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TAX AUDIT�Clauses 26 to 44

September 02, 2023

Northern India Regional Council (ICAI)

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CA. Pankaj Saraogi

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COMPLIANCE OR COMPILATION OR COMPLICATION

  • Till AY 2013-14
    • Compliance of compilation
  • W.e.f. AY 2014-15
    • Obviously a compliance
    • Data compilation is there but with perfection
    • Complication – only in terms of comparability of columns in Form 3CD and columns in ITR forms
    • Addition u/s 143(1) on the basis of Tax Audit Forms

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COMPLIANCE OR COMPILATION OR COMPLICATION

  • W.e.f. AY 2020-21
    • Data compilation is there but with professional competence
    • Pre-filled ITR from Tax Audit report filed
  • W.e.f. AY 2022-23
    • No new clause notified till date
    • But 2 clauses made effective – GST & GAAR

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3CD vs ITR

  • Corresponding columns in Schedule OI
  • Must match otherwise 143(1) addition or selection u/s 143(2)
  • For every column in 3CD, match corresponding column in ITR
  • Example - CSR expenses (no column in 3CD but if disclosed in other column in 3CD and in ITR in CSR expenses, differences may arise)
  • Gratuity provision generally reflected twice – 40A(7) and 43B but in ITR, at one place only

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CLAUSE 26 – SECTION 43B

  • TDS – to be reported or not?
  • Expense incurred during the year vs expense outstanding as at year end
  • Any requirement of reconciliation vis-à-vis past years
  • Paid after signing of tax audit report but before DD of ITR
    • Revise Tax Audit Report
  • What if expenses no more payable – whether to be reported or not in year in which it is no more payable

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CLAUSE 27

  • CENVAT vs GST – GST to be reported or not
  • Prior period expenses – Difference between
    • Expenditure of any earlier year debited to P&L A/c
    • Expenditure relating to any earlier year but has crystallized during the relevant year
    • Material adjustments necessitated by circumstances which may be related to previous periods but determined in the current period
      • Recording of expense on settlement of a long dispute in a particular year
      • Debit of sales return of ales recorded in earlier years

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CLAUSE 29B

  • Clause 29B – Section 56(2)(x)
    • Buy back of shares (DCIT vs Venture Lighting India Ltd 150 taxmann.com 523 (Chennai) & VITP (P.) Ltd. vs. DCIT 143 taxmann.com 304 (Hyd.)
    • Bonus shares
    • Right shares/fresh issue of shares
    • Waiver of loan – upto AY 2023-24 vs section 28(iv) vs Hon’ble SC in Mahindra & Mahindra 404 ITR 1 vs non-business loan
    • Issues – on the occasion of marriage (vs business receipts/personal receipts)

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CLAUSE 31

Clause

Particulars to be reported

31(a)

All loans or deposits accepted in excess of specified limit u/s 269SS during the previous year

31(b)

Particulars of all specified sums accepted in excess of the specified limit u/s 2699SS during the previous year

31(ba)

All receipts in excess of the limit specified in section 269ST otherwise than by way of cheque/bank draft/ECS through a bank a/c

31(bb)

Receipts in excess of limits specified u/s 269ST by cheque/demand draft not being account payee cheque/account payee bank draft

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CLAUSE 31

Clause

Particulars to be reported

31(bc)

All payments in excess of the limits specified in section 269ST otherwise than by way of cheque/bank draft/ECS through a bank a/c

31(bd)

Payments in excess of the limits specified in section 269ST by cheque/demand draft not being account payee cheque/account payee bank draft

31(c)

All repayments of loan deposit or specified advance exceeding the limit specified in section 269T

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CLAUSE 31

Clause

Particulars to be reported

31(d)

Particulars of repayment of loan/deposit/specified advance in excess of the limits specified in section 269T otherwise than by way of cheque/bank draft/ECS through a bank a/c

31(e)

Particulars of repayment of loan/deposit/specified advance in excess of the limits specified in section 269T by cheque/demand draft not being account payee cheque/account payee bank draft

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CLAUSE 31

  • Death of lender
    • Loan shifted in name of nominee/legal heir
    • How to report alongwith nature of mode of receipt and payment
  • Adjustment by way of journal entry
    • SLP pending with Hon’ble SC
      • PCIT vs Shakti Foundation 107 taxmann.com 460
      • CIT vs Object Frontier Software 75 taxmann.com 196
      • Favorable (as net settled through cheque) DCIT vs Macrotech Developers Ltd 143 Taxmann.com 106 (Mum. ITAT)

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CLAUSE 31

  • TAQRB – Observations
    • Consolidated figures are reported for multiple parties
    • For observation – general language used without modifying as per facts

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CLAUSE 32

  • Clause 32(a) – b/f loss/depreciation
    • Amount returned = amount assessed if assessment attained finality
    • TAQRB Observations
      • Section under which Order passed and date of order not reported
  • Clause 32(b) – change in shareholding – Section 79
    • Need to check shareholding of each year of which losses are being carried forward to current year

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CLAUSE 32

  • Clause 32(c) – speculation loss – section 73
    • Explanation to Section 73

Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

    • Need to be checked, whether general losses are speculative losses or not

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CLAUSE 33 – DEDUCTION u/c III/VI-A

  • Specially in case of individuals
  • Audit of books of business or of individual
  • If of business, then payments covered up by Chapter VI-A should be reported only if made through bank accounts pertaining to business

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CLAUSE 34 TO 37

  • Clause 34 – TDS
    • Both – through P&L and outside P&L (advances/property)
    • Cross verify clause 21(b) (i.e. section 40(a)(i)/(ia)) vs clause 34
      • Mismatch = advance payments, capital expenditure
    • Take care of 194R
    • Difference in opinion regarding deductibility, section thereof
      • Observation clause 3 or clause 5
  • Clause 35 – principal goods traded
    • Goods > 10% of total purchases
    • Obtain statements provided to bankers
  • Clause 37, 38 & 39 – Various Audits
    • GST Audit = two views

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DEEMED DIVIDEND – 2(22)(e)

  • Clause 36A(a)

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  • In case of common shareholder in lender & borrower, who has to report? – common shareholder or borrower.
    • Madhur Housing and Development Co. 340 ITR 14 (SC)

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DEEMED DIVIDEND – 2(22)(e)

  • Registered vs beneficial owner
    • Conflict judgements – CIT vs C.P. Sarathy Mudaliar 83 ITR 170 (SC) & Rameshwarlal Sanwarmal 2 SCC 371 (SC)
    • Conflict considered in National Travel Services vs CIT 89 Taxmann.com 332 (SC) (pending with Chief Justice)
  • Accumulated profits (not able to compute) – disclaimer may be given
  • Circular No. 19/2017 dated 12/06/2017

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CLAUSE 40 - RATIOS

  • Turnover – as per books only
  • TAQRB Observation
    • net profit before tax to be reported
  • For service sector – only net profit ratio to be disclosed, GP ratio not required
  • Reconciliation with ITR – Schedule Manufacturing, Trading & P&L A/c
  • Stock-in-trade – only closing stock of finished goods and not others
  • Consistency in numerator and denominator – in case of net profit other incomes may be included – state the fact in 3CA/3CB
  • Last year not audited = need not be disclosed for last year

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CLAUSE 44

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CLAUSE 44

  • Aggregate required to be reported (although facility to add rows is provided in utility)
  • Both revenue and capital expenditure to be reported
  • Depreciation – not required to be included in column 3 to 7 (not even in column 2)
  • Bad debts, provisions – not required to be included (but for provisions, any amount adjusted with provisions, need to be accounted) in column 3 to 7 (but in column 2 – yes)

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CLAUSE 44

  • Transactions = not supply of services/goods (Schedule III) – need not be given. e.g. salary (but in column 2 – yes)
  • Non-GST Expenditures (like petroleum) = exempted supply (non-taxable supply = exempted supply)
  • Column 6 = column 3 + 4 + 5. no need to go for exact meaning of word “payments”
  • Column 2 = Column 6 + 7 (except for reasons mentioned above)
  • Interest = from unregistered entities (may be verified from PAN available whether that person registered or not)

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CLAUSE 41 TO 43

  • Clause 41 – demands raised/refunds issued – any law except income-tax law/wealth-tax law
  • Clause 42 – whether required to furnish Form No. 61/61A/61B
    • Check invoices of amounts more than Rs. 2 lakh
  • Clause 43 – Section 286 – Reporting entity

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CLAUSE 29 & 29A

  • Clause 29 – Section 56(2)(viib)
    • Balance sheet – preceding adopted in AGM
  • Clause 29A – section 56(2)(ix)
    • Forfeiture of advance for capital asset
    • Advance not repayable on lapse of time

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CLAUSE 30A

  • Clause 30A – primary adjustment and secondary adjustment (transfer pricing)
    • Conservative approach - disclose
      • Primary adjustments for AYs prior to AY 2017-18
      • Primary adjustment aggregating less than Rs. 1 crore for a previous year
    • Interest calculations to be checked
    • Period of interest – upto March 31st or upto signing of tax audit report

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CLAUSE 30B

  • Clause 30B – Section 94B – interest expense
    • Restricted to 30% of EBITDA (as per books)
    • Applicable only if interest expense (allowable) > Rs. 1 crore
      • For each AE or in aggregate to be seen – debatable issue
    • Brought forward interest to be seen

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CLAUSE 30C - GAAR

  • Tax impact Rs. 3 crore or more
  • Tax implications considered explicitly & adequately by Court/NCLT, then GAAR = Not Applicable
    • Panasonic India (P.) Ltd., In Re 2022 138 Taxmann.com 579 (NCLT)
    • Carry forward of losses/GAAR – to be considered by AO during assessment proceedings
  • Not applicable where Advance Ruling obtained
  • Transaction similar to prior year be reported if considered by CIT/Panel
  • Obtain – management representation letter
  • Disclaimer where tax benefit to all parties not determinable

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PRESENTATION BY:

CA. Pankaj Saraogi

  • B.Com.(H)-SRCC, FCA (10th Rank), DIIT (ICAI), LL.B.
  • Email: pankaj@saraogi.co.in
  • Mobile: +91 98103 08129

THANK YOU

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