Tax Audit Documentation & Checklist. Roopali J, CA Partner akasam and associates Chartered Accountants

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1 Tax Audit Documentation & Checklist Roopali J, CA Partner akasam and associates Chartered Accountants

2 Objective Tax Audit To assist Income Tax Department to assess correct income of assessee and give information on compliance prescribed under the Act Main report Form 3CA: Applies where accounts of business or profession of assessee have been audited under any other law Form 3CB Applies in cases where accounts are not required to be audited by any other law Annexure in Form 3CD to main report giving particulars of compliance

3 Applicability of Tax Audit S. 44AB Every person carrying on business whose Gross Turnover, Receipts Or Total Sales exceed Rs.1 Crore Every person carrying on profession whose Gross Receipts exceed Rs.25 Lakhs Where profits & gains of person from business are taxable on estimated basis u/s 44AD, 44AE, 44BB or 44BBB & such person claims his income to be lower than profits & gains so estimated

4 Tax Audit Procedures Primary responsibility is of assessee to ensure compliance, prepare and submit relevant information Tax Auditor (TA) to verify compliance TA to- Use professional skill & expertise Apply Generally Accepted Auditing Procedures as applicable for other audits Apply techniques of reasonable test audit checks & compliance tests depending upon internal controls of assessee Follow principles of Materialit, Prude e & Su sta e Over For

5 Tax Audit Procedures Refer to following publications issued by ICAI- Standards on Audit (SAs) Guidance Notes (GNs) on Audit Reports & Certificates for Special Purposes GN on Tax Audit, Supplementary GN on Tax Audit, GN on section 145A considering VAT & GN on section 14A Issues on Tax Audit SA Auditor s report on financial statements Statement on qualifications in Auditor s report

6 Documentation and Checklist Permanent File PAN, TAN, registered office, branch office details, other taxes registration o s and relevant supporting documents, partnership deed/coi along with MOA, AOA etc. Working File All the working papers collected while doing the audit for that particular year starting with appointment letter

7 Annexure to Tax Audit Report (Form - 3CD) Clauses 1-8 Name of the assessee Address Part - A Permanent Account Number Applicability of indirect taxes along with registration numbers Permanent Audit file Status Previous Year Ended Assessment Year Relevant clause of 44AB to be mentioned Working audit File

8 Relevant Clauses Impacted by Management decisions Part - B Clause 9 Is applicable to Firms & Association of Persons Names of partners / members & their profit-sharing ratios [Sub- Clause (a)] Changes in the constitution, or profit-sharing, of Partnership/ Association & the particulars of change [Sub-Clause (b)] Clause 10 Nature of Business / Profession (If more than one business/ profession is carried out, then nature of every business/ profession) [Sub-Clause (a)] Particulars of change in business / profession [Sub-Clause (b)]

9 Clause 11 Relevant Clauses Impacted by Management decisions Whether books of accounts are prescribed as per S. 44AA? [Sub- Clause (a)] Books of Accounts maintained (In case of computerized system of accounting, mention books of account generated by such system) along with details of each location wherein these are maintained[sub-clause (b)] List of books and nature of relevant documents examined [Sub- Clause (c)] Clause 12 Mention profit assessable on presumptive basis which is included in profit & loss account and relevant section under which it is assessable

10 Clause 13 Relevant Clauses Impacted by Management decisions Method of Accounting followed in P.Y [Sub-Clause (a)] Any change in method of accounting in relation to last P.Y [Sub-Clause (b)] Details of such change and its effect on profit / loss to be mentioned in tabular form [Sub-Clause (c)] Details of deviation in method employed from accounting standards prescribed u/s. 145 & effect on profit / loss [Sub-Clause (d)] Clause 14 Method of Valuation of Closing Inventory employed in P.Y [Sub-Clause (a)] Details of deviation of such method of valuation from method prescribed u/s. 145A & effect on profit / loss [Sub-Clause (b)]

11 Relevant Clauses Impacted by Management decisions Clause 15 Give following particulars of Capital Asset converted into Stock-in- Trade- Description of Capital Asset [Sub-Clause (a)] Date of Acquisition [Sub-Clause (b)] Cost of Acquisition [Sub-Clause (c)] Amount at which asset is converted into Stock-in-Trade [Sub- Clause (d)]

12 Relevant documentation to be checked In case of Company Memorandum of Association Articles of Association Minutes of the meetings conducted by the Board of Directors Directors Report Notes to the audited Financial Statements Previous Year ROI Accounting policies and procedures Documents filed with ROC In case of a Firm Obtain a true copy of the partnership deed signed by all the partners Obtain a true copy of the amendment / admission / retirement deed and get a declaration stating that there has been no change in the profit sharing ratios during the year by all the partners

13 Relevant documentation to be checked The nature of business stated in partnership deed/ MoA & AoA, can be cross checked with Sales Tax Registration Certificates, Shop Act Licence, Service tax registration certificates etc. For businesses falling in presumptive taxation category take a declaration that the activity is the same & no other activity is being conducted

14 Steps Verification of Books of Accounts Detailed ledger scrutiny to be conducted Expenses and income heads should also be checked for comparing with the previous year accounting method. Check the year end entries in journal for the expenses provided and see the method of providing expenses is as same as of earlier year. Similarly payment entries in the beginning of the year should also be checked for checking the way of dealing with expenses and provisions. Pl check for the applicability of Accounting Standards and CBDT circulars wherever applicable Wherever supporting documentation is not completely available, confirmation from management in the form of management representation letter (MRL) to be obtained

15 Clause 16 Amounts not credited to Profit / Loss Account, being - items falling within scope of S. 28 [Sub-Clause (a)] Verify the reserves account, or any other account, capital account of the proprietor/partner, credits in the other balance sheet items to identify if any item is directly credited to the same. pro forma credits, drawbacks, refunds of customs or excise duties or service tax, sales tax or VAT, where same are admitted as due by concerned authorities [Sub-Clause (b)] Check for the claims lodged and admitted by authorities. escalation claims accepted during P.Y [Sub-Clause (c)] any other items of income [Sub-Clause (d)] capital receipt [Sub-Clause (e)]

16 Clause 17 Where any land or building or both is transferred during the previous year for a consideration less than value adopted or assessed or assessable by any authority of a State Government referred to in Section 43CA or 50C then details of Property actual consideration received or accrued versus value adopted or assessed or assessable is to be mentioned in tabular form

17 Clause 18 Particulars of depreciation as per Income Tax Act, 1961 for each block of assets in following form- description of asset / block of assets [Sub-Clause (a)] rate of depreciation [Sub-Clause (b)] actual cost / WDV [Sub-Clause (c)] Additions (along with date of asset being put to use) / deductions made to block along with following adjustments [Sub-Clause (d)]- CENVAT claimed & allowed Change in exchange rates Subsidy, grant or reimbursement Depreciation allowable [Sub-Clause (e)] WDV at end of P.Y [Sub-Clause (f)]

18 Clause 18: continued ascertain date of asset being put to use - an e pert s opinion if necessary or certificate from assessee Any interest paid on money borrowed for purchase/construction of asset, upto the date on which asset is put to use, be capitalized to the cost of asset loan papers subsidy documentation if any received for acquiring the asset be reduced from the cost of acquisition. Section 43A Any asset purchased from outside India out of borrowing in foreign currency the foreign exchange fluctuation ( only to the extent of amount actually repaid) be considered as part of the cost of the asset. Lease agreement to be verified to ascertain whether the asset is on a finance lease or operating lease. Operating lease dep available to lessor, Finance lease dep available to lessee.

19 Clause 19 Amounts admissible u/s. 32AC, 33AB, 33ABA, (wherever applicable), 35(1)(i) to 35(1)(iv), 35(2AA), 35(2AB), 35ABB, 35AC, 35AD, 35CCA, 35CCB, 35CCC, 35CCD, 35D, 35DD, 35DDA & 35E- Debited to Profit / Loss Account (showing amount debited & deduction allowable under each section) [Sub-Clause (a)] Compliance with all the conditions, if any specified under the relevant provisions of the Act or Rules or any other guidelines, circular etc., issued in this behalf needs to be verified and reported in tabular manner

20 Clause 20 Sum paid to employee as bonus or commission, where same was payable as profits or dividend [Sub-Clause (a)] Sums received from employees as contributions to any provident or superannuation funds or any other fund u/s. 2(24)(x); due date for payment & actual date and amount of payment to concerned authorities u/s. 36(1)(va) [Sub-Clause (b)] in tabular form

21 Clause 21 Amounts debited to Profit / Loss, being- capital expenditure [Sub-Clause (a)] personal expenditure [Sub-Clause (b)] expenditure on advertisement in any publication of political party [Sub-Clause (c)] expenditure incurred at clubs [Sub-Clause (d)]- as entrance fees & subscription as cost for club services & facilities used penalty or fine for violation of any law [Sub-Clause (e)(i)] any other penalty or fine [Sub-Clause (e)(ii)] expenditure incurred for an offensive purpose or that which prohibited by law [Sub-Clause (e)(iii)]

22 Clause 21 continued. Amount inadmissible u/s. 40(a) [Sub-Clause (f)] as payment to non resident referred to in sub clause (i) as payments to residents referred to in sub-clause (ia) as payments referred to in sub-clause (ic)/(iia)/(iib)/(iii)/(iv)/(v) For non/short deduction or non/short payment of TDS including variation in rates All details of the payments/payee need to be reported in tabular form

23 Clause 21 continued. Amounts debited to Profit / Loss, being- Amounts inadmissible u/s. 40(b) / 40 (ba) paid by way of Interest, Salary, Bonus, Commission or remuneration On The basis of examination of books of accounts and other relevant documents/evidence, whether the expenditure covered u/s 40A(3) r.w.r 6DD or u/s 40A(3A) were made by account payee cheque drawn on a bank or account payee bank draft. If not the details need to be furnished in tabular form Provision for gratuity not allowable u/s. 40A(7) [Sub-Clause (i)] Any sum paid as employer not allowable u/s. 40A(9) [Sub-clause (j)] Particulars of contingent liability [Sub-Clause (k)] Deduction inadmissible as per S. 14A relating to expenditure pertaining to Income not forming part of Total Income [Sub-Clause (l)] Amount inadmissible under proviso to S. 36(1)(iii) [Sub-Clause (m)]

24 Clause 22: Amount of interest inadmissible under S. 23 of Micro, Small & Medium Enterprises Development Act, 2006 Micro Enterprise: In case of enterprise engaged in manufacture or production of goods pertaining to any industry specified in SCH I Industries (Development and Regulations) Act Investment in Plant and Machinery does not exceed Rs Lacs In case of Service Enterprise, investment in equipment does not exceed Rs Lacs Small Enterprise: In case of enterprise engaged in manufacture or production of goods pertaining to any industry specified in SCH I Industries (Development and Regulations) Act Investment in Plant and Machinery is more than Rs.25 Lacs but does not exceed Rs.5 Crore In case of Service Enterprise, investment in equipment is more than Rs.10 Lacs does not exceed Rs.2 Crore

25 Medium Enterprise : In case of enterprise engaged in manufacture or production of goods pertaining to any industry specified in SCH I Industries (Development and Regulations) Act Investment in Plant and Machinery is more than Rs.5 Crore but does not exceed Rs.10 Crore In case of Service Enterprise, investment in equipment is more than Rs.2 Crores but does not exceed Rs.5 Crore MSME Act lays down that an interest payable or paid by the buyer, under or in accordance with the provisions Sec 23 of the Act, shall not for the purpose of the computation of income under Income Tax Act,1961 be allowed as a deduction.

26 Clause 23 Particulars of payments made to persons specified u/s 40A(2)(b) related parties Clause 24 Amounts deemed to be Profits and Gain under Section 32AC (investment in new P&M) )or 33AB (Tea/coffee/rubber development account) or33aba (site restoration fund) or 33AC (reserves for shipping business) Clause 25 Amount of profit chargeable to tax u/s. 41 & computation thereof

27 Clause 26 In respect of any sum referred to in Clauses (a), (b), (c), (d), (e) or (f) of S. 43B, liability for which- Pre-existed on first day of PY but was not allowed as deduction preceding PY & was paid during PY or not paid during PY [Sub-Clause (i A)] Was incurred in P.Y & was paid on or before due date for furnishing returns of P.Y u/s. 139 (1) or not paid on or before due date [Sub- Clause (i B)] State whether sales tax, customs duty, excise duty or any other indirect tax, levy, cess, impost etc. is passed through profit / loss account

28 Clause 27 Amount of CENVAT Credit utilized during P.Y. & treatment in profit / loss account & treatment of CENVAT Credit outstanding [Sub-Clause (a)] Particulars of prior period Income / Expenditure credited / debited to Profit / Loss Account [Sub-Clause (b)]

29 Clause 28 Whether during the previous year the assessee has received any property, being share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia). If yes, please furnish the details for the same. Clause 29 Whether during the previous year the assessee received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib). If yes, please furnish the details of the same

30 Clause 30 Amount borrowed on hundi (including interest thereon) repaid other than through account payee cheque (section 69D) Clause 31 Particulars of each loan / deposit exceeding limits specified u/s. 269SS taken or accepted during P.Y- Name, address & PAN of lender / depositor Amount of loan / deposit Whether loan / deposit was squared up during P.Y Maximum amount outstanding at any time in P.Y Whether loan / deposit was taken / accepted otherwise than by account payee cheque or account payee bank draft [Sub-Clause (a)]

31 Clause 31 continued Particulars of loan / deposit repaid exceeding limits specified u/s. 269T during P.Y- Name, address & PAN of payee Amount of repayment Maximum amount outstanding at any time during P.Y Whether repayment was made otherwise than by account payee cheque or account payee bank draft [Sub-Clause (b)] Whether certificate has been obtained from assessee regarding taking or accepting, or repayment of same through account payee cheque / draft [Sub-Clause (c)] Such particulars are not necessary in case of government companies, banking companies or corporations established under Central, State or Provincial Act

32 Clause 32 Details of brought forward loss or depreciation allowance, in following manner [Sub-Clause (a)]- Serial No Asst Year Nature of Loss / Allowance (in Rs.) Amount as returned (in Rs.) Amount as assessed (refer to relevant order) Remarks Where change in shareholding of company has taken place in P.Y due to which losses incurred in preceding P.Ys cannot be carried forward as per S. 79 [Sub-Clause (b)]

33 Clause continued Whether the assessee has incurred any speculation loss referred to in section 73 during the previous year, If yes, please furnish the details of the same. Whether the assessee has incurred any loss referred to in section 73A in respect of any specified business during the previous year, if yes, please furnish details of the same. In case of a company, please state that whether the company is deemed to be carrying on a speculation business as referred in explanation to section 73, if yes, please furnish the details of speculation loss if any incurred during the previous year.

34 Clause 33 Section-wise details of deductions admissible under Chapter VI-A or Chapter III (Section 10A, Section 10AA). Details as under: Section under which deduction is claimed Amount admissible as per the provisions of the Income Tax Act 1961 and also fulfills the conditions, if any specified under the conditions, if any specified under the relevant provisions of the Act or Rules or any other guidelines, circular etc., issued in this behalf.

35 Clause 34 Whether the assessee is required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB. If Yes, please furnish below mentioned in tabular manner:- 1. TAN 2. Section 3. Nature of payment 4. Total amount of Payment or Receipt of the nature specified in Col Total amount on which tax was required to be deducted or collected out of (4) 6. Total amount on which tax was deducted or collected at specified rate out of (5) 7. Amount of tax ded. Or coll. Out of (6) 8. Total amount on which tax was deducted or collected at less than specified rate out of (7) 9. Amount of tax deducted or collected on (8) 10.Amount of tax deducted or collected not deposited to the credit of the Central Government out of (6) and (8)

36 Clause continued Whether the assessee has furnished the statement of tax deducted and collected within the prescribed time. If not, Please furnish the details:- TAN Type of Form Due Date for furnishing Date of Furnishing, if furnished. Whether the statement of Tax deducted or collected contains information about all transactions which are required to be reported. Whether the assessee is liable to pay interest under section 201(1A) or section 206C(7). If Yes, please furnish:- TAN (1) Amount of Interest Payable (2) Amount Paid out of (2) (3) Date of Payment (4)

37 Clause 35 In case of trading concern, quantitative details of principal goods traded- 1. Opening Stock 2. Purchases during P.Y 3. Sales during P.Y 4. Closing Stock 5. Short / Excess [Sub-Clause (a)] In case of manufacturing concern, quantitative details of principal items of raw materials, finished goods & / or by-products- 1. Opening Stock 2. Purchases during P.Y 3. Consumption / Production during P.Y 4. Closing Stock 5. Short / Excess 6. Yield of finished products 7. Percentage of yield 8. shortage / excess, if any

38 Clause 36 In case of domestic company, details of tax on distributed profits u/s O in following form- Total amount of distributed profits [Sub-Clause (a)] amount of reduction as referred to in section 115-O(1A)(i) amount of reduction as referred to in section 115-O(1A)(ii) Total tax paid thereon [Sub-Clause (b)] Dates of payment with amounts [Sub-Clause (c)]

39 Clause 37 Whether any cost audit was carried out, If yes, give the details if any, of disqualification or disagreement on any matter/ item/ value/quantity as may be reported/identified by the cost auditor. Clause 38 Whether any audit was conducted under the Central Excise Act, 1944, if yes, give the details if any, of disqualification or disagreement on any matter/ item/ value/ quantity as may be reported/identified by the auditor. Clause 39 Whether any audit was conducted under section 72A of the Finance Act 1994 in relation to valuation of taxable services. If Yes, give the details, if any, of the disqualification or disagreement on any matter/ item/ value/ quantity as may be reported/identified by the auditor.

40 Clause 40 Calculate following ratios: Total Turnover Gross Profit / Turnover Net Profit / Turnover Stock-in-trade / Turnover Material Consumed / Finished Goods Produced Clause 41 Please furnish the details of demand raised or refund issued during the previous year under any tax laws other than Income tax Act, 1961 and Wealth tax Act along with details of relevant proceedings.

41 Any Questions

42 Contact Details Any queries, contact,

43 Thank You