rs.1,50,000

Cash book , Journal, Ledger;

Carbon copies of bills and receipts serially numbered, where sum exceedsRs. 25,Original bills and receipts for exp. incurred or, where such bills and receiptsare not issued and the expenditure incurred < Rs. 50, payment vouchersprepared and signed by the person, unless the cash book containsadequate particulars in respect of the expenditure;For medical profession, apart from the above books, a daily case register inForm No.3C and an inventory of stock of drugs, medicines etc. should bemaintained. [Rule 6F]

By Businessmen and other professionals (not specified above):a) Income > Rs. 1.20 Lacs orb) Total sales, turnover or gross receipt > Rs. 10 Lac

No account books have been prescribed by CBDT in case of above.

Besides, where an assessee is covered U/S.44AD, S.44AE, S.44AF, S. 44BB or S.44BBB & he claims his income is lower than that computed under the respectiveSections, he shall compulsory maintain the aforesaid books of account.

Penalty for failure to maintain account books, u/s. 271A - Rs. 25,000.


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10.Whether the profit and loss account includes any Profits and gainsassessable on presumptive basis, if yes, indicate the amount and the

relevant section (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB or any otherrelevant section.)

Form No. 3CDPart B

S. 44AD: Civil contractor

8% of gross receipts or any higher amount [NA if gross receipts > Rs.40 lac]

S 44E: Business of Plying, hiring or leasing goods carriages

Rs.3,500 PM for heavy goods vehicle and Rs.3150 PM for other vehicles or

any higher amount [NA if assessee owns > 10 goods carriages any time

during PY]

S 44AF:Retail Business

5% of Turn-over or any higher amount [NA if gross receipts > Rs.40 lacs]

S 44BBB:Foreign cos. Engaged in the Business of civil Construction, etc.,incertain turnkey Power projects

10 % of amount for specified activities


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11.

(a) Method of accounting employed in the previous year

(b) Whether there had been any change in method of accounting employedvis-a-vis the method employed in the immediately preceding previous year

(c) If answer to (b) above is in the affirmative, give details of such change,

and the effect thereof on the profit or loss

(d) Details of deviation, if any, in the method of accounting employed in theprevious year from accounting standards prescribed under section 145and the effect thereof on the profit or loss.

Form No. 3CDPart B


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Clause 11(a)

Method of AccountingMercantile or Cash

Clause 11(b)

Only non-corporate assessees can change their method of accounting fromcash to mercantile orvice-versa.

Clause 11(c)

Effect thereof on the profit or loss refers to the effect on the profit or loss asper the P&L a/c. It does not refer to the effect on taxable income.

Non-disclosure of a change in accounting policy will have to be reportedunder clause 11(d) and not under this clause.

Clause 11(d)

S.145 (1) requires the assessees to comply with the AS notified u/s 145(2).

NAS(IT)- I - Disclosure of Accounting Policies and

NAS(IT)-II - Disclosure of prior period items and extraordinary items andchanges in accounting policies.

Form No. 3CDPart B


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20 of 52 Taxing Time for Tax AuditCAK.G.AcharyaForm No. 3CDPart BForm No. 3CDPart B

12.

(a) Method of valuation of closing stockemployed in the previous year

(b) Details of deviation, if any, from the method of valuation prescribed u/s 145A,

and the effect thereof on the profit or loss

12A. Give the following particulars of the capital asset converted into

stockin-trade:-(a) Description of capital asset;

(b) Date of acquisition;

(c) Cost of acquisition;

(d) Amount at which the asset is converted into stock-in-trade.

Form No. 3CDPart B

Clause 12(a):

Raw materialat cost:

Finished goodsat cost or NRV, whichever is lower.


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COST

Cost of inventories should include cost of purchase, cost of conversion and all cost

incurred to bring the inventories to their present location and condition.

Cost of conversion to include fixed factory overheads also (i.e. Absorption costing

basis). Direct costing (marginal costing or variable costing) basis is not allowed

Cost of inventories of items that are not ordinarily interchangeable and goods or

services produced and segregated for specific projects should be assigned by

Specific identification of their individual cost. However, when there are large

number of items of inventory which are ordinarily interchangeable, specific

identification of costs is inappropriate since, in such circumstances, an enterprise

could obtain predetermined effects on the net profit or loss for the period by

selecting a particular method of the ascertaining the items that remain in

inventories.

The cost of inventories, other than those specified above, should be assigned by

using the FIFO or weighted average cost formula.

Form No. 3CDPart B


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NET RELISABLE VALUE: (NRV)

NRV should be estimated at each balance sheet date.

Estimates of NRV should take into consideration fluctuations of price or cost

directly relating to events occurring after the B/S date to the extent that such

events confirm the conditions existing at the B/S date.

Estimate of NRV- when based on contract price- Estimates of NRV must also take

into consideration the purpose for which the inventory is held. For example, the

NRV of the quantity of inventory held to satisfy firm sales or service contracts is

based on the contract price.

Estimate of NRV-when based on general selling prices- If the sales contracts are for

less than the inventory quantities held, the NRV of the excess inventory is based on

general selling prices.

COMPARISON BETWEEN COST AND NRV:

Item-by-item basis or on group of similar or related items basis. Aggregate

comparison is not permissible.

Form No. 3CDPart B


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Clause 12(b)

S. 145A. Notwithstanding anything to the contrary contained in S.145, the valuation of

purchase and sale of goods and inventory for the purposes of determining theincome chargeable under the head PGBP shall be-

1. in accordance with the method of accounting regularly employed by the assessee:

and

2. further adjusted to include the amount of any tax, duty, cess or fee (by whatevername called) actually paid or incurred by the assessee to bring the goods to the

place of its location and condition as on the date of valuation.

Clause 12A:

1. The particulars of clause 12A have to be furnished with reference to the previous

year in which the capital asset was converted into stock-in-trade.

2. Though the purpose of reporting is keeping in view the provisions of S. 45(2), the tax

auditor is not required to compute to market value, capital gain, business profit etc.3. He has to disclose the date of acquisition of asset and cost acquisition.

4. He has to report the amount at which the asset is converted into stock-in-trade (as

per books of account). If the conversion value is at the book value of asset, he has

to report the fact under this clause.

Form No. 3CDPart B


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13. Amounts not credited to the profit and loss account, being, -

(a) the items falling within the scope of section 28;

(b) the proforma credits, drawbacks, refund of duty of customs or excise orservice tax, or refund of sales tax or value added tax where such credits,drawbacks or refunds are admitted as due by the authorities concerned;

(c) escalation claims accepted during the previous year;

(d) any other item of income;

(e) capital receipt, if any

Form No. 3CDPart BForm No. 3CDPart BForm No. 3CDPart BForm No. 3CDPart B

Clause 13:Sub-clause (b) and (c) will not apply to an assessee following the cash basisof accounting.

According to ICAI, If the letter admitting the amount is dated say 28-3-2007and received by the assessee on 2-4-2007, it is admitted by the authoritieswithin the previous year.


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14. Particulars of depreciation allowable as per the Income-tax Act, 1961 inrespect of each asset or block of assets, as the case may be, in the followingform :-

(a) Description of asset/block of assets

(b) Rate of depreciation

(c) Actual cost of written down value, as the case may be

(d) Additions/deductions during the year with dates; in the case of any addition of an asset,date put to use; including adjustments on account of: Modified Value Added Tax creditclaimed and allowed under the Central Excise rules, 1944, in respect of assets acquired

on or after 1st March, 1994,

(i) change in rate of exchange of currency, and

(ii) subsidy or grant or reimbursement, by whatever name called

(e) Depreciation allowable

(f) Written down value at the end of the year

Form No. 3CDPart B


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Applicability of clause 14 -

Regular Depreciation u/s 32(1)(i)/(ii) Addition depreciation u/s 32(1)(iia)

Available in respect of tangible assets(buildings, machinery, plant and furniture)and intangible assets.

Available only forplant and machinery items excludingthe following:

Ships and aircrafts.

Machinery/ plant installed in any office,premises/residential, accommodation in the natureof guest house.

Office appliances/road transport vehicles.

Any plant/machinery whose 100% of actual cost hasbeen allowed as deduction.

Available in respect of new as well assecond-hand items

Available only in respect of new item.

Rates will be prescribed % on WDV

[as per S.32(1)(ii) prescribed % of actual

cost]

Rate is 20% of actual cost if acquired and installed on orafter 1-4-2005 and 15% of acquired and installed on or

after 1-4-2002 but before 1-4-2005.Available to all assesses across the board Available only to assesses who manufacture or produce

articles/things.

Assessee will be allowed depreciationirrespective of whether he claims it or not.

Same

Is additional depreciation available to an assessee engaged in production of computer software?

Form No. 3CDPart B


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15. Amounts admissible under sections

33AB, 33ABA, 33AC, 35, 35ABB, 35AC, 35CCA, 35CCB, 35D, 35DD, 35DDA, 35E

(a) debited to the profit and loss account (showing the amount debited anddeduction allowable under each section separately);

(b) not debited to the profit and loss account

Form No. 3CDPart B

16

(a) Any sum paid to an employee as bonus or commission for services rendered,where such sum was otherwise payable to him as profits or dividend. [Section36(1)(ii)]

(b) Any sum received from employees towards contributions to any providentfund or superannuation fund or any other fund mentioned in section 2(24)(x);and due date for payment and the actual date of payment to theconcerned authorities u /s 36(1) (va)

17 A d bi d h fi d l b i


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17. Amounts debited to the profit and loss account, being :-

(a) expenditure of capital nature;

(b) expenditure of personal nature;

(c) expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by

a political party;

(d) expenditure incurred at clubs, -(i) as entrance fees and subscriptions

(ii) as cost for club services and facilities used

(e) (i) expenditure by way of penalty or fine for violation of any law for the time being in force;

(i) any other penalty or fine:

(ii) expenditure incurred for any purpose which is an offence or which is prohibited by law;

(f) amounts inadmissible under section 40(a);(g) Interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/40(ba) and

computation thereof;

(h) (A) whether a certificate has been obtained from the assessee regarding payments relating to anyexpenditure covered under section 40A(3) that the payments were made by account payee

cheques drawn on a bank or account payee bank draft, as the case may be

(B) amount inadmissible under section 40A(3), read with rule 6DD [with break-up of inadmissibleamounts]

(i) provision for payment of gratuity not allowable under section 40A(7);

(j) any sum paid by the assessee as an employer not allowable under section 40A(9);

(k) particulars of any liability of a contingent nature

(l) amount of deduction inadmissible in terms of section 14A in respect of the expenditure incurredin relation to income which does not form part of the total income;

(m) amount inadmissible under the proviso to section 36(1)(iii);Form No. 3CD Part B


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Clause 17(e)

The tax auditors opinion on deductibility or non-deductibility ofpenalty/fine/expenditure incurred for offence/purpose prohibited by law is not required.

[Para 32.1].Payments for breach of contract of payments for redressal of contractual wrongs arenot required to be reported under this clause.

If the impost is purely compensatory in nature, the same is not required to be reportedunder clause 17(e).

Lachmandas Mathurdas Vs CIT (2002) 254 ITR 799 (SC) Interest on arrears of sales tax

was considered as not being penal but compensatory in nature.

Clause 17(h)

If an amount is disallowed u/s 40(b) and the same has been paid in cash in violation ofS. 40A(3), can such expenditure be disallowed under both sections?

It has been held that disallowance u/s Section 40A(3) cannot be made when net profitsare computed estimated basis. [CIT Vs Purushothamalal Tamrakar (2004) 270 ITR 314

(MP)], [ACIT Vs Padamchand Bhansali 86 IIJ 215 (Jd)].

Clause 17(i)

If provision for gratuity is not made in accordance with GAAP, tax auditor will have toqualify his report in Form NO.3CB. Non-allowability under S. 40A(7) is no excuse for notmaking a provision in accordance with GAAP.

Form No. 3CDPart B


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Clause 17 (f):

Provisions of S. 40(a)

S. 40(a) disallows the following.

i. Interest, royalty, fees for technical services or other sum chargeable under this Act, which ispayable.

A. outside India; or

B. In India to a non-resident, not being a company or to a foreign company and if the taxhas not been paid thereon nor deducted there from under chapter XVII-B;

ii. STT;

iii. FBT;iv. Amount of tax levied on the PGBP or assessed at a proportion of, or otherwise on the basis of,

any such profits or gains.

v. Wealth-tax.

vi. Payment to a PF or other fund established for employees benefit, unless proper arrangements ofTDS on any taxable payment out of such fund are made

vii. Income Tax paid by employer on Perquisites of employee [S. 40(a)(v)]

viii. Interest, commission or brokerage, rent, royalty, fees for professional or technical services toresident on which TDS is not deducted or paid within the due date.

ix. Any payment which is chargeable under the head Salaries. if it is payable

A. outside India; or

B. to a non-resident, and if the tax has not been paid thereon nor deducted there fromunder chapter XVII-B;

MSMEDA 2006


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Micro, Small & Medium Enterprises Development Act

Obligations ofbuyer under the Act:

Pay within agreed time which cannot exceed 45 days from date of

acceptance/date of deemed acceptance. If no time for payment has been

agreed then payment should be made on or before the appointed time i.e. 15

days from acceptance.Otherwise - pay compound interest at 3 times of bank rate notified by RBI.

Interest will apply even if contract states otherwise.

Not to claim deduction (under the IT Act) of the interest paid/payable.

Particulars Invesment

Plant & Machinery(Manufacturing)

Equipment(Service)

Micro Enterprises * Upto 25 Lacs Upto 10 Lacs

Small Enterprises * 25 Lacs to 5 Crores 10 Lacs to 2 Crores

Medium Enterprises 5 Crores to 10 Crores 2 Crores to 5 Crores

*Suppliers to file a memorandum

Form No. 3CDPart B

MSMEDA 2006


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MSMEDA 2006

According to S. 22 of MSMEDA, where any buyer is required to get his annual accounts

audited under any law for the time being in force, such buyer shall furnish the following

additional information in his annual statement of accounts.

The principal amount and the interest due thereon remaining unpaid to any supplier as

at the end of each accounting year;

Interest paid by the buyer in terms of S. 16, along with payment amount made to the

supplier beyond the appointed day during each accounting ear;

Interest due and payable for the period of delay in making paymentInterest accrued and remaining unpaid at the end of each accounting year; and

The amount of further interest remaining due and payable even in the succeeding years,

until such date when the interest dues as above are actually paid to the small enterprise,

for the purpose of disallowance as a deductible expenditure u/s 23.

Tax Auditors dutiesThe Interest liability/payment under S. 16 if debited to P&L a/c will have to be mentioned

by the tax auditor in his tax audit report under clause 17(e) as this amount is incurred for a

purpose which is contravention of law.

Form No. 3CDPart B


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18. Particulars of payments made to persons specified under section 40A(2)(b)

Form No. 3CDPart B

Clause 18:

The tax auditor is only required to give particulars of payment to persons specified underS. 40A(2)(b) under this clause.

He is not required to give his opinion on the unreasonability/excessiveness of the

payments. That is the AOs prerogative.


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19. Amounts deemed to be profits and gains under section 33AB or 33ABA or 33AC

Form No. 3CDPart B

20. Any amount of profit chargeable to tax under section 41 and computation

thereof

21. *(i) In respect of any sum referred to in clause (a), (b), (c), (d), (e)/ (f) of section43B, the liability for which;

(A) pre-existed on the first day of the previous year but was not allowed in the

assessment of any preceding previous year and was:(a) paid during the previous year;

(b) not paid during the previous year;

(B) was incurred in the previous yearand was:

(a) paid on or before the due date for furnishing the return of income of the previous yearunder section 139(1);

(b) not paid on or before the aforesaid date

(ii) *State whether sales tax, customs duty, excise duty or any other

indirect tax, levy, cess, impost, etc., is passed through the profit

and loss account.


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22 (a) Amount of Modified Value Added Tax credits (now Cenvat credits) availedof or utilised during the previous year and its treatment in the profit and lossaccount and treatment of outstanding Modified Value Added Tax credits in

the accounts(b) Particulars of income or expenditure of prior period credited or debited tothe P&L account

Form No. 3CDPart B

23. Details of any amount borrowed on hundi or any amount due thereon(including interest on the amount borrowed) repaid, otherwise than

through an account payee cheque. [Sec.69D]

24 *(a) Particulars of each loan or deposit in an amount exceeding the limit specified insection 269SS taken or accepted during the previous year :-

(i) name, address and permanent account number (if available with the assessee) of thelender or depositor;

(ii) amount of loan or deposit taken or accepted;

(iii) whether the loan or deposit was squared up during the previous year;

(iv) maximum amount outstanding in the account at any time during the previous year;

(v) whether the loan or deposit was taken or accepted otherwise than by an accountpayee cheque or an account payee bank draft

*(These particulars needs not be given in the case of a Government company, a banking company a

corporation established by a Central, State or Provincial Act.)


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24.

(b) Particulars of each repayment of loan or deposit in an amount exceeding the limitspecified in section 269T made during the previous year :-

(i) name, address and permanent account number (if available with the assessee) ofthe payee;

(ii) amount of the repayment;

(iii) maximum amounts outstanding in the account at any time during the previousyear;

(iv) whether the repayment was made otherwise than by account payee cheque oraccount payee bank draft

(c) Whether a certificate has been obtained from the assessee regarding taking or acceptingloan or deposit, or repayment of the same through an account payee cheque or anaccount payee bank draft. [Yes/No]

The particulars (i) to (iv) at (b) and the Certificate at (c) above need not be given in thecase of a repayment of any loan or deposit taken or accepted from Government,

Government company, banking company or a corporation established by a Central,State or Provincial Act


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Clause 24(a)

Sale proceeds collected by the selling agent (on behalf of his principal) is not a

loan or deposit.

Advance received against sale is not a loan or deposit.

Security deposits against contracts, etc. are deposits.

The entries that relate to transactions with a supplier and customer are not loan

or deposits accepted.

If the aggregate loans/deposits in a year (from a singly party) exceed Rs.20,000

but each individual item is less than Rs.20,000 the information will still be required

to be given in respect of all such entries starting from the entry when the

balance reaches Rs.20,000 or more and until the balance goes down below

Rs.20,000.

The Gauhati High Court in the case of CIT Vs Bhagwati Prasad Bajoria (HUF)

(2003) 263 ITR 487 has held that where the loan transaction was genuine and

there was a immediate necessity for money, discretion used by the officer under

Section 273 B not to levy penalty under Section 271 D for violation of the

provisions of Section 269 SS is justified.

Penalty for Contravention of 269SS/T = Amount of loan or deposit [S. 271D/E]

Form No. 3CDPart B


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25.(a) Details of brought forward loss or depreciation allowance, in the following manner,

to the extent available:Serial

Number

Assessment

Year

Nature of

Loss/allowance

(in Rs)

Amount as

Returned

( in Rs)

Amount as

Assessed (give

Reference to

Relevant order

Remarks

(b) whether a change in shareholding of the company has taken place in the previousyear due to which the losses incurred prior to the previous year cannot be allowed

to be carried forward in terms of section 79.

Form No. 3CDPart B


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Clause 25(a)

Amount to be stated as per return and assessment orders, appellate orders,

revision and rectification orders of Past AYs.

Should be separately given under each head of income under which theloss/depreciation remain unabsorbed.

In the Remarks column information about pending assessment /appeals /

rectification / revision proceedings or delay in filing loss returns may be given.

Clause 25(b)

Applies only to Cos. in which public are not substantially interested.

Provision of S. 79 - will not apply in the following cases where a change in thesaid voting power takes place in a PY as a result of

Death of a shareholder; [first proviso to S. 79]

Gift of shares to any relative of the shareholder making such gift; and

Amalgamation or Demerger of a foreign company subject to the condition that 51%

shareholder of the amalgamating or demerged foreign company continue to be theshareholders of the amalgamated or the resulting foreign company.

Unabsorbed Depreciation u/s 32(2) & unabsorbed Scientific Research Allowance u/s

35(4) can be carried forward, despite change shareholding > 51%.

Form No. 3CDPart B


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26. Section-wise details of deductions, if any, Admissible underChapter VIA

Form No. 3CDPart B

27.(a) Whether the assessee has complied with the provisions of Chapter XVII-B

regarding deduction of tax at source and regarding the payment thereof tothe credit of Central Government [Yes/No]

(b) If the provisions of Chapter XVII-B have not been complied with, please givethe following details*, namely:-

(i) Tax deductible and not deducted at all

(ii) shortfall on account of lesser deduction than required to be deducted

(iii) tax deducted late

(iv) tax deducted but not paid to the credit of the Central Government

Please give the details of cases covered in (i) to (iv) above.


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Clause 27There are a number of debatable issues involved -So it may not be possible to

give a yes/No answer to clause 27(a). Tax auditor may make appropriate

comments against clause 27(a) along the following lines:

If the tax auditor is Satisfied regarding TDS compliance

We have verified the compliance with the provisions of chapter XVII-B

regarding deduction of tax at sources and regarding the payment thereof to

the credit of the Central Government. Our verification has been carried out in

accordance with the Auditing Standard generally accepted in India, which

includes test checks and concept of materiality. On the basis of verification a

aforesaid, we have not come across any material non-compliance with the

provisions of Chapter XVII-B regarding deduction of tax at source and

regarding the payment thereof to the credit of the Central Government.

If the tax auditor is NOT Satisfied regarding TDS compliance

We have verified the compliance with the provisions of chapter XVII-B

regarding deduction of tax at source and regarding the payment thereof tothe credit of the Central Government. Our verification has been carried out in

a accordance with the Auditing Standards generally accepted in India which

include test checks and concept of materiality. The non-compliances

revealed during our verification as aforesaid have been mentioned in item

27(b) hereunder.

Form No. 3CD Part B


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Clause 27(b)(i) Tax deductible and not deducted at all

Sl. No. RelevantSection Particulars of theamount credited / paid Amount of tax deductible butnot deducted Remarks

Suggested format for reporting Non-Compliances

Clause 27(b)(ii) shortfall on account of lesser deduction than required to bededucted

Sl. No. RelevantSection

Particulars of theamount credited / paid

Amount of

Tax deductible

Amount oftaxdeducted

Remarks

Not deducting SC or Cess tantamounts to short deduction.


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44 of 52 Taxing Time for Tax AuditCAK.G.AcharyaSuggested format for reporting Non-Compliances

The non-compliances required to be reported in clause 27(b)(iii) Tax deducted

late may be in the following format:

Sl.No.

RelevantSection

Particulars of theamount credited /

paid

Amount ofTax deductible

Due date ofdeduction

Amount oftax

deducted

Remarks

Clause 27(b)(iv) Tax deducted but not paid to the credit of the Central

Government .

Sl.No.

RelevantSection

Particulars of theamount credited /

paid

Amount of taxDeducted

Tax Deducted butnot deposited

with the Central

Govt.

Remarks

Report only cases where

TDS has been deducted but not paid before the last date of the previous year underaudit.


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28.

(a) In the case of a trading concern, give quantitative details of principal items ofgoods traded :

(i) Opening Stock;

(ii) Purchases during the previous year;

(iv) Sales during the previous year;

(v) Closing Stock;

(vi) Shortage/excess, if any

(b) In the case of a manufacturing concern quantitative details of the principal items of raw

materials, finished products and by-products:

A. Raw Materials:

(i) Opening stock;

(ii) Purchases during the previous year;

(iii) Consumption during the previous year;

(iv) Sales during the previous year;

(v) closing stock;

(vi) * yield of finished products;

(vii) * Percentage of yield;

(viii) * Shortage/excess, if any *To the extent available.

Form No. 3CDPart B


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B. Finished products/By-products :

(i) opening stock;

(ii) purchase during the previous year;

(iii) quantity manufactured during the previous year;(iv) sales during the previous year;

(v) closing stock;

(vi) shortage/excess, if any

* information may be given to the extent available.

Form No. 3CDPart B

29. In the case of a domestic company, details of tax on distributed profits undersection 115O in the following form :-

(a) total amount of distributed profits;

(b) total tax paid thereon;

(c) dates of payment with amounts

30. Whether any cost audit was carried out, if yes, enclose a copy of the reportof such audit [See section 139(9)]

31. Whether any audit was conducted under the Central Excise Act, 1944, if yes,enclose a copy of the report of such audit


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32. Accounting ratios with calculations as follows :-

(a) Gross profit/Turnover;

(b) Net profit/Turnover;

(c) Stock-in-trade/Turnover;

(d) Material consumed/Finished goods produced

Form No. 3CDPart B

Clause32:

Numerators and denominators used for calculating the ratio should also be

specified.

Ratios have to be given for the business as a whole.In case of a partnership firm, the net profit ratio should be calculated after

charging such interest and remuneration as these items constitute a charge of

profit as per GAAP.

Place:Date:

Name:Address:


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Annexure - I

PART A

1. Name of the assessee

2. Address

3. Permanent Account Number

4. StatusDomestic Company in which publicare not substantially interested.

5. Previous year ended

6. Assessment year

PART B

Nature of business or profession in

respect of every business orprofession carried on during theprevious year

CODE

Form No. 3CDPart B


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49 of 52 Taxing Time for Tax AuditCAK.G.AcharyaForm No. 3CD Part B

Current Year Preceding Year

Sl. No. Parameters 2006-2007 2005-2006

1Paid-up share capital/capital of partner/proprietor 1099100 1099100

2 Share Application Money/Current Account of Partner or Proprietor,

if any, 0 0

3Reserves and Surplus/Profit and Loss Account 4605492 3524031

4 Secured loans 6846651 4235693

5 Unsecured loans 862782 898589

6 Current liabilities and provisions 6107477 5642267

7 Total of Balance Sheet 14174505 10647761

8 Gross turnover/gross receipts 40625483 19071156

9 Gross profit 6912638 4102426

10 Commission received 0 0

11 Commission paid 1800 0

12 Interest received 1321 2001

13 Interest paid 879753 606905

14 Depreciation as per books of account 321410 292504

15Net Profit (or loss) before tax as per Profit and Loss Account 1599216 258017

16Taxes on income paid/provided for in the books 647623 73516


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Expense s.t to FBT Value of FB

1 Privilege/Service/Facility/Amenity - Directly or Indirectly by E'R to E'E 0%

2 Any Free or Concessional ticket for private journeys 100%

3 Contribution to Superannuation fund > Rs.100000 Per Employee 100%

1 Entertainment 20%

2 Hospitality of every kind to any person 20%

3 Conference 20%

4 Sales promotion, including publicity excluding advertisement 20%

5 Employees Welfare 20%

6Conveyance 20%

Tour and travel (including foreign travel) 5%

7 Use of Hotel, boarding and lodging 20%

8 Repair, running (incl. Fuel), maintenance of Cars and depn. thereon 20%

9 Repair, Running (incl. fuel), maintenance of aircraft and dep. thereon 20%

10 Use of Telephone including mobile phone (other than leased lines) 20%

11 Maintenance of accommodation in the nature of guest houses 20%

12 Festival celebration 50%

13 Use of health club and similar facilities 50%

14 Use of any other club facilities 50%

15 Gifts 50%

16 Scholarship 50%

Form No. 3CDPart B


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FBT requirements and Tax Audit Report:

Nature of Business:If the assessee is carrying on multiple activities like software, hardware, trading etc,

the concessionary value of fringe benefits can be quantified based on separate

books of account maintained for each activity.

In case the assessee is not maintaining separate books of account F A Q No.41 of

the circular suggests that the expenditure may be attributed to various activities

proportionate to the Wages & Salaries cost of the assessee.

Effect of CBDT circular on Tax Auditors

CBDT Circular has answered 107 FAQs with regard to FBT. Where the clarifications

given by the Board are not in line with the Act or Rules, the auditor and the

assessee need not follow the same.

Form No. 3CDPart B


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CA. K. Gururaj AcharyaB.Com., Grad.CWA., FCA.

Documents

TaxAudit Final 29.09.07